Category: Energy Finance Lab Post

MODELING DOMINANT PRODUCER PRIORITIES IN CRITICAL MINERAL MODELS 2/14/2025

MODELING DOMINANT PRODUCER PRIORITIES IN CRITICAL MINERAL MODELS

Payne student researchers Reese Epper, Sito Abasi Udoh and Jordan Kengue describe their economic behavior model framework that considers the impact on critical minerals markets of a dominant producer prioritizing market share gains or price stabilization. The team developed initial models for global copper, cobalt and nickel markets, integrating real world data. They were guided in the project by Energy Finance Lab Program Director Brad Handler and Payne Faculty Fellow and Mines’ Viola Vestal Coulter Chair of Mineral Economics Ian Lange.  February 14, 2025.

Evolution of The Carbon Market for Addressing Distressed and Abandoned Assets 2/7/2025

Evolution of The Carbon Market for Addressing Distressed and Abandoned Assets

Payne Institute Energy Finance Lab Program Director Brad Handler addressed attendees at the inaugural SPE Decarbonization Congress in Texas on the evolution of carbon markets to finance the decommissioning of primarily orphaned and abandoned oil and gas wells. Attached are his slides and prepared remarks.  February 7, 2025.  

CRITICAL MINERALS SUPPLY CHAIN: ROLE AND IMPACT OF ASM 2/6/2025

CRITICAL MINERALS SUPPLY CHAIN: ROLE AND IMPACT OF ASM

Payne Institute Critical Minerals Program Manager Clarkson Kamurai, Student Researchers Isabel Guajardo and Grace Akinyi, Energy Finance Lab Director Brad Handler and Faculty Fellow Ian Lange write about how a significant increase in the supply of dozens of so-called “critical minerals” will be needed in the coming decades, for uses ranging from defense to no- and low-carbon energy. Mineral endowment and production capacity have therefore become crucial assets for developing economies. Yet one set of the stakeholders — artisanal and small-scale mining (collectively referred to here as ASM) — tends to be overlooked and may prove to be crucial.  February 6, 2025.

Sibanye Stillwater’s lessons about US mining sufficiency 1/22/2025

Sibanye Stillwater’s lessons about US mining sufficiency

Payne Institute Student Researcher Annie Welch, Critical Minerals Program Manager Clarkson Kamurai, and Energy Finance Lab Director Brad Handler write about how the economic challenges for Sibanye Stillwater’s U.S. Platinum/Palladium mining operations. The analysis offers an illustration of the limitation of recent Inflation Reduction Act tax incentives (45X).  January 22, 2025.

DOI’s Orphaned Well Methane Leakage Insights and VCM Implications

DOI’s Orphaned Well Methane Leakage Insights and VCM Implications

Wells Plugged with Pre-Plugging Methane Measurements by U.S. State, 2022-6/30/24

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: Wells with non-detectable rates of methane emissions are included in the data and are assigned a “0.00 grams/hour” rate
Source: U.S. Department of the Interior

Key Points. DOI data highlights that most methane leakage from orphaned wells comes from a very small % of those wells; this implies carbon markets might support relatively few wells if only the current leak rates are considered. The DOI report acknowledges that current leaks likely worsen over time, supporting a VCM methodology based on “expected emissions”.

The DOI’s annual report to Congress. The Department of Interior (DOI)’s Orphaned Well Program Office released its annual review last month. The report provides a comprehensive review of the Office’s Orphaned Well Program (OWP), which was funded by the Bipartisan Infrastructure Law (BIL).

This blog examines that methane emissions data and offers thoughts on implications for using the voluntary carbon markets (VCM) to raise private funds (to supplement BIL funding) to plug a larger number of orphans.

Through September 2024, $1.3 billion of the OWP’s $4.7 billion had been obligated (but not spent); 83% of the obligated funds went to states, with the balance to federal and tribal programs. The program had resulted in 9,002 orphaned wells plugged by June 30, 2024, of which 8,813 were plugged by states and the balance on federal and tribal lands.

DOI state data shows relatively few wells are methane emitters… States reported a total of 1,260 wells on which methane leakage measurement had been conducted. Of these, methane leakage was detected on 290 wells, or 23%. Other data presented in the DOI report suggests that at least ½ of these 290 had leakage rates of below 10 grams per hour (i.e. were very small emitters), leaving perhaps 5-10% with more significant emissions rates.

…of which a tiny number are “super emitters”. Of the remaining wells with more significant leakage/emission rates, the report does not detail every larger emitter but does indicate that there was one well that had methane emissions of 33,153 grams per hour (g/h) (seemingly in Colorado) and one that had emissions of 6,500 g/h (in Montana). See Exhibit.

For reference, the largest measured methane leakage/emission rate on an orphaned well was 76,000 g/h (Riddick, S. et. al. Methane emissions from abandoned oil and gas wells in Colorado).

It is very well dependent, but perhaps a minimum threshold for utilizing the VCM is a 250-500 g/h methane leakage rate (equivalent to ~300-600 cubic feet/day). There are several variables involved in determining if a well plugging project can earn an adequate return through selling methane abatement credits in the VCM. These include:

  • the cost to plug the well (which can range from a few tens of $thousands to over $1 million)
  • the methodology a project developer is using that impacts the crediting period (see a recent Commentary from the Payne Institute for discussion on the different Standard Setters’ methodologies including the logic behind different crediting periods.)
  • the price realized for the credits in the marketplace, and
  • project developer return requirements

Yet to offer an illustration, a well emitting 250 grams per hour could generate ~$75,000 using CarbonPath’s methodology (which allows up to a 50 year crediting period) at an assumed price of $25/ton (which is in the ballpark of current selling efforts). For relatively shallow/inexpensive-to-plug wells, this appears supportive of an adequate return (presumably covering some allocation of finding expenses, site remediation and/or overhead recovery in addition to the “direct” well plugging costs).

Some other takeaways from the DOI report:

A much larger proportion of wells will be tested for methane leakage going forward. The 1,260 wells with a methane measurement represent 14% of the aforementioned 8,813 wells plugged by states using BIL funding. This low proportion reflects that fact that the Initial grants issued to states under BIL did not require measurement. Subsequent rounds of funding (under the Formula and Performance grants) do require such testing (as well as requiring a screening for groundwater and surface water impacts and providing prioritization approaches for plugging wells), so the proportion of wells tested in future years will be much higher.

The DOI acknowledges that leakage rates can grow over time. The report notes that as “subsurface oil and gas casing and well infrastructure erode over time, deterioration and other factors can lead to increased methane emissions from [a] well.” This is supportive of methodologies that allow crediting based on an “expectation to emit” (discussed in the Payne Institute Commentary referenced above).

12/5/2024

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Kickstarting VCM crediting for orphan oil wells 11/20/2024

Kickstarting VCM crediting for orphan oil wells

Payne Institute Sustainable Finance Lab Program Manager Brad Handler and Student Researcher Anne Welch write about how voluntary carbon market (VCM) credit issuances are getting underway for plugging orphan oil wells. Having the credits in hand will now let developers educate and get feedback from buyers and others in the ecosystem—a critical step in establishing the activity as a credible and attractive source of carbon offsets.  November 20, 2024.  

CCS’ Finance Gateways

CCS’ Finance Gateways

 

 

 

 

 

 

 

Source: MFUG

Key Points: Recent innovation in U.S. CCS financing include the first tax equity deal, which industry insiders indicate is more popular than direct pay or transfers. Meanwhile, project developers are looking beyond the 12 years of IRA tax credits to other revenue and to networks of CO2 sources to raise expected financial returns.

First tax equity financing for CCS. Harvestone Low Carbon Partners LP (HLCP) and Bank of America announced a $205 Million (MM) tax equity financing in September. The deal was the first arranged for Carbon Capture and Storage (CCS); the structure has been widely used in renewable energy. It was also the first tax equity structure to offer the option of buying either 45Q or 45Z credits (i.e., the CCS and clean fuel tax credits, respectively, established in the Inflation Reduction Act or IRA); the selection of which of the two tax credits can be made every year.

In a tax equity financing, the investor (in this case Bank of America) receives a passive equity interest in the project (in this case the special purpose company HLCP). The investor funds a portion of the capital cost of the project and receives a set rate of return — via the losses generated on the project that the investor uses to offset its own tax obligations — for the 12 years of eligible credits. The investment vehicle is considered to have a limited risk/downside, in part because:

  • any loans to the project are subordinated below this tax equity in priority of getting paid (unlike other equity, which is subordinated to debt); and
  • only 20% of the investor’s cash outlay to the developer is required as of mechanical completion (with the balance due at the placed-in-service date), which minimizes delivery risk

The IRA includes provisions that allow for the government to “direct pay” tax loss credits to the developer and for the developer to transfer (i.e., sell) its credits to other parties. However, tax capital appears to be considered by industry participants the most attractive to investors, despite the structure’s complexity. Reasons for this include that direct pay is only available for five years and the government has paid very slowly; and in transfer transactions buyers are paying as little as $0.90 on the $1.00.

It is worth noting that it is possible that these tax incentives may be altered going forward, if, for example, the incoming Congress determines that extending the 2017 tax cuts requires funding offsets in other areas. With that said, CCS was looked on favorably in the first Trump administration, perhaps in part because it does offer a path to continued operation of legacy fossil-fueled power and other industrial facilities and has fossil industry support.

Projects look for more revenue sources to raise financial returns. If IRA tax credits are sufficient to enable some low cost CCS projects, generally developers appear to be evaluating projects assuming there will be additional revenue sources and often an ability to leverage their infrastructure investments. These could come from network hubs with multiple sources of CO2, the addition of low carbon products (e.g. hydrogen), proceeds of credit sales (e.g., through California’s Low Carbon Fuel Standard) and, if passed, 45Q extensions. Notably, the need for multiple revenue sources is exacerbated as inflation (of construction costs) has undermined the value of the IRA 45Q credit .

CCS participants also continue to look to the Voluntary Carbon Markets (VCM) as a source of revenue. (Note there is one U.S. CCS project that has issued carbon credits.) The VCM is considered to have vast potential, particularly if its use can be “sanctioned” as a means to help countries meet their climate commitments (via Article 6 of the Paris Agreement); with that said, international governance bodies’ work to agree on rules for accounting for stored CO2 is slow going. Using the VCM does raise questions about establishing project additionality, although there has also been consideration of a class of credits that would explicitly not require such an additionality test, but would also not allow buyers to make offsetting claims.

11/11/2024

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Carbon Credits for Mitigating Orphan & Idle Oil Well Methane Emissions 11/1/2024

Carbon Credits for Mitigating Orphan & Idle Oil Well Methane Emissions

Payne Institute Faculty Fellow Jim Crompton, Sustainable Finance Lab Program Manager Brad Handler, and Student Researcher Vandan Bhalala write about how it is well understood that permanently plugging old, abandoned oil and gas wells in the U.S. can make a big impact in our nation’s efforts to combat global warming.  Through the Bipartisan Infrastructure Law, public funding has increased to properly plug many orphan wells.  November 1, 2024.

FINANCING OPTIONS & LIABILITY MANAGEMENT IN CCS 10/24/2024

FINANCING OPTIONS & LIABILITY MANAGEMENT IN CCS

Payne Institute Sustainable Finance Lab Program Manager Brad Handler presented at the Houston Strategy Forum’s “Carbon Conclave” held on October 22, in Houston, TX.  This paper addresses some of the academic and advocacy communities’ thinking on the state of risk management and financing opportunities for the U.S. CCS sector, and the Payne Institute’s perspective on some of these issues that comes out of its ongoing work in carbon finance and some specific work looking at managing liability in CCS.  October 24, 2024.

Governments Act On Their Own To Support Carbon Credits

Governments Act On Their Own To Support Carbon Credits

Exhibit: Indicative Allocation of Carbon Credit Retirements, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: World Bank 

Key Points: 90% of carbon offset credit demand goes toward voluntary commitments today. But credits’ use to satisfy compliance obligations should grow. Nearer term, using credits in lieu of paying carbon taxes or buying allowances should lead this growth — 35 jurisdictions allow it today and additions are in the works including the EU, India and Indonesia.

The World Bank’s annual State and Trends of Carbon Pricing report. This annual report is a solid resource for perspective on all facets of carbon pricing, including carbon related revenues (USD104 Billion in 2023, raised from carbon taxes or Emissions Trading Systems (ETS)) and the status and prospects for carbon markets.

Crediting is predominantly used to satisfy voluntary commitments today. Carbon (offset) crediting reflects the issuance of tradable securities, in which each credit reflects the avoidance or removal of one ton of carbon dioxide (or its equivalent on a global warming impact basis, CO2e). A buyer of the carbon credit “retires” the credit when the buyer “uses” the credit to report offsets to the buyers’ own CO2e emissions (the credit is retired to ensure that it is not “double counted”, i.e. that is not also used to offset a different emission ton).

Per the World Bank (WB) report, 90% of the retirements in 2023 went towards voluntary purposes, which are companies’/entities’ mitigation commitments (see Exhibit). The balance went towards compliance purposes, of which there are two broad categories:

Domestic uses for credits. Domestic obligations, imposed on companies, include carbon taxes or relate to allowances on a country’s Emissions Trading (cap-and-trade) System. Where allowed, companies can buy (and retire) carbon credits to satisfy these obligations. Domestic compliance comprised ~9% of retirements in 2023.

International uses for credits. International obligations stem from country-level or international association commitments to lower greenhouse gas emissions. Country level commitments include Nationally Determined Contributions (NDCs) while the largest international association mechanism is the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). In these cases a country or entity uses credits (bought from another country) to help satisfy its greenhouse gas emission reductions commitments. Once credits are bought by one country/entity, there is to be an offsetting deduction in emissions reduction that can be claimed by the “host” country (from which the credits are sourced); this offsetting deduction is referred to as a Corresponding Adjustment.

The mix should include more use of crediting for compliance purposes over time…domestic use should continue to lead compliance-based growth. Currently 35 jurisdictions (national and sub-national) allow companies to use credits to satisfy some of their compliance obligations. The most significant from a volume perspective is currently Colombia, with oil companies (e.g., Chevron) purchasing carbon offset credits in lieu of paying carbon taxes (see Exhibit). Five of the jurisdictions have been added since the start of 2023: Chile, Portugal, Saudi Arabia, Nova Scotia province, and Washington state. Further, China restarted its program following a six-year hiatus.

The WB reports that another 11 jurisdictions are developing crediting mechanisms. These include India, the EU, Indonesia, Mexico, Egypt, and Vietnam; it notes that Brazil is also moving down that path, although is at an earlier stage.

Use for cross-border (international) compliance likely only comes later. International compliance crediting is expected to be largely dependent on the countries that were party to the Paris Agreement (from COP21) agreeing on terms related to two articles: 6.2 (which addresses transferring the credit for emissions reductions from one country to another) and 6.4 (which addresses establishing a multilateral carbon credit market). Negotiations on these articles did not fare well, again, at the most recent COP as details on several items have proved intractable. Meanwhile, per the WB report CORSIA revised its allowed credits and entered a voluntary phase at the beginning of 2024. It notes demand is expected to rise significantly starting in 2028 when the program enters its obligatory phase, with the caveat that terms must be worked out for corresponding adjustments by the host countries.

5/31/2024

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