Power & Pipes

We’re back with another update from CERAWeek 2024 by S&P Global to highlight some key takeaways from day two of the conference. Many of the sessions on this day were dedicated to infrastructure development and highlighted the opportunities and the challenges facing energy project developers.

In one panel discussion, titled Growing Global Footprint of CCUS: What Are the Models for Deployment?, the panelists expressed the following viewpoints:

• CCUS (carbon capture, utilization, and storage) technology is key to reaching net zero. However, capital investment is needed to get proposed projects off the ground. Of all the proposed projects in the pipeline to date, only 18% have reached final investment decision.
• It’s unlikely the world will stop using fossil fuels. Therefore, globally, we need to consider implementing a system to capture carbon dioxide (CO2) and permanently put it in the ground. In order to stimulate investment in CCUS projects, governments should consider conditioning drilling permits on the removal of CO2.
• A complication could be the distance between the site of emissions and the storage facility. For example, one panelist noted how companies in Japan were investing in CO2 transport via marine vessel in order to connect the emitter to a permanent storage facility. This point was reiterated by others on the panel, noting the challenges with low carbon hubs. The cheaper the cost, the faster it scales—but proximity matters. Developers must consider how close the storage facility is to the emitter.
• Liability for “leaks” and “loss” is one of the most controversial aspects of contracting in this space. This becomes even more complicated if multiple parties are storing CO2 in the same place. Contracting parties must address liability issues.
• With respect to progress, one panelist spoke about how the technical aspects of geological storage are well known and advanced, noting that their company has been removing carbon and either using or storing carbon for decades. So, the challenge is not on the operations aspects of a CCUS project, but rather on the commercialization and project siting aspects. Stakeholder engagement and community involvement in understanding the importance of CCUS projects is key to advancing development.
• Another panelist explained that there will never be a commercial model for CCUS because there will always be a cheaper way (i.e., emitting the CO2). This again points to the need for a license condition to require CO2 removal, which mitigates the amount of risk to the developer. Estimates show that by 2030, 10% of emitted CO2 will be stored underground, but this cannot be achieved with government subsidies alone—everyone must agree to sequester carbon as a condition to producing gas. This could remove the commercial risk.
• The panelists also discussed how artificial intelligence (AI) is helping CCUS development. Operators of CCUS projects have massive amounts of data. Using AI to analyze this data could be helpful in making things cheaper, better, faster. AI can also assist with detecting seismic activity associated with drilling, which is helpful for reassuring the public in areas where this is a concern (particularly in the UK).

Another panel discussion, titled Gas & LNG: Investing for the Long-Term, focused on issues involving permitting, contracting, and financing. With new and increasing demand for energy, especially natural gas, supply-side investment is needed. Demand is expected to grow globally, from power plant developments to the increasing need for power from AI. One panelist noted that running an AI query requires 30% more energy than running a Google search.

With respect to permitting, the panelists offered the following viewpoints:

• They are optimistic that the pause on liquid natural gas (LNG) export authorizations in the United States will be lifted because there is confidence that the models the US Department of Energy has run in the past will continue to show the benefits of increasing LNG exports.
• Regarding Australia’s LNG business, currently there are no real challenges with permitting, but the country is seeing an uptick in activism, which could lead to delays. There appears to be a need to fix the country’s permitting system and to recognize that it is in Australia’s interest to sell its LNG to developing and already-developed companies.
• Energy security equals national security. Panelists suggested we get back to stable, reliable affordable energy. For example, Australian LNG has helped keep the lights on in Japan.

With respect to contracting, the panelists noted the following:

• Long-term contracting has been the bedrock for LNG project development and continues to be the preferred way to contract for LNG.
• Long-term contracting for customers in Southeast Asia means affordability, energy security, and predictability. Security and proximity to markets are also important, and good contracts make for good, affordable projects. Predictable terms, arbitration, etc. make for affordable product in the Global South.
• It is becoming easier to sell LNG delivered ex ship rather than free on Board as more countries and companies are investing in owning their own LNG vessels.

With respect to financing, the panelists noted the following:

• As projects and companies mature, companies can be more creative with how expansions are financed. For example, brownfield investment capacity has more flexibility because less financing is needed. In the future, we may see a mix of big greenfield projects and incremental brownfield projects, which may also result in more flexible contract terms.
• The spot market will likely grow because projects require less long-term contracts to underpin the initial investment. Also, many long-term contracts allow customers simply to pay a liquefaction fee without paying for the commodity.

In closing, the panelists noted what they view as some additional challenges, including:

• Financial institutions are facing pressure to stop investing in fossil fuel projects, so LNG projects must have a clear decarbonization strategy (e.g., LNG with CCUS), which gives investors more leeway to invest in such projects. This also supports LNG as a transition fuel that can be decarbonized.
• Inflation ripples through LNG financings and projects. The LNG industry needs to continue to tell a solid green story that includes methane capture, CCUS, more efficient ships, and methane slippage prevention.

Stay tuned for more insights from CERAWeek throughout the week.