Carbon Capture And Sequestration (CCS): A Pipedream Or A Real Business Opportunity For Gas Pipeline Developers?

May 2009 Vol. 236 No. 5

Bruce E. Warner and Mark S. Shaffer

Currently, proposals to reduce greenhouse gas (GHG) emissions into the atmosphere are central to both federal and state legislative and policy initiatives. Many of these proposals cite CCS as a promising approach for substantially abating GHG emissions.

This article attempts to address CCS issues at a high level. It looks at the problems and the potential for successfully deploying CCS systems.

Policy and Politics: The capture of CO2 at its source and its transportation to storage for indefinite containment (sequestration) or for use in other applications such as enhanced oil recovery (EOR) attracts many advocates of reducing carbon emissions because large amounts of CO2 emitted from electric power generation and industrial burning of fossil fuels are suitable for either containment or use in EOR. A recent publication by the Congressional Research Service noted that theoretically, carbon-capture technology could remove as much as 80-90% of CO2 emitted from electric power plants and other industrial sources.

However, as the same publication notes, because of environmental, technological and cost issues related to capturing CO2, analysts disagree on when CSS processes might be widely available in the U.S. at competitive levels with other currently available technologies for generating electricity. Public policy issues with respect to the regulatory treatment of CO2 as a commodity and whether transmission facilities should be regulated also will decide when such facilities realistically can be deployed.

While contemplated policies such as cap-and-trade programs that impose costs on generators for CO2 emissions would favor CCS projects, wide-spread deployment of CCS facilities will depend on many unpredictable factors that will evolve as the public policy debate continues in the context of impending executive and legislative initiatives.

The Obama administration strongly endorses reducing GHG emissions. Its 2010 budget proposal calls for a carbon cap-and-trade (auction) program that will begin in 2011. House Energy & Commerce Committee Chairman Henry Waxman (D-CA) has expressed his intent to have a GHG bill ready by the end of May. While its contours are yet to be determined, most legislators and environmental interests endorse a cap-and-trade approach.

Some interests, including major oil companies, support a carbon tax approach. Either approach will result in a price on carbon that will affect the cost of commodities such as gas, plastics and electricity. Regardless of which approach ultimately is adopted with respect to carbon reduction, the development of a CCS infrastructure is a primary component of plans to reduce GHG emissions and presents an opportunity that deserves serious attention by pipeline developers.

The Basics
While the immediate potential for CCS projects is unclear, the authors believe that the advent of the public policy debate related to budget and GHG legislative proposals should encourage pipeline developers to seriously explore the development of an interstate CCS pipeline transportation market. Pipelines have the skills and resources needed to provide this infrastructure. Within the United States, somewhere between 3,000-4,000 miles of CCS pipelines have been developed over the past 30 years to transport CO2 for EOR. Given the emerging energy policies of the Obama administration, there is no doubt that a much expanded role for CCS pipelines seems probable.

Pipelines can be built in three basic configurations to deliver CO2 to a “sink” area for injection into a salt cavern, depleted oil/gas field or non-mineable coal seam formation. The associated electric or other sources that emit carbon can be built directly over the sink, a single line can be built from the source to the sink formation, or a network of CO2 pipelines can be built to transport the gas to the storage formations. Since some electric plants, such as peaking plants, do not run continuously, a network configuration may be favored to improve the load factor, and thereby the economics of the pipelines.

Obviously, if the source is located directly over the sink formation, the pipeline would be very short in length and would not be a major economic consideration. If the carbon capture site configuration and an available sink formation were relatively close to each other, single lines would likely evolve whose depreciable life would be tied to the physical and economic life of the source. The future evolution of a more extensive CO2 interstate transportation network will depend on legislation, regulatory considerations and the pipeline economics of CCS.
Some Issues: Before the marketplace invests significant resources in developing CO2 transportation facilities, a number of developments will need to occur. As noted earlier, a carbon cap-and-trade law would improve the economics of carbon capture and sequestration facilities, such as those associated with coal power plants. However, CCS facilities will increase the cost of delivered power.

Today, renewable electric generation options, such as wind or solar panels, appear to be preferred energy source alternatives by some state regulators and national political leaders. Natural gas power plants also seem to be preferred over coal plants, even with potential CCS facilities, due to their relatively low capital cost requirements, shorter construction windows, and greater certainty today since significant additional gas supplies are available from non-conventional gas fields such as the Barnett Shale fields in North Texas. Thus, policymakers will need to adopt policies that encourage the development of carbon capture facilities irrespective of cost disadvantages while research continues into more efficient and cheaper capture technologies.

Successful CO2 pipeline development will also require that CO2 is viewed by policymakers and the public as a commodity (rather than hazardous material) that can and should be safely transported and stored without significant risks. This will require continued technological advances, appropriate safety legislation, eminent domain transportation rights and greater public clarity regarding environmental benefits of CO2 capture and storage policies. Treatment of CO2 as a commodity, rather than as a hazardous material, would facilitate transportation to remote storage sites and sequestration in applications where some economic benefit besides disposal can be realized, such as is currently the case with EOR.

Development of a pipeline network also will depend on the ability of electric utilities and other industrial customers to pay for the facilities. Current state regulatory procurement processes that evaluate the best power source options will remain in place, and a power plant with CCS must be a best, or at least an acceptable alternative to others in that planning process.

The economics, in part, will depend on the cost of purchasing emissions credits as an alternative to CCS-related facilities once a cap-and-trade market fully evolves. Whether the CO2 transportation facilities are price-regulated is important, but not really the central question because the costs of transportation can be recovered by the pipeline developer if a contract with a creditworthy customer is in place. However, if CO2 transportation facilities were price-regulated, such as is the case today with interstate natural gas transportation facilities, this could help in the state-regulated energy procurement approval processes.

Therefore, a jurisdictional transportation scheme may enhance the successful evolution of the CCS industry similar to the support provided in the early development of the interstate natural gas pipeline industry. In the alternative, policymakers could permit negotiated rate- or market-based rate options for the CCS industry, similar to successful programs in use in the natural gas pipeline and storage industry.

CO2 pipelines are physically very similar to natural gas pipelines in almost all important respects. The pipeline and compression facilities can be built using transferrable, well-developed technology for similar costs per mile, though CO2 pipelines would often be higher pressure pipelines than is the case for natural gas pipelines. CO2 pipelines would have electric compression facilities rather than gas-fired compression which are more typical in the interstate natural gas pipeline transportation network.

CO2 pipelines do not corrode faster than natural gas pipelines as long as contaminants are controlled; thus, they do not inherently depreciate faster or slower than natural gas transportation facilities. Due to these factors, improving the cost of CO2 transportation would depend most importantly on government economic policies, such as depreciable tax life, whether investment tax credits would be available, regulatory depreciation policies, and favorable transportation rate design options.
Given favorable regulatory and tax policies, CCS pipeline costs could be recovered using a levelized cost of service approach which avoids the problems associated with a high initial cost of service and averages the cost of service over the levelization period. If the CO2 pipelines are non-price regulated facilities, the recovery of costs would be a matter of negotiation between the customers and the pipeline developer, a process that is already well-established in the natural gas pipeline industry.

The Potential
In March, the INGAA Foundation, Inc. released a study entitled: Developing a Pipeline Infrastructure for CO2 Capture and Storage: Issues and Challenges. The study addresses many of the issues raised above. Prepared by ICF International, the study purports to be the first study of facility requirements under a mandatory, national GHG emission reduction program. The study suggests that technology is not an issue, but policy questions associated with business and regulatory structures need to be answered before there is likely to be considerable capital invested in creating such a pipeline network.

It suggests the nation’s natural gas pipeline transmission system represents a model for what a CO2 pipeline network could look like because the natural gas pipeline network interconnects thousand of natural gas distribution companies, power plants, and industrial facilities to multiple gas-producing basins. The study predicts that by 2030, as much as 15,000 66,000 miles of transmission and distribution facilities may be needed, depending on how much CO2 must be sequestered and the degree to which EOR is involved. It notes that this amount is similar to the miles of existing U.S. crude oil and products pipelines.

The study recognizes that many of the involved technologies are not mature and that their use in the circumstances and scale that may be needed will carry technological and commercial risks. It suggests that coal power plants will dominate future projects and the dollars required for capture, compression and storage will be major components affecting the projects.

The study presents four cases to estimate the infrastructure that will be required based on high- and low-case expectations for CCS and the extent to which CO2 is used for EOR. The authors circumscribe the projections by noting that they are based on general and unknown factors. The high-case scenario projects the need for an additional 20,610 miles of transmission by 2030 if EOR is small, and an additional 36,050 miles if EOR is greater. This projection equates to between $32.2-65.6 billion in construction costs for new CO2 pipelines.
The low-case scenario calls for 5,900-7,900 miles of new pipelines, depending on the degree to which longer distance transportation to EOR sites takes place. The dollars for construction under this scenario ranges between $8.5-12.8 billion.

Conclusion
The circumstances that will drive the evolution of an extensive CO2 network are tied to improved technologies and to progress on resolving critical policy and regulatory issues.
The authors suggest that those interested in CCS pipeline development should promote the following policies:

  • CCS transportation as transportation of a commodity rather than as a hazardous material
  • Eminent domain rights and certification of CCS transportation facilities
  • Jurisdictional status and price regulation of interstate CCS transportation facilities that allows for return levels that will reasonably compensate project developers for the potentially high risks of CCS system development
  • Economic incentives, such as favorable income tax treatment and innovative rate strategies, including market based rates, and negotiated rates

Author’s note: For more information on this topic, see the excellent article: “From EOR to CCS: The Evolving Legal and Regulatory Framework for Carbon Capture and Storage,” by Phillip M. Marston and Patricia A. Moore in the 2008 Energy Law Journal (Volume 29, No.2).

Authors
Bruce E. Warner, CPA, is vice president of Brown, Williams, Moorhead & Quinn, Inc. in Washington, DC. Brown, Williams, Moorhead & Quinn, Inc. He is an energy industry financial consultant and regulatory litigation expert. He has been with BWMG since 2006 and is an expert on cost of service, depreciation, rate base and rate design issues pertaining to natural gas and oil pipelines. He can be reached at warner@bwmg.com.

Mark S. Shaffer is an Associate of BWMQ. He has more than 20 years experience in the energy industry. Prior to joining BWMQ, he was Executive Director of the INGAA Foundation, Inc., and held senior policy positions at the Federal Energy Regulatory Commission. He can be reached at mshaffer@bwmg.com.

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