Horizon | Edition 6

Unlocking the potential of basin-wide carbon capture

By our calculations, even if we manage to meet the goals of the Paris Agreement and limit global warming to 1.5 °C of pre-industrial levels, fossil fuels will still account for close to 37% of the world’s primary energy demand in 2050. Moreover, we estimate that we would need to reduce emissions by 1.8 billion tonnes of carbon dioxide equivalent (BtCO2e) a year over the next three decades to have a chance of hitting that 1.5 °C target. This is a colossal challenge and one that a transition to renewables alone cannot solve. Achieving a low-carbon future requires not just carbon avoidance, but also carbon removal, especially through carbon capture and storage (CCS). Much of the work in this area has focused on individual parts of the CCS value chain, as well as on policy and regulation, but we believe the real, scalable solution lies in basin-wide CCS. By taking advantage of economies of scale, we can find a community answer to a community problem. Using proprietary data and screening, Wood Mackenzie has identified the location of 1,500 potential depleted oil and gas reservoirs that are technically capable of storage. Our asset-level emissions benchmarking tool has enabled us to map industrial point-source emitters to potential storage sites and we have validated our approach through case studies. Matching pre-screened storage sites with nearby industrial clusters, we believe, could be the foundations of a commercially viable carbon disposal industry.

HORIZONS

Location, location, location:

the key to carbon disposal

June 2021

Neeraj Nandurdikar Global Head of Power & Renewables Consulting Amy Bowe Head of Carbon Research

Contents

Unlocking the potential of basin-wide carbon capture Solving the carbon conundrum CCLSTR or, as we like to call it, the solution Coopetition + CCLSTR = a carbon-disposal industry

1. 2. 3. 4.

Amy Bowe

Head of Carbon Research

Amy has nearly two decades of experience covering the energy industry, with a strong focus on climate risk and strategy. As head of our Carbon Research practice, she is responsible for developing new carbon-related products and offerings with a consistent approach to climate-related analysis across all sectors and value chains. Prior to moving into her current role, Amy spent eight years with our Consulting team, where she originated and co-led the development of our Carbon Benchmarking initiative. She also led the team’s broader carbon offering, including energy transition strategy development, lifecycle emissions analysis of portfolios and investments and scenario analysis for purposes of TCFD disclosure. Before joining Wood Mackenzie, Amy spent four years at Hess Corp., where she conducted long-term supply and demand analyses of oil, gas, and broader primary energy trends, and helped to develop the company’s climate change strategy. Amy has also worked as an analyst for PIRA Energy, PFC Energy and Ziff Brothers Investments.

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Neeraj Nandurdikar

Vice President, Global Head of Power & Renewables Consulting

Neeraj joined Wood Mackenzie in 2021 as Global Head of Power and Renewables Consulting in our Energy Transition Practice. Prior to this, he ran a successful global energy consulting practice for 21 years. He brings decades of experience as a trusted advisor to Executive and C-level clients in the integrated energy sector. His expertise encompasses energy transition business models, GHG and carbon reduction strategies and initiatives, competitive intelligence, change management, leadership coaching and large-scale transformation programmes. Neeraj is also the co-author of Leading Complex Projects: A Data-Driven Approach to Mastering the Human Side of Project Management (2018).

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Greig Aitken

Director, M&A Research

With over 12 years of relevant experience, Greig brings a holistic view of corporate activity to the upstream M&A research team. Greig heads up the M&A Service, which harnesses the power of Wood Mackenzie's global asset research to provide an unparalleled independent view on upstream mergers and acquisitions. Greig's responsibilities include overseeing and supporting individual deal evaluations, and analysing industry trends on themes such as valuations, corporate strategies and value creation. Greig's views are regularly sought by the media and he is a frequent presenter at forums and conferences. Greig joined Wood Mackenzie in 2012 as analyst in the M&A Service. Prior to this, Greig was a sell-side equities analyst in Brewin Dolphin’s award-winning institutional broking business (now N+1 Singer). He was Extel-rated in both the Technology and Oil & Gas sectors, and was the #1 ranked stock picker in the energy sector (FT / Starmine Analyst Awards, UK & Ireland). Greig spent the early part of his career as a software developer in the pensions and life assurance industry. With a background in technology, Greig has taken a keen interest in the rising prominence of digitalization in the oil and gas industry, and has contributed to recent Wood Mackenzie research on the topic.

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Solving the carbon conundrum

If we want to limit global warming to the challenging but necessary 1.5 °C set out in the Paris Agreement, the world must find ways to capture the CO2 it emits and lock it away for good. Global temperatures are already 1.2 °C above pre-industrial levels and limiting them to 1.5 °C will soon become impossible, so we must act now. Our 1.5 °C Accelerated Energy Transition (AET-1.5) scenario, however, suggests that even with the most aggressive climate action, by 2050, hydrocarbons will still account for almost two-fifths of total primary energy demand globally. If we limit the rise in temperature to an easier, but still challenging, 2 °C by 2050 (our AET-2 scenario), hydrocarbons will be required to satisfy 50% of all primary energy demand. In other words, under our AET-1.5 scenario, the world will still be producing just shy of 30 million barrels of oil a day in 2050. Likewise, the world will still consume 3,200 bcm of natural gas, despite significant growth in renewables. Thus, zero-carbon solutions - renewables - alone cannot resolve the challenge. We must think in terms of carbon avoidance and carbon removal, which means accelerating the upscaling of carbon capture utilisation and storage, starting now.

Figure 1: CO2 emissions change - WM ETO versus AET-2 versus AET-1.5

1 Wood Mackenzie’s (WM) AET-2 and AET-1.5 Scenarios extend to 2050; however, for comparability with WM ETO 2020, we only show the forecast to 2040

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Scaling up CCS requires us to think of radically different and paradigm-challenging ways to solve the carbon problem. We must not just turn to innovative technologies and new policy and regulatory design, but challenge our traditional business models and ask whether they are up to the task. ‘Coopetition’ is the way forward - joining forces with the competition.

CCLSTR or, as we like to call it, the solution

In contrast, Trinidad and Tobago was found not to be viable for CCS using depleted oil and gas reservoirs. Despite having several power plants, gas processing plants and the four-train Atlantic LNG facility all within a fairly tight 50 km radius, storage capacity is lacking. Trinidad and Tobago has plentiful natural gas and oil reservoirs, but the majority are still producing. There are only five depleted oil and gas fields within a 100 km radius of the islands that could be viable storage candidates. Together, these sites have 10 MtCO2 of storage potential, equivalent to just one year of emissions from the country’s natural gas and power industries. Extending the search radius to 200 km would increase potential storage capacity to 40 MtCO2, however, this is still well below the 35-40 years of storage required to make CCS economically viable.

Source: Wood Mackenzie

Conclusion: Coopetition + CCLSTR = a carbon-disposal industry

A greater, concerted focus on basin-wide carbon capture and sinks is imperative. Adapting to this new approach will not be easy. Companies need to think hard about how they actually compete. If arch-rivals Pepsi and Coca-Cola can collaborate to solve common problems, such as cutting back on plastic waste, surely companies in the energy and industrial sectors can join forces to build a carbon-disposal industry. Certain factors are critical to making this work - emission volumes, emission types, proximity to suitable subsurface reservoirs and existing transport infrastructure, for instance. Favourable government regulations and tax policy are crucial if companies are to be incentivised to avail of technically advantageous sites. Above all, firms must be willing to collaborate with others for the common good. Using data to quickly screen cluster-to-sink opportunities is, therefore, critical to advancing the basin-wide carbon capture pathway. Instead of talking in the abstract, stakeholders can now have discussions on specific clusters and specific assets, calculating their emissions and mapping them to specific storage sinks with the right geological properties within a given proximity to balance the overall economics. Basin-wide CCS entity discussions can then proceed knowing who has what stake in what venture. Much of the requisite technical data exist already. Wood Mackenzie developed CCLSTR using its own comprehensive datasets. This gives stakeholders – companies, regulators and policymakers – a basis for grounded discussions on what needs to happen to make a specific cluster-to-sink a reality. It also provides project developers with enough information to identify the infrastructure needed for that specific cluster-sink combination. We have already identified 1,500 fields globally as possible candidates for carbon storage, 62% of them in North America alone. Our hope is that by using this rapid screening process, we can quickly move into venture-shaping discussions, enabling the boldest companies to build a carbon-disposal industry.

Carbon capture: nothing new, but underused

The world has been experimenting with CCS for decades – from the early 1970s, when it was first used for enhanced oil recovery; to the mid-1990s, when Equinor (then Statoil) completed the world’s first commercial CO2 storage project; to 2003, when the US Department Of Energy launched its regional partnerships on CCS; to 2009, when world’s leading economies established the Global CCS Institute. Yet, we have barely put a dent in the problem. In 2019, the world emitted around 33 gigatonnes (Gt) of CO2. The current CCS projects in operation are capturing just a fraction of that, about 40 million tonnes (Mt) of CO2 annually. This is down to both technical barriers and a lack of commercial incentive. The most established capture technologies are energy intensive, which drives up costs, especially for applications with low-concentration CO2 source streams, such as cement or steel. Newer technologies are less energy intensive, but have lower capture rates and are less scalable. These technical barriers are compounded by a dearth of supportive policy environments and business models. Much of the work on CCS today centres on two workstreams: (1) regulatory and policy issues and (2) lowering the costs of capture. Policy organisations, industry associations, think tanks and companies are working with governments to shape regulations, policies and incentives that promote, support and help accelerate CCS adoption. This includes making the emission of CO2 more costly, so that CCS appears comparatively affordable and attractive. Industrial firms, start-ups and engineering firms are investing time and money to ensure that CCS projects and processes can be scaled up efficiently and effectively and that the dollar cost per tonne of CCS can be brought down faster, making CCS projects more economical. Work to date has focused on new capture technologies, such as direct air capture, modularisation and standardisation, lower energy requirements and costs, and how they apply to less concentrated CO2 streams. This is not enough, however.

While it is important to pursue these pathways, focusing solely on technology and/or regulation will lead to what climate-science scholar Myles Allen calls “dangerous optimism” - where every story or post about some advancement in technology or regulation creates the impression that technology and regulation are solving the problem, so nothing else needs to be done. Furthermore, much of the work today is being conducted in scattergun fashion, with individual firms, start-ups and think tanks working to develop industry- or technology-specific solutions rather than coordinated, cross-industry, community solutions. There are a few notable exceptions, such as the Northern Lights, Net Zero Teesside and Port of Rotterdam Porthos initiatives. These are few and far between, although the conversation on basin-wide CCS is growing. Put simply, the magnitude and urgency of the problem call for a completely different approach. If we are to have an impact on emissions, there needs to be a far more urgent and broader discussion of the viability of basin-wide CCS. Success will require economies of scale to triumph over economies of scope. Where economies of scale are to be had in basin-wide storage, such projects should take precedence, matching large concentrations of emitters and large numbers of technically viable storage locations. The current array of CCS projects suggests that industry appears to favour economies of scope (or specialty), however, prompting companies to focus solely on, say, capture or transport.

“Dangerous optimism”

Wood Mackenzie believes that this is where CCS clusters can play a pivotal role in harnessing economies of scale. Synergies are greatest where industrial point sources are near both each other and a viable storage site. CCS clusters and hubs link multiple industrial emission point sources with common storage locations through shared transport infrastructure. Shared costs and liabilities help to de-risk the project for all participants and can make CCS feasible for smaller point sources, for which the solution would not otherwise be economical. Basin-wide carbon capture is the quintessential complex venture problem. Complex ventures are notoriously difficult, as multiple stakeholders need to coordinate across workstreams, as can be seen in the chart. Get the sequence wrong, and you can be looking at major business failure.

CCS clusters: getting to the root of the problem

2 Allen, M. (2020) Fossil fuel companies know how to stop global warming. Why don’t they? ted.com, Countdown, October 2020.

2040

2030

2020

2010

2000

Fuel switching and efficiency gain - Industry Reduced coal-to-power Reduced oil-to-power Reduced gas-to-power Nature-power solutions

Fuel switching and efficiency gain - RCA Transport electrification CCUS - Power CCUS - Industry Direct air capture (DAC)

WM ETO WM AET-2 WM AET-1.5

GtCO

WM ETO

WM AET-2 (-40%)

WM AET-1.5 (-70%)

1 Direct air capture (DAC) is an engineered technology that captures carbon directly from the atmosphere by pulling air through a filter, extracting the CO2 through a series of chemical reactions, and returning the remaining air back to the atmosphere.

Source: Wood Mackenzie

Figure 2: Stages and considerations for basin-wide carbon capture assets

One of the reasons we don’t see many more basin-wide capture and sink projects is a ‘venture shaping’ issue. Put simply, what does a basin-wide CCS business look like? Who owns it? How can costs and value be fairly shared? How is value calculated? How are risks distributed? What does basin-wide carbon sink governance involve? These are not insurmountable problems, but are tricky to solve in the hypothetical. In essence, establishing basin-wide carbon capture and storage is akin to creating a carbon disposal industry, not unlike the waste management sector in cities or counties. This is where science comes in handy. More progress can be made on the business side of things when they are founded on basic data. Basic data – the properties of the flue gases, the volumes, the distances to storage sinks, the industries involved and the properties of the sinks, for instance – are all basic data. These data are necessary for meaningful discussion on forming a business venture. Often, gathering these basic data takes time and money, as they are not available from a single source, not standardised, cleaned and/or in an easily accessible form.

One of the most promising joined the Alexandria industrial cluster on Egypt’s northern coast, which includes the two-train Egyptian Liquefied Natural Gas (ELNG) facility and the El Mex Refinery, with depleted gas fields in the Nile Delta Basin. Based on our assessments of the current emissions volume from the cluster and the storage capacity in the depleted Saffron and Rosetta fields, we estimate there to be 39 years’ worth of storage potential - at the upper end of the 35-40 year range required for CCS.

This is where carbon clusters linked to storage (CCLSTR) can make a difference. Wood Mackenzie’s granular asset-level data on industrial emissions, courtesy of its Emissions Benchmarking Tool, enables the identification of emission clusters globally. These data are then combined with our comprehensive and granular Lens subsurface data on the characteristics of potential storage sites, such as capacity, porosity, seal type and quality, as well as various other parameters. This allows us to map sources with nearby sinks that have the requisite storage capacity and properties, as well to identify existing transport infrastructure that could be used or repurposed. The point sources we include are refineries, gas processing plants, liquified natural gas (LNG) plants, power plants and metal (such as steel and aluminium) refineries and smelters. More importantly, this data and screening process can also identify clusters around the world that do not have suitable storage sinks nearby, so require different solutions. To test the theory, we completed a screening exercise to identify depleted oil and gas fields close to industrial clusters in basins with no existing CCS projects. The screening identified four locations for further detailed analysis. The four sites, within 100 km of industrial point sources, have the capacity to store more than 700 MtCO2. Three of the four locations were deemed viable candidates for CCS hubs based on technical considerations alone.

Pinpointing the storage opportunities

Renewables are not enough

Figure 3: A promising storage opportunity on the Egypt’s northern coast

Basic data Science driven

Venture shaping Business driven

Asset development Engineering and PM driven

Once the other two workstreams have been resolved the asset can be built/executed? Pipelines, compression and capture facilities can be engineered, built and executed

• •

What is the size of the pie and how will it be shared “fairly” amongst ALL stakeholders? What is the economic/societal value? Do all stakeholders agree on value? If multiple companies are involved in venture, how will governance work? What business models need to be thought of for a community problem?

• • • •

Location of Storage and Characteristics Properties of incoming flue gas stream Process data, Scaling up Data, Technology Readiness Information

• • •

Adapted from Industrial Megaprojects, Edward W. Merrow, Wiley, 2011

Main emission point sources: 4.5MtCO2 Refineries 2.5 MtCO2/a LNG plants 1.7 MtCO2/a Petrochemical plants 0.3 MtCO2/a

Click on the + icons for more details

Potential storage capacity: 178 MtCO2

Transport (km of gas pipeline): 2,300km in the Nile Delta Basin

• • •

We must think in terms of

carbon avoidance and carbon removal

joining forces with the competition.

‘Coopetition’ is the way forward -

can play a pivotal role in harnessing economies of scale

CCS clusters

We can map sources with nearby sinks that have the requisite storage capacity and properties

HORIZONS

Reversal of fortune:

oil and gas prices in a 2-degree world

June 2021

Basic data Science driven

Venture shaping Business driven

Asset development Engineering and PM driven

• • • •

Location of Storage and Characteristics Properties of incoming flue gas stream Process data, Scaling up Data, Technology Readiness Information

• • •

Once the other two workstreams have been resolved the asset can be built/executed? Pipelines, compression and capture facilities can be engineered, built and executed

• •

• • • •

Once the other two workstreams have been resolved the asset can be built/executed? Pipelines, compression and capture facilities can be engineered, built and executed

• •

Basic data Science driven

Venture shaping Business driven

Asset development Engineering and PM driven

Once the other two workstreams have been resolved the asset can be built/executed? Pipelines, compression and capture facilities can be engineered, built and executed

• •

If multiple companies are involved in venture, how will governance work? What business models need to be thought of for a community problem?

• •

What is the size of the pie and how will it be shared “fairly” amongst ALL stakeholders? What is the economic/societal value? Do all stakeholders agree on value?

• •

Once the other two workstreams have been resolved the asset can be built/executed?

•

Pipelines, compression and capture facilities can be engineered, built and executed

•

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