Catch, don’t release: the dawn of the CCS era

The oil and gas industry has been experimenting with carbon capture and storage (CCS) as a way of dealing with unwanted carbon emissions for decades. Even so, it has barely managed to put a dent in the problem.

In 2019, the world emitted around 33 gigatonnes (Gt) of CO₂, but current CCS projects are capturing just a fraction of that, about 40 million tonnes (Mt) of CO₂ annually. If we are to hit global decarbonisation goals, this removal capacity will have to rise to at least 7,000 MtCO₂ per year by 2050. That’s a huge challenge.

Doing nothing is not an option

Changes are afoot, however. The number of planned carbon sequestration projects has ballooned in the last few years, from around 50 in 2019 to nearly 300 today. It is a huge growth opportunity for the upstream sector that utilises existing skill sets and infrastructure. Indeed, 2021 has been a landmark year for CCS, propelling it from the fringes to the main stage.

As we wrote in our June upstream insight report – CCS: upstream’s commercial conundrum – three of the largest gas projects approved so far this year – Barossa (Australia), North Field East (Qatar) and Ghasha (UAE) – all have high CO₂ content and come with associated CCS or carbon capture, utilisation and storage (CCUS) plans to capture and/or offset it. The energy transition means the upstream industry can't ignore the challenges of carbon-intensive fields; operators must take tangible steps to offset their carbon footprint.

Nonetheless, we believe companies and investors continue to underestimate the regulatory, commercial and technical hurdles they have yet to overcome. Current and aspiring CCS operators know that hitting targets will be very challenging. Many admit in private that they are at the start of a steep learning curve and lack certainty as to their ability to execute in the absence of relevant legislation. Even so, establishing a footprint is strategically important, especially as companies hope to turn CCS into a future source of cash flow.

It’s time to pull together

There are myriad CCS investment drivers. For some, it is an environmental, social and governance (ESG) issue, so it’s a natural step to decarbonise their upstream operations and increase sustainability. For others, it is a huge business opportunity, albeit one that still requires a commercial, cash flow-driven model.

CCS projects – in particular, collaborative CCS projects – are an essential part of upstream’s future in a lower-carbon world. As outlined in a recent Horizons monthly article, decarbonising upstream is crucial as ESG risks expand. CCS can prolong asset lives, maintain investability and help capture price premia. Carbon pricing will expedite these factors. Cleaner molecules extend longevity under all scenarios. And for the most ambitious companies, it can help provide material solutions to Scope 1, 2 and 3 emissions.

The industry can’t do it alone, however, and company targets will not be met if the right carbon pricing, credits, incentives, legislation and regulation are not in place. One of the biggest problems facing the growth of CCS is the lack of relevant legislation and regulation. A gulf is also growing between the OECD countries with ambitious decarbonisation goals that are starting to actively facilitate CCS projects and the rest of the world.

Regulation, funding and the carbon price

Such facilitation takes two key forms: CCS regulation and government funding. CCS projects require government policy and support to proceed. However, most countries lack the requisite legal and fiscal legislation framework on sequestration, licensing, carbon accreditation, incentives and ultimate liability for leakage risk. This is putting the brakes on operators keen to implement CCS in countries such as Indonesia, Russia and Australia. Some countries, such as Timor Leste, are targeting a CCS revenue stream from depleted fields to replace hydrocarbon revenue, but it is unclear whether existing commercial models and fiscal systems can facilitate such a shift.

The lack of a clear economic incentive for CCS means that virtually all projects in operation today have required significant levels of government support. Public funding is helpful and necessary – as it was in the early days of wind and solar – but for CCS to scale up beyond demonstration projects, it must be driven by commercial imperatives.

Here, the future direction of carbon pricing will be crucial. Every company looking at CCS is wrestling with the commercial piece of the puzzle. The scale and uncertainty of the costs is significant. And with so few projects developed in recent years, benchmarks are few and far between. For the time being, then, CSS remains a cost, but as carbon prices rise, that will change. Early movers may gain a valuable strategic advantage, but it won’t be easy.

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