This month’s edition of the Pipeline Technology Podcast sponsored by Pipeline & Gas Journal features Jeff Lee of Kronos Management discussing the promises and risks of carbon capture investment.

In this episode, you will learn about the latest developments around Carbon Capture, including current projects, methods, benefits, and government incentives for carbon capture. Jeff and Russel also discuss the future of CO2 and what pipeline operators should expect in the coming years.

Carbon Capture: Show Notes, Links, and Insider Terms

• Jeff Lee is a seasoned oil & gas engineer with more than 20 years of oil and gas capital projects, field development, infrastructure planning, operations, corporate development, and executive experience in the U.S. and Canada. Connect with Jeff on LinkedIn.
  • Kronos Management is a boutique management and technical consulting firm for the oil and gas industry. Kronos advises lenders, investors, and operators on midstream asset quality, due diligence, project development, regulatory compliance, and technical design.
• Pipeline & Gas Journal is the essential resource for technology, industry information, and analytical trends in the midstream oil and gas industry.  For more information on how to become a subscriber, visit pgjonline.com/subscribe.
• Denbury Inc., a Delaware corporation, is an independent energy company with operations that are focused in two key operating areas: the Gulf Coast and Rocky Mountain regions.
  • Denbury Green Pipeline allowed for the first CO2 injection into Hastings Field, located near Houston, Texas, in 2010. This pipeline also delivers CO2 to oil fields along the Gulf Coast from Baton Rouge, Louisiana, to Alvin, Texas. 
• CO2 EOR (Carbon dioxide enhanced oil recovery) is the process of injecting CO2 into the subsurface of existing oil fields to boost oil recovery. It is the only commercially established carbon utilization option that provides large-scale permanent storage for captured CO2.
• Carbon Capture and Storage (CSS) involves the trapping of man-made CO2 underground in order to avoid its release into the atmosphere.
  • Carbon Capture Utilization and Storage (CCUS) is an emission reduction process developed to prevent large amounts of CO2 from being released into the atmosphere.
• Sequestration is the process of permanently storing CO2 in subsurface structures such as oil reservoirs, natural gas deposits, unmineable coal seams, deep saline formations, shale rich in oil or gas, and basalt formations. 
• 45Q Tax Credit is a tax credit supported by the U.S. government that is intended to incentivize investment in carbon capture and sequestration.
• Liquefied Natural Gas (LNG) is natural gas that has been cooled to a liquid state (liquefied), at about -260° Fahrenheit, for shipping and storage. The volume of natural gas in its liquid state is about 600 times smaller than its volume in its gaseous state in a natural gas pipeline.
• The Carbon Storage Assurance Facility Enterprise (CarbonSAFE) initiative projects focus on the development of geologic storage sites for the storage of 50+ million metric tons (MMT) of carbon dioxide (CO2) from industrial sources.
• ESG (Environmental, Social, and Governance) issues are part of the evaluation process for how corporations are managed, measured, and operated.

Carbon Capture: Full Episode Transcript

Announcer:  The Pipeline Technology Podcast brought to you by Pipeline & Gas Journal, the decision-making resource for pipeline and midstream professionals. Now your host, Russel Treat.

Russel Treat:  Welcome to the Pipeline Technology Podcast, episode 19. On this episode, our guest is Jeff Lee, with Kronos Management. We’re going to talk to Jeff about the March 2022 Pipeline & Gas Journal article titled “Promises and Risk of Carbon Capture Investment.”

Jeff, welcome to the Pipeline Technology Podcast.

Jeff Lee:  Thanks for having me, Russel.

Russel:  Before we dive in, do you mind telling us a little bit about your background and how you got into pipelining, particularly around CO2?

Jeff:  Sure. I have been in the oil and gas industry for more than 20 years now. I started out working for a pipeline consulting company in Oklahoma. Then in 2005, I started working for Denbury. Denbury Resources is a premier CO2 EOR operator.

I learned everything about CO2 at Denbury. I spent seven years there. I was the surface, facilities, and pipeline engineer, built the Green Pipeline in the Gulf Coast, worked on the Lost Cabin CO2 Capture Project with ConocoPhillips in Wyoming.

More recently, I’ve done quite a bit of project development work for CCS developers, and some business case studies for people who are interested in the industry.

Russel:  We’ve definitely trooped up and down some of the same pipeline right-of-ways, I imagine, because I certainly did some work with Denbury as they were building their green pipeline and bringing it into Texas. That’s awesome.

Probably the best thing to do maybe is start off with some definitions. I always try to decode the buzzwords a little bit when I’m doing this kind of podcast. What is CO2 EOR?

Jeff:  CO2 EOR is when you use CO2 and you inject it into an oil and gas reservoir to recover more oil that is otherwise unrecoverable. That is the primary driver of the CCUS industry since the ’70s and ’80s.

Russel:  It’s implied, what you said there, but CO2 enhanced oil recovery has been around since the late ’60s, early ’70s. It’s been around a long time. That technology is quite mature. A couple of other definitions. What is carbon capture?

Jeff:  Carbon capture is the capture of CO2 from mostly anthropogenic sources, which means man-made sources.

These days, there are developers who are trying to capture CO2 from the flue stacks and emission sources such as ethanol plants and chemical plants, natural gas processing plants, eventually the steel mills, cement plants, power plants, and whatnot. That is the capture.

Russel:  Basically, any place you see a stack behind an industrial process is taking that stack and capturing that waste gas, rather than it going into the atmosphere, it’s going through some process to capture it, keep it from going into the atmosphere.

Jeff:  Correct.

Russel:  What is sequestration?

Jeff:  Sequestration is just a fancy word for storing the CO2 underground. It could be in a depleted oil and gas field, or it could be used as part of the CO2 EOR operation, and then some of the CO2 remains trapped in the reservoir.

Recently, more and more people are looking at saline aquifers for storing CO2 purposes. You sequester the CO2 underground for eternity.

Russel:  What kind of aquifer is that, that you said?

Jeff:  Saline aquifer. These are natural formations that can trap CO2 for a long time with a proper seal.

Russel:  Interesting. I’m sitting here, I’m thinking about that. Does that mean I can make carbonated spring water if I sequester the CO2 into a water aquifer?

Jeff:  We’re not exactly storing the CO2 in the drinking water. These are formations in the ground that trap brine. There’s enough storage capacity in the United States to store a lot of this anthropogenic CO2.

There’s another one that I didn’t mention, is there’s some new development in trying to sequester CO2 in mineralized rocks. One of the pilot projects in Iceland is trying to do just that. You mix CO2 with rocks underground, and then it’s sequestered forever.

Russel:  Sequestration, as distinct from enhanced oil recovery, is I put it underground just to keep it underground, wherewith enhanced oil recovery, I put it underground to produce oil. Some of the CO2 comes back. I continually am recapturing it and I’m re-injecting it to produce the oil.

Jeff:  Right.

Russel:  Ultimately, some portion of that CO2 is sequestered, but that’s different than a pure sequestration project where I’m just putting it into some formation where it’s going to be trapped and not released.

Jeff:  Correct. It’s a waste disposal business when you talk about pure sequestration.

Russel:  What is the state of the CO2 market in the U.S.? What’s the nature of where we are in the reality of these kinds of projects happening?

Jeff:  There’s a lot of attention lately because of the 45Q tax credit, as a lot of your listeners may be aware of. It’s a federal government tax credit program to incentivize the development of CCS and CCUS. Traditionally, the CCUS business is only economical when it’s combined with EOR, which is enhanced oil recovery. The oil revenue pays for the CO2.

It’s a pretty capital-intensive business because you have to build a lot of upfront CO2 infrastructure and CO2 recycling facilities in the oil field. The payback is a bit slower than, say, drilling a shale oil well. Without the oil revenue, a lot of this CCS, CCUS business will depend on government incentive or, in some cases, government penalty for emitting CO2, such as in Europe.

In the U.S., the 45Q tax credit is the driver for a lot of the new attention.

Russel:  That starts to raise some questions about business models and how those business models work, but before we get into that conversation, I want to talk a little bit more about the project.

Having worked with Denbury in the past, and having taken a – it’s probably 10 years ago since I took a really deep look at the CO2 market – one of the things that I saw, at least at that time, is most of the capture and sequestration projects were pilots or proof of concepts at scale, where they were putting capture and sequestration right next to a coal plant.

It was a means to try and continue to have coal be viable for a longer period of time, because if the coal doesn’t have any CO2 emissions, then I can continue to use it to generate electricity.

What I saw in those projects was one, they were very costly. They would be very difficult to justify because of the electric rates you’d have to charge to do the project. The other thing I saw was there was this issue of…Well, I can’t necessarily sequester the CO2 where the coal-fired power plant happens to live.

That has other economic consequences about there’s the point that I’m producing the CO2 and the point where I’m going to inject it. They’re maybe not geographically close together. Is that still true in the projects that are going on, or are we past that state of development?

Jeff:  I would say that if you look at a midstream business model standpoint, a very big driver is volume aggregation. If you have a single source of CO2 and a single sink location, and then you have to build a pipeline in between, in the current state of affairs, it’s pretty hard to make it work economically.

If you have a business model to aggregate a lot of volume, and you can take advantage of the economy of scale, with the right technology, with the right scale, with the right incentives from the government, you can make a project work in today’s environment.

There is some creativity involved in this business environment to make a project work. The technology cost is coming down, and then there’s more and more mandates and more and more incentives for emission sources to start looking at getting rid of CO2. It’s a very dynamic situation right now.

Russel:  That certainly fits with my experience. We’ve mentioned a couple of times the Green Pipeline. We probably ought to talk about that project a little bit. With what you’re talking about in terms of the business model and the gathering model, that’s what Denbury was trying to do with the Green Pipeline.

They took their Mississippi EOR assets, and they extended their pipeline through Southern Louisiana, Southern Texas, moving the CO2 pipeline along where all the industrial facilities are and looked at some capture projects along that path, and then took that CO2 into East Texas into these old, depleted oil fields and revitalized them with CO2.

It’s an interesting business model that Denbury put in place.

Jeff:  The Green Pipeline was built to expand the EOR operation over to Southern Louisiana and into the Houston area, Hastings Oil Field. The original design had always been to accommodate future anthropogenic sources and industrial sources, CO2 sources, down at the Gulf Coast.

As most people know, there’s a bunch of industrial facilities that emit CO2 in the corridor where the Green Pipeline traverses. Hydrogen production, ammonia, fertilizer plants, etc. Lately, there’s been some LNG facilities that came online, and they may need to get rid of CO2 at some point.

Denbury’s Green Pipeline had been built with those man-made sources in mind. Their business model is only for EOR. You might say that Denbury had a vision back more than 10 years ago to make this work and gather more CO2, and lessen the cost of drilling at the Jackson Dome CO2 source.

Russel:  When I read your article, one of the things that popped out to me that I thought was very interesting is, we’ve talked about in this conversation that EOR has been around for a long time, and that people have been injecting CO2 into the ground for a long time.

You mentioned in your article that at present, most of the CO2 that’s being injected is EOR related. The amount that’s being injected for sequestration is smaller by comparison.

Jeff:  That is true. As I mentioned earlier, the primary economic driver of CO2 sequestration is the oil revenue so far.

Russel:  The economics are very different. That goes to the other part of your article that I found quite fascinating, which was when you started to talk about the business model and how it actually works.

Maybe we could unpack that a little bit. You got a couple of pretty cool, little graphics around how this all works and how the business model plays out, but I found it very interesting. Break down for us how the business model works in this CCS world.

Jeff:  I should probably clear up a few concepts. CCS, carbon capture and storage, and CCUS is carbon capture, utilization, and storage. There’s a different schedule for the tax credit. If you’re going to use the CO2 for oil recovery, or to make products, or make fuel, for example, then the tax credit is $35 a metric ton, as of 2026, and then it would adjust for inflation afterwards.

If it’s CCS and you’re not using the CO2, you’re just purely disposing the CO2, then it’s $50 a ton    metric ton – from 2026 onwards. There are bills in the Congress that are being debated right now about raising this 45Q credit to maybe $85 a ton for CCS, and in some versions of the bills, it goes up to $175, I believe.

That’s going to be pushing the industry along, and it’s going to make the project a lot more economical.

The business arrangement for how to take advantage of this tax credit is pretty unique. Because of the large amount of dollar amount 45Q payout over 12 years is going to generate, you need some entity with a lot of appetite for tax credits. You need a large income base to offset your taxes. Most players don’t have that.

They would have to bring in, say, a tax equity investor, to partner up and form a development partnership company to take advantage of the large amount of tax credit generated.

The government supplies the subsidy, and then we have a capture company that has developed a capture facility and maybe even the pipeline and its own storage. Then they would have a partnership flip structure.

The developer would put in some capital. The tax equity investor would put in some capital. They build this facility, and then they distribute the income and loss, and the 45Q tax credit according to their own formula.

Then at the end of the 12-year payout period, the investor will probably bail out and sell the stake over to the developer. In the 12-year period, you have to meet a certain investment threshold for everybody, obviously. That’s how it works.

Russel:  Not knowing a lot about how midstream organizations are typically put together, how complex of a structure is that? Is that somewhat some more or quite different than what you would typically see in a private equity-based midstream?

Jeff:  The business model is such that it needs some other types of changes to make it more accessible to more players. For example, there are bills that would propose to change the tax credit to a tax refund. It’s called a direct pay option.

There’s also bills that would possibly extend that 12-year period to match the asset life of a typical industrial facility so that it would generate more tax credit and it would increase the economic appeal of such projects. There are some other versions of it to make it more appealing.

It’s just like in every new industry. If you look at the wind and the solar industries in the beginning, nothing was attractive economically. The government would have to step in and provide some incentives, and maybe provide some R&D dollars to bring down the cost. The technology cost in this space, the CCS and the CCUS space, would eventually come down.

As a matter of fact, the Department of Energy has a lot of grant programs and spent a lot of money on basic research to incentivize new generation solvents or sorbents to bring down the technology cost of capture.

They’ve also done a lot of studies. One of the programs is called CarbonSAFE. They characterize a bunch of saline aquifer reservoirs in the Lower 48 to try to de-risk CCUS for potential developers. There’s lots of things going on right now.

Russel:  That’s one of the things I find interesting about this whole…Certainly, there is value in taking a waste gas and doing something with it other than just putting it into the atmosphere. This reminds me of conversations in my youth when there was a lot of intentionality about clean water and proper disposal of waste chemicals and trash.

At that time, there was a lot of things that were just raw, untreated effluents out of various processes that were going into rivers and waterways, and really making them awful. We’ve come a huge amount of distance.

My own personal experience just being a sailor and spending a lot of time at Galveston Bay here near Houston is I see dolphins all the time, and you didn’t see dolphins when I was a kid in Galveston Bay.

Now, we’re trying to do the same thing with air quality. That’s my take on it. I think the challenge is that you really need stability, because the kinds of projects that are required, these are large capital intensive, very complex projects, and they need 5 to 15-year paybacks.

They’re certainly longer than any presidential administration, so the need for stability in the political environment, and the tax model, and all that kind of stuff is really critical to having all this stuff work.

Jeff:  Yeah, I would agree with that. The fortunate part of the story is that CCS and CCUS enjoys broad bipartisan support. It can be a source of growth for the economy, and so both sides of the aisle find something to support for CCS and CCUS.

Worldwide, this macro environment is not going to go away with increased attention to ESG, shareholder pressure, and the new generation coming up. They’re thinking of CO2 as a different animal than we used to think about it. Leaded gasoline used to be the norm, and now it’s not, and everybody knows the hazard.

CO2 can be a valuable commodity. If you price it correctly, then it can generate its own industrial momentum, and it could be an industry on its own. It’s just another commodity like ammonia, hydrogen, and helium. Why not CO2?

Russel:  There’s been markets and uses for CO2 for a very long time. It’s feedstock in many industrial processes. It’s used as a cryogenic for other kinds of processes. CO2 as a – not a fuel, but a product that has been officially used, has been around for a long time. The challenge is we’re producing more, and more, and more of it, and that has an impact.

Jeff:  The current industrial use of CO2 is not nearly large enough to absorb all the CO2 emissions.

Russel:  Oh, no. It’s a very, very small part of what we’re actually producing as a waste product from other processes. No doubt about that.

What would you say that you would want pipeliners and the industry at large to know about this whole topic about CO2? What do you think the future holds? Where are we headed?

Jeff:  I think that the macro trend for CCS and CCUS is very strong and it’s not likely to go away. Then people’s attitude towards CO2 is changing. I believe that the government is also under increasing pressure to provide more and more support for the CCS and CCUS industry, worldwide.

As I mentioned in the article, the CCS lacks a business model right now in the West, and it lacks political will in the East, in Asia specifically, but that’s going to change. Recently, I’ve been involved in an Asian Development Bank grant program to support a demonstration project for CCUS in China.

Even the large industrial sector in China is thinking about capturing their CO2 and sequestering CO2. As we all know, China is the largest emitter of CO2 in the world, and they are starting to get serious about that, too.

With Europe, Asia, and United States getting on board, it’s going to survive the political cycles that we are constantly worried about. The next administration is going to do something different, but I think this trend is going to stay.

[background music]

Russel:  I think that’s a good place to leave the conversation. I just want to say it was great to get to talk to you. I learned some things through this conversation. I appreciate you coming on the podcast and offering your perspective.

Jeff:  Thanks for having me, Russel.

Russel:  I hope you enjoyed this month’s episode of the Pipeline Technology Podcast and our conversation with Jeff. If you’d like to support the podcast, the best way to do that is to leave us a review on Apple Podcast, Google Play, or on your smart device podcast app. You could find instructions at pipelinepodcastnetwork.com.

If there is a Pipeline & Gas Journal article where you’d like to hear from the author, please let me know either on the Contact Us page of pipelinepodcastnetwork.com or reach out to me on LinkedIn. Thanks for listening. I’ll talk to you next month.

Transcription by CastingWords