Andre Hardy:
Welcome to the Industries in Motion Podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries. Please listen to the end of this podcast for important disclaimers. My name is Andre Hardy, and I am head of Canadian and Asia Pacific Research. Let's get into today's episode. I am very happy to introduce our guest, Greg Pardy. Greg is a managing director and head of global energy research at RBC Capital Markets.
Andre Hardy:
He leads a team of more than 30 professionals in Canada, the United States, Europe and Australia who cover energy and utilities companies. He is also directly responsible for research coverage of Canada's senior E&Pand integrated oil companies. Greg joined RBC Capital Markets in 2009, and has about 30 years of equity research experience. He is the top ranked analyst covering the Canadian integrated space for independent investor surveys. Greg, thank you for joining us.
Andre Hardy:
Today, we'll be discussing carbon capture and storage, or CCS, which could play a pivotal role in the CO2 equation for energy companies and other industrial companies. The RBC Global Energy Research team recently published a report under our RBC ESG Stratify brand titled, Carbon Capture & Storage: Dare to Dream Big. This in-depth report highlights CCS mechanics, global adoption, the importance of private-public partnerships and regional policy dynamics.
Andre Hardy:
Greg, there's obviously a lot of focus on climate change and potential ways to mitigate global warming. Why do you think carbon capture and storage is so important to understand, and why now?
Greg Pardy:
Yeah. Thanks, Andre. I guess, first off, nice to be here to talk about the report. That's a great question, but let me start first by just thanking some of the major contributing analysts to the report, to the CCS report, Dare to Dream Big, because this truly was a team effort. Luke Davis, Al Stanton, Victoria McCulloch, Megan Schippmann, Gordon Ramsay, Biraj Borkhataria , and Scott Hanold all played key roles. And it truly was a report in which no single analyst is a master of all topics.
Greg Pardy:
But fundamentally, we believe the global energy transition to a low carbon state over the coming decades is going to require multiple pathways to get there. When we look at carbon capture and storage, or CCS for short, as you referred to, we see this as a major highway in that equation for a couple of reasons. The first is the technology has been around in various forms for decades. We look upon the technology risk as relatively low. Second, it can be implemented within a reasonable timeframe, say five to seven years from paper to practice.
Greg Pardy:
When you sum it all up, we think this is a very practical approach to cut emissions in quick order. I think what's ironic is that, while fossil fuels are seen as the main CO2 source, many of the capture skills reside within oil companies. They hold most of the capture patents and the companies have the core skills required for gas transportation and storage. They're key players in this overall equation as well. We decided to publish that in-depth report now because we think there's considerable political momentum, obviously globally behind climate change. You can't open the papers without seeing something on climate change in general, but also CCS. We believe that this is going to translate into private and public investments as it already is.
Andre Hardy:
Help us understand, Greg, the mechanics of CCS. How is carbon captured? How is it transported? How is it stored?
Greg Pardy:
Yeah, let's start with the basics. CO2 is formed, as you know, during the combustion of any fuel containing carbon. Think of coal, gas, biomass, and waste. It's also produced when natural gas is processed and also arises in the creation of fertilizer, chemicals, cement. Then of course, you have energy intensive industries like steel production. So, CO2 is coming at us from a lot of different sources. Now, you can think of carbon capture and storage in three parts: capture, transport, and then ultimately permanent storage.
Greg Pardy:
The first piece, capture, this is actually the most complex and costly. It involves removing CO2 from the hydrocarbon stream, and that can be done before or after combustion. I think the thing to remember here is that capture costs tend to fall as CO2 concentration rises. That CO2 is then cooled and compressed into a fluid state, and that's done to reduce volume, and then it's transported to a storage site. Now, this is generally done via a pipeline, like natural gas, but it could also certainly involve ships and other forms of transport in some regions.
Greg Pardy:
The last piece of the equation is the most important, permanent undergroundstorage involving depleted oil and gas reservoirs, or saline aquifers. Now, I'm simplifying things here, but hopefully that creates a clear picture.
Andre Hardy:
Yeah, that's certainly helpful. Thank you. Great overview. CCS seems like a pretty realistic solution to the CO2 challenge, but adoption has been fairly limited so far. Why is that?
Greg Pardy:
Yeah, it's a real conundrum, and you're absolutely right. Adoption, in fact, it's been quite limited. So, we count 26 CCS projects worldwide capturing about 37 megatons per annum of CO2. That is less than a half percent of global CO2 emissions. And we think this has everything to do with economics 101 and essentially reflects inadequate penalties in the form of low carbon prices, but also inadequate incentives in the form of low offset credits. As a result, this has led to large emitters electing to vent CO2 emissions directly into the atmosphere over time.
Andre Hardy:
So, you say there are only 26 projects worldwide so far. In what countries has CCS been more effective and why?
Greg Pardy:
Yeah, like so many other things, the US actually boasts the bulk of CCS projects globally. That's partly due to its history of gas processing, but also CO2 enhanced oil recovery or EOR, which began in the 1970s. CO2 EOR really involves the use of injecting CO2 as a sweeping mechanism to boost the recovery of oil over time. You can sort of think of using your garden hose on the driveway when you're trying to clean it up. Interest in the US has also been stimulated by the 45Q incentive tax credit. Now this is a performance based federal tax credit that goes to the entities that own the equipment.
Greg Pardy:
When you look at the US, you've got both a government incentive and a secondary use of CO2 in place, which doesn't necessarily exist everywhere. Now, just to be sure, Canada, Norway, Australia, Saudi Arabia and the UAE, they trail as distant seconds numbers-wise, but have actually got some very high profile projects and we think that these can serve as models in the future.
Andre Hardy:
Interesting. Thanks for the color. What needs to happen for CCS to blossom globally to help tackle climate change?
Greg Pardy:
Yeah, I mean, I think this is another great question because you're really getting at the crux of our thesis, and that is that, in the absence of drivers involving the secondary use of CO2, when you look at carbon capture storage on its own, it's actually a pretty capital intensive investment with fragile returns that depend almost entirely on carbon prices and government policies. That's a lot of words, but what this means is that both carrots, in the form of incentives, and sticks, in the form of sufficiently high carbon prices, both need to be in place.
Greg Pardy:
If you think about it, we're asking large emitters to make huge multi-year investments in CO2 reduction. And this is going to require long-term visibility on carbon levies and also the durability of government policies as elected leaders come and go, especially in a world of shrinking CO2 emissions over time.
Andre Hardy:
Right. That makes a lot of sense. You talked about the United States being a leader in CCS. Can you expand on what's going on in other regions?
Greg Pardy:
Sure. I would probably highlight two regions, the UK and then Canada. The UK is undergoing a rapid transition on CCS and this is really from a standing start, but it has everything to do with their focus on the energy system delivering net zero emissions by 2050. So, a little bit of recent history. In April of 2021, the UK’s Sixth Carbon Budget requires the country to reduce its GHG emissions by 78% by 2035 and that's versus 1990 levels.
Greg Pardy:
These pathways actually envisage CCS clusters as a critical and cost of effective means of meeting the UK's net zero target, and they have a goal of capturing 10 megatons per annum of CO2 by 2030. What's interesting is, is that when you look at Europe, they actually look at CCS as a facilitator, as it can unlock new industries such as blue hydrogen production and low carbon power. The UK is really getting on with business here.
Greg Pardy:
Canada has adopted a proactive stance vis-a-vis climate change, no question about that, with increasing carbon prices, but we'd look at the sticks being in place, but not necessarily the carrots or incentives. Let me give you some numbers. Just as a reference, Canada's federal government has established national standards on carbon pricing, C$40/tonne this year rising to C$50/tonne in 2022. Then it'll escalate by C$15/tonne per year to C$170/tonne by 2030. Essentially the carbon price in Canada is going to more than triple over eight years, which is actually quite dramatic. And it has targeted large emitters with outputs of 50,000 tonnes/year with individuals receiving offsets via rebates.
Greg Pardy:
Now, back in the April 2021 budget, the federal government proposed to introduce an investment tax credit or ITC for capital invested in CCUS. The goal is to reduce CO2 emissions by at least 15 megatons per annum. That is expected to be, in effect, beginning in 2022. Now, CCUS in Canada is looked upon as the only currently available technology with the potential to create negative emissions. That's really important, and it will be available across a wide range of CCUS applications.
Greg Pardy:
Think of fuels, concrete, plastics and blue hydrogen, but not enhanced oil recovery. There was a consultation period, a 90 day consultation period that actually ended in early September, and so we are awaiting details on the shape of that ITC, but we made the point in the report, we think it's important that it be refundable, transferable and payable on upfront qualifying capital expenditures, and obviously backed by policy durability to really go and spur private investment.
Greg Pardy:
I think the last thing I'd probably do here Andre is maybe just highlight the Oil Sands Pathways to Net Zero initiative. Now, this was unveiled back in June and now consists of a sextetof oil sands producers that account for about 95% of oil sands emissions, which are around 68 megatons per annum. They launched a plan to achieve net zero scope one and two emissions by 2050. That is expected to cost somewhere around C$75 billion over the next 30 years. About half that equation actually involves carbon capture storage.
Greg Pardy:
Capturing emissions up in Fort McMurray and ColdLake and Christina Lake, and then transporting that CO2 to storage in the Cold Lake region. These are large companies, they're serious, and we know, based upon their track record, that they can execute. So, we look upon the ITC as kind of the missing piece right now, but one that's really critical to getting shovels in the ground on enabling infrastructure if we're truly serious about the how in cutting emissions predominantly in Canada.
Andre Hardy:
Thanks, Greg. This has been really informative. I can see why you and your team are so interested in the future of CCS as part of the CO2 solution in tackling global warming. Thanks a lot for discussing this exciting opportunity with us today. What else lies ahead in today's ever evolving markets and industries? We'll be keeping track right here on Industries in Motion. We also ask that you listen to Lori Calvasina’s podcast, Markets in Motion provided by RBC Capital Markets. Until then, thank you for joining us on this episode recorded November 23rd, 2021, and make sure you subscribe to Industries in Motion wherever you listen to your podcasts.
Andre Hardy:
If you'd like to continue this conversation or you're interested in more information, please contact your RBC representative directly, our visitor website at www.rbccm.com/industriesinmotion. Thank you very much.
Speaker 3:
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