Listen: Oil production and carbon capture takeaways from CERAWeek

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Jeff Mower:
Hello and welcome to the Oil Markets Podcast by S&P Global, where today we will be talking about US crude production growth, and the need for carbon capture projects. I'm Jeff Mower, Director of Americas Oil News, and I'm joined today by senior upstream editor Starr Spencer and midstream oil editor Binish Azhar. The 2024 CERAWeek by S&P Global conference just wrapped up in Houston where oil industry executives were talking up often aggressively the need for oil and gas to remain in the mix during the transition to cleaner energies. They were also talking up environmental solutions, which will be needed to keep that oil flowing, namely the need for large scale carbon capture projects. Now S&P Global Commodity Insights expects US production to peak at a little over 15 million barrels a day by 2032 before sliding to 8 million barrels a day by 2050.
It should come as no surprise that the Permian Basin will make up the bulk of that growth rising to around 8 million barrels a day from 5.4 million barrels a day currently. But where does that leave the US Gulf of Mexico offshore? Starr, how about starting off with where we stand now and what you heard at CERAWeek conference, were there any surprises from CERAWeek?

Starr Spencer:
Not as far as the Gulf of Mexico is concerned. US Gulf is a vibrant, actually, it's more vibrant than it has been in a while. Crude oil production in the US Gulf is about currently 1.8 million barrels a day, and the US Gulf has composed about in years past, in the last several years, anywhere from 14% to about 17% of total US production. We should end 2024 about 1.9 million barrels a day of crude, but at least in S&P Global Commodity Insights' view we're going to stay there through 2025 at the upper end. Total US Gulf production in 2025 we have at just about 2 million barrels a day, 2.1 million barrels a day in 2026 and '27 also, but then it begins to taper back to 2 million barrels a day in 2028.

Jeff Mower:
Now, is that just a natural tapering? How much of that has to do with the current auctions? The last five-year plan that was released from the Biden administration called for just what, three auctions over five years?

Starr Spencer:
Yes. Well, let's backtrack a minute. There have been five-year leasing plans for decades, and the last five-year plan covered the years 2017 to 2022. Well, the Biden administration took office in 2021. They should have begun making plans for another five-year plan from 2022 to 2027, but they didn't. There was a bit of wrangling about whether they were going to have lease sales at all. The new five-year plan, which was released late last year, said that there would only be three lease sales between 2024 and 2029. By contrast, for decades, we've had two lease sales a year. In any five year plan, we have had at least 10 sales, sometimes 11 if you include infrequent sales from the Eastern Gulf of Mexico, which largely is off limits to leasing.
But to answer your question, I'm not exactly sure, it's possible that the lack of regular lease sales may have contributed to maybe a little bit of production. But don't forget, most discoveries nowadays are in the very deep water, and those discoveries take anywhere from 5 to 10 and sometimes 15 years to put online depending on the size and whether oil companies have to construct brand new production installations.

Jeff Mower:
A lot of the projects now, I know there's some projects coming on stream this year over the next couple of years, those are going to be what, tiebacks?

Starr Spencer:
We'll have both. Tiebacks are discoveries around existing fields that have production hubs. So you could just basically hook the discovery into that production hub, and it takes maybe a year, a year and a half to do. By contrast, if you have to build a whole new production hub that could run into years and well, I was going to say hundreds of millions of dollars, but it's really multi-billions of dollars right now. But luckily for the Gulf of Mexico, BP and Shell and other Chevron, other big companies have discoveries that they made 5, 10, 15 years ago that are only now coming online because they've been in ultra-deep, ultra-high pressure and high temperature conditions. For instance, BP made the Kaskida discovery and the Tiber discovery back in 2006 and 2009, but there wasn't the wherewithal, the technological wherewithal to produce those. So only now is BP thinking about and probably going to be green lighting pretty soon, both Kaskida and Tiber.

Jeff Mower:
The most recent five-year plan it has caused some uproar, at least there were some US Gulf states recently were criticizing the plan. Their concern is the lack of money that would come into their coffers. I know there was a bill, I'm not sure exactly what happened to it, there was a bill that was floated in the House a while back that would require 13 offshore leases over the next five years. Prospects of that passing, considering that the Senate is controlled by Democrats..., but it does show there's some pushback there. It does make me think about what, did we see any of that pushback from CERAWeek? Was there? I think there was one company in specific, right, was it, Woodside?

Starr Spencer:
Woodside Energy. Yeah, Australian-based company. Yeah. I wouldn't say they're a big producer, but they have a big field. They operate the Shenzi field in the Gulf, and they have stakes in a couple of other large, they're a partner in the BP-operated Mad Dog, which is a pretty large field in the Gulf. Woodside said it's very interested in continuing in the Gulf, but there's a little concern, and it's just not Woodside. I've heard it from the last three years actually, that they're really concerned about the future of leasing and especially if Biden gets in office again.

Jeff Mower:
Sure. What's the expectation, I saw that the American Petroleum Institute said recently that they expect leasing would speed up if Trump were elected, but what's the expectation there? Would it really speed up? How much, I guess what's the ability?

Starr Spencer:
He could speed it up, but would he speed it up is the question? And here's the thing. What happens with these five-year leasing plans is it's a process. As I said, if all had gone according to how it has been in the past, Biden would've taken office and he would've immediately assembled his team of Gulf of Mexico experts and they would've gotten to work forging a new plan for the next five-year lease sale, which would've been 2022 to 2027. It takes a couple of years to actually develop a new plan because it has to go out for public comment. There has to be environmental reviews of several things, certain mammals, and they have to be assured that they're going to continue, that they won't be disturbed, and then the public has to comment at every step of the way. Yeah, it takes a couple years or a year and a half to do that.
If Trump got in office, he wouldn't start the process until 2025, so it'd be another year we'd be into 2026 and the period is going to end at '29, which okay, it would leave you a couple of years for more lease sales. But I don't know, like I said, he could do it, but would he do it? That's a question.

Jeff Mower:
Sure. Then there's the whole longer term outlook question, right?

Starr Spencer:
Right.

Jeff Mower:
Like you were saying, these are projects that take many years to develop, and if you think that is demand going to be there, that's the big question for that oil down the road. Binish, you were also covering the conference. By the way it was great seeing you both there. It was great working with you. On the carbon capture front, it's a big, big topic at the conference considering the need to manage carbon with the expectation that oil production is going to be needed for some time. Right. What were you hearing on that front as far as these big carbon capture projects are going? What were the obstacles there? Was there a sense of optimism? There's plenty of projects in the works. I was just reading earlier that Louisiana itself has something over 50 projects, applications in the works right now.

Binish Azhar:
Yeah, so carbon capture definitely became a more focused conversation during CERAWeek this year, especially as we're seeing these forecasts for oil production revised a lot higher. One of the main roadblocks when it comes to carbon capture was its regulatory and costs. Actually, according to S&P Global Commodity Insights data, nine projects were canceled in 2023 and four CCS projects saw final investment decision. This ratio definitely is a little intimidating. When it comes to regulations, Louisiana is a great example to talk about. Just January of this year, the US EPA gave authority to Louisiana over the Class VI underground injection wells licensing. These licenses are used by the CCS industry to permanently sequester captured carbon in underground geologic forms.
Traditionally, the EPA is who oversees this, and when it's given to the State of Louisiana in this example, it's expected that this process should go a lot faster now getting these permitting approvals for the CCS projects. That's definitely a big part of why we're seeing this shift in Louisiana with all these different projects. Now with the Class VI licensing under the Louisiana Department of Natural Resources, the process is expected to be a lot faster than versus under the EPA.

Jeff Mower:
I think I was reading the same report as far as the S&P Global one. They said there have been some cancellations, but they're still expecting these large scale CCUS and hub project overall capacity to rise down the road. I thought one thing that was interesting, I heard when we talked about the funding, like these credits, again the $85 metric ton credit in the US under the Inflation Reduction Act; ExxonMobil's CEO Darren Woods said that he wasn't relying on subsidies. They're looking to build out carbon capture and they're looking at it in the long term, like the credit helps to get things moving, but these bigger projects down the road shouldn't need that sort of subsidy. That seems to be what he was getting at there.

Binish Azhar:
Yeah. Even with this $85 per metric ton credit that is being offered, the trend during CERAWeek definitely seemed that the cost remains a really big barrier to wide scale deployment and just viable business opportunities when it comes to carbon capture, specifically when it comes to these hard to abate sectors like steel, cement. These are industrial sectors outside of energy and are hard to attract investment from. While oil and gas definitely seems to be up in arms in supporting carbon capture, to see that true investment bring these projects to life will need a diverse customer base. When he was talking about that $85 per metric ton not being enough, even if we move over to Canada, Pathways Alliance, Kendall Dilling, he's the president of Pathways Alliance, made the same comment that even if in Canada if they were to see something like an $85 per metric ton incentive, it still wouldn't be enough to bring a major CCS hub project like Pathways Alliance to life. So cost definitely continues to be a major barrier.

Jeff Mower:
When you mentioned the diversifying customers, is that something that the oil companies were mentioning, like, "Okay, we can justify building these big hubs, but we need more than say oil and gas participate"?

Binish Azhar:
Yeah, exactly. Hubs themselves are not something... We're seeing conversation about CCS hubs pop up here and there and the main cause is so that the industry that they're capturing these emissions from is easily transportable to these geologic forms that will hold on to that carbon dioxide. Yeah, if hubs are only going to rely on the oil and gas production side of things, that is what's made clear that that won't be enough.

Jeff Mower:
Another obstacle, we were talking about this earlier, another obstacle is getting the land, eminent domain. That's an issue as well, am I correct?

Binish Azhar:
Yes, definitely. Actually in North and South Dakota, we may see some kind of precedent set for eminent domain for these carbon capture projects. So eminent domain refers to the legal mechanism that allows an entity such as Summit Carbon Solutions the authority to survey private property for public use. It's highly opposed by landowners who are arguing that captured carbon dioxide has no public use. Summit Carbon Solutions, their pipeline project, which was previously scrapped entirely, has been brought forward again to North Dakota's Public Service Commission now that they've made some adjustments to that pipeline to accommodate landowners' concerns in that the pipeline was going through landslide areas, as well as fire hazard areas.
But alongside them bringing their case to the North Dakota Public Service Commission, a Summit Carbon Solutions case is also being brought forward to the South Dakota Supreme Court where they will argue whether eminent domain should be allowed to force land easements needed for the pipeline construction. The higher court is going to address whether the carbon is a commodity and if Summit is a common carrier. This really could set a precedent for future projects if it's determined that captured carbon is a public good.

Jeff Mower:
Oh, interesting. As far as Summit Carbon Solutions, as far as that project goes, when you talk about their easements, how much are they seeking for eminent domain? How many, I guess, landowners are standing in the way there?

Binish Azhar:
According to Summit Carbon Solutions, over 80% of their pipeline route has been voluntarily acquired already. So it seems that 20% remaining is what they would need to use eminent domain to force those land easements. But public hearings are set for April, May, and June, so we'll hear from landowners and environmentalists on what case they're going to make against that remaining portion. Then this project might be one of the first that we see get some kind of approval and on its way to construction.

Jeff Mower:
You mentioned Pathways Alliance awhile ago. I did want to mention that even though they brought the issue of credits, and I think in Canada, they're also seeking something called Contracts for Difference, which is a mechanism that would guarantee a carbon price down the road because these projects take so long to build and so on and so forth, so they want some sort of guaranteed carbon price. I believe that's something they're still looking for. But they're still on track. They said that they were going to begin construction in the fourth quarter of 2025 and plan to start storing carbon by 2029 or 2030.

Binish Azhar:
Yeah, that's right. Pathways Alliance was expected to file the regulatory application by the end of last week. Yeah, it'll be a one-year approval process before they see a final investment decision. Yeah, it's still a long ways out, but they're also definitely making waves in terms of the timeline.

Jeff Mower:
As far as a Trump administration goes, I don't know, from what I've read at least, that while a Trump administration might have some impact on offshore leasing, I'm not sure if it'll have much of an impact on these sort of credits for the industry. Right. That's something that would likely stick, at least that's what some of the folks are saying at the conference. We're running out of time here, but I wanted... Starr, what are you looking for, I guess, what's next in the Gulf of Mexico or what sort of projects are you looking at next?

Starr Spencer:
Well, the anchor project that's operated by Chevron, it's one of those high pressure, high temperature wells is supposed to come on this year. Also, another such project, high temperature, high pressure is it's called Shenandoah. Wow, that was discovered way back in 2009 also. That's operated by a small private operator, Beacon Offshore. I think I had already said that BP's CEO Murray Auchincloss said that during the recent CERAWeek conference that the company is expected to Greenlight Kaskida later this year and possibly Tiber soon afterward. In December of 2023, Shell sanctioned its first high pressure, high temperature project field called Sparta. These big fields, these big high temperature, high pressure fields are in thousands and thousands of feet of water, 8000, 9000 feet of water, and they're drilled down to about 30,000 feet, some of them. They're very big wells, so they'll help cover some of the declines in production. I just wanted to stress that really dropping off production, we probably won't see that until 2030 and beyond, just because of the long lead times to get fields on stream.

Jeff Mower:
Oh, fair enough. How about Binish, what are you looking at next as far as carbon capture goes?

Binish Azhar:
Yeah, I'm definitely looking forward to seeing how the proceedings of Summit Carbon Solution case goes with the South Dakota Supreme Court. I think whether eminent domain is allowed to be used for CCS projects will really make a difference in the timeline going forward. I think these hub expansions, that was a big talk at CERAWeek. For CCS I'm looking forward to seeing come up that are designed as hubs and as well as overall a portfolio approach. Because it seems like during CERAWeek a big critique of the oil and gas industry was this project-focus approach to CCS, while a portfolio approach could actually round out and really, really help tackle their emissions.

Jeff Mower:
All right, well, fair enough. Well, thanks very much, Starr and Binish for joining me in this conversation. Of course, thank you for listening. This Oil Markets episode was produced by Jennifer Pedrick in Houston.