Ambitious CCS project may dent strong ACCU demand expected from Santos' Barossa gas field

Santos' Barossa gas project is expected to generate significant demand for local carbon credits under Australia's reformed emissions compliance scheme, but the successful completion of a challenging carbon capture and storage project could substantially reduce the need for offsets starting in 2028, according to market participants and data from S&P Global Commodity Insights.

The Santos-owned Barossa offshore project proposes to provide a new source of gas to the existing Darwin LNG facility in Australia's Northern Territory due to exhaustion of the Bayu-Undan field in Timor-Leste. The company is targeting first gas in the third quarter of 2025.

However, the field's high emissions intensity of 18% is expected to significantly increase its carbon costs under the new Safeguard Mechanism rules, which require reservoir emissions from new gas fields to be net zero.

As a result, Santos will have to offset all the CO2 reservoir emissions through the retirement of Australian carbon credit units, or ACCUs.

Offsetting emissions

Barossa's reservoir CO2 emissions are expected to be 1.18 million mtCO2e in 2025 and rise to 2.47 million mtCO2e by 2027, according to data from S&P Global Commodity Insights' upstream oil and gas projects evaluation tool Vantage.

This includes reservoir CO2e emitted both at the offshore facility and the Darwin LNG facility.

Emissions are expected to stabilize at these levels until 2037, after which they are expected to start declining as gas production falls.

The gas field is expected to generate total reservoir emissions of 12.80 million mtCO2e through 2030, which will need to be offset using ACCUs.

"Over the period to 2030, roughly [Santos] would be buying about 13 million-14 million mt of the ACCUs," said Kevin Morrison, energy finance analyst for Australian gas at the Institute for Energy Economics and Financial Analysis.

Total ACCU holdings of all market participants in Australia stood at 36.2 million mt as of the end of 2023.

The demand for ACCUs from the project is expected to be focused on Generic ACCUs, representing the lowest-cost abatement, said Guy Dickinson, CEO of Australia-based carbon offset services providers BetaCarbon and Clima.

Platts, part of S&P Global, assessed the price of Generic ACCUs at A$33.85/mtCO2e ($22.41/mtCO2e) on April 8. Generic ACCUs, generated from avoidance-based methods such as landfill gas and avoided deforestation, are the cheaper credits available in the carbon market.

However, some market participants expect the price of Generic ACCUs to rise above A$40/mtCO2e through 2024 and early 2025, further raising the cost of offsetting emissions.

There are other gas projects also under development, such as Woodside's Scarborough gas field and Eni's Verus gas field, which might have demand potential for ACCUs.

However, Scarborough gas field's annual reservoir CO2 emissions that will be fully removed at Pluto LNG plant are expected to be low at about 210,000 mt of emissions through 2030, according to S&P Global Vantage estimates.

Italian oil heavyweight Eni, which is heading the development of the Verus field, recently said that it was reviewing plans for the field due to its high emissions intensity.

CCS play

However, Santos' demand for ACCUs for Barossa might be significantly reduced under its plans to re-purpose the declining Bayu-Undan field as a carbon capture and storage hub.

Under the project, Santos is planning to transport reservoir CO2 from Barossa to Bayu-Undan via the existing pipeline and re-inject it back into the depleted reservoir.

The Bayu-Undan CCS project is expected to store 1.48 million mt of reservoir CO2 on the first CO2 injection from Barossa in 2028, according to Vantage data. The CO2 injection is expected to rise to 2.47 million mtCO2 in 2029 and stabilize at that level until 2030.

The company said in February that the project's front-end engineering design was 86% complete with the final investment decision targeted for 2025.

If the Bayu-Undan capacity is fully utilized for Barossa, the company will need to offset only 0.98 million mt in 2028, with no offsets needed starting in 2029, according to Vantage estimates.

However, there are some financial and technical concerns regarding Santos' ability to achieve the target set by the Bayu-Undan CCS project.

"We have done a lot of studies on CCS and really it doesn't match up to what the companies say and the expectations," Morrison said.

Chevron's Gorgon CCS project, located in Australia and the world's largest, has so far stored less than half of its targeted emissions after running for five years and spending nearly $3 billion, he said.

Morrison added Santos had given no estimates about the cost and source of energy required to fuel compressors to transport CO2 through a more than 500 km pipeline between the Darwin plant and the Bayu-Undan reservoir.

"Santos hasn't said anything about cost and if you look at Chevron's experience with Gorgon, it could run into billions of dollars very quickly," according to Morrison.

Besides Bayu-Undan, the demand is also expected to be impacted by the startup of Santo's jointly-owned Moomba CCS facility, which is the only Australian CCS project currently registered to generate ACCUs.

The facility is on track for the first CO2 injection in mid-2024 and is expected to start generating ACCUs within a year, Santos said on Feb. 21.

Santos has also started stocking up on ACCUs and entered into forward contracts for the purchase of 2.5 million credits to be delivered between December 2023 and January 2027.