By Clark Butler, Guest Contributor, Institute for Energy Economics and Financial Analysis
The government of Australia recently proposed to broaden the scope of its Climate Solutions Fund to include the ability to invest in carbon capture, use and storage (CCS or CCUS) projects. However, there is not one example of a CCS project anywhere in the world that offers a financial justification for investing in CCS. In the absence of a carbon price, CCS will never provide a return on investment. European oil companies—in particular, Equinor, Shell and Total—are investing in CCS, notwithstanding the lack of return, because it is an important part of their decarbonisation narrative and supports their aims to be seen as “responsible” energy companies. If a carbon price is introduced, the business case might change; the market could then decide how much to invest in CCS projects. Institute for Energy Economics and Financial Analysis’s (IEEFA) recent report, “Carbon Capture and Storage Is About Reputation, Not Economics” explains why there is no financial reason to invest in CCS and what could be done to make a business case out of it.
CCS, Carbon Sinks and a Carbon Price
Oil majors Total and Shell have both emphasised the role that CCS, carbon sinks and a carbon price play in their ability to meet their long-term net-zero objectives. The figure below shows directionally how Shell could meet its goal. Although this is not intended to be a precise chart, it is noteworthy the proportion of the reduction attributed to “natural sinks” (i.e., planting trees) and CCS. Patrick Pouyanné, Chairman and CEO of Total, has stated, “We have the technology to capture and reinject carbon. The real question is how to do it in a way that is economically sustainable. That brings us back to the issue of carbon pricing.” In relation to CCS for coal-fired power generation, Pouyanné has said, “I know that people advocate for clean coal, but frankly, clean coal means a lot of CCS, and I would like to see where the CCS technologies are.”
IEEFA supports the idea that a carbon price is essential to achievement of large-scale carbon emission reductions. However, the fact that both companies’ CEOs refer to this almost as a precondition to their climate goals invites scepticism about their commitment to unilateral action on CCS. Each company currently spends an immaterial percentage of annual capital expenditure on CCS, so it is arguable that CCS is little more than a helpful marketing message to support their boarder decarbonisation ambitions.
What is Carbon, Capture and Storage?
Carbon capture, use and storage (CCS or CCUS) encompasses an integrated suite of technologies that can prevent large quantities of carbon dioxide (CO2) from being released into the atmosphere as a consequence of using fossil fuels. This technology has been applied in a wide range of industries since 1972 when several natural-gas processing plants in the Val Verde area of Texas began employing carbon capture to supply CO2 for enhanced oil recovery (EOR) operations. Since then, more than 200 million tonnes of CO2 have been captured and injected deep underground. The net emissions impact of CCS must include emissions from the energy used in the process (up to 20% more than an operation without CCS) and the emissions from any oil extracted using EOR.
CCS involves three major steps:
Capture: The separation of CO2 from other gases produced at large industrial process facilities such as coal and natural-gas-fired power plants, steel mills, cement plants and refineries.
Transport: Once separated, the CO2 is compressed and transported via pipelines, trucks, ships or other methods to a suitable site for geological storage.
Storage: CO2 is injected into deep underground rock formations, usually at depths of one kilometre or more, depleted oil or gas fields, deep saline aquifer formations or other forms of underground caverns, though it could apply to any form of storage.
The ‘usage’ component includes applications of the carbon in industrial processes such as the manufacture of synthetic diesel, biofuels, solvents and polymers. However, there are some key problems. Storage solutions can and do leak methane. The energy cost involved in the process materially reduces its net benefit. It does not make any economic sense, absent a whole-of-economy price on carbon emissions, supported by carbon border taxes (as proposed by the European Union).
Transportation and storage are two key areas of concern. ‘Captured’ carbon must be separated, transformed and, in most cases, transported to the sequestration site. The energy used in this process and the leakages that can occur during transportation and handling can materially reduce the net impact of the CCS process.
Further, the underground storage into which the carbon is injected is not always secure. Wells have weaknesses and gaps. Fracking causes long-term subterranean instability, and seismic activity could dislodge even the most carefully stored carbon. Leaks in the Aliso Canyon natural gas storage facility in 2015 “released 97,100 metric tons of methane to the atmosphere,” doubling the methane emission rate of the entire Los Angeles basin. According to geologists, leaks should not be a practical concern for carbon dioxide (CO2) storage if the CCS process is carefully implemented. However, further research concludes that the consequences of a minor leakage could reduce the benefit of CCS by up to 35%.
The fossil gas industry has failed to systematically cap, sterilise and monitor abandoned gas wells over the last few decades, so methane leakage is massively underreported and largely ignored (thanks to regulatory capture and constant defunding of EPA departments). Further, the industry resists accepting liability for leakages.
The Economics of CCS Are Wrong
Whilst the technical issues of CCS can probably be addressed with engineering solutions over time, the more significant problem is a financial one. CCS is an expensive process that generates very little revenue. Aside from limited pricing signals from emissions trading systems, there is no financial reason to invest in CCS. Consequently, there are no commercially viable examples of CCS anywhere in the world.
The traditional financial justification for doing CCS is for enhanced oil recovery (EOR). With oil prices currently well below breakeven for oils sands extraction, this does not begin to cover the costs of CCS. With costs in the order of US$4,200 per kilowatt for a power plant equipped with CCS, even if it works, CCS is a poor investment, multiples of the cost of new renewable energy even when the addition cost of firming is included. It is no surprise that the few operating CCS plants globally are government subsidised.
Playing With Someone Else’s Money
Shell: Royal Dutch Shell promotes CCS as a key factor in its new, bold emission reductions strategy: to bring down its net carbon footprint of products by 50% by 2050. As a then new CEO in 2014, Ben van Beurden told the audience in a keynote speech at Columbia University that CCS could remove up to 90% of emissions from power generation. In 2015, Shell promised investment in CCS, coinciding with the opening of the Quest CCS facility in Canada. At every AGM since, van Beurden has returned to CCS as a key part of the solution. To date, Shell has two CCS projects: Quest in Alberta, Canada, funded by the Albertan and Canadian governments and operated by Shell; and Gorgon in Western Australia, a project in which the project principals (Shell and Chevron) are financially motivated not to operate the CCS plant. The Gorgon plant has failed to meet its targets every year, notwithstanding a $60 million subsidy from the Western Australian government. Shell’s actual outlay in CCS over the years remains to be seen. Its overall investment in renewables is well behind its stated targets. Any progress Shell demonstrates in removing carbon from the atmosphere using CCS (1 million tonnes per annum at Quest and up to 4 million tonnes at Gorgon) should be seen in light of Shell’s total emissions of 656 million tonnes per annum (80Mt scope 1 and 2; 576Mt scope 3).
Total SA: Total SA has also promised massive investment in CCS to remove up to 5 million tonnes of CO2 per annum (8% of Total’s scope 1 and 2 GHG emissions and 1% of scope 1/2/3 emissions). Total SA is an investor in Equinor’s Sleipner CO2 storage as well as, with Shell and Equinor, the larger Nordic project under development, Northern Lights.
Equinor: The Norwegian state oil and gas producer has been investing in CCS since 1996, mainly because Norway has had a carbon price since 1991. Its Sleipner CO2 storage and Snøhvit CO2 storage facilities have cumulatively captured and stored around 22 million tonnes of CO2. Compared to the rest of the fossil fuel industry, this is considerable achievement but this pales into insignificance when one considers that Equinor is responsible for over 330m tonnes of CO2-e emissions every year (scope 1, 2 and 3). With the carbon price, there is a modest economic return on its CCS operations but the impact on emissions is immaterial in the scheme of Equinor’s contribution to global warming. By way of comparison, Equinor’s scope 3 emissions increased by 26 million tonnes per annum from 2014 to 2018.
Capturing Carbon at Power Stations Proves Fraught
CCS is more problematic in relation to power stations. Boundary Dam in Saskatchewan, Canada and Petro Nova in Texas are the only power stations to implement a CCS retrofit that were completed in North America this past decade. Boundary Dam, owned by the Saskatchewan utility, SaskPower, cost C$1.3 billion to the retrofit, was years behind schedule, and operated at less than 50% capacity when it finally commenced. Only one power unit has been retrofitted and SaskPower made a decision not to apply the technology to the other units. Petro Nova cost US$1 billion, at approximately $4,200 per kW, and captures 33% of emissions from one unit (654 MW). The carbon was intended to be supplied for enhanced oil recovery (EOR) but the price has fallen dramatically since the initial modelling was done and the project is a financial failure. It receives a $50 per tonne subsidy from the US government—effectively a carbon price—to keep it running at this minimal level. Kemper was to be the shining example of ‘clean’ coal. A massive new coal-fired power station in Mississippi—possibly the largest project ever in the state— promised jobs and cheap, clean electricity. The $2.4 billion estimated cost ($4,100 per kW) blew out to US$7.5 billion and the project was abandoned. There is no business case for gas CCS other than as a corporate social responsibility initiative, and there is no business case for coal CCS at all.
The IEA identifies CCS as mitigating up to 9% of GHG emissions by 2050 but notes, “With only two large-scale CCUS power projects in operation at the end of 2018 and a combined capture capacity of 2.4 million tonnes of CO2 (MtCO2) per year, CCUS in power remains well off track to reach the 2030 Sustainable Development Scenario (SDS) level of 350 MtCO2 per year. As CCUS applied to power is at an early stage of commercialisation, securing investments will require complementary and targeted policy measures such as tax credits or grant funding. Support for innovation needs to target cost reductions and broaden the portfolio of CCUS technologies.”
The figure below highlights the IEA’s assessment of the huge gap between aspiration and reality in relation to power CCS.
If the Australian Government wishes to encourage the development of CCS in Australia, in both gas and power, a carbon price would be a much better policy than the subsidisation of uneconomic CCS project proposals.
The original report can be downloaded by clicking here