Where Are the Deals Going to Happen and Why? Midland CO 2 Conference December 3, 2018 Jeff Brown

Transcription

1 Where Are the Deals Going to Happen and Why? Midland CO 2 Conference December 3, 2018 Jeff Brown 1

2 The Left Coast View of Enhanced Oil Recovery 2

3 Main Topics 45Q ~parity to renewables in terms of cost per ton of CO2 avoided. Different technologies benefit more or less from 45Q. Cheaper capture opportunities tend to be harder to find and smaller & more expensive opportunities are easy to find and giant. It may be a tall order to figure out how to link up a big cohort of sources via a long-distance pipe to reach a big cluster of oilfields, all before 45Q start of construction deadline hits. With 45Q, sources near sinks could jump start the industry, subject to some wild cards we will discuss. 3

4 1. Rough Abatement Cost Parity with 45Q Improvements 4

5 Costs $46 PTC to Save 1 MT with 2MWh vs. $35- $50/MT w/ 45Q 1 MWh Save ½ MT CO2 $23 Save another ½ MT CO2 $23 Save 1.0 MT CO2 total 1 MWh Treasury pays $46 total NREL, in estimating impact of extending renewables tax credits concluded that one MWh of renewable power would displace a mix of 80% natural gas and 20 % coal power. NREL Base Case weighted average CO2 savings: (80% gas x 0.4 MT/MWh) + (20% coal x 1.0 MT tons/mwh) = 0.5 MT CO2 saved per wind MWh 5

6 $35-$50 per MT is Insanely Cheap 6

7 7

8 Some types of capture projects require small upfront capex compared to the NPV of tax credits. Here investment is $ invested per s- ton of CO2 that the capture facility can catch in a year-- $/tpy. The blue line is NPV at 12% of claiming 45Q on one s-ton/yr over 12 years starting Credits/tpy. 8

9 2. Comparative Capture Costs 9

10 Cost of Capture Basics Cost to pay back financiers: Upfront equipment cost per tpy x capital recovery factor. CRF is a single % rate that rolls up total debt payments, dividends, return of equity, and tax. Example: $200 per tpy x 15% CRF = $30 per tpy Some projects only need compressors and minor other equipment because CO2 is already pure: ethanol, gas processing, and ammonia. Others need much more capital to separate out CO2 from mixed gas stream. Overhead, maintenance, tax, insurance Electric usage to run motors, fans, and compressors typically ~ MWh per ton captured x cost of power Fuel usage gas or coal in systems that need to regenerate solvent. Typically ~2-3 mmbtu per ton captured 10

11 $ per s-ton caputre $70 $60 $50 Figures vary wildly here I applied common sense to a host of mutually conflicting U.S. and European studies. Cost of Capture per s-ton $40 $30 $20 $10 $- Capital Recovery O&M Fuel Power 11

12 Cheapest Sources are Small, Expensive are Big Plant Size $/Ton Cost Gas Proc. 608,208 $ 9.05 Ethanol 134,029 $ Ammonia 429,507 $ Hydrogen 401,000 $ Cement 1,068,789 $ Coal Power 1,644,325 $ Steel 4,972,525 $ Comb. Cycle 914,741 $

13 3. Creating a Network to Link Sources and Sinks over a Long Distance 13

14 Combining Supply, Demand, and Transport Next couple of slides are a cartoon version of work Carbon Capture Coalition and National Petroleum Council are doing. Obtain a demand curve broken up by regions Create a supply curve for capture combined with transport The raw cost of capture has a steeply rising curve. However, long distance transport is really expensive if all you have are the cheap sources. Pipeline costs falls drastically with total volume. 14

15 Equilibrium w/ $60 Oil cuts off coal plants 15

16 No deal Costs more than buyers will pay 16

17 Preliminary Thoughts I think we re likely to conclude that with current costs of equipment, money, and operations, combined with long-distance transport, and ~$60/bbl oil, it is hard to assemble a giant deal out of the gate I think I would look really hard at sources that are close to sinks and now work based on 45Q. That could lead to the following: Equipment costs drop as a number of deals get done in each industry and template plant layouts and supply chains develop. Enough progress is made that 45Q is renewed. Strong federal support for pipeline systems knocks down tariffs on trunk lines to below $10/ton. Wild cards that could really help: High, stable oil prices Extra incentives to cut finance costs Help from states on sales and property taxes Better support from Public Utility Commissions on rate-basing utility capture projects or at least making sure they run at baseload 17

18 4. Numbers for Sources Located Near Sinks Pretty Close 18

19 Upfront Investment for 4mm MTpy: 20 yrs $1 billion equipment 12% /yr = $120 mm/yr $70 million minimum to bank +$50 million hoped for by equity =$120 mm/yr 19

20 Generating Sufficient Returns to Repay Investment Per MT +$30 Section 45Q*/MT +$20 Sales of CO2 to EOR (Fixed) +$50 Revenue ($20) Operating Costs/MT ($80) Total 4mm MTpy $120 million $80 $200 +$30 Operating Cash Flow +$120 ($18) Mortgage Payment on Plant ($12) Dividends to Stockholders ($30) Use of Cash for Financiers ($70) ($50) ($120) million $0** Net $0 Net *Spreading the net present value of $35 for 12 years over 20-yr operating life of the plan & rounding for illustration. For simplicity I am making gross approximation that tax credits = cash. Actually they aren t and this introduces serious extra complexity we won t discuss in this summary presentation. **This isn t NO profit: it is just enough dividends to keep 20 equity happy.

21 $ Millions per Year for 4 million MT/yr plant Stable Revenues & Stable Cash Flows Work Fine $200 +$200 Revenue -$80 opex $150 $100 $50 $0 ($50) $70 for bank +$50 for equity Equity Distribution Mortgage Default Mortgage Paid Operating Costs Revenues 21

22 $ Millions per Year for 4 million MT/yr plant #1: Low Utilization Kills Equity and Defaults Debt $200 $150 90% Baseload 55% as VG Backup $100 $50 $0 ($50) Equity Distribution Mortgage Default Mortgage Paid Operating Costs Revenues 22

23 GWH of Total Generation Fossil % Total--Dashed Line Not a Theoretical Issue: Lower Utilization Rates of Fossil in California 300,000 Fossil % Energy (GWh) Dropping as VG Rises 100% 250,000 90% 80% 200,000 60% 57% 51% 61% 60% 60% 57% 47% 70% 60% 150, ,000 50,000-40% % 40% 30% 20% 10% 0% Gas and Coal Baseload Low Carbon VG GWh Fossil % Total 23 Note: VG = Variable Generation, i.e., wind and PV storage that depend on weather and cannot be turned on and off at will. Source: California Energy Commission reports. See

24 However, the Rise in Variable Energy Produced was not Accompanied by a Drop in Fossil Plants on Standby Installed GW bh Type Ratio Total GW to Firm GW Rising VG GW Installed But Unchanged Fossil Baseload Fossil GW Base Low-CO2 VG Total GW: Firm GW 24

25 #2: Variable CO2 Prices Can Default Debt 25

26 Oil Prices are Volatile 26

27 WTI Oil Price per Barrel If Oil is Not Locked in, Rating Agencies Assume a Draconian Stress Case Debt Capacity is Nil $95 Oil Price Forecasts, Futures, and Stress Cases 2017Q1 $85 $75 $65 $55 $45 $35 $ Moody's Stress WTI Future Bank Base Bank Stress US EIA 27

28 #3: Fuel and Electricity are a Huge Wild Card Item Quantity Price Cost/Ton Price Cost/Ton Price Cost/Ton Fuel for Steam 3 MMBTU $ 1.00 $ 3.00 $ 3.00 $ 9.00 $ 4.00 $ Electricity 0.2 MWh $ $ 6.00 $ $ $ $ $ 9.00 $ $ Minemouth coal Commodity Gas Industrial Gas Wholesale power Low Industrial Rates High Industrial Rates 28

29 Solutions to Three Prior Problems Utilization: Treat fossil plants with CCS same as renewables. Contracts to buy energy from CCS-fitted fossil plants as baseload if energy produced, the grid has to buy it. That would fix the utilization rate problem. Fluctuating Oil: Contracts for differences = floating to fixed swaps on oil, to hedge CO2 prices OR fixed price CO2 contracts offered by producers. That would fix the fluctuating CO2 price risk. Oilcos pay fixed price for CO2. Steam and Electricity: PUCs should develop special rules for capture plants that are contiguous to power plants give them access to wholesale prices or steam/electricity at cost. Should be a discounted rate for electricity that is running pollution control devices in industry. 29

30 Analysis of Financing Tools Beyond 45Q 45Q tax credits only address equity portion of financing capital structure Do nothing to lower cost of debt & do nothing to address volatility of revenues. Will only be available through 2023 start of construction, after which??? Tool Purpose Applicability Private Activity Bonds for Capture Equipment Federal Loans for CCS and pipelines Contracts for differences MLP exemption for electric sales revenues for generators with CCS Lower interest rates and extend term of debt Even longer and cheaper than PABs to help debt Lower cost of debt and raise leverage levels, increasing ROE Lower cost of equity and transactions cost by letting power plant be in MLP Parties doing corporate finance (before 45Q expiry), all projects after 2023 Parties doing corporate finance (before 45Q expiry), all projects after 2023 All projects selling CO2 All financings, with possible exception of rate-based traditionally regulated IOUs 30