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CCUS: From High-Stakes Gamble to Safe Bet

Investors question the feasibility of CCUS technologies aiding short-term decarbonisation efforts, but progress is being made. 

To reach net-zero greenhouse gas (GHG) emissions by 2050, the world needs to upscale sustainable technologies not yet in wide circulation. One solution frequently seen in the transition plans of firms in heavy-emitting sectors is carbon capture, utilisation and storage (CCUS).

CCUS works by capturing CO2 from fuel combustion or industrial processes, transporting it via ship or pipeline for reuse as an energy source or funnelled into permanent storage deep underground in geological formations.

It isn’t a new idea. Capturing CO2 and preventing it from being released into the atmosphere was used in the early 1970s to aid oil recovery.

Having suffered from under-investment for decades, CCUS is now seen as a key component of net-zero strategies, according to Axel Dalman, Associate Oil and Gas Analyst at Carbon Tracker.

“Virtually all decarbonisation scenarios assume material use of CCUS in the future. It has a place in the race to net-zero, but it should really be focused on the hard-to-abate sectors, such as steel and cement. From that perspective, the fact that capital is flowing to those technologies is positive,” Dalman tells ESG Investor.

For asset owners with carbon-intensive companies in their portfolios, it’s important that CCUS is upscaled, or they risk holding stranded assets. They will also be looking at how power utilities, with their legacy of coal and gas-powered plants, plan to implement CCUS-based technology to prolong gas-powered electricity generation as they shift to renewable energy.

Even if CCUS can be proved to work at scale, there are risks that must be accounted for. Capturing and storing carbon does not incentivise carbon-intensive industries to scale back their usage of fossil fuels, rather it allows them to continue. Further, carbon leakage could prove just as damaging as pumping carbon into the atmosphere in the first place.

Investors are wary of companies putting too many of their eggs in the CCUS basket, experts say, noting that credible decarbonisation plans should include a wide range of solutions for cutting emissions in the short, medium and long term.

Nonetheless, many agree that CCUS has a part to play in the transition to a low-carbon world, with policymakers and investors increasingly incentivising companies to develop such solutions.

“The recent explosion of net-zero commitments means that the realistic potential of CCUS will have to be resolved soon,” warns James Leaton, Senior Vice President of ESG at Moody’s Investors Service.

Growing pains 

Investor scepticism has been fuelled by the number of upscaled CCUS projects which have crumbled under pressure. To date, over 80% of projects in the US have failed, according to a 2020 study published in Environmental Research.

“Chevron’s Gorgon project in Australia is a good example of how spectacularly CCUS can fail. Instead of being a carbon sink, it became one of Australia’s biggest sources of emissions,” says Dalman.

The flagship scheme was designed to capture emissions from a liquefied natural gas field. However, earlier this year, the American multinational energy corporation announced that the Gorgon project had failed to capture the promised 80% minimum of emissions generated over the first five years.

CCUS-based solutions have also been used to promote the continuation of unsustainable business practices, Dalman adds. One of the main commercialised uses of CCUS today is in enhanced oil recovery (EOR).

“And it takes some real delusion to call that a low-carbon technology,” he says.

EOR CCUS works by injecting pressurised CO2 into existing oil and gas reservoirs, pushing more oil and gas out. This does use up a lot of repurposed CO2 and leaves it permanently buried, but it’s also allowing oil and gas companies to tap finite natural resources more quickly.

This contributes to the concern that widely adopted CCUS will promote unsustainable business as usual, giving companies the excuse to delay transitioning to renewable energy and low-carbon operations and products.

For this very reason, just like purchasing carbon credits, using CCUS to store carbon isn’t seen as a viable solution by the Science-Based Targets initiative (SBTi).

In cases where CCUS is being used to “prolong the life of fossil fuels”, it should be “disincentivised” by investors, says Angela Quiroga, ESG Analyst at Union Investment.

If CCUS technologies are successfully scaled, Quiroga argues that even the most bullish scenario suggests that just “15% of today’s CO2 emissions worldwide could be offset”.

As such, investors are continuing to look to back companies that are pursuing a range of technological solutions, Quiroga adds.

For example, blue and green hydrogen are “alternative low-carbon sources of energy that will play a key role in the decarbonisation of the oil and gas sector”, she says.

While the long-term goal of many oil and gas companies is to transition away from the use of fossil fuels, in the interim they are looking to ensure their production processes are more sustainable. This will require either capturing and storing the carbon emitted during exploration and refining, as well as powering future operations using alternative low-carbon solutions such as hydrogen.

However, commercialised green hydrogen is not yet an option, and blue hydrogen will still require CCUS to capture and store emissions.

Incentivising progress

More money is flowing into the development of CCUS-based solutions, making then more viable and less risky.

With more funding for the development and implementation of testing facilities and subsequent upscaling of CCUS-based solutions, the widespread use of CCUS is becoming more feasible.

“We already have the technology, but we haven’t scaled it fast enough due to the lack of incentives,” says Paola Perez Pena, Principal Research Analyst of Climate and Sustainability at IHS Markit. “There is no doubt that we need CCUS if we want to meet net-zero targets. The question here is if the industry will get the right economic incentives to grow at the pace it needs to.”

Policymakers are increasingly directing investment and resources into CCUS.

For example, the US expanded its 45Q tax credit in 2018 to reward companies that capture and store carbon.

In Europe last year, the EU Innovation Fund was launched to invest in demonstrated innovative low-carbon technologies, funded by revenues from the Emissions Trading System (ETS). In July, the fund invested more than €118 million in 32 projects across 14 Member States that include hydrogen, CCUS and renewable energy.

And it’s not just policymakers funding CCUS.

In January 2020, tech behemoth Microsoft announced plans to become carbon negative by 2030. It also launched a US$1 billion Climate Innovation Fund to invest in the global development of carbon reduction, capture and removal technologies.

The Oil and Gas Climate Initiative (OGCI) is a CEO-led enterprise that aims to accelerate the industry response to climate change. It collectively invests over US$7 billion each year in low-carbon solutions, accounting for almost 30% of global operated oil and gas production. Members include bp, Equinor, Shell and Total Energies.

The OGCI launched the OGCI Climate Investments fund to invest in technologies and projects accelerating decarbonisation in oil and gas.

In 2019, the OGCI also launched its CCUS KickStarter campaign to help drive down costs of developing and upscaling solutions developed by CCUS hubs and to attract widespread commercial investment.

Developments backed by the OGCI that are expected to be operational before 2025 include the UK’s Net Zero Teesside and Norway’s Northern Lights’ Longship projects.

Market growth

The injection of capital is accelerating progress, experts say.

Plans for more than 30 new integrated CCUS facilities have been announced since 2017, according to the International Energy Agency’s (IEA) ‘A new era for CCUS’ report.

These span a variety of carbon-intensive sectors, such as coal to chemical, natural gas processing and steel, as well as projects developing low-carbon energy replacements, such as hydrogen and waste-to-energy.

As well as projects in the US and Europe, others are planned in Australia, Korea, China, New Zealand and the Middle East.

If all these were to proceed, the amount of global CO2 capture capacity would more than triple to around 130 million tonnes per year, the report noted. 2020 annual CO2 capture capacity from power and industrial facilities was 40 million tonnes, the IEA added.

“There are also a wide range of new players across the value chain, including technology start-ups and infrastructure companies. These could play a significant role in the development of CCUS, thus investors should be aware of them,” Perez Pena points out.

The pilot and demonstration-scale CCUS facilities currently operating could be scaled up to fully fledged commercialised solutions within the next few years, according to a 2020 report by international think tank the Global CCS Institute.

The think tank reported 34 pilot and demonstration-scale CCUS facilities in operation or development last year, as well as eight CCUS technology test centres spanning a variety of sectors.

“The spread of CCUS projects across sectors reflects the strength and diversity of energy production and manufacturing industries,” the Global CCS Institute said.

One such example is the technology platform Global Thermostat. Last year, it demonstrated the scalability of its CCUS technology in a pilot plant with a capacity of 4,000 tonnes of CO2 per year. Global Thermostat has since partnered with ExxonMobil to upscale its solution.

More recently, insurance group Swiss Re (US$110 billion in AUM) signed a purchase agreement totalling US$10 million over the next decade with Climeworks, a company specialising in CO2 capture technology. The long-term agreement commits Climeworks to scaling up Swiss Re’s existing CCUS capacity as the insurer attempts to decarbonise its operations in line with its net-zero by 2030 pledge.

Investor expectations

In the short term, CCUS technologies can’t deliver the results needed by carbon-intensive companies looking to drastically reduce their absolute emissions, experts say.

But, as we get closer to the world’s 2050 deadline, they will play an important part in the removal of any remaining emissions that can’t be so easily cut – such as those produced by hard-to-abate industries.

“Right now, expecting CCUS to do the heavy lifting is taking a huge bet,” says Carbon Tracker’s Dalman.

He adds that sectors such as oil and gas should instead be demonstrating how they plan to transition to sustainable business models or “winding down their operations with capital returned to shareholders”.

In the near term, companies’ decarbonisation plans need to be “credible and feasible”, agrees Quiroga. Investors are looking for a focus on improving energy efficiency and renewable low-carbon alternatives, she adds.

“Nonetheless, if a company can successfully improve and scale CCUS today, then that can only be positive for our chances of meeting the goals of the Paris Agreement,” says Dalman.

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