CCUS: De-Carbonizing Canada’s Oil & Gas Industry

Ben:

Our views, I think the industry has to want it to happen, and they need to work together. The emitters, the timing of carbon abatement they want to move forward with this, whether it's improving your ESG profile. Whether it's a different view and where carbon taxes are going to go you really need industry to get together. Particularly, the oil sands companies to want this to happen.

Michael Torrance:

Welcome to sustainability leaders. I'm Michael Torrance, chief sustainability officer with BMO financial group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities. To explore how this rapidly evolving field of sustainability is impacting global investment business practices, and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal it's affiliates or subsidiaries.

Michael Torrance:

Today, we have a special episode from BMO's IN Tune podcast, that aired December 22nd, 2021. In Tune features equity research analysts from BMO capital markets, and explores key emerging themes, trends, and issues, which are important to our institutional clients globally. Today, BMO's Camilla Sutton, MD in our equity research group is joined by BMO's Doug Morrow, Ben Pham, and John Gibson, to discuss how carbon capture usage and storage also known as CCUS, represents one of the best near term opportunities to reduce CO2 emissions. Particularly, as Canada looks to meet its 2030 and 2050 emissions reduction targets.

Camilla Sutton:

Carbon capture usage and storage, this is the conversation we're delving into today, in today's edition of In Tune. I'm Camilla Sutton, head of product management and equity research. And, I am joined by my colleagues, Doug Morrow, Director ESG strategy, Ben Pham, MD energy infrastructure, and John Gibson, VP energy services. Doug, let's start with your ESG expertise. Can you provide an overview of carbon capture usage and storage, or CCUS and why it's important for Canada's climate change goals?

Doug:

Sure. Thanks Camilla. So, CCUS is a technology that essentially captures carbon emissions from industrial sources and really traps them before they enter the atmosphere. And then, the CO2 can be transported from point sources and sequestered underground, as is the case with CCS, or recycled and utilized in other products like plastics, or biofuels as is the case with CCUS. Now, the reason CCS and CCUS are important in the Canadian context, is that Canada quite simply, in my opinion, is unlikely to achieve its climate change goals without the widespread adoption of these technologies. So, let's take a look at the numbers for a second. Right now Canada's total emissions are about 730 million metric tons, which is about 2% by the way of global emissions, sometimes people think the figure's higher, but it's about 2%.

Doug:

Now, if we break down the 730 million figure, we find that the Canadian oil and gas sector is responsible for 191 million tons or 26% in the total. This is based on Canada's latest GHG inventory. Now, this 26%, it's the largest of any single economic sector, with the next largest being a transport at about 25%. Now, in the US, the oil and gas sector represents about 5% of their total emissions. So, you can see right away that finding ways to reduce oil and gas industry emissions matters a lot to Canada. As for our target, this is based on our latest NDC which was submitted in August, the country's committed to reducing emissions by between 40% to 45% below 2005 levels by 2030. And, this is up by the way from an earlier target of 30%. So, what this means is there's an emissions gap of about 220 million tons or 30% of current emissions.

Doug:

So, this is an incredibly ambitious target, and there's a lot of work to do, especially considering that 2030 is not that far out. Now, CCUS is one of many different strategies that the government has in its playbook, for meeting this 2030 target. In Canada's latest NDC, the government announced plans for an investment tax credit for capital invested in both CCS and CCUS projects. And, the government expects that these policy measures could reduce emissions by about 15 million tons. So, this is about 7% of our goal, and it's actually an enormous amount for a single policy measure.

Doug:

So, consultations on this tax credit are continuing with input from industry other stakeholders, and details are forthcoming. And, just a final comment here, I think one of the issues from an ESG point of view with CCUS, is that it's sometimes seen as a distraction and kind of propping up the oil and gas industry in an economy that's moving away from fossil fuels. But, I don't see it like that at all. I think that that view obfuscates the complexity of the situation in the fact that oil and gas are deeply embedded in our economy. And, contrary to what some people think, oil demand is not going to peak anytime soon in our view. In fact, we think that global oil demand in 2040 is likely to approximate pre-pandemic demand, of about 103 million barrels per day. So, from this point of view, I really think CCUS is a critical part, not only of our emission reduction strategies a country, but also our economic competitiveness.

Camilla Sutton:

So, John, can you walk us through and explain what is carbon capture utilization and storage?

John:

Sure. Thanks Camilla. So, essentially the process involves capturing carbon dioxide or CO2, from sources such as coal, oil, and natural gas, or the atmosphere. The captured CO2 is then pressurized and transported to either be used, which I'll get into a little bit, or injected into depleted oil and gas formations for permanent storage underground. So, the full process of CCUS is pretty multifaceted. Firstly, it involves capturing CO2 gas in various stages, which include number one, pre combustion, number two, post combustion, and lastly Oxy-fuel combustion systems. So, pre-combustion capture involves the stripping of CO2 from the fuel source before combustion is completed. This process is typically operated with integrated gasification combine cycles, or IGCC. And, it involves gasification and partial oxidization of the fuels to produce CO2 and hydrogen, which are then separated using various absorption processes. So, the hydrogen produce can then be used as a transportable fuel or product.

John:

Secondly, post combustion capture involves capturing CO2 from exhaust streams, following fuel combustion, and this process is primarily used in existing power plants, which have been retrofitted. While, post combustion capture is the most widely used process currently, the advantages of the pre combustion process include lower amounts of gas volumes required for processing, as well as higher CO2 concentrations in the resulting gas. And, then third Oxy-fuel combustion systems burn fuel in a pure oxygen environment rather than just natural air. So, the resulting exhaustion from Oxy-fuel combustion is highly concentrated in carbon dioxide, which allows for more efficient carbon capture. So, then moving on to the second stage of CCUS is its utilization or usage of carbon dioxide. So, CO2 gas can be used directly or as a feed stock in a diverse group of products. These include fertilizer production, enhanced oil recovery, or better known as EOR heat transfer fluids, as well as in food and beverages.

John:

It can also be chemically converted to various fuels, chemicals, and building materials. And then, the last stage of CCUS involves storage for gas that is enabled to be chemically converted, or used directly for various products and services. This process involves injecting CO2 into old oil and gas reservoirs in [inaudible 00:08:00] formations, at which point the gas is permanently stored underground. So, really the whole point of CCUS is to eliminate store or reduce the amount of CO2 heading into the atmosphere. But, there are various techniques and processes to get us to the point of CO2 usage or storage. We should note that carbon capture is not really a new development. Although, like Doug mentioned, as we move towards ambitious goals, such as net zero in 2050, carbon capture represents one of the best near return opportunities to reduce greenhouse gas emissions.

Camilla Sutton:

Ben, you recently wrote CCUS breathes new life into Canadian pipe infrastructure, with 10 billion plus opportunity. Can you walk us through what the key drivers developments are?

Ben:

Hi, Thanks Camilla. And, it's a great question. There's a couple of things we're monitoring or falling perspective to developing, or getting carbon going here. And, Doug referred to that the first, most important one is government support or subsidy, the investment tax credit that effect, that could come in sometime in 2022. You look at some of the projects that have been built globally in Canada, the government has subsidized around two thirds of the capital costs. And, for me personally, I'm looking for at least a 50% subsidy support from the government for CCUS to further develop further the industry, that's the first area we're looking for in terms of catalyst. The second piece of it is a carbon tax side of it, and clearly Trudeau, our prime minister in Canada has indicated carbon taxes are going to 170 a ton by 2030.

Ben:

It's roughly 40 bucks today going to $50. And that's a very good price signal to encourage emitters, to build CCUS facilities. Because, effectively you think about it, you either, as emitter you either pay that carbon tax or you go out and build a carbon facility, or find ways to bate carbon to mitigate a future rising cost curve. Anecdotally, what we've heard is you need probably $70 to $80 a ton for CCUS to happen, and another 20-30 bucks for the infrastructure to occur. And, so that, 170 is really a good signal to be a catalyst for CCUS development. And, the last thing I'd say on this, this point here is, and this is really our view is, I think the industry wants or has to want it to happen.

Ben:

And, they need to work together, the emitters, the timing of carbon abatement, they want to move forward with this. Whether it's improving your ESG profile, whether it's a different view, and where carbon taxes are going to go, you really need industry to get together, particularly the oil sands companies to want this to happen in a much quicker pace. And, to meet those goals, the 2030 goals or 50 goals that Doug mentioned earlier in the government commentary, you need the infrastructure companies involved in a big way. We think there's pipeline infrastructure in the ground, you can utilize, there's lower cost of capital then emitters to keep that overall cost lower over time.

Camilla Sutton:

So, Ben, can you drill down a little bit and tell us what this means for Canadian pipe infrastructure investment?

Ben:

It's a really interesting question. And, we go back to the title reference, the 10 billion plus figure. Bottom line, it's going to be a huge number. I mean, we put a plus sign after that to more signal that this is really initial calculation, we think. And, even at 10 billion is going to be a huge impact or CapEx requirement. And, that number to be clear, that's only for the infrastructure, not including the CCUS facility themselves. And, I want to maybe take a step back, and Doug mentioned the emissions in Canada currently... If you were to look at Alberta specifically, we're seeing a greenhouse gas emissions CO2 of almost 275 mega tons, annually a year. And you've may have heard out there that each one mega ton is about a billion of CapEx need across the entire CCUS value chain.

Ben:

So, that's almost a $300 billion CapEx opportunity across the entire value chain, which is almost equivalent to how much is being spent in renewables globally, each year. And, so it's a huge number to really think about and consider. Realistically, not all of that's going to go away, that's basically all emissions going away in Alberta. And, just as importantly, not all of it will be mitigated through carbon capture. That's probably more limited to the oil sands companies, and that number's around 70 mega tons a year. So, you're going from 265 billion to 300 as a starting point down to 70 billion or so, you just restrict oil sands. And, out of that number, we've calculated about 10 billion just for the infrastructure investment alone. And, I'm not going to stop there, because it's also important to highlight that what we're seeing with the newer CCS projects being proposed, as hydrogen being built on.

Ben:

And, I really think the government of Canada trying to push carbon infrastructure and CCUS, will enable the hydrogen industry. And, that's probably going to be an even bigger market than we're seeing on the CCUS side. On top of all of that, and you can see I'm really excited about this opportunity for a coverage is, you're going to need power generation, to the parities facilities. The Alberta economy will lift as well. So, we see this really more beneficially directly for the pipeline names, but also benefiting most of all of our energy infrastructure names that are doing business in Canada, in Alberta specifically.

Camilla Sutton:

So, you've hinted at it a bit here, Ben, but how does it really impact some of the stocks that you cover?

Ben:

In a report, we flagged a couple of projects that have already been developed, so I think this is real, it's happening. This isn't a hydrogen situation where we'll maybe we'll see it happen by 2030, there's a lot of activity going on. But, more specifically, if you were to think about direct impacts, it's going to be all the pipeline names, more specifically the large cap names, and we've seen TC Energy Pembina announce, Alberta carbon grid. We think it's a really interesting proposal because what we're learning here is for this to be effective... Because this is a causation or reduction scenario rather than increasing widgets or increasing EBITDA, is a cost structure is going to be quite important. You have the government support, but you want low cost infrastructure. And, we think the pipeline names are well positioned for that because they have existing steel in the ground.

Ben:

They can repurpose, they have of a low cost of cap, as I mentioned earlier. And, they have decades of experience building pipelines. But, what we also observed is, you got to think about carbon infrastructure as more the highway. You're not going to see one pipeline being built for one CCS facility. You're going to see one pipeline built and connecting to 20 different CCS facilities, collecting it and clustering everything together. Moving that carbon, that molecule and storing it in one big hub, rather than a couple dozen hubs, across Canada. That's what's going to make a competitive project. And, so TC Energy Pembina already have that. And, after our in front report that we put out there, about a week later... Interestingly, and the timing was fantastic, is we saw Enbridge announce a project with Capital power, almost similar thing there. Enbridge wants to build the pipeline and the storage, but instead of transporting carbon from a CCS facility, based on the oil sands business, it's going to be taking carbon from a natural gas power facility instead. So, it's outside of that 70 megaton I mentioned within oil sands.

Camilla Sutton:

So, John, what about the world of Canadian energy services? It's expected to play a big role in the development of carbon capture and storage projects as well. Previously, you've identified two companies, Enerflex and computer modeling group as being well positioned. Can you speak to the current opportunities for these companies as well as what role you expect them to play moving forward?

John:

Yeah, for sure. So, like you said, Enerflex and computer modeling group have been active on the carbon capture and storage front in the past. And, I expect this business to become a larger part of their portfolios moving forward. But, I guess I should caveat this with the fact that we will need to see additional government support, particularly in Canada. But that, I mean, we just heard Ben speak to the excitement around of these programs and, it seems like an actual thing that's going to happen here. So, first we'll talk about Enerflex, it's actually been working on various hydrogen renewable natural gas and carbon capture projects dating back to the 1990s. So, it's not exactly new to them, but last quarter of the company and what today was looking at more than 30 carbon capture opportunities in various countries. So, the carbon capture and storage systems Enerflex would build would be roughly the same size as a large gas plant or compression station. Which are quite equipment intensive, and much of Enerflex's manufacturing and capabilities and expertise in natural gas compression and processing crossover really well to carbon capture.

John:

So, I should point out that, and Ben spoke to this when he talks about the 10 billion plus in investment. This doesn't really include some of the ancillary spending on additional infrastructure and this includes gas, compression and processing. So, I think Enerflex will be a key beneficiary here. In terms of computer modeling group, it's an oil and gas reservoir simulation software company. It's a little bit different than the rest of the companies I cover. But again, their expertise in this area really lends itself well, in terms of modeling carbon capture. Or essentially modeling the best way to inject CO2 back into old oil and gas reservoirs.

John:

And, these energy transition products are making up a larger portion of their business with around 10% of run rate revenue expected to come from various hydrogen geothermal and CCUS projects. So, with a significant investment expected in carbon capture over the next few years, I only expect this business to grow for both of these companies. And, you also see new companies start to pop up. We're already seeing it with some privates, not only in the compression or processing side or even the reservoir simulation side, but more on the capture side. So again, I expect more of these businesses to pop up here over the next few years as these projects move forward.

Camilla Sutton:

Doug, Ben and John, thank you so much for joining us today. It's been a really interesting in conversation around carbon capture usage and storage.

Michael Torrance:

Thanks for listening to sustainability leaders. This podcast is presented by BMO financial group. To access all the resources we discussed in today's episode, and to see our other podcast, visit us at bmo.com/sustainability leaders. You can listen and subscribe free to our show on apple podcast or your favorite podcast provider. And, we'll greatly appreciate a rating and review, and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and puddle creative. Until next time I'm Michael Torrance, have a great week.

Speaker 3:

The views expressed here are those of the participants and not those at bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain for looking statements. Investors are cautioned, not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only, and does not constitute investment legal or tax advice. And, is not intended as an endorsement of any specific investment, product, or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results.