The global urgency to combat climate change by cutting greenhouse gas (GHG) emissions—foremost amongst which is carbon dioxide (CO2)—has only intensified throughout the COVID-19 pandemic. Fundamentally, we believe the energy transition to a low carbon state over the coming decades will require multiple pathways to get there. Carbon Capture & Storage—or CCS for short—could be a major highway in that equation. This speaks to the fact that the technology has been around in various forms for decades (technology risk is relatively low), and it can be implemented within reasonable timeframes—say 5-7 years—from paper to practice.
Disclosures and Disclaimers
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How Does CCS Work?
CO2 is formed during the combustion of any fuel containing carbon - coal, gas, biomass and waste; it is also produced when natural gas is processed and fertilizer/chemicals/cement are produced. CCS can be thought of in three simplified parts 1) capture, 2) transport and 3) permanent storage. The first piece—capture—is the most complex and costly and involves removing CO2 from the hydrocarbon stream. That CO2 is then cooled and compressed into a fluid state (to reduce volume) for transport to a storage site, generally via pipeline, but like natural gas, could also involve ships + other forms of transport. The final piece of the equation is the most important—permanent underground storage involving depleted oil and gas reservoirs or saline aquifers.
Global Scope, but Limited Adoption To Date
We count 26 CCS projects worldwide capturing almost 37 mega tonnes of CO2 per annum (Mtpa) — or less than 0.5% of global CO2 emissions of 38,000 megatonnes in 2019. We believe this dynamic boils down, in large part, to economics—and reflects inadequate penalties in the form of low carbon prices and incentives (low offset credits). Anchored by tax credits and enhanced oil recovery (EOR) schemes, the United States leads the way in operational CCS. Canada, Norway, Australia, Saudi Arabia and the UAE trail as distant seconds numbers wise, but possess some high profile projects. From a standing start, CCS is emerging at a rapid clip in the United Kingdom.
Carrot & Stick Approach Needed for Further Adoption
In the absence of revenue drivers involving the secondary use of captured CO2, CCS on its own is a capital intensive investment with fragile returns that depend almost entirely on carbon prices and government policies. Thus, evolution of the private-public partnership model is essential for CCS adoption to blossom. In our minds, both carrots—in the form of incentives—and sticks—in the form of sufficiently high carbon prices—need to be in place. The requirement for large emitters to make large, multi-year investments in CO2 reduction will require long-term visibility on carbon levies and durability of government policies as elected leaders come and go.
Early Days on Costs & Returns
Capture costs are the biggest component in the CCS equation and tend to fall as CO2 concentration rises. The determination of rates of return on CCS investments—even with carbon price determination—remains opaque in part given the early stage of development and scale.
Andre-Philippe Hardy
Head of Canadian Research
André-Philippe Hardy is Head of Canadian & APAC Research at RBC Capital Markets, a premier investment bank that provides a focused set of products and services to corporations, institutional investors and governments around the world. RBC Capital Markets’ Canadian equity research team is consistently top-ranked by institutional investors, as per the Brendan Wood International, Greenwich and Institutional Investor surveys. Prior to becoming Head of Canadian Research in November 2013 (he was appointed Head of APAC Research in November 2019), Andre led RBC Capital Markets’ Canadian financial services Equity Research team for six years, with direct coverage of banks and insurance companies. Throughout his career as an equity analyst, Andre was ranked consistently as a top analyst in his sectors in industry surveys, while his stock-picking success was validated by his StarMine rankings and his work was often quoted in the financial press. His primers on banking and insurance were unique products, which were widely read by investors as well as management teams. Andre joined RBC Capital Markets in 2007 after almost a decade in the equity research departments of Merrill Lynch Canada and TD Securities.
Greg Pardy
Head, Global Energy Research, RBC Capital Markets
As Head of Global Energy Research, Greg is responsible for leading a team of more than 30 professionals in Canada, the United States, Europe and Australia who cover E&Pand Integrated oil companies, Oilfield Services, as well as Energy Infrastructure, MLPs and Power &Utilities companies. He is also directly responsible for coverage of Canada's Senior E&Pand Integrated Oil companies. Prior to joining RBC Capital Markets in 2009, Greg was the Director of Equity Research at Scotia Capital for two years. Prior to this, he provided research coverage of the Canadian energy sector for 15 years at Scotia Capital and Goldman Sachs in New York. He was the top-ranked Analyst covering the Canadian Integrated &Refining sector in 2020 as per independent investor surveys. Greg is a Managing Director at RBC Capital Markets.
