CERAWEEK: Carbon capture costs outweigh incentives, fail to attract hard-to-abate industries

Operators are committed to reaching net zero goals outlined in the Inflation Reduction Act by tackling carbon emissions through large scale storage projects, but current incentives have failed to rally industries behind the proposed carbon solution. Challenges in scalability and commercial appeal persist, with cost remaining a primary barrier to widescale deployment, company executives said March 18.

"The jury is still out" on the subsidies for carbon capture projects in the IRA, said Tak Ishikawa, CEO of Mitsubishi Heavy Industries America during a panel at CERAWeek by S&P Global. "Ever since the IRA was introduced in August of 2022, there has not been once single carbon capture project that has seen a final investment decision."

The expansion of the 45Q tax credit to $85/t, while significant, has done little to move hard-to-abate sectors on its own.

"It's just not enough" to cover capital expenditure, debt servicing and providing a return, Ishikawa said, suggesting that the incentives outlined in the IRA were lackluster compared to the costs required for scaling these projects.

Unless the market was willing to pay a premium for a clean product, "it's really difficult to justify a carbon capture project just on the 85 dollars."

An expansion in hub operations could pose as one solution to the problem, with S&P Global Commodity Insights analysts estimating a 15% to 40% reduction in costs hinging on the development of hub operations paired with other offsetting measures.

"Having [carbon capture] hubs closer to where the CO2 source is," could promise development in infrastructure such as pipelines, Shell's Integrated Gas and Upstream Director Zoe Yujnovich said. Shell is already more than halfway to reaching a 50% reduction in emissions, well ahead of the 2030 target as noted in the IRA.

Transportation constitutes another opportunity to create commercial use and scalability for CCS technology, according to Yujnovich. Yujnovich cited Shell's partnership with Total Energies and Equinor on the Northern Lights project, Norway's first license for CO2 storage and shipping, as an example of a full-scale commercial CCS project.

The project helps industrial sources such as Heidelberg Cement reduce their CO2 emissions by capturing, liquifying, and shipping them to an onshore terminal on the Norwegian west coast. From there, the liquified CO2 is transported by pipeline to an offshore storage location for permanent storage.

"Being able to ship CO2 allows you to broaden commercial uses," Yujnovich said, which could incentivize these hard-to-abate sectors like the cement and steel industries.

"Direct air capture's timeline is different, but there are some major advantages," Richard Jackson, CEO at Oxy said, suggesting that direct air capture could be another part of the solution. "Directly taking emissions and storing them is an efficient way to scale."

Through their subsidiary 1PointFive, Occidental is expecting their large-scale direct air capture plant to be operational by mid-2025 as construction is underway on the Texas-based project, STRATOS. Designed to capture up to 500,000 tons of CO2/year, STRATOS could offer cost-effective solutions to hard-to-decarbonize industries according to the company.

Development of cost-effective carbon capture portfolios

Funding large-scale clean energy projects should require a more "holistic" approach, said Joanne Salih, a partner at Oliver Wyman's energy and natural resources practice.

"If we are talking about CCS, I don't actually believe that the challenge is inherently in the project, but it's the fact that it is being phrased as project and project finance to the institutional investors, which makes it very difficult," Salih said on the sidelines of the conference.

"The returns profile for carbon capture projects...in the traditional sense of what return is, is right now unknown and/or zero or negative, and potentially minimal moving forward," Salih added.

"We have to stop looking at things as individual projects," Salih said, adding that a proper investment portfolio would include upstream and downstream asset bases. For instance, the inclusion of hydrogen and carbon capture.

"I can optimize my margin on the one side and reduce my emissions on the other," she said. "That's the only way we can make this work."

Developing cost-effective carbon capture portfolios appears to be the key to scaling the industry, especially as demand increases from the oil and gas industry as it gets closer to the IRA's net zero target year of 2030.