SHEL - As Carbon Capture Advances In U.S. Midstream Can Help
2023-09-13 08:00:00 ET
Summary
- Enhanced incentives in the Inflation Reduction Act are making more carbon capture projects a near-term reality, and midstream companies are playing key supporting roles.
- Exxon has signed a 25-year agreement with EnLink for the transportation of captured carbon dioxide starting in 2025, and EnLink is in conversation with several other potential partners.
- In its carbon capture strategy, Occidental plans to leverage its subsurface expertise, while partners, including midstream companies, can focus on their strengths.
Carbon capture, utilization, and sequestration (CCUS) is one of several clean energy technologies receiving notable government support thanks to the Inflation Reduction Act (IRA). Specifically, The Inflation Reduction Act Includes Significant Benefits for the Carbon Capture Industry increased the federal income tax credit per ton of captured carbon and provides an option for direct pay from the Treasury. With more generous credits, the IRA is making carbon capture projects a near-term reality, and midstream companies are playing key supporting roles. Today’s note looks at two companies that are helping lead the charge on CCUS projects and how they are partnering with midstream names.
Exxon’s growing CCUS business and EnLink Midstream.
Exxon Mobil (XOM) has decades of experience in CCUS and is focusing its efforts on reducing emissions for energy-intensive industries. XOM is expanding its CCUS capabilities through the planned Exxon Mobil Announces Acquisition of Denbury of Denbury Resources (DEN) – a long-time player in enhanced oil recovery (EOR). While there are different types of EOR, the relevant method involves injecting carbon dioxide (CO 2 ) into a reservoir to boost oil production. DEN owns and operates around 20% of US CO 2 pipelines strategically located along the Gulf Coast, as well as 10 onshore sequestration sites.
The combination of DEN and XOM has the potential to eventually reduce emissions by over 100 million tons per annum (Mtpa) on the Gulf Coast according to XOM. Since 4Q22, XOM has signed agreements to transport and store 5 Mtpa of CO 2 for industrial customers Linde (LIN), Nucor (NUE), and CF Industries (CF). These facilities will be using point-source capture, which contains the CO 2 from a smokestack or flue gas stream before it can be released into the atmosphere.
To facilitate these agreements, Exxon has partnered with EnLink Midstream (ENLC), which will EnLink Midstream Signs Transportation Service Agreement with Exxon Mobil captured CO 2 to XOM’s storage site under a 25-year, ship-or-pay agreement. The captured CO 2 from CF Industries (up to 2 Mtpa starting in 2025) and Nucor (up to 0.8 Mtpa starting in 2026) will be transported through ENLC’s system. ENLC will use both existing natural gas pipelines and new facilities as it invests ~$200 million in the project. XOM has initially reserved 3.2 Mtpa starting in 2025 but could transport up to 10 Mtpa.
In its 2Q23 earnings call presentation, ENLC outlined a goal to create a $300+ million EBITDA business for CO 2 transportation by 2030 with much of its focus on Louisiana. The state is a natural fit for ENLC’s CO 2 business given significant emissions along the Mississippi River industrial complex, several sequestration sites, and ENLC’s existing natural gas pipelines that can be repurposed to transport CO 2 . ENLC has been in conversations with several sequestration providers, including Shell (SHEL), ConocoPhillips (COP), and Talos Energy (TALO). In May 2022, ENLC announced a letter of intent with Occidental’s (OXY) Oxy Low Carbon Ventures for CO 2 transportation in Louisiana.
Occidental and partners focus on what each does best.
OXY has been particularly active with CCUS opportunities, including direct air capture ((DAC)). DAC refers to removing carbon dioxide from the atmosphere in areas with high emissions. DAC is more expensive to develop than point-source capture, but it also receives richer tax credits ( up to $180 or $130 per ton ). Only six DAC projects are currently under construction globally according to the International Energy Agency . Last month, OXY announced the $1.1 billion acquisition of Carbon Engineering, which focuses on DAC.
OXY’s subsidiary 1PointFive is currently building a DAC facility in Texas, called STRATOS. Upon startup in mid-2025, STRATOS is expected to be the largest DAC project in the world, designed to capture 0.5 Mtpa of CO 2 . 1PointFive is also developing a DAC facility on the King Ranch, near Corpus Christi, Texas, which was recently awarded a grant from the Department of Energy (DOE). The DOE announced up to $1.2 billion for two DAC projects – 1PointFive’s South Texas facility and Project Cypress in Louisiana.
On their August earnings call, OXY’s management explained that their approach to CCUS is to focus on what they do best. OXY has used CO 2 for EOR for almost 50 years, so their expertise is in understanding the subsurface. Other partners can focus on their individual strengths, including midstream companies helping with transportation of CO 2 . For its sequestration hubs, OXY has partnered with Enterprise Products Partners (EPD) on the Texas Gulf Coast and with Western Midstream (WES) for opportunities in parts of the Permian and DJ Basins.
Bottom Line:
CCUS is enjoying positive momentum thanks to the provisions of the IRA and proactive company efforts. Opportunities related to CCUS are starting to materialize for midstream companies with quantifiable EBITDA potential in the case of EnLink. Over time, efforts to support carbon capture can have a more meaningful financial contribution for midstream.
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As Carbon Capture Advances In U.S., Midstream Can Help