Insights and Commentaries
Carbon capture and storage: Challenges, enablers and opportunities for deployment
30th July 2020
Carbon capture and storage, or CCS, is a proven and safe technology vital to achieving climate targets, as highlighted by the IPCC and other credible organisations, studies, and governments. Over the past three years, the CCS project pipeline has strengthened, and facilities continue to come online. Today, there are 20 commercial large-scale CCS facilities in operation. Combined, these facilities capture and permanently store around 40 million tonnes of CO2 each year.
However, to meet climate mitigation targets, an estimated 2000-plus large-scale CCS facilities must be deployed by 2050. In order to achieve this scale of deployment, it is crucial that the challenges, enablers and opportunities for CCS are considered, understood, and addressed.
There is no doubt the main challenge to CCS deployment is commercial. CCS requires investment in capital-intensive long-lived assets. In addition to the capture plant, those assets include CO2 transport pipelines and geological storage resources which cost hundreds of millions of dollars to appraise, build, and develop. The service CCS provides, emissions abatement, has no or low value in most markets. Whilst capture technologies are well developed and proven, their application in most industries has been very limited which increases perceived risk. In most jurisdictions, regulations covering the geological storage of CO2 are absent, creating compliance risk. Long term liability for stored CO2 in those jurisdictions generally rests with the operator in perpetuity which can disqualify investment.
Essentially, the well-established and familiar business models, structures, and practices that exist in mature industries and play a significant role in reducing perceived investment risk have not yet developed for CCS. The resulting risk premium on the cost of capital further impairs the investability of CCS projects. In most circumstances, CCS investments are net present value (NPV) negative.
In addition to commercial challenges, there is significant skepticism of CCS amongst those with little knowledge of it. Often, concerns are held about the safety of CO2 transport and storage. Most assume that CO2 is stored in the gaseous phase and therefore must leak, possibly catastrophically. It is also common for CO2 storage to be confused with hydraulic fracturing or for individuals to be concerned about induced seismicity, or that natural seismicity will cause leaks.
In fact, CO2 is not flammable or explosive like natural gas. It is not toxic like refrigerants used in refrigerators and air conditioners. A catastrophic leak to the atmosphere from a depth of more than one kilometer is virtually impossible. CO2 storage reservoirs are operated below the fracture pressure of the rock formation with a margin of safety – there is no “fracing”. Any seismicity resulting from CO2 injection is very minor, requiring instrumentation to detect it. Earthquakes, such as those regularly experienced in Japan, have not caused any leakage of stored CO2.
Despite these public misconceptions and commercial challenges, there are circumstances where specific policies and commercial opportunities have successfully enabled CCS investment. Twenty-four CCS facilities are either operating or in construction, all having made a positive financial investment decision.
The first enabler is high concentration CO2 gas streams and access to high-quality CO2 geological storage resources for which data necessary for appraisal is available. This coincidence of circumstances reduces the cost associated with capture, storage site appraisals, CO2 transport, and CO2 storage operations.
The second enabler is a bankable and material source of revenue. Eighteen existing CCS facilities —operating or in construction — sell or utilise CO2 for enhanced oil recovery (EOR) which creates a long-term secure revenue stream. In the United States, tax credits issued under section 45Q of the Internal Revenue Code, have been an important enabler of the six CCS facilities that have commenced operation in there since 2011. Several new projects that will be eligible for tax credits are now progressing through studies.
Carbon pricing can also support the business case for CCS. A carbon tax introduced in Norway in 1991 incentivised the development of the Sleipner and SnØhvit CCS projects. Regulation has played a role in incentivising investment in CCS by proscribing emissions above a certain level. Chevron recognised the need to reduce CO2 emissions from its Gorgon LNG project in Australia and included CCS in its Environmental Impact Statement. The approval of the project by the Western Australian Government subsequently included a mandatory condition to inject at least 80 per cent of the reservoir CO2 produced by the gas processing operations.
The introduction of an emissions performance standard for power generation in 2011 in Saskatchewan was a driver of the development of the Boundary Dam CCS facility. Without CCS, the Boundary Dam coal unit would have been required to close and be replaced by a natural gas combined-cycle plant. At that time, the expectation of higher and more volatile gas prices made CCS retrofit of the coal unit the highest NPV option.
The third enabler is transparent and predictable regulation of access to pore space for the geological storage of CO2. Investors must be confident that they can secure the right to exploit geological storage resources and manage compliance risk associated with CO2 storage operations. Further, it is critical for governments to implement a well-characterised legal and regulatory framework that clarifies operators’ potential liabilities for stored CO2. One excellent example is the framework implemented by the Australian Government whereby the storage operator bears the risk of short-term liability during the operational period of the project and for a specified post-closure period.
The fourth enabler is a supportive government. Governments can provide financial support in the form of capital grants, operational subsidies, or concessional loans for specific projects if necessary. Governments can also support the establishment of CCS hubs, which significantly lowers the cost of CO2 transport and storage through economies of scale, by being the first investor in CO2 transport and storage infrastructure.
In addition, governments have an important role to play in building public confidence and understanding of the necessity of CCS in meeting climate targets. The United Kingdom Committee on Climate Change provides an excellent example in their May 2019 report describing how the UK can achieve net-zero emissions by 2050. Their analysis demonstrates the need for every possible low emissions and energy efficiency technology including CCS to mitigate emissions from industry, power generation, and hydrogen production. Importantly, it identified that 179Mt of CO2 must be captured and stored in the UK in the year 2050.
Finally, for CCS deployment to reach the scale required it is important to consider the near-term opportunities for CCS investment. Most opportunities demonstrate the following attributes:
- Relatively high CO2 concentration gas streams e.g. natural gas processing, refining, hydrogen production, various chemical processes.
- Relatively proximate (within 500km) high-quality geological storage resources and existing geological data, usually collected for the purpose of hydrocarbon exploration.
- Bankable financial reward for CO2 capture and storage.
- Transparent and predictable regulation of CO2 storage and commercially acceptable management of long-term liability for stored CO
- An actively supportive government that understands the role of CCS in achieving its emission reduction commitments.
Achieving the goal of net-zero emissions by 2050 requires ongoing commitments to deep emissions reductions through the adoption of a range of technologies and mitigation solutions, including CCS. To reach the levels of CCS deployment required to meet climate targets it is vital that the challenges and enabling factors of deployment, as well as the vast opportunities the technology provides, are not only well-understood but are considered and acted upon with urgency.
 By 2026 tax credit value will rise to USD35/tCO2 for EOR and USD50/tCO2 for dedicated storage or utilisation.