Business Model of Carbon Capture and Storage (CCS) Projects for High-CO2 Fields

Lot, Hasnor (PETRONAS) | Yeow, Andrew (PETRONAS) | Buang@Mahmood, Anuar (PETRONAS) | Ismail, Badrul Hisyam (PETRONAS) | Zainal Abidin, Muhamad Adib (PETRONAS) | Wan Abdul Wahab, Wan Adli (PETRONAS)

OnePetro 

Abstract High-CO2 gas fields present a dilemma to Host Government wanting to both ensure security of supply and achieve net zero aspiration. While carbon capture and storage (CCS) technology holds promise of technical feasibility to unlock these fields, its commercial success ultimately hinges on the choice of an appropriate business model. This study compares the economics of the traditional business model i.e., CCS as part of the upstream petroleum operation dedicated to a Production Sharing Contract (PSC) vs. the alternative business model i.e., a regional CCS hub separately managed by a Special-Purpose Vehicle (SPV). To maximize the return on its investment in a gas value chain, Host Government aims to minimize the upstream cost of gas (COG), which in turn comprises the technical cost, fiscal/tax charge, and cost of capital components. Thus, in this paper, the business models are compared in terms of their COG, and the reasons for the differences are further analyzed by looking at the drivers affecting the components. To illustrate the comparison numerically, synthetic technical data based on several recent CCS projects are evaluated under Malaysian petroleum fiscal arrangement and tax regime. The scope of the CCS projects contemplated in this study is restricted to managing the CO2 inherent in upstream high-CO2 gas fields. The paper finds that the alternative business model outdoes the traditional in several ways. The economies of scale of a hub design optimize capital expenditure, while utilization by multiple users reduces hub operator’s risk, potentially lowering tariff. The SPV can better realize tax incentives and also benefit from a lower tax rate. In PSCs where cost recovery provisions prioritize operating expenditure over capital expenditure, upstream Contractors may prefer paying tariff per usage rather than building their own CCS facility up front. Access to cheaper financing from environmental, social, and governance (ESG) investors and government agencies, coupled with the perception of lower business risks, should also translate into a lower cost of capital. There are various spin-offs and qualitative benefits too. While the paper affirms the intuitive expectation that the alternative business model generally surpasses the traditional, it also cautions that the optimal choice may switch beyond certain thresholds (number of fields, distance between PSCs, volume of CO2, etc.). In addition to the between-model selection problem, the paper also discusses within-model fine tunings and optimization. This paper lays out important caveats and considerations that might be of interest to petroleum authority and government policymakers tasked with the development of business model for upstream CCS projects.

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