One common misconception about the Trump administration is that we will see an elimination of many of the ESG-related tax incentives and grants. We’ve already seen grants cancelled for carbon capture and hydrogen projects, and many alternative energy incentives are being eliminated or phased out. One of the areas I long predicted wouldremain untouched was the 45Q tax incentives for Carbon Capture Utilization and Sequestration (CCUS), but I was wrong. It got touched, but in a good way—the EOR tax credit of $60/ton was increased, to make it consistent with geologic storage at $85/ton.
Evolution of the 45Q program. It’s interesting how the 45Q program, which has been around since 2008, started to gain opposition from the environmental groups, not because they were against CCUS but because it was benefitting oil and gas. We even saw HR 1946 introduce the 45Q Repeal Act. It’s interesting how, when people realized that CCUS could benefit oil and gas, they made about the sharpest U-turn on a policy I have ever seen. Congressman Ro Khana (D – Calif.), who cosponsored HR 1946, said, “Subsidizing carbon capture and utilization undermines our ability to hold Big Oil accountable for the climate crisis.” Interesting—by allowing oil and gas operators to participate in the program, they essentially could become a carbon zero source of energy and products. Sounds like a good thing, right? But not if you are anti-oil and need to blame the industry for everything.
The good news is that HR 1946 seems to be stalled in the House Ways and Means Committee, and people who track these things say it will never get out of committee. And that seems likely, as the Big, Beautiful Bill just expanded the 45Q in an area that helps oil and gas. Many people forget that the Bipartisan Budget Act (BBA) of 2018, which was signed by U.S. President Donald Trump, expanded 45Q. Then Biden, under the Inflation Reduction Act (IRA), which boosted inflation, increased 45Q again.
CCUS is here to stay. So, it was evident that Trump wasn’t against CCUS and supported it in his first term, even though he has been against many of the other alternative energy mandates and incentives. I have always maintained that CCUS was here to stay, given the many benefits it has for oil and gas, especially as we transition into a larger exports of LNG. The EU and others have established sustainability standards for LNG imports, making carbon offset LNG more valuable.
I’ve expected that CCUS will be a growing industry and that the growth of CCUS will be led by the oil majors. Oxy, ExxonMobil and Chevron have already made significant investments in billions of dollars towards development of CCUS within their businesses. Oxy has gone as far as to create a CCUS subsidiary in 1Point5. You should continue to expect growth in CCUS, coming primarily from, or with the support of, oil and gas firms.
Just this month, we have seen Climeworks, a leader in CCUS, raise $162 million to scale up their carbon capture, or more specifically, their Direct Air Capture systems. We have also seen Colorado-based Terra CO2 raise $124 million to build out their facilities, which make a concrete alternative that reduces carbon. JPMorgan also made an announcement this month, with the formation of their blockchain business unit Kinexys. It is developing a new blockchain process to tokenize carbon credits. We will see further investment in CCUS.
Trading of carbon credits. Besides the 45Q tax credit, carbon credits are also traded in the voluntary market, which continues to grow. The idea of tokenizing these credits makes it easier and safer to trade carbon credits. The growth of the voluntary market also further incentivizes the investment into CCUS. One of the concerns over the voluntary carbon market has been the legitimacy of the program. With tree planting and other programs never getting audited, how do you maintain those credits? Is the tree still there, did it get torn down, or was it burned down? There are many people working on an audit process, but this tokenizing approach can only help legitimize carbon credits in general. And a growing Voluntary Carbon Market just helps grow CCUS.
The CCUS news gets even better. We have talked about the rise of the data center, and we are seeing aggressive expansion of data centers in the Permian basin to take advantage of low-priced natural gas. As these projects expand, we are also seeing an expansion of gas processing and pipelines in the Permian basin, a trend that has been going on for a few years now, but it is gaining momentum.
We are also seeing drilling and completion trending toward areas that have more gas. This is important, as this capacity increases and the demand from data centers increases, we will see a surge in CO2 sources in the oil field. The gas processing facilities provide the lowest-cost CO2 available right now, and this will be a growing capacity that will produce more low-cost CO2. Then, the data centers, themselves, will become a significant source of CO2. We will see the Permian basin become a hotspot for CCUS, as the cheapest CO2 will be plentiful.
Let me clarify why I say cheapest CO2. You see, a gas processing plant uses amine scrubbers to remove CO2 and other gases from the natural gas to purify it. Amine scrubbers are essentially Carbon Capture systems; the CO2 is then vented to the environment. You now have a CO2 source that is already captured, requiring a little bit of conditioning but not requiring the higher cost of carbon capture. Combine this with carbon sequestration or utilization capacity currently in EOR, and you have a ready-made market.
I’ve never been afraid of making predictions, but I expect the Permian basin to become ground zero for a boom in CCUS. They will have the low-cost gas for data centers, which will lead to an expansion in gas processing, which will then lead to more CO2 sources, especially when combined with data centers as a source.
EOR applications. Then, you have conventional oil fields using CO2 for EOR, which just had the tax credit increased. So, expect more EOR. We have experimentation with CO2 flooding in unconventional fields. I expect that to increase, and we will ultimately move towards a carbon zero oil and gas industry. How do you argue with the lowest-cost and greenest energy source becoming natural gas?
And this won’t be something exclusive to the Permian basin. I expect other basins to participate. We are already seeing the Bakken shale operators prepare themselves as a CCUS hub. They may not have the Permian scale, but you can expect some big announcements in the future out of the Bakken, as well. It may seem like a pipe dream, but let me tell you, this is the direction we are heading, and it’s going to be a wild ride on the way. Until next month, opportunities are on the way. WO
MPATTON@HYDROZONIX.COM / MARK PATTON is president of Hydrozonix, an oil and gas-focused water management company. He is a chemical engineer with more than 25 years of experience developing new technologies for wastewaters and process residuals.