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Setting out on a net-zero path means energy companies committing to a carbon management strategy since there is no pathway to net-zero without substantial carbon emissions reductions.

While managing carbon emissions provides energy companies with a social license to operate—while also appeasing environmentally conscious capital investors—there is an economic case to be made for carbon management operations. Between the federal 45Q tax credit, and both voluntary and regulated carbon markets, enough financial incentives have emerged to make the value proposition for carbon management appealing.

“There is a growing number of projects that actually do produce a very respectful return, in the context of the carbon capture challenge,” said Nick Fulford, senior director, gas/LNG, carbon management, energy transition, Americas, for GaffneyCline.

“We’re talking about absolutely the tip of the iceberg at the moment,” Fulford continued. “In volumetric terms, we’re talking about a handful of tons per annum of carbon in a challenge which lowers hundreds or thousands of times that, which will ultimately have to be addressed. But that’s really where the investment case is coming from.”

Offsets and credits

As Tim Romer, CFO and head of strategy for Project Canary, explained, it is impossible to completely eliminate emissions down to zero, so companies with a net-zero goal in mind need to acquire carbon offsets. This is where carbon markets come into play.

“You have to measure the emission, you have to reduce the emission, but for those emissions that can’t be reduced to zero, you have to have an offset,” he said.

Romer explained that there are several types of carbon markets throughout the world, selling and trading credits and offsets, such as in California, which has adopted a regulated market through cap-and-trade.

“Those trade at a value, and there’s also a voluntary market of offsets, which is a little bit evolving in nature,” he said. 

Regulated markets are more active in regions where there exist government regulations for emissions reductions, such as in Europe and in California, where voluntary markets exist where there are fewer regulations, such as in most of the U.S.

“The value of those voluntary offsets are really dependent upon who is the registry and who is the certifier of what the offset is,” Romer said. “And then the other way to create an offset is through carbon capture. So, the value proposition to all these companies is, we know there’s going to be some emissions that you can’t reduce.

“We think carbon capture is an economic means relative to purchasing offsets to reduce emissions. So, what they’re trying to do is provide new means by which to capture and then sequester those emissions that can’t be reduced, that way you get to net-zero.”

Regional approaches

Fulford explained that the value proposition for carbon management often varies on global regions, the regulatory landscape and investment frameworks. For example, in the Middle East, where economies are most energy-intensive, there has been a realization of an “existential challenge.”

“If they don’t adopt and somehow transform into a low-carbon energy consumer or producer, then there’s a generational problem for people going forward because the whole country’s economy hinges in some around energy production,” he said. “The value proposition is absolutely long-term survival.”

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In Europe, there is a greater sense of social engagement with climate issues. 

“There’s an acknowledgment that the energy transition will have a cost associated with it, which needs to be borne appropriately across society, which might mean taxes or subsidies or other ways to address carbon in a noncommercial way,” he said.

The value proposition for carbon management in the U.S., according to Fulford, is reflective of the way in which the country’s economy has functioned, as well as how the oil and gas economy has worked.

“Which is, if something doesn’t generate a financial return, then why would you do it?” he said. “In the U.S., the challenge is around a sustainable investment case.”

GaffneyCline has seen a “significant uptick in serious money” being invested into the carbon management space, he added. But with those investments are coming an understanding that, in many cases, “an amount of money will have to be deployed without that clear, sustainable investment case that normally would exist.”

Opportunities in sequestration

In terms of value creation, carbon sequestration offers perhaps the most opportunities.

Large carbon emitters, such as ethanol plants, can pay third parties to capture and sequester their carbon. Those emitters can than earn 45Q tax credits—currently $50/metric ton stored underground—or sell carbon offsets on the market. Meanwhile, those third-party companies generate revenue from the emitters, such as ethanol plants, to capture and sequester their carbon. 

“Ethanol plants are a place where they feel like there’s a real value proposition to carbon sequestration because you need to burn fossil fuels to create the ethanol,” Romer said. “If you can capture those emissions, it makes that ethanol a cleaner product. They can’t reduce emissions to zero, so they go to offsets. So what are their choices in offsetting? They either go buy offsets or they pay somebody to capture their carbon and put it back in the ground.”

As Fulford explained, processes such as ethanol, ammonia and some types of natural gas reforming utilize a high-pressure stream of CO₂, which is readily capturable and represents a profitable prospect under the 45Q credit program.

“Beyond that, any sort of post-combustion capture, whether you’re looking at a refinery or a power station or a purpose-built hydrogen plant, the technologies are still relatively inefficient,” he said. “The capture process itself has a very high energy price to pay.”

Active projects

In terms of sequestration projects that are currently offering strong economics are those along the Gulf Coast corridor, Fulford said.

“Given the geological understanding of the area and the existence of large saline aquifers, the investment case around a significant sequestration project is quite robust, provided you can secure a supply of CO₂ to put in it,” he said. “You can see that there are projects emerging involved purely on the sequestration side that have managed to secure a supply contract that produces a respectable return.”

Talos Energy is one operator that is making a substantial investment in carbon capture and sequestration (CCS) along the Gulf Coast. The offshore producer has so far announced three CCS projects for which it is at least a 50% operating partner—two in Texas and one in Louisiana.

The Bayou Bend CCS project, a venture with Carbonvert, includes a lease agreement with the Texas General Land Office for a CCS site located offshore Jefferson County, Texas, near the Beaumont and Port Arthur industrial corridors. According to Talos Energy, the lease comprises more than 40,000 acres adjacent to the corridor with an estimated capacity of 225 million to 275 million metric tons of CO₂. 

The Coastal Bend Carbon Management Partnership is a venture between Talos Energy and Howard Energy Partners for CCS opportunities on site at the Port of Corpus Christi. 

The project and lease option agreement encompass about 13,000 acres for CCS project evaluation, with an initial goal to sequester 1 million to 1.5 million metric tons of CO₂ per year into saline aquifers. 

The River Bend CCS project includes an agreement with a large Louisiana landowner to lease about 26,000 acres along the Mississippi River industrial corridor for future CCS projects. The project includes 26,000 acres leased in Iberville, St. James, Assumption and Lafourche parishes, which, according to Talos, emit about 80 million metric tons of CO₂ per year. 

The sequestration project is comprised of three sites with a cumulative storage capacity of more than 500 million metric tons, according to Talos Energy.

‘A seat at the table’

With the multitude of international carbon markets, and the wide disparity in carbon prices in those markets, many aspects of the economics of carbon remain to be settled. Fulford explained that in some ways, the early days of the carbon management industry reflect that of the onset of the shale revolution, in the sense that profitability was clear, but getting to that point was initially unclear to many new entrants.

“There is a price to pay for having a seat at the table and generating experience,” he said. “There are some parallels with the shale gas revolution where a lot of people got interested at the point where it was clear that money was going to be made, but not so much how. From the projects we have worked on, the financial case, the risks, the normal commercial drivers often are either absent or remain to be proven much more than any other category of energy project. But there are a small number of projects now that are proving profitable.”

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