UK Leasing

Future lease sales could include more overseas carbon capture offers

In January 2021, federal offshore lease sales in the Gulf of Mexico were suspended by executive order, creating a moratorium on leases reminiscent of the 2010 drilling moratorium. The court-ordered sale of 257 leases, which that took place last month, effectively ended the moratorium, at least to our knowledge. But what is perhaps most interesting about Lease Sale 257 is that it can be considered as the first time that an oil producer, namely ExxonMobil in this case, has acquired offshore blocks. for offshore carbon capture and storage (OCCS) purposes.

For context, the moratorium on leases was put in place by an executive order from President Biden in January. And it is no coincidence that soon after, the United States joined the Paris Agreement, thus affirming its commitment to environmental protection and the energy transition. It should also be noted that the concept of OCCS has received support from the United Nations, the organizing body of the 2015 Paris Agreement. As such, it can perhaps be considered ironic that the American efforts energy transition and decarbonisation have converged with Lease Sale 257 which, of course, was created with the aim of producing offshore hydrocarbons.

Notably, the blocks related to the area on which ExxonMobil has made offers (see the “blue blocks” in Figure 1) are considered to be in shallow water, an area that received little interest during the reviews. 2020 lease sales. Importantly, more than 90% of US offshore production takes place in deep water, according to data released by BSEE in 2020. The fact that the ExxonMobil blocks are not in deep water suggests that the company has another goal for them. Looking at the map, it can also easily be seen that these “blue blocks” are in close proximity to the company’s flagship business, the Houston Ship Channel. With this project, ExxonMobil says it intends to decarbonise industrial sources by sequestering CO2 captured in offshore reservoirs via submarine pipelines. It seems likely that future OCS lease sales will include more bid-driven sequestration.

OCCS Trends

OCCS projects are not a new idea and ExxonMobil has experience in this area. In particular, it joined forces with Equinor on the Sleipner project in 1996. There, more than 19 million tonnes of CO2 were permanently sequestered in underwater reservoirs off the coast of Norway. This sequestration experience undoubtedly strengthens ExxonMobil’s readiness to deploy and execute OCCS projects in the Gulf of Mexico.

The recently formed joint venture between Talos Energy and Carbonvert is further testimony to the growth of the OCCS market in the Gulf. In August, the joint venture acquired 40,000 acres in Texas state waters near Beaumont / Port Arthur in Jefferson County for carbon sequestration. It is interesting to note that the offshore blocks acquired by ExxonMobil are located in the immediate vicinity of the license acquired by the company Talos Energy / Carbonvert.

In addition, just days before the sale of Lease 257, Talos Energy and Storegga announced their intention to sequester the CO2 from the Freeport LNG facility in reservoirs in the Gulf. (This author has described the emerging UK-US collaboration here). This effort is separate and in addition to the Talos Energy / Carbonvert joint venture. Tim Duncan, CEO of Talos Energy, said his company’s collaboration with Freeport LNG “is complementary to our larger hub project in Jefferson County.”

Additionally, it has been shown that an onshore LNG facility can successfully use offshore tanks for sequestration, as has been achieved by Equinor in Norwegian waters via an 88 mile submarine pipeline to Snøhvit.

Federal waters vs state waters

There is of course a key distinction between federal and state waters, and it will be interesting to see if the CCOS flourishes in state or federal waters. Talos Energy / Carbonvert has opted for waters in the state of Texas, while ExxonMobil targets federal areas of shallow water off Texas. The moratorium on leases that took place this year may not bode well for future OCCS projects in federal waters – a point that would be ironic, given that the moratorium was ostensibly designed to protect the environment. But companies that invest millions of dollars in OCCS projects may not want those projects to be subject to the disposal of shifting presidential administrations and shifting political sentiments. For example, the Talos Energy / Carbonvert joint venture was able to secure permits in state (Texas) waters even as the federal lease moratorium was underway.

It should be noted that the Submerged Lands Act (SLA) of 1953 ratified the various jurisdictions between state and federal waters, and gave the US executive branch regulatory power over them. The law also limited state waters to just a few nautical miles, with the federal government having jurisdiction over the vast remaining portion of national waters. Obtaining acreage within state waters may be preferable for the operations of the CCOA in that it limits the ability of the federal government to intervene in one way or another. However, there is a significant drawback to acquiring land in state waters, as these areas are usually limited to a few nautical miles.

A new emerging market

The United States is on the cusp of an offshore sequestration market. This has been reinforced by the recently adopted Infrastructure Bill, which commits to supporting companies that sequester CO2. Certainly, potential sequestration projects in the Gulf of the United States will likely also require tax credits such as can be found in section 45Q of the IRS tax code. From a feasibility perspective, there is a precedent for underwater carbon storage, and the Gulf of Mexico in the United States has a long history of technological and commercial innovation. It should be noted that if government support were to be withdrawn, the viability of this market could be called into question. Against the backdrop of these trends and parameters, it will be interesting to see how many more energy companies enter this space.