Carbon Capture Rising

Opportune LLP

Over the last few months, I’ve seen a great increase in the number of articles, papers, and webinars addressing issues related to carbon capture, utilization, and storage (CCUS), but this isn’t the first time I’ve seen heightened interest in the topic. In 2009, Congress attempted to pass legislation that would’ve established a cap-and-trade regime for CO2 emissions.

At the time, the company I was working for had an operation in an Alabama Smackover field that would’ve needed to consider re-injecting or disposing of its produced CO2. Many others in the industry were also preparing to deploy CCUS technology, so much so that the Society of Petroleum Engineers offered a one-day course in the geological sequestration of CO2 in 2010.

After the cap-and-trade legislation failed, however, interest in the technology decreased pretty quickly, except for perhaps within the coal industry where a search for ways to make coal “clean” continued to today. Recently, however, a few factors have converged that lead me to believe that CCUS is poised for a meaningful growth phase and one that will require many of the technical and business skills of the upstream energy business.

Tax Incentive Expansion & Clarification

The tax credit that applies to CCUS projects (Section 45Q) was originally enacted in 2008, but the credit was significantly modified in 2018 to make it available to more taxpayers. Also, in 2020, the IRS released regulations that, when combined with earlier IRS guidance, provided more certainty to project developers regarding whether and how their projects would qualify.

Changing Administration

The incoming Biden Administration appears to recognize that fossil fuels will continue to play a very important role in our economy and has made CCUS a higher priority than the previous administration. It’s also one of the approaches to climate change that generates a measure of bipartisan support.

Evolving Public Opinion

According to a Pew Research survey, the percentage of American adults who agree that “dealing with global climate change should be a top priority for the president and Congress” has increased from less than 30% in 2010 to over 50% in 2020. In addition to impacting policy, these sentiments play a role in the ESG investing movement, which is increasing pressure on capital providers and their capital sources (endowments, pension funds, etc.) to invest in green technologies. As investors respond to public pressure, more capital is available to develop CCUS projects.

Low Returns To Upstream Investments

For investors who know the upstream oil and gas space, but have been disappointed with the long-term returns to drilling and production activities, CCUS provides opportunities for lower-risk, fee-based businesses that use many of the technologies and skillsets they are familiar with.

A shift to CCUS will be natural for some of them and the management teams they sponsor. Here at RED, for instance, we’re expanding our reservoir simulation capabilities to provide reservoir modeling services to developers of CCUS storage projects.

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Opportune LLP

Opportune LLP on:

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