Could CCS be the GCC’s solution to maintaining oil revenues?

President Biden recently announced plans to reduce the USA’s greenhouse gas (GHG) emissions by at least 50 percent below 2005 levels by the year 2030.  As the new administration seeks to engage and lead the world on climate change, more ambitious announcements from other countries are expected. 

Carbon abatement schemes are therefore in sharp focus. This will be challenging for the GCC. The GCC’s rapid economic development and industrialisation has led to an almost 8 percent growth in power consumption each year.  Hydrocarbons are not only the main fuel for generating power and operating energy-intensive industries, but also the main source of wealth.   

Carbon capture utilisation and storage (or sequestration) (CCUS) is the process of capturing carbon dioxide (CO₂) at source; for example, fossil fuel power plants, transporting it to a storage site, and either depositing it where it will not enter the atmosphere (normally an underground geological formation) or turning it into useful commercial or industrial products. In theory, it is a way to continue carbon producing activities without increasing GHG.

CCUS in the GCC

GCC countries are at the forefront of adopting CCUS technologies and the UAE is a global leader in its approach to climate change.  It recently announced its second progressive Nationally Determined Contribution, which makes the UAE the first country in the region to commit to an economy-wide reduction in emissions, with a goal of a 23.5 percent emission reduction by 2030 from a 2016 baseline. 

In 2016, a joint venture of Masdar and ADNOC established Al-Reyadah, the first commercial-scale CCUS facility in the Middle East.  Currently, the facility has the capacity to capture 800,000 tonnes of CO₂ annually. ADNOC plans to expand this capacity to 5 million tonnes of CO₂ a year by 2030 to capture more CO₂ from its own gas plants. In January 2020, ADNOC signed a strategic framework agreement with Eni to explore new opportunities for collaboration in CCUS.  ADNOC said that this agreement “builds on ADNOC’s recently announced sustainability goals, particularly its commitment to decreasing its GHG intensity by 25 percent by 2030”. The UAE also aims to become a major hydrogen producer, contributing to its efforts to cut carbon emissions by nearly a quarter. 

There are several other CCUS projects in the region. Saudi Arabia established the KACST - Technology Innovation Center on Carbon Capture and Sequestration and Saudi Aramco has its own research and development program for CCUS.  Aramco’s Hawiyah Gas Plant uses carbon capture technology to capture CO₂, pipe it to the Uthmaniyah oil field and inject it into the oil reservoir – not only sequestering CO₂ but also helping to maintain the pressure in the reservoir and enhance oil recovery. Qatar has the Qatar Carbonate and Carbon Storage Research Center while Bahrain has established the Sitra Carbon Capture System.

While the GCC countries have been generally successful in adopting CCUS, scaling up the use of CCUS technologies may prove more difficult.  Hurdles to large-scale CCUS adoption in the region include high capital costs, lack of technical preparedness, lack of direct economic incentives (such as carbon pricing), and underdeveloped regulatory frameworks. Significantly, reinjecting gas for enhanced oil recovery (EOR) has been one of the key drivers for adopting CUS schemes in the GCC. Critics have noted the irony of using a carbon abatement tool such as CCUS to increase oil production.

Challenges of CCUS

There are no easy solutions for such challenges. The GCC states could enhance regional governance and cooperation, or partner with global CCUS leaders to jointly fund CCUS research and development (such as some of the recent initiatives by ADNOC).  Dissemination and exchange of knowledge and capacity building will be important factors in growing CCUS.  Critically, any plans should include promoting regional legal and regulatory issues including long-term liability for storage; regulation of transport; the treatment of stored carbon under emissions trading regimes; issues of property ownership (including IP rights); and handling perception and engagement with the public. We look at these legal and regulatory challenges below.

The CCUS regulatory regimes typically operate on two levels: a high-level global climate change agreement is necessary because emissions must be reduced for a climate change strategy to work throughout the world; and national frameworks are necessary to implement international agreements and national mandates at a domestic level. Investors want regulatory certainty for CCUS projects and governments typically want a level playing field – they do not want national carbon reduction commitments to disadvantage their own domestic companies.

The UNFCCC (the Paris Agreement) and its subsidiary Kyoto Protocol are the existing global climate change agreements. The UNFCCC established goals while the Protocol set binding emission reduction targets for industrialised member countries.  Low-carbon technologies are typically more expensive than conventional technologies, and therefore deployment of low-carbon technologies requires an overarching societal mandate.  The global level objective is climate change abatement.  In addition to being a good “global citizen”, national objectives may also include energy diversity, energy security, and reducing pollution and other negative environmental impacts.  The GCC countries are likely to have one or more of these as objectives on a national level.

National legal and regulatory frameworks are critical to CCUS development.  Firstly, a national framework establishes the mandate for GHG reduction and rules for CCUS projects which are essential for investment decisions by utilities, industry, and financial markets.  CCUS projects are capital intensive and with no regulatory certainty, private sector developers and investors may be reluctant to assume the risks associated with such investments.

In GCC countries, CCUS projects have typically been undertaken by government-owned companies and some of the issues that would arise on a privately funded project may not be strictly relevant.  However, it appears from recent joint venture announcements that regional national companies intend to partner with international companies on CCUS projects.  Governments in the region are generally pro-active and flexible on projects that benefit the region and CCUS projects are likely to be favourably treated.  Nevertheless, investors will likely seek some legal and regulatory clarity in relation to their investments in CCUS.  Some of the issues that will need to be considered for CCUS projects that involve injecting CO₂ into geological formations, are as follows: 

Geological storage permits.  Many countries in the region do not have rules for geological storage facilities.  Permits for use of storage sites for CO₂ injection may need to be given to projects based on: suitability of storage formations; environmental requirements; storage operator requirements including financial security; third-party liability; site closure, certification, and abandonment; and harmonisation with hazardous waste rules.

Storage site access.  CCUS projects must have access to storage sites, which in many cases are not located at the emission source.  Local governments will need to make government-owned storage sites (onshore and offshore) available to CCUS projects on favourable terms.

Pipeline access.  CCUS projects of this type must have access to pipelines to transport CO₂ from the source to the storage facility.  Many jurisdictions in the region do not have existing rules for CO₂ pipelines or other pipeline rules that may be used or modified.  Accordingly, some mechanisms for third party access to pipelines may be needed (although in the region these may be agreed on a case-by-case basis).

Liability and environmental regime.  CO₂ must be stored indefinitely.  However, indefinite responsibility and liability for storage facility operators is neither practical nor attractive for commercial projects.  Accordingly, government bodies such as national oil companies may need to assume long-term liability for the stewardship of the storage site. The greatest environmental risk associated with long-term storage of CO₂ is gradual or catastrophic leakage, which could entirely negate any environmental benefits of capturing and storing CO₂ emissions. A strict monitoring system is needed to detect any issues as early as possible, as well as comprehensive environmental strategies to deal with leakages.

Financial support.  The lack of clear rules and emerging technology risk, together with an insufficient carbon price currently disincentivises investment in CCUS projects. Such projects could be incentivised through grants; credit support; and liability relief.  Since taxes are rare in the GCC, tax benefits are not as important as they are in other countries.

Carbon trading schemes.  Carbon credits allow companies to compensate for their GHG emissions. There are three basic types of carbon credit: those from reduced emissions (typically energy efficiency measures); removed emissions (carbon capture and planting trees); and avoided emissions (producing energy from carbon neutral sources).  Companies can meet their climate targets by purchasing credits for their current emissions.  There is currently no internationally standardised way to trade carbon credits, no way to verify the compensating activity behind them, nor universal acceptance of what constitutes compensating activity, although the UN is working on international trading standards.  The EU Emissions Trading Scheme has been operating since 2005 and works on the ‘cap and trade’ principle.  A cap is set on the total amount of certain GHG that can be emitted by installations covered by the system.  The cap is reduced over time so that total emissions fall.  Within the cap, companies receive or buy emission allowances, which they can trade with one another as needed.  They can also buy limited amounts of international credits from emission-saving projects around the world.  After each year, a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed.  If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.  While establishing carbon trading markets in Dubai and Doha has been discussed before, such plans were derailed by past financial crises and no market has yet been established in the GCC.

Conclusion

Wide-scale adoption of CCUS technology has been slow in the GCC and faces many challenges.  Some are technical and financial; others are legal and regulatory such as the lack of transparent regulations and legislation. There are also serious environmental concerns associated with CCUS projects, such as potential leakage.  Some commentators say the benefits of CCUS do not justify the perceived risks, particularly if the carbon removed from the atmosphere is used for EOR.

However, many of the companies currently involved in CCUS and EOR in the region counter that, while CCUS will help increase or maintain oil production, it also helps to free up other gas from reinjection for power plants, where it will substitute for more carbon-intensive fossil fuels, such as coal or oil.  Without downplaying the environmental risks inherent in CCUS, such risks are successfully handled by the oil industry daily.

ADNOC’s CEO, Dr Al Jaber, stressed recently that pro-growth policies based on a diversified energy mix are essential for sustainable post-covid economic recovery. To power this growth and ensure continued global progress, oil and gas will need to remain part of this energy mix for many years to come. 

CCUS is a viable option to help GCC countries maintain their oil and gas-powered economies and to allow targets for GHG emissions, including CO₂, to be met at a reasonable cost.  A GCC-based emissions trading platform could disburse emissions credits when carbon is stored underground and withdraw credits if previously stored carbon escapes into the atmosphere.  Moreover, combining CCUS with fossil fuel power generation helps to address the intermittency problem associated with renewable energy without increasing carbon emissions.

Given prevailing global politics, GCC countries must produce oil and gas with much lower carbon intensity whilst they plan for a future where oil is no longer highly prized.  Plotting this transition and sustaining their incredible economic growth will be fiendishly difficult.  A scalable CCUS solution that helps GCC states maintain their oil and gas revenues and contribute to global carbon abatement gives policy makers a concrete basis for creating extensive investment incentives.

Ana Severova and Richard Devine are partners at Devine & Severova FZ-LLC, a legal consultancy based in the UAE.