Carbon Capture and the cost of Clean Oil

A large section of the oil industry sees its future role in the energy transition being secured by Carbon Capture Usage and Storage (CCUS). Indeed the ‘Net Zero Basin’ strategy for the UKCS hinges on sequestering most of the carbon resulting from using North Sea production. In 2019 the UK sector produced 635mmboe which represents around 200 million tonnes of carbon dioxide. To capture and sequester (store) this carbon will cost around $20bn per annum (note the value of the production is $41bn). The prevailing assumption is that consumers will accept this additional charge in return for the convenience of using hydrocarbon energy and its asset base (e.g. pipelines and petrol stations). Thus, the industry can continue to produce oil at comfortable margins, confident that this will match consumer demand. I would like to challenge the underlying assumption that CCUS is the way forward for the oil industry.

The generally accepted full cycle cost of carbon capture and storage is around $100 per tonne of carbon. Consuming one barrel of oil, as energy, produces about 300kg of CO2; so the cost to sequester carbon is around $33 per bbl. With a baseline (as opposed to a current collapsed oil price) oil price at $65 per bbl, this means a 50% increase in the price for net ‘clean oil’. Will society accept the option of, either paying $100 per bbl for clean oil, or $65 for dirty oil?

The challenge for the 50% increase in fossil fuel prices, is that the cost of renewable energy is continually reducing. A study from Lazards in 2019 quotes the LCOE (levelized cost of energy) of new wind installations is between $28 and $54 per MWh, while that of grid scale solar is $44 to $36 per MWh; with both technologies reducing costs at around 5% per annum. The equivalent cost of gas derived energy is $44 - $68 per MWh. Increasing the cost of gas by 50% to include carbon capture further increases the price differential.

This ‘carbon reduction’ mark-up will either be mandated by the market that demands clean energy, or set by policymakers in the form of a carbon tax. In any event, it seems safe to assume that the cost of hydrocarbons to the consumer will have to include the cost of CCUS. Today, the oil price is set globally; will that continue when fossil fuels will have to compete in local markets? The energy price to the market will be set by the lowest cost of clean energy for that particular use. The carbon waste disposal charge will advantage those with the lowest production costs who are able to absorb these additional costs while maintaining a competitive price to the market. Clearly the market will determine those activities (e.g.

some elements of transport) that are prepared to pay the clean price premium for hydrocarbons.

If the price for hydrocarbons is set by the market at current levels, in the face of competition from alternatives, this means that the $33 per bbl cost has to be absorbed into the current cost structure. This is only viable for production with a pre-tax net income per bbl of around $35, or a fully built up (F&D plus lifting) cost of less than $30 per bbl. Clearly including these costs impacts both national government’s tax revenue and oil company margins. The oil industry will not be able to sustain the current double digit IRR’s.

Within the UKCS, the impact of a 50% increase in the cost base to produce net clean hydrocarbons must be understood. UKCS production costs are not competitive globally and thus will be threatened by lower cost net clean hydrocarbons from elsewhere (in particular the Middle East with the lowest production costs in the world).

Accepting this analysis mandates operators to include the costs of CCUS in their forward capital cost structure without assuming that this cost increase will be passed to the consumer. It is unlikely that the consumer will pay a higher price for clean fossil fuels when there are lower cost alternatives. The price for energy will be set locally by the availability (amount of sunshine and wind) and the penetration of renewable energy. Hydrocarbons will compete in smaller markets/uses in which there are no viable alternatives – e.g. aviation and some aspects of transport.

It is this price competition that I see as being the main threat to the oil industry. Hydrocarbons, burdened by the carbon waste disposal costs will be uncompetitive except in certain niche markets. In the face of this existential challenge, individual companies should be examining their asset base on the basis of low-cost production, and/or providing a CCUS service. The alternative is to get involved in the emerging low carbon energy economy. 

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If you would like to share your views privately, you can contact me directly at hamish@minus7.co.uk or direct message me via LinkedIn if you prefer. I would appreciate hearing your thoughts.

Please note all opinions are my own unless otherwise stated.

Any content related to this can be found by putting this hashtag into the LinkedIn search bar: #DoesOilLeadOrFollow

Below are additional references you may find useful.

Another article of mine: "Should the oil industry lead or follow."

A recording of my speech given at the recent APPG Global 2019 conference in London and other relevant articles that have informed my thinking:

Additional External References:

Aramco Chief Sees Perception Crisis for Oil Industry via Bloomberg

“The old has a habit of killing the new,” says Andrew Smart, the managing director of global energy industry at the consulting group.

Read more in this article:

If you would like to share your views privately, you can contact me directly at HWilson@westwoodenergy.com or direct message me via LinkedIn if you prefer. I would appreciate hearing your thoughts.

Please note all opinions are my own unless otherwise stated.

Any content related to this can be found by putting this hashtag into the LinkedIn search bar #DoesOilLeadOrFollow