Oil industry gears up to tap U.S. climate bill for carbon capture projects

© Reuters. FILE PHOTO: A Shell employee walks through the company's new Quest Carbon Capture and Storage (CCS) facility in Fort Saskatchewan, Alberta, Canada, October 7, 2021. REUTERS/Todd Korol

By Liz Hampton

(Reuters) - Tax credits in the $430 billion U.S. climate and tax bill set to be signed into law this week will kickstart carbon sequestration projects, say oil and gas proponents, offsetting startup costs for some of the anti-pollution initiatives.

Carbon capture and storage hubs that take gases from chemical, power and gas producers and oil refineries have become the energy industry's preferred way to combat climate warming. But large-scale development has snagged over costs and lack of guaranteed revenue.

The Biden administration's Inflation Reduction Act, which was approved by lawmakers last week, provides a tax credit of up to $85 per ton for burying carbon dioxide produced by industrial activity, and up to $180 per ton for pulling carbon dioxide (CO2) from the air.

The bill also greenlit new leases of federal land for oil and gas development, without considerations of climate impacts. Importantly, it automatically approved high bids from a November 2021 offshore auction that included a drilling project intended for a carbon-burying scheme.

"It's a pretty big deal," said Tim Duncan, chief executive of Talos Energy (NYSE:TALO) Inc, an offshore oil and gas producer that is building a business around carbon sequestration. Talos has launched four projects and signed up big backers including Freeport LNG and Chevron Corp (NYSE:CVX) .

“This is going to unlock a significant amount of emissions that could become economic for capture,” added Chris Davis, a senior vice president at Milestone Carbon, which develop carbon projects for mid-sized companies.

CONTINUED STRUGGLES

Over the last two decades, companies have tentatively tried and largely struggled to make a business from using CO2 to boost oil production. More recently, big investors want firms to address global warming, and the oil industry aims to show it takes climate change seriously.

There are carbon sequestration hubs proposed around the world - in Alberta in Canada, Rotterdam in the Netherlands, and Huizhou, China. Another type of carbon capture, which directly catches the greenhouse gas from the atmosphere rather than industrial production, also are being considered.

A massive expansion of carbon capture is vital to reaching net-zero emissions by 2050, according to energy consuming nations advocate, the International Energy Agency (IEA). The sector must go to storing 7.6 billion tonnes a year from around 40 million tonnes currently.

The new tax incentives mean "a number of small to mid-scale projects have a better chance of becoming economical," said Frederik Majkut, a senior vice president for energy services company Schlumberger (NYSE:SLB)'s Carbon Solutions business.

There are some 5 billion tons of carbon released in the United States annually that could be captured by these sequestration schemes. Previously, very little of that could be captured economically, said Milestone's Davis said.

"With $85 a ton, I think you can get another billion tons," he said. "It starts to look like an attractive investment."

BIGGER PROJECTS

Larger projects, such as that advanced by Exxon Mobil Corp (NYSE:XOM), which floated a $100 billion plan for a massive carbon hub serving refineries and chemical plants, will need carbon taxes and other initiatives, said analysts.

Widespread deployment of these industrial hubs will require additional policy support from the Biden administration, an Exxon spokesperson said of the bill's climate provisions.

Smaller projects are more likely to advance but still face hurdles including underground pore rights and permits, said Tracy Evans, chief executive of CapturePoint, which struck a partnership with pipeline operator Energy Transfer (NYSE:ET) for a Louisiana hub.

Currently, permitting for carbon injection wells can take years to secure. And while offshore auctions cover large blocks, aggregating smaller tracts of private land owners onshore can slow the process, he said.

"It will drive more investment in the space for sure," Evans said.