Rescue package CCS investments: What does it mean?

A recent rescue package launched by the Norwegian government intends, among other things, to stimulate activity levels through carbon capture and storage ("CCS") investments. What are the main elements of this scheme, and what does it mean for investors and suppliers?

CCS is widely recognised as an important measure to reduce global climate gas emissions in line with the targets in the Paris agreement, and has additionally been hailed as a potential Norwegian industrial adventure. The Norwegian Government has therefore invested in CCS for years, and a full-scale CCS demonstration project in Norway has been appraised since 2015.

Few details are known about the CCS aspects of the new rescue package, but the main elements appear to be that:

    1. An investment decision for the existing full-scale project will be made in connection with the 2021 state budget, due in October 2020, and

    2. Carbon capture from emission sources in Bergen, Trondheim and Stavanger will be assessed.

We will below look at the implications of each of these elements, and highlight some key uncertainties and take-aways.

Investment decision for the ongoing project in October 2020

The ongoing full-scale project is currently in the study phase, and the Government's final investment decision was planned in late 2020/early 2021. Bringing this decision forward to October 2020 does not initially appear to constitute a major change from the existing plan. However, considering that the investment decision has been postponed several times before, the increased emphasis on a timely conclusion could be important in practice.

Key uncertainties and take-aways include:

    • In order to stimulate activity, the outcome of the Government's investment decision is arguably more important than the timing of it. The rescue package does not appear to explicitly address this matter, but commentators believe that the Government will now in practice have to make a positive investment decision for the full-scale project. If so, this is probably the most important CCS related part of the rescue package.

    • The full-scale project is based on cooperation between the Government and commercial players. For the latter, their involvement is likely motivated by a belief that CCS will become a commercial technology in the future, and a key driver for this is that the costs of emissions will increase due to rising taxes and fees. This prompts the question whether the corona crisis will impact the legislators' willingness to use taxes and fees to incentivise the industry to cut emissions, at least in the short to medium term. As an illustration, there have already been calls from the Norwegian opposition to exempt various sectors from CO2 fees, showing that fees designed to protect the environment are not shielded from discussion in the face of the corona crisis.

Assessing carbon capture from sources in Bergen, Trondheim and Stavanger

In the ongoing full-scale project, CO2 is only captured from emission sources in the Eastern part of Norway. Pursuant to the new rescue package, also Western- and Mid-Norway emission sources will be assessed, meaning that these regions could benefit from increased CCS investments.

Key uncertainties and take-aways include:

    • For the full-scale project, the Norwegian Government has set a dual aim: To realise a cost-efficient solution for full-scale CO2 handling in Norway, provided that this contributes to technology development on a global scale. Building a new industry in Norway has therefore in itself not been deemed sufficient to qualify for Government financial backing; the initiatives must be cost-efficient and contribute to technological development. A key question is whether potential capture projects at the new emission sources have to undergo similar qualifications, or whether the Government could be willing to back projects which would not previously have qualified for support. Especially in the former case, the potential investments in physical capture facilities which the supplier industry is hoping for will likely still be years into the future.

    • According to a public summary of the Ministry of Petroleum and Energy's draft agreement with the commercial players for the full-scale project, the latter take on a commercial risk. If political uncertainty related to future emission costs, and thereby the commerciality of CCS, increases as a result of the corona crisis, it will be interesting to observe whether the commercial model will need to be revised.

    • The rescue package does not directly address the transportation and storage part of the full-scale project, but it may indirectly benefit from the scheme. According to sources, economies of scale entail that the storage part of the full-scale project will be significantly more cost-effective if further capture projects are initiated, and the storage facilities will be able to accommodate larger quantities of CO2 than envisaged in the existing project.

In summary, the CCS related aspects of the latest rescue package raise more questions than they answer, and we expect that the details will be hammered out in the months to come. However, based on the information made available so far, both investors and suppliers should consider the rescue package as more of a nudge than a push in the direction of increased Government CCS investments.

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