December 16, 2023 [JPT]- ExxonMobil will soon own the only company with an interstate pipeline carrying captured carbon dioxide to storage sites.
ExxonMobil is accelerating the growth of its carbon storage business by acquiring Denbury, which owns the only pipeline transporting captured industrial carbon dioxide along the Louisiana and Texas coast.
The all-stock deal valued at $5.9 billion includes the pipeline plus 10 carbon storage sites under development by Denbury in a region with a concentration of major carbon emitters and secure geologic sites for storage.
When explaining the logic of the deal, ExxonMobil CEO Darren Woods focused on how it could add to ExxonMobil’s CO2 sequestration business, rather than Denbury’s more than 47,000 BOPD production.
“What we’re buying with Denbury is 20-plus years of experience in sequestering CO2, storing CO2, … the assets that move the CO2, and the storage sites strategically located along that corridor of high-emissions sources so that we can cost effectively capture the CO2, transport it, and sequester it underground,” he said.
An analyst saw the deal as “marking another milestone in the maturing carbon capture and storage (CCS) business.
“ExxonMobil has announced what looks to be the first significant public M&A deal where CCS assets make up the bulk of value,” said Andrew Dittmar, senior mergers and acquisitions analyst for Enverus.
Last year Denbury injected 4 million tons of carbon for storage and enhanced oil recovery. ExxonMobil plans to scale that up extremely.
“Once fully developed and optimized, this combination of assets and capabilities has the potential to profitably reduce emissions by more than 100 million metric tons per year in one of the highest-emitting regions of the US” said Dan Ammann, president, ExxonMobil Low Carbon Solutions.
Denbury’s 1,300 miles of pipelines—particularly the 925-mile line running from near Jackson, Mississippi, south to the petrochemical corridor along the Mississippi, and then west to Houston—connect to 10 of ExxonMobil’s long-term storage sites under development, giving ExxonMobil a competitive edge as it builds its carbon storage business.
So far, ExxonMobil has three large-scale contracts with third parties needing to dispose CO2 because they are in hard-to-decarbonize industrial sectors such as the fertilizer, steel, and industrial gas business, Wood said.
The pipeline offers what looks like a long-term edge. It took 10 years to obtain the permits and build the Gulf Coast pipeline, said Nikulas Wood, senior vice president for Denbury, in a recent earnings briefing. He told stock analysts that cost estimates of $2 to $4 million per mile, based on past projects, are low compared to the current cost of permitting and building another such line through the dense web of pipe in south Louisiana and Texas.
“Given the significant capital and years of work required to fully develop our CO2 business, ExxonMobil is the ideal partner with extensive resources and capabilities” to develop and fill its storage sites and expand the pipeline, said Chris Kendall, Denbury’s president and CEO.
Two key pieces of that plan are to expand Denbury’s pipeline to Corpus Christi, Texas, and develop the Dorado Sequestration Site. The recently purchased 30,000-acre site in Matagorda County, southwest of Houston, is expected to be able to store 115 million metric tons of CO2. With other good locations nearby, Dorado could become part of a major storage hub.
Alternative energy businesses are often associated with low profit, but this isn’t one of them, according to ExxonMobil.
“The deal we’re doing today with Denbury has really solid returns, the contracts that we have today have really solid returns, they compete in our portfolio,” Woods said.
Added to that are tax credits which were significantly increased last year, and which will cover a significant part of the cost of putting gas into storage essentially forever.
That should be a plus for earnings in the near term and critical for the business as it expands.
While the initial customers will be huge facilities where cost per ton of capturing the carbon is not so high—ExxonMobil’s initial storage customer was the world’s largest ammonia plant where they are investing $200 million to capture the gas—Wood said over time they will moving to facilities where the waste stream has lower concentrations of carbon, increasing the capture cost per ton, and “we’ve got to make sure that the economics stand up.”
Denbury’s history runs parallel to the development of using carbon dioxide to enhance oil recovery (EOR), going back to the days when all the gas used was supplied from natural sources. The eastern end of the Gulf Coast Pipeline is the Jackson Dome—a natural source of CO2. The company’s EOR project now focuses on captured gas, which comes with a tax credit for the gas that remains in the ground.
Denbury’s EOR programs delivered 47,500 B/D last year and are expected to add production equal to 10 to 20% of the original oil in place, according to the company. Its current project in the Cedar Creek Anticline is its largest ever and the gas injection now is expected to add oil production starting later this year.
Those long-lasting, slow-declining fields are a good complement to ExxonMobil’s large Permian operation where the wells are short-lived and fast- declining, Dittmar said. While he estimated they are worth $1.7 billion, he pointed out that’s a tiny addition for a major oil company.
“XOM (ExxonMobil) would have been exceedingly unlikely to buy these assets in isolation,” he said, adding, “The real driver of the deal is access to Denbury’s CCS infrastructure.”
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