I’ve talked about the importance and emergence of decarbonization to the oil and gas industry, but yet there are plenty of people in oil and gas that aren’t on board. They put ESG and decarbonization in the same bucket as “woke ideology,” and that’s a shame. I am a big fan of oil and gas activist Alex Epstein and agree with the importance of the industry, but I also see decarbonization as a critical component to our success.
I don’t see embracing decarbonization as an anti-oil position, but a way to enhance value for the industry. So, in an attempt to reach out to those who aren’t on board with decarbonization, let’s take a look at recent news and trends.
The supermajors are all in. In the last column, we mentioned Oxy’s efforts with the formation of Oxy Low Carbon Ventures, highlighted in a recent article from The Wall Street Journal (WSJ) But ExxonMobil’s moves have been rather impressive. They announced a milestone of 5 million metric tons of CO2 under capture and storage agreements by signing their third deal in the past seven months, the most recent with Nucor. They also announced the deployment of Honeywell’s carbon capture technology at their Baytown, Texas, refinery.
In a recent podcast, ExxonMobil Chairman and CEO Darren Woods stated that his firm has pledged $17 billion through 2027 for low-carbon initiatives. Let’s just say ExxonMobil is full steam ahead on decarbonization. Not to be left out, Chevron New Energy Ventures, in a recent interview with Chris Powers, Vice President of Carbon Capture Utilization and Storage (CCUS), announced $10 billion of investment in low-carbon projects through 2028. When the supermajors are investing tens of billions of dollars, I think it’s time to pay attention.
Oil and gas has the skill set. But more than paying attention, why does this make sense? Decarbonization requires two things: the capturing of a CO2 source and then the sequestration of that CO2. Today, most CO2 capture is centered around amine scrubbers, a technology used widely in gas processing. So, the oil and gas industry already has previous experience deploying and utilizing the technology used in carbon capture.
Then, there’s sequestration, which requires the drilling of wells for subsurface geologic storage of CO2, where you need to understand subsurface geology and reservoir characteristics and monitoring. Well, guess what, there isn’t an industry that understands this better than oil and gas. I would go as far as to say that if decarbonization is going to be successful, it needs the oil and gas industry to provide the scale and expertise.
Additionally, there is the transportation of the CO2 source to the sequestration well, and, again, the oil and gas industry has the experience and expertise to manage this aspect. You see, there isn’t an industry that is better-suited to execute the development of decarbonization.
It's not just tax credits. Now, let’s get into the motivation of why the oil and gas industry should get into decarbonization. First there’s the tax credit, which was recently increased in the Inflation Reduction Act. Although complicated, the tax credit ranges from $60/ton for waterflood applications, $85/ton for emission source capture and sequestration and $180/ton for direct capture, taking CO2 straight out of the air.
Rystad Energy has projections of capture costing $150/ton today but dropping to about $60/ton over the next 10 years. There are some sources within the oil and gas industry, which I can’t disclose, but say they can recover for under $30/ton. That makes this very lucrative for the industry.
This tax credit also can be converted to cash. Essentially, these federal subsidies will likely result in a positive cash impact for the investment. But there’s more. There is also the carbon offset market, which is additive to the tax credit. Recently, in the WSJ, it was stated that total carbon revenues could be $300-$430/ton of CO2. So, the tax credit can justify the investment, as the carbon offset market is gravy. And the carbon offset market is gaining interest.
Carbon credit market is growing. Recently, Morgan Stanley announced a $200 million investment in carbon credits. Additionally, Carbon Growth Partners also announced that they are raising $200 Million carbon credits and offsets. The growth of the carbon credits market has been significant, and many are projecting that it will continue as more and more companies make the zero-carbon pledge. A recent market analysis consultancy projected the carbon credit market to exceed $1 trillion in the next five years.
Carbon credits become more valuable in non-attainment areas (where air emissions exceed national standards), and the Permian basin is on the EPA’s radar for a non-attainment designation. Money is already moving into carbon credits and with demand increasing, due to the growing carbon zero movement, the carbon market should continue to see significant growth. Additionally, many supermajors expect that their stocks will increase in value, as they get closer to carbon neutrality. There is so much opportunity for decarbonization to become a significant new revenue source for the industry, in tandem with it being expected to increase the values of their stocks.
But wait, there’s more. So, for all the naysayers, there are many reasons to take decarbonization seriously. And yet, we haven’t discussed that in some markets, especially in Europe, you will likely have to offset your CO2 emissions for natural gas, to sell it. We have airlines today that are offsetting their use of jet fuel, while power plants are offsetting their emissions, as well as other industries. They will either capture their emissions but then need a sequestration partner, or they will just buy the offset. And no one is better positioned to accomplish this than the oil and gas industry. We are on the ground floor of an emerging industry, and it’s time to understand it and take it seriously. No, this isn’t a woke ideology; this is an opportunity.
The path will not be easy. There are problems ahead. Recently, in Europe, Shell and Repsol were forced to remove advertising because of “greenwashing “claims. Some of the EU recent rulings are preventing companies from making carbon-neutral claims—based solely on offsetting—but the Shell and Repsol cases were based on claims made by groups stating that oil and gas companies should not be able to advertise new products—renewable energy in the case of Shell—without admitting that they are a source of emissions through oil and gas activities. I find this a little concerning, because solar companies can claim carbon neutrality in their advertising, but they aren’t offsetting or creating credits from their manufacturing of solar panels. A bit of a double standard, but I still think logic will prevail.
There will be challenges ahead. But, as many people have already stated, we cannot have reliable energy without oil and gas. Now, with the federal subsidies, we can capture and sequester CO2, while developing a new industry. I see a future, where you can buy an electric car or decide to buy a combustion engine vehicle and offset its emissions. Let the market decide.
- Applying ultra-deep LWD resistivity technology successfully in a SAGD operation (May 2019)
- Adoption of wireless intelligent completions advances (May 2019)
- Majors double down as takeaway crunch eases (April 2019)
- What’s new in well logging and formation evaluation (April 2019)
- Qualification of a 20,000-psi subsea BOP: A collaborative approach (February 2019)
- ConocoPhillips’ Greg Leveille sees rapid trajectory of technical advancement continuing (February 2019)