Under pressure: Enhanced oil recovery operations drive US to CO2 injection milestone

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Hill Vaden:

All right. Welcome back to EnergyCents, an S&P Global Commodity Insights podcast covering all things on the topic on the intersection of energy and finance. This is your co-host, Hill Vaden, and I'm here with your other co-host, Sam. I just butchered that. Sam Humphreys, how are you?

Sam Humphreys:

Oh, you didn't butcher it. It's one of those things, you say it a million times. Sometimes it just autopilot switches off.

Hill Vaden:

Sometimes it just stumbles off the tongue.

Sam Humphreys:

Exactly. But I'm good. How are you?

Hill Vaden:

I'm doing all right. So, we just spoke with Derek Gonsuron, who reached out to us last week or a couple of weeks ago to let us know that in the US, we have reached a milestone of injecting one gigaton of carbon dioxide, which is a, I suppose in some ways it's an arbitrary number, but it's a major milestone in the idea that we can capture, transport and inject CO2 in very large volumes. And a gigaton is a billion tons. And so, he goes into some of the details of why this potentially matters in a carbon-constrained economy. Can you flag some things for people to listen to?

Sam Humphreys:

Yeah. Sure. I think the important thing to note here is you've already said it, is that it's injecting CO2. So, this is used almost exclusively as part of enhanced oil recovery. So, that's getting more oil out of depleting fields and they come up slightly lower carbon barrels or whatever, but the technology that has been established around it and then the pipeline network that's been established to transport CO2 from third party sources, not just geological sources and how that is built up.

And then what that means for scaling it up this industry to potentially store CO2 in the future, which is where we want to go to achieve that net zero, well, environmentally friendly net zero targets that we've got for 2050. And again, you put that a few key projects that have been underway, know Denbury's obviously in there and just what we need to do in the future to ramp up that injection and storage capacity. But what about you, what did you think?

Hill Vaden:

I just think that it's another example of off-take being important to emerging energy ideas. And the PPAs or power purchase agreements really help to scale things like solar and batteries and wind. And this is the off-take is that the CO2 is needed to make oil. And so, there's a business model that is helping to prove concept of some of the technical requirements around potentially storing CO2 that has potentially some unintended consequences for the learnings of CO2 as a molecule management business. So, there's a lot to unpack and a lot to learn from. So, we can hand off to Derek now.

Sam Humphreys:

Enjoy.

Hill Vaden:

All right. Derek, thank you for joining us today after this long Memorial Day weekend to talk about carbon capture utilization and storage and the gigaton milestone that has recently been reached here in the US. And so, for those listening, which I suppose is everybody hearing this, can you set up the introduction of why this milestone is significant and anchor where we are and why we're talking today?

Derek Gonsuron:

Well, I would like to talk to the people that aren't listening to this, bring them in. So, how this works.

Hill Vaden:

That's about going viral is with the people who didn't listen or hearing about it. That's a sign of success.

Derek Gonsuron:

I'm trying to figure out what charts are compared to long fallen down. So, hi, I'm Derek Gonsuron, Head of US-Content for Upstream Services. And why this is important is because when we look at the measures of CO2 injection, it's been measured in thousands and millions. But when we talk about environmental, it's the gigaton level. And at gigaton, which was a billion tons, it's always being looked in the future like this stuff we need to get to in 2050.

And so, when we started acquiring and bringing in and looking at well level injection data, we started noticing something. I was like, "Hey, we're pretty close. The US is going to surpass this milestone soon." And sure enough, we did this year.

And so, the reason that's important is because with a lot of people, naysayers for the CCUS industry, hitting a milestone that requires thousands of wells and thousands of miles of pipeline and a lot of infrastructure and a lot of economic incentives to get there. And so, being able to hit that milestone gives the industry a retrospective to look back and say, "Hey, this is how you can get it done. And requires a lot, we can get it done."

Sam Humphreys:

So, if we step back a bit, obviously, CO2 injection has been going on for a while. This isn't necessarily a new technology. So, can you frame up how long it's taken to get to that point and how has that rate changed to get to it? And we can look at the future afterwards, but has it been a quick ramp up in the last five years? Just set the scene a bit there for us please.

Derek Gonsuron:

Yeah. So, it took about 44 years to get there. So, significant amount of time. And so, the very first year, only about 4,000 metric tons were injected that year. And that's been this gradual ramping up ever since because as the technology was proofing out, a couple more people got involved, more wells were drilled, more injection happened. Then we started going from the thousands to tens of thousands to hundreds and how technology grows, that gradual ramp up happened. And so, over those 44 years we got there. And so, to now we're, last year we injected 46 million metric tons of CO2 last year in the US alone.

So, it's been that gradual ramp up. And that's something that when you put that timescale on there, that 44-year timescale, that's where you can see those big numbers happen. But that's where when we look at the other timescale, which is where we're going out to 2050, while what kind of infrastructure and injection is needed to get to those other goals, is where the shrinking of that timescale and the increase of the injection time needs to ramp up.

Hill Vaden:

And has it been linear or has there been a hockey stick where all of a sudden there was a catalyst or certain catalysts that caused the rate of injection to increase, whether that be the Inflation Reduction Act or some success with Denbury? Or has it just been a slide up into the right for 44 years?

Derek Gonsuron:

Yeah. It's been the second one. So, yes, Denbury was the real catalyst there to get things going. They really saw potential for EOR, invested pretty heavily in it and really started ramping up. And you can just see this gradual increase of injection over time. And then when Denbury starts injecting into their EOR fields, start building all their pipeline, we just see this hockey stick ramp up where we're going from the hundreds of thousands and a few millions to the tens of millions of tons per year ramp up.

And so, Denbury really was the big player that changed the game and for the US and attributed to the most pipeline, the most wells and the most injection bias, significant margin in this space. And they just saw the economic incentives in business. Yeah. Sorry. Go ahead, Sam.

Sam Humphreys:

EOR is Enhanced Oral Recovery for folks that might not know. So, can you just explain a little bit about those projects for folks who might not be aware, whatever you've been doing over the last couple of years?

Derek Gonsuron:

Yes. So, there's lots of ways to go into what's called tertiary recovery, like the final recovery of an oil field. And so, when you look at fields, fields need certain characteristics in order for them to be up for tertiary recovery. And so, that requires injection into the field and the flushing of oil. Some people use steam, some people use water.

But found that CO2, this was the starting of that technology 44 years ago, was pretty effective at it. Emulsifies with the oil when it's injected, comes up out, they separate the CO2 and then turn back around and re-inject it. And so, the effectiveness of CO2 compared to water was really strong. But then they had the issue of getting the source of that CO two going in.

And so, that's when most of this started with geologically sourced CO2. So, producing a well with CO2, transporting out to the field and injecting it. And that's where we got earlier where the natural economics were there so people would go out and acquire CO2. And then over time, as carbon capture technology came in, a few facilities started capturing and injecting. And then what we're seeing now is the reverse incentive where companies like Denbury and they have OXY and Contango in there, they were paying for CO2 from these fields.

But now with these economic incentives for these fields, they can get paid to inject their CO2 into those reservoirs because when that CO2 sweeps across the field captures that oil and comes up, a lot of it is left behind. Reservoir engineers might get on me to this, but 20 to 40% could be left behind in these fields depending on the maturity of the field.

And so, that volume can be counted in things like 45Q tax credits and carbon markets as a sequestered volume. And so, that opens up a different market in different economic incentives where it's not just the barrels of oil on the other end, it's the sequestered CO2 that helped with their economics of these fields as well.

Hill Vaden:

And so, Denbury was acquired by Exxon, what, a couple years ago, three years ago. And you said that they've been really driving the acceleration of this when Denbury's been around for, I don't know what, 15 plus years, 10 plus years, when did the hockey stick begin to bend and did it accelerate? You mentioned the economic incentives of the IRA. Did it accelerate with that or was it steady as she goes?

Derek Gonsuron:

The economic incentives didn't really align with that because the incentives were more along the lines of is the oil price and is our efficiency is our scale right to make this work? And so, the IRA and 45Q tax credits weren't playing as much into it because remember this was mostly geologically sourced in.

And so, it really kicked off around 2010. That's when we jumped from about 10 million times a year to 30 million times per year. We had a 3x jump. And that's when Denbury was, the cow was kicking in there and we peaked at 72 million times a year. That was in 2019.

And so, it was those incentives of economics of scale and things along those lines that really helped out. And what is interesting is that the 45Q tax credit, even with the companies that were capturing CO2 still wasn't quite in play yet. So, we have companies that are doing ammonia production and ethanol production that we're putting capture facilities on 10 years ago that didn't have the 45Q tax credit in their line of sight to go after it because they were just doing it because Denbury was knocking on their door saying, "Hey, we need a CO2 source."

Or it might've been Kinder Morgan or Minox, I don't know all of their business plans, but they might've been knocking on the door saying, "Hey, we need a CO2 source and your ethanol facility is pretty close to any ORR field. Would you mind selling a capture facility and we'll pay you $10 a metric ton for that CO2?" And so, the economic incentives were there from an operational standpoint.

So, what's happening is now that the economics are steroids when we look at 45Q because now the ethanol producer or the ammonia producer is incentivized to install that facility, and if they're close enough to these fields, then everybody's a win-win in this scenario. Where instead of paying for their CO2, they can get paid to inject it. And so, it just works out.

And one thing that people on Sam's team, the international team have done is they have an EOR dashboard and they've been finding fields, hundreds, thousands of fields around the world that are past their screening capabilities and could be possibly EOR conversion fields. So, there's a lot out there that people can go after.

Sam Humphreys:

It definitely is. So, if we're talking now about the US and we've talked a lot about EOR, this gigaton that's been injected into the US, is that exclusively being used for EOR or has there been any storage potential in that as well? Because we talk about storage, not just reuse and sequestration. Has that happened?

Derek Gonsuron:

Or the incentive or the intent to be storage? Yeah, I would say of that gigaton six, seven in a few fields here and there for the intent and talking about million metric tons, and so very, very small numbers. So, when we look at 1,013 million metric tons of that gigaton, it'll be 1,019 or whatever you call it. I'm sorry, reversed my math there, but very small has been intentionally injected for sequestration.

Now, the knock-on effect of the CO2 being left behind in these EOR fields is sequestered that was that 20 to 40% I mentioned earlier. So, we're still getting large volumes of CO2 being sequestered in these EOR fields. But that wasn't the intent. The intent wasn't for that, it was for an historical cover. The knock-on effect, you get what's called what Denbury calls a blue oil barrel or they call a net negative barrel where we're injecting more CO2 from anthropogenic sources than the oil that we're making produces. And so, there's a knock-on effect of that that helps them out.

Hill Vaden:

Two questions here that I think are related, and if they're not, you'll have to bear with me and answer both of them. So, if I'm buying CO2 from an ethanol producer or whatever in the way that you just described, is that on a multiyear offtake agreement where I say, "Hey Derek, I want to buy your CO2 and I'm going to buy it every day for the next 10 years at this price."

And then a second question that I think is related to that, if there's a 45Q involved in this overall experience, do I, the mover of that CO2 and the store of that CO2 it, or do you the ethanol producer, who gets the tax benefit from that? So, it's two questions, long-term contract, does it exist? And two, who gets the tax benefit?

Derek Gonsuron:

Yeah. So, much better the second one than the first one. A lot of those contracts aren't really exposed publicly. We would love to see them. So, if someone is listening to this and has contract terminology in terms they would love to share with us for analysis, and I know our consulting and insights team would love to have it to see how some of that stuff works.

But yeah, so it was likely to be a multiyear agreement along those lines. But when it comes down to the 45Q tax credit, I'll sit on that one. It is the emitter. So, the emitter gets the tax credit. And the way 45Q is set up in the US, if it goes into pure sequestration, it's $85. If it goes into utilization like this in EOR, it's $60. There's lots of push to move that 60 to 85 because you can only count the sequestered volume. Remember that small 20 40% I was mentioning earlier, only that volume of CO2 can get counted there. And so, if it's sequestered, no matter how you do it should be 85.

Now, the emitter gets that. And so, in this case, if it's $60 and it's an ammonia facility, they'll get that amount and then they can pay an offtake where they can say, you take care of the transportation and injection of this CO2, and I'm going to pay you. In this case we'll say, Denbury or OXY or whoever I'm going to be, I will pay you 10, 15, $20 a ton to take this off. And then the operator in this scenario will get to keep 50 or $40 a ton depending on how their setup is. And these are me speculating some of the economics here, but because again, we don't have those contracts like we said we would like to have earlier.

But yeah, so that's how that works out is they set up a deal for the amount per ton based off of that. So, the durability of policy of 45Q really plays into this because someone can really get holding the bag right here if they set up a long-term contract and 45Q gets changed materially in near term.

Sam Humphreys:

So, I'm a bit curious about the transporting of CO2 in this industry because I mean, so heads up to people listening. Derek's written a really good blog that's out on our website detailing some of these facts that we'll put link into. But there is a significant amount of pipelines that have been constructed to transport CO2, and there's some planned, if I'm right, I may have just made that up, but how does that tie into the costs and the projects? Is it the emitters building the pipelines or is it a third party? How does it work in terms of the CCS industry compared to an upstream industry, for example?

Derek Gonsuron:

So, it could either be a midstream player or an injection player, but it's typically not the emitters in this case that are building the pipelines. And so, yeah, you're correct. In order to get to that gigaton level, we had almost 6,000 miles of pipelines for CO2 late in the US and there's over 2,000 planned right now for CO2.

Now, you can have a midstream company in this case you look at stuff like Summit, a navigator, which was a [inaudible 00:17:19] project in the Midwest, but Summit is picking up some of those crumbs and trying to make those connections work out. So, they could be a mystery company where they're setting it up and they're going to connect the emitters to the sequestration companies and bring the CO2 to the field. That could be the setup.

And it also could be somebody like this case, we'll go back to a Denbury or an OXY or a Kinder Morgan scenario where they're saying, "We're going to build the infrastructure, we're going to build the fields, we're going to connect to you because we need your CO2. And so, we'll make the connections in that scenario and we do the full offtake, where it's not a manufacturing company and an operating company separately. We're doing the whole thing. We one stop shop, you pay us, and we're going to make all the connections worth out."

Hill Vaden:

Kind of the technical milestone here seems the main driver of this business is oil price, that if I can make more oil because of your CO2, then I will sign an agreement to buy your CO2. And then the consequence of that, the unintended benefit in a way is that I have stored your CO2 and the relevance to I guess the larger carbon constrained economy is that now we've reached this technical milestone in the US and we've stored a gigaton of CO2. There is a business model in the application of that CO2 to enhance oil recovery.

As we think about potentially the opportunity for scale, what are the conditions that other companies or other participants would need to get involved here? I assume all this is happening, a lot of this is happening in west Texas. Where are the geologic limitations? Where are the pipeline limitations? If you and I want to start a business, can we get in it or is this limited to Kinder, OXY and Denbury/Exxon?

Derek Gonsuron:

So, if you want to get into it, it has a lot of activity in the Rockies, a lot of activity in West Texas, a lot of activity on the Gulf Coast, actually number one state is Mississippi for injection actually by a long shot. And so, when you look at the setups out here for what makes it work, is where can you get the leasing and infrastructure and pipeline set up easily?

And hint on something earlier, the navigator CO2 pipeline, this one was trying to take CO2 from ethanol, mostly ethanol capture in the Midwest and bring it to Illinois and Indiana into the basins there that were good for sequestration issue. There was not a lot of people were up to speed on what it takes to get a pipeline through multiple states and counties and all of that. And so, it hit a lot of legal and social roadblocks up there.

So, where you want to try to get into it is where you can move it and move it at scale. Trucks work, but trucks aren't going to be as economically efficient as a pipeline, especially when we're talking the million to billion gigaton level of moving. And so, you want to look at areas where you can move it easily and where some of that is out of the way, cleared out of the way, clear path where you can get it to where you use sequester to.

So, the vicinity, how close you are to your injection site plays into it. But there's a lot of sites that are being discovered right now. We're looking at stuff on my team where we are taking our data, our tools, our software and our interpretations into Kingdom, which is our software tool, and are finding undiscovered carbon sequestration reservoirs. We found over 200 already in the Gulf of Mexico alone that somebody might've discovered them but they might not have published them yet.

So, we're trying to lean that way and try to find where some of these sites are. And something I had mentioned earlier on the international team, they're looking at it from an EOR capacity as well. So, we're looking at it from an S&P if we're trying to help our clients find these reservoirs. Where are the EOR fields? Where are the carbon sequestration fields so that they can go after.

And if they can pair those up and decrease that distance between the emitting site and the sequestration or in this case the EOR site, then that's going to be the path of least resistance to get this stuff going. Oh, and a country where your economic policy is going to be stable for long enough where you sure you can make that money.

Sam Humphreys:

Good [inaudible 00:21:27]. So, apologies for my ignorance. Are there projects that are going across multiple states at the moment or are they all limited to, like you say, within state just for those reasons that you outlined?

Derek Gonsuron:

Yes. Many projects going across states, but most of those we consider a project, most of those would be like a transportation project like I mentioned Summit or a few others, especially if we're talking Midwest level stuff right there because this is a lot of CO2, easy, cheap to put a sequestration on some of these facilities. Really expensive and hard to get it to where it needs to. Not a lot of sequestration area. So, have to go across multiple states to transport it in those areas.

But right now, we're Denbury, OXY, Exxon, all those have it. And right now, in the Rockies, they're multistate pipelines going across north-south, going east-west from Mississippi all the way to central Texas. And so, there's lots of pipelines in that 6,000 mile quote I said earlier that are taking it right now. And that was what was required to get to this gigaton milestone. And so, when we look at where to get to the next gigaton milestone, yes, we need additional thousands of miles pipeline at across additional states to move the next gigaton.

Hill Vaden:

Where would you put these barrels relative to other barrels coming out of the ground that if it costs me makeup numbers, $50 to frack an unconventional well in west Texas, is this going to break even at $51, $40? And how do I think about this in the stack of new oil coming into market? If a new barrel of oil coming out of a tertiary recovery field is the avenue for the CO2 to get sequestered?

Derek Gonsuron:

I think one of the things on this one is that if you're getting that incentive, if you're getting the incentive from either a carbon market or a tax credit to inject a CO2, your price per barrel is going to be incentivized very nicely. So, we're talking about where they were paying say $10 a ton to get it. Now, that's reversed where they're getting paid, that's a $20.

And in my example here, that's a $20 per ton of CO2. That's not a barrel equivalent, but that's a blip of their economics for their feedstock in this case, the feedstock being the CO2 as the sweeping mechanism. And so, that's pretty strong.

And even before, we're going back to Denbury now, even before Exxon bought Denbury, Denbury was in their public report saying they are flush with cash. They don't need to take out loans. They were doing very fine because their economics were flipped and very beneficial in that scenario. So, yeah, there's an incentive there. It's almost those stay strong where they can go that companies can go that route and be strong economically.

And the other part of it is if there ever becomes a green market for oil, when I say that, I mean the least carbon intensive barrel you can get, there is no carbon intensity that is better than a CO2 ER produced barrel because in some cases, if you can get an anthropogenic source versus geological, you can have a net negative barrel is what Denbury and couple of other people are saying. They're calling it a blue oil barrel. We'll see if it takes off in the same color scheme that ammonia does. But we haven't seen that buying preference for that barrel yet take off because I'm probably introducing you all to that term.

Sam Humphreys:

It is the first time I've had that, but I like it. I like the color coding. So, if we're looking forward and we've touched on this briefly, we've done a gigaton in America, how quickly can we scale up to the next gigaton? And what are the key things that are needed to achieve that? I'm sure there's a goal by 2050 you say. Is that a goal for the next gigaton or is that a goal to be net zero by then? Can I clear that up?

Derek Gonsuron:

So, I don't want to step too much on our climate scenarios, people's toes here because they're ones that are predicting the stuff on the next gigaton. Our side is saying the likelihood of getting net zero worldwide is very unlikely, but to hit to that gigaton level, our team is saying worldwide yearly totals over two gigatons by 2050.

Now, in order to get to net zero, our team is saying you need to get to six. So, that's why that Delta exists. That's why when we say net zero is going to be pretty hard by 2050 is because we're saying you probably need to get to about six gigatons worldwide per year, but the world that the current rate might get to two gigatons per year max.

And now when we go up to the US and just look at the US, like I was saying earlier, US last year injected 46 million tons last year. But our team is looking at what's happening on the sequestration side as well too. And as a lot of projects coming online, a lot of momentum that's still there for that $85 a ton for 45Q still exists as of a day after Memorial Day. When this publishes, we'll see.

But in 2028, we're saying we're going to be sequestering 53 million net tons per year. So, more. So, sequestering more at 53 than we injected last year at 46 by 2028. That's a ramp up we're expecting to see. And the change in dynamics of the carbon management industry in the US.

Hill Vaden:

And can you put the US in perspective globally if we've injected a gigaton in 44 years, are we a gigaton ahead of the rest of the world, or are we a gigaton behind the rest of the world? Where do we rank?

Derek Gonsuron:

Not a lot of countries have exposed their volumes like the US has, the requirements for US companies to report at the well level. And injection is very different than what we've seen in the rest of the world. So, it's really hard to tell what those volumes are from another countries. Yeah. We're talking very, very different numbers here because not a lot of EOR projects have taken off in the rest of the world. Not a lot of sequestration has taken off in the rest of the world.

So, yeah, we're talking in the tens of millions of tons, maybe hundreds in some countries. There'll probably be a few countries in the thousands. But yeah, we're not talking at the gigaton level 11 injection at the US. It's just EOR has been going on for so long and so much infrastructure here that is really moving CO2 at a whole other level over here. And I really hope that someone is listening from another country like, "Hey, I have a really good number for you there." All right. I'd love to see it. Give me some of that was hidden data sets and reports I was talking about earlier that not all of us can get our hands on.

Sam Humphreys:

We always love to see those. So, just conscious that we are coming to the end of our conversation, what are some things that we should be watching out for? We always ask this in the next six months to a year, but in this industry, what are a few key things, whether it's legislation, key company activities, what should we be looking out for?

Hill Vaden:

Wait, and I'm going to interrupt you. Without predicting policy, what are some things that we should watch for?

Derek Gonsuron:

So, things you watch for would be capture facilities and sequestration coming online. So, many projects have hit FID, have broken ground, and now we're going to start seeing them coming online. There was just a flurry of announcements. If y'all follow me on LinkedIn, I have a Tuesday post, CCUS day as it's spelled where I cover announcements. And I've noticed a trend where it came from companies saying they were going to do stuff, the company's breaking ground and building facilities and announcing first capture, first injection.

And so, we're seeing the rate of facilities coming online from those previous years of announcements. So, that's when we're seeing, this is the year where I think where projects start. We started to see steel. We start to see dirt move. We start to see carbon being captured. That's I think the big thing we're going to be seeing this year in the next couple of years for carbon management in CCUS.

Hill Vaden:

Any states, projects or companies in particular that we should keep an eye on? Mississippi, that's an interesting one that I think is maybe not on everyone's radar.

Derek Gonsuron:

Yeah. That one's big. Yeah. So, to your point earlier, I brought up the numbers here. Mississippi did 457 million metric tons, and Texas did 393. So, Mississippi had Texas by a little bit there. So, the big players in this case are going to be mostly your legacy E&P, exploration production companies because of the molecule management component.

Because what we are in this industry is really good at moving molecules around from the subsurface and into the subsurface. It doesn't matter what the molecule is, we're really good at that and that's what this industry requires. It's taking molecules, moving them around, in this case, injecting them into the subsurface at scale.

And there is a lot of people with that skillset in this industry. And we're going to see companies that have that skill set succeed here. Companies that are trying to get into this that do not have that skillset are going to struggle because there's a lot that goes into this. These are long-term projects and there's a lot of nuance here. And there's learnings from the last 44 years that need to take with them. And all these companies that we mentioned before, a lot of those people are in the wind landing at these other places and going to be taking that skillset with them to help these other companies succeed.

Hill Vaden:

All right. Well, thank you. That's plenty to pay attention to and an interesting milestone for us to see when we get to the next one. So, thanks so much for your time, Derek, and we'll look forward to talking about this again soon.

Sam Humphreys:

Yeah. Thanks, Derek.

Derek Gonsuron:

Thank you all for having me here on, Sam. Appreciate y'all.