Carbon capture in Asia-Pacific upstream faces cost and legal challenges

Oil and gas producing countries in Asia-Pacific are aiming to develop carbon capture, utilization and storage supply chains through their upstream sectors, but success hinges on reducing costs and navigating the complex legal and policy frameworks yet to be established.

Last week, countries planning to export CO2, such as Japan and Singapore, and importers like Indonesia signed a series of CCUS agreements at the Asia Zero Emissions Community Ministerial Meeting in Jakarta. Other hydrocarbon producers in the CCS race include Australia, Malaysia, Thailand and China.

The Asia-Pacific region lags the US and Europe in CCUS projects, but hydrocarbon producers are taking the lead thanks to lower capture costs in gas processing and the use of CO2 in enhanced oil recovery operations, which aims to maximize production from depleted oil fields.

Natural gas processing is the focus for Asia-Pacific, accounting for 34% of CO2 capture capacity in the pipeline, followed by coal power and hydrogen production, according to S&P Global Commodity Insights’ H1 2024 review of carbon capture projects published in August.

“Southeast Asia is emerging as an attractive region offering some of the most cost-competitive CO2 storage options,” Commodity Insights analysts said, adding that momentum in Asia-Pacific is building through policies and hub/cluster projects.

While there may appear to be competition, each country with capacity to store CO2 -- onshore, offshore or both -- may have different objectives, from using CCS to meet nationally determined contributions under the Paris Agreement to facilitating new oil and gas production, said Michael Harrison, Senior Energy, Resources and Infrastructure partner at law firm baker Botts.

For Australia, which has some of the best solar and wind resources, CCS is part of its energy policy but not central to achieving NDC, Harrison said. “Australia may regard itself as wishing to use its CO2 storage capacity to promote new hydrocarbon projects, while allowing other countries to achieve their NDCs by sending their CO2 to Australia for storage.”

“In any event, the key to the use of CCS is its cost, and the key cost in any CO2 value chain is the cost of capture. Typically, for each emitter seeking to use CCS, capture is between 60% and 70% of the estimated cost, with transportation and storage making up the balance,” Harrison added.

Harrison said while some projects, like the Netherlands’ Porthos project to capture CO2 in Rotterdam and store it in the North Sea, are being closely watched by the industry, “first-of-a-kind projects” tend to have cost overruns.

CCS breakeven cost can vary but is estimated around $100 per metric ton of CO2 equivalent in oil and gas, with lower thresholds seen in Chinese upstream.

Legal and policy hurdles

Countries are developing legislative and regulatory regimes for CCUS, with some, like Indonesia, borrowing from existing upstream contracting structures. However, several legal aspects of shipping CO2 across international borders require intergovernmental negotiations, which will take time to resolve.

“Emitters are looking for clarity on costs and prospective liability arising from loss of CO2 in transit and from storage. This is an issue for emitters in the country of storage and emitters considering exporting CO2 to the [storage] country,” said Harrison, who advises on such legal frameworks.

Harrison said the focus is on issues like licensing regimes and the risk of permits being suspended due to changes in law.

This has become critical as climate policy becomes increasingly geopolitical.

“In addition, the [importer] will want the [exporter] to assume proportionate liability for the costs of addressing the cause of any leak of CO2 following the transfer of title in the CO2 and the CCS storage facility to the country where the CO2 is stored,” Harrison said. “These are some of the bigger issues, there are many more.”

Even the use of carbon credits to finance carbon capture remains controversial.

“In general terms, there continues to be a debate about whether each [metric ton] of CO2 stored permanently should give rise to carbon credit,” Harrison said, adding that although CCS is a means to avoid emitting CO2, it does not remove CO2 already in the climate system.

These issues create uncertainty in policymaking -- a recent Indonesian CCS/CCUS law lacks clarity on carbon credit usage, while Australia has yet to achieve general acceptance for the basis of its policy that allows local carbon credits from CCS projects.

China and Japan

Commodity Insights analysts said Japan is the only country in Asia-Pacific with a clear CCUS target, with a CCS Business Bill to start projects by 2030.

China could be a gamechanger with its recent plan to decarbonize coal and cut 50% of emissions from pilot projects by 2027, Commodity Insights analysts added. “Such an ambitious plan could significantly accelerate the evaluation of CCUS as a solution, resulting in sooner deployment at scale of this technology. The next three years will be crucial for the technology in the region.”

“CCS is now recognized as essential to addressing climate change,” Harrison said. “It is clear that CCS is not a bridging solution, it is a long-term solution.”