Why Carbon TerraVault is attracting attention

Ryan Fan: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Ryan Fan. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Francisco Leon: What investors should expect is a number of catalysts in 2024. Getting the first ever permit for CO2 injection in California is going to unlock a number of final investment decisions, you talked about. Shovels on the ground decisions for CRC and for California, which we’re excited about.

Ryan Fan: In today’s episode, we’ll take a deeper dive into the opportunities and challenges of the Carbon Capture and Storage, or CCS, for project developers. In particular, we’ll explore Carbon TerraVault CCS project launched by California Resources Corporation, an independent energy and carbon management company. The state of California has some of the strongest decarbonisation and emissions reduction goals in the US. And we’ll hear how Carbon Volt is attracting investor attention to help scale CCS in California to meet these ambitious climate goals. Commercial scale carbon capture and storage may have been considered nascent just a few years ago, but we have seen significant capital investment in this technology of late. Traditional oil and gas companies have begun to invest heavily into CCS, whether it be greenfield projects with Chevron or through M&A like Exxon acquiring Denbury. CCS is no longer a science project, but rather a reality. It has gone from concept to shovels in the ground, which is leading to CO2 underground. Today, I’m excited to welcome our guest, Francisco Leon, President and Chief Executive Officer of California Resources Corporation. Mr. Leon joins CRC at its inception in 2014 as Vice President of Portfolio Management and Strategic Planning. He has since held senior positions within the company as Vice President of Corporate Development and Executive Vice President and Chief Financial Officer, before assuming his current role. Good afternoon, Francisco. Welcome and thank you for joining us today on The Sustainability Agenda.

Francisco Leon: Ryan, thank you so much for having us. I’m excited to tell you about California resources and our carbon terrible platform. So thanks for having us.

Ryan Fan: Yeah, we’re excited to hear about it. So let’s dig in. Carbon capture and storage is proliferating in the US with the help of policy driven financial incentives. Can you explain the CRC carbon business to us? What are some of the goals for this business?

Francisco Leon: Yeah, absolutely. So in 2021 we launched Carbon TerraVault, which is part of CRC’s carbon management business. And we were trying to help California advance the energy transition. California has a net zero goal of 2045, or they’re looking to eliminate about 400 million tons of emissions per year in CRC’s perfectly situated, a solutions provider to the state of California. Given that our objectives align extremely well. So Carbon Vault is a scalable carbon management platform, and the plan is to provide services to capture, transport and store CO2 for different customers, industrial emitters of different types, and lower the emission footprint of those industries and therefore generating value to not just the shareholders, stakeholders that participate in the process, but also our local communities. So the plan to be more specific is to develop the CCS projects, take CO2 from different factories, different plants and store it underground reservoirs, combination of depleted oil and gas fields in different type of reservoirs, like saline aquifers, and then permanently store the CO2 underground. Importantly, our platform is not an enhanced oil recovery platform like you have in other states of the US. We are developing only a permanent sequestration business. So the plan, the overall objective is to develop sites throughout California that will capture a billion metric tons of CO2 and have storage sites for those amounts. That is about 20 million tons of emissions that we would look to capture. So about 5% of the overall emission footprint of California. Now, not all of those emissions can be captured with CCS. We actually think that number is closer to 60 to 90 million tons of the emissions that could be captured through CCS, so could be representing about a quarter of the addressable market on a success basis. Importantly, CO2 permits are being issued and reviewed by the Environmental Protection Agency. We are on track to receive our first draft permit in the next few weeks. This would be the first ever permit in California of its type. It’s a permit called the Class VI permit. Couple more points I’ll mention we have our connection with Canada investors. We are partnering with Brookfield, specifically their Global Energy Transition Fund, where they have allocated at least to begin with, $500 million as an initial investment into Carbon TerraVault. So where other parts of the US you’ll hear about CO2 pipes, that’s the beginning of every conversation around CCS for California resources. It’s really the land. We are the largest mineral acreage holder in the state of California. We are thinking about a transition over time that transforms oil and gas fields into different opportunities, and one that we’re really excited about is conversion of oil and gas reservoirs into pore space that can be developed to store the CO2. The advantage could not be clearer than if you focus on our Elk Hills field in the central part of California. That field is about 47,000 acres. It’s held in fee simple, which means we own the surface and all the minerals below that. That’s where we have most of our oil and gas production. We also have already a power plant that generates about 550MW of power. So we’re creating a clean energy park that we’re inviting a number of new and exciting industries to build on top of our reservoir. So where we do see a need for CO2 pipelines down the road, the initial projects in California will be developed on top of the reservoir at our field at Elk Hills. A lot of technologies that we’re going to bring forward clean hydrogen, clean ammonia, renewable natural gas, direct air capture, just to name a few. We’re excited.

Ryan Fan: That’s fantastic Francisco, thank you for that. As mentioned earlier, the CCS business is proliferating and that is despite some significant challenges. For example, the navigator project, one of the largest CCS projects in the US Midwest, was recently cancelled because of pipeline permitting issues. Can you talk to us about why CRC and its Carbon TerraVault approach is different, and how your geographical exposure to California makes you different? In particular, how has the CRC mitigated project development risk here where others have been unable?

Francisco Leon: And, you know, it’s important to highlight that the oil and gas industry has been utilizing CO2 for over 50 years in different forms, in different parts of the world. We’ve developed a lot of expertise to handle CO2, and that CO2 is a safe gas to transport and a safe gas to utilize across the board. So I’m very comfortable with the implications of having to transport and capture store CO2. California has a lot of advantages compared to other projects that you cited. So first of all, you have a the state of California that is driving through policy, the change in the transition. There’s alignment and a lot of incentives that are available for us to pursue this. You also are looking at places like Kern County that are impacted by the energy transition. A lot of the tax revenues in Kern County are derived from oil and gas production and jobs. So it’s a county that we are partnered with today. We are integral to the community, and there’s a support system embedded in there to continue generating really good quality jobs through the energy transition. So I expect us to have, as we move forward, a really good dialogue with the community. That community work doesn’t come because there’s a project development. It doesn’t come out of nowhere. Unknown group of people saying, we’re going to build all these facilities and all this infrastructure around you, trust us. That trust and that element of partnership is not something that we take for granted. We’ve been discussing carbon for a couple of years now, and ultimately, what we invite people is to have a dialogue, have a seat at the table to communicate their concerns, to come look at the sites where Elk Hills is remote and it’s a field by CRC away from any population centre. So we’re asking people to come and take a look so we can answer questions with facts, with evidence of how this is going to work. We also work very closely with the unions. California is also on the labour front that these projects will bring a lot of high paying, high quality jobs into California. So it’s a good opportunity to bring prosperity to the communities where we live. We’re excited about that. Ultimately, the proof point will be as we are looking to receive this first permit in Kern County, it requires a public comment period, which were estimating to be about 90 days. And that’s where we’re going to be able to showcase what the benefits that the project brings. We bring a lot to the conversation. We bring a lot to the state. We believe we offer a fast track to get some of these projects to be sanctioned, to be in place and to deliver some of the benefits and the promise of the energy transition. It is hard, right? That transition is hard for a lot of people, and I can appreciate the challenges that others are facing as well. We do feel that our approach, the location of the site, the work that we’ve done over multiple years to mitigate the risks and ultimately showcase the numerous benefits that a project that CTV offers in the Clean Energy Park is going to bring to a community that really needs the support.

Ryan Fan: You mentioned a couple of things earlier about policy alignment from California, but land ownership being fee simple and about a clean energy park, and these are all uniquenesses to CRC, and so do you think that it was this combination of this that led to Brookfield entering into this JV and making this investment? Can you maybe talk us through the due diligence process with Brookfield, and why they found the Elk Hills Field project so attractive?

Francisco Leon: Yeah, absolutely. I think you summarized it well. Those were part of the diligence that made Brookfield come to partner with us. It’s really been a tremendous partnership, and there’s a lot of capital that looks for projects like this, and certainly Brookfield, it’s a very successful company raising capital and placing it. But we do not take for granted the quality of the partnership. And really we’re looking for more than just capital, we’re looking for a partner that can help us grow the business that has expertise in places where we don’t have expertise, that has a reach to the market that we wouldn’t be able to get. So a true partner that enhances what we were building. And we found that with Brookfield, they really started the carbon capture investment with a company called Entropy based out of Calgary, part of the advantage Group. And they did their homework first on the capture side of the equation. And as they were looking to place that technology, they decided that California had the best elements for ultimately advancing the technology, at least in the US. That’s where our need for capital, our need for this partnership and their objectives to grow their CCF platform came together. They were also in the midst of raising their Global Transition fund, a massive raise, $16 billion that were put together as we were talking to them. So it became a natural fit for them to come in the States where we did. As I said before, we really wanted to highlight that in California, the scarce resource in CSE is the pore space, where you have a government that is dictating a transition, that has a carbon tax already in place, that has incentives like LCFS, that go beyond the federal incentives to be able to make this a reality. The difficult part is we studied the opportunity was getting the pore space permitted and getting accumulation of the permit going through the significant technical rigour of the EPA and then making this project a reality. So I think once we were able to discuss that with Brookfield in some detail, they got comfortable to give us a valuation mark of $10 per metric ton of capacity to buy into our reservoir. So that validates our strategy, also gives them a seat at the table to help us advance the project. Again, from what we think is the most valuable part of the value chain. And then you had the benefit of the IRA coming together, enhancing the incentives from the federal government. So what we’ve seen is a lot of deal flow. We’ve seen a lot of opportunities, both existing emissions and new greenfield technologies come to the table, having options to go to other parts of the US, to other markets. They’re coming in the new greenfield technologies to partner with us and build adult kills and the brownfield projects, even though we haven’t announced a partnership quite yet, there’s a lot of really good work in progress looking to help industries, not just on the refining sector and the power sector, but also cement, as an example, really hard to abate emissions of industry that are absolutely needed where there’s no replacement. There’s a lot of appetite for these industries and companies to reduce their footprint, leak their project, lower carbon intensity. So we’re working through that and having Brookfield by our side, where they bring expertise on different fronts as one of the largest investors in the renewable space, has been a really good match. Now that we’re about a year and a half into the JV and we’re just getting started.

Ryan Fan: You mentioned a lot about heavy emitters and point source capture. And given the naturally contained carbon ecosystem in California, why do you then also focus on exploring direct air capture? What do you see from policy support and long term fundamentals that would suggest that a DAC hub in California would thrive suddenly?

Francisco Leon: So if you think about it again, what’s the mission statement is to help California reduce their emissions. And as I said earlier, you know, about 60 to 90 million tons per year are addressable with carbon sequestration, CCS. But what happened with the rest? Well, the rest is, a part of it, we’re addressing where replacement fuels building clean hydrogen plants, but the third component is direct CO2 removal. And that’s where we’re excited about progress. Fairly quick progress we’re seeing on direct air capture. So DAC is not investment in DAC plants. It’s not something that I foresee in the near term or a platform, but direct air capture needs a storage site, right? It’s really direct air capture plus S, right. People forget about the S. The S is the storage of where does that CO2 go once it’s captured. And we want to provide that solution as well, but that direct CO2 removal is going to be absolutely critical for those emitters that are out there in different parts of the world having to run big data centres, right? The tech companies that are big consumers of energy. A lot of times we rely on coal plants in other countries having a massive footprint. It’s only going to get bigger with artificial intelligence about to take off. So direct carbon dioxide removal makes sense, makes sense in that context. And there are incentives. The Department of Energy just started creating these hubs around the US, and there are team put together a phenomenal consortium of DAC technology of different academics, different universities across California, different groups that want to make this project a reality. And we were able to get a funding from the DOE to pursue a field study to understand better the cost of DAC. We want to be the DAC hub of California, and we’re advancing that through some of our sites. It helps that their incentives, already contemplated by 45 cu in the IRA of $180 per ton, but we’re definitely watching the voluntary credit market take off. You see some of the biggest tech companies in the world already participating in this space, and they have their own net zero ambitions, and they recognize there needs to be an offset to some of their emissions. And so this direct carb removal, where you can track ownership of the CO2 that’s being captured, but put it into a permanent sequestration site that is truly permanent, we expect that to have significant value in the voluntary credit market. It’s just getting started. It’s early, but we have the right elements. And again, it’s part of the way it will help California reach their objectives as part of the equation.

Ryan Fan: Okay. So let’s close out this podcast with a preview of what’s to come. What should investors expect in the coming year from CRC with regards to its carbon management business?

Francisco Leon: Yeah. What investors should expect is a number of catalysts in 2024, getting the first ever permit for CO2 injection in California is going to unlock a number of final investment decisions. You talked about shovels on the ground decisions for CRC and for California, which we’re excited about. We are finalising the steps to make a decision on our own brownfield projects. So these are emissions that we’re going to capture from one of our existing plants, that we have a project that’s 100% under our control on top of the rest of war. No need for pipeline. And it’s a pre-combustion high concentration stream. So low cost, great feasibility, great track towards having the evidence that the market and the stakeholders need. So that decision should come shortly after we receive the final permit from the EPA, which we’re anticipating sometime in the first half of 2024. And then we also are getting ready to make decisions on a clean hydrogen project that kills blue hydrogen specifically. So feeding natural gas and creating a clean molecule, hydrogen. We’re working with off takers. There’s a lot of interest from different types of offtake. It’s an undeveloped market, but there’s an exciting level of interest in we’re trying to make sure we the right long term contracts the right visibility into the projects. Both Brookfield and CRC have retained the right to invest directly into the hydrogen project. So we’re reviewing that, but at the very least, it will be our first greenfield project where we’re going to get paid to collect the CO2 from the site.

Ryan Fan: That’s fantastic. Francisco, thank you for taking the time to join us on the show today, and we really look forward to seeing all these positive catalysts come to fruition for CRC, and thank you to our listeners for tuning in.

Francisco Leon: Thanks, Ryan, and to your listeners, thanks so much.

Ryan Fan: Please join us next time as we tackle some of Sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Ryan Fan, and this is The Sustainability Agenda.

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