Over the past year, the Texas Clean Energy Project (TCEP) has emerged at the front of a small pack of US projects that aim to sell their CO2 to oil drillers. By doing so, TCEP may just re-write the rules of CCS, shifting the focus from government-backed sequestration efforts, to commercially-funded projects to capture and sell CO2 to recover oil and other industrial uses. This approach shifts CCS to CCUS (carbon capture utilisation and sequestration).
This reorientation was on display at the annual meeting of the Electric Power Research Institute (EPRI), the R&D arm of the US utility industry, in Pittsburgh in May, where for the first time petroleum engineers were present in tellingly large numbers. Testament to CCUS’ rise, the event was the stage for a major push on national policy to formally tie enhanced oil recovery (EOR) together with the goal of carbon capture. (Find details of the National Enhanced Oil Recovery Initiative (NEORI) at this post with two of the principles behind the initiative: Part I here, and Part II here).
TCEP emerged as another standout at the conference as a pioneering project that’s fully funded and on track to build a first-of-its-kind ‘poly-gen’ power plant, which converts coal into three saleable outputs: power, CO2 and industrial chemicals. I’ve written about TCEP previously here at the Global CCS Institute: first here in a Q&A with Laura Miller, former Mayor of Dallas, who has joined the team developing the project, and again in an update on the project’s progress.
At the May EPRI meeting, I got the chance to learn more about the innovative financing and business model that’s bringing TCEP to life. W. Harrison Wellford, chief executive of Wellford Energy, offered the perspective of the investment community on the project. As a financial advisor to the project, Wellford sees TCEP as a game changer in the way power generation has been conventionally developed and financed. Power plants aren’t just about electricity anymore. Think of it this way, he said: “We will pay about US$45 million for coal at mine mouth for this plant. That will produce at the end of day US$750 million in sales” of a mix of products. “You’re taking a very cheap fuel resource, and creating a valuable product through the alchemy of a plant like this.”
TCEP is drawing attention from beyond US shores. On 13 August, a group of Chinese investors including China Petrochemical Corp. (or Sinopec, China’s national oil company), announced it was in late-stage talks to invest US$1 billion to acquire an equity stake in the project. If completed, the deal would be the largest investment by China in the US power market to date, according to The Wall Street Journal. The move would advance a growing movement to link China’s rapidly expanding power sector with US advanced coal technologies. See this post for background on US-China joint efforts in CCS.
Sales outlook
To understand TCEP’s current financing, it’s necessary to first have a clear view on what the plant will produce. In his slides, Wellford explained that the project would yield three major streams of revenue: power, CO2 and urea. The following details are adapted from slides that Wellford presented.
- Power – The plant will produce electrical output of 400 MW gross, with 160 MW net available for sale to the grid. The balance is consumed to drive CO2 and chemical manufacturing operations at the facility. Discussions for terms of the power off-take arrangements are set at 30-year, fixed price, as a base load generator in the Electric Reliability Council of Texas (ERCOT) and per volume terms set out in a power purchase agreement. ERCOT operates the regional grid, encompassing the state of Texas and a few bordering regions. At peak demand, ERCOT consumes over 65,000 MW.
- CO2 – Sales of CO2 are expected to be set up as 15-year, rolling contracts. Wellford explained that the project has attracted interest from multiple parties in EOR markets, looking to draft contracts and sketch out term sheets. The revenue from these CO2 sales is not dependent on carbon legislation, Wellford emphasized. Pricing will be linked to market rates for West Texas Intermediate (WTI), a benchmark indicator for US oil markets. When up and running, TCEP will operate at a 90 per cent capture rate, yielding some 2.7 million tons of CO2 per year. The annual current demand for CO2 in the region for EOR is estimated to be more than ten times that amount, at 33 million tons. The CO2 will be qualified as Verified Emissions Reductions on the American Carbon Registry.
- Urea – A major market participant has contracted to take urea produced by TCEP, and includes the plants full annual production. In this case, prices will be tied to actual secondary sales to downstream consumers, subject to a floor, on the downside, and on the upside, to price sharing mechanisms. Urea production is predicted to hit 720,000 tons per year at full operation. Currently the US market for urea, used primarily as a raw ingredient in fertilizer, is 8.5 million tons per year. Of that, some 5 million tons are imported.
Financing
Wellford emphasized that getting TCEP off the ground has been as much a financial challenge as an engineering feat, and perhaps more so. He commented:
“To finance a project like this, we would typically go to power markets. But they don’t know anything about EOR. To go around the world and try to make a case for an Integrated Gasification Combined Cycle (IGCC) plant for risk, but to educate them in two other industries – chemical fertilizers and oil and gas – that’s a lot harder… We’ve made a lot of progress educating people on how this will work. And I think we’ll succeed, but it hasn’t been easy.”
The TCEP Project is fully funded through project financial close, Wellford said. As of his talk, the bulk (US$1.3 billion, or 52 per cent) of project finance, is coming from debt in the form of bonds and bank loans. The next largest share (US$845 million or 31 per cent) is from equity and tax equity. The balance (US$415 million, 17 per cent) is from an Energy Department grant. He pegged total project costs at US$2.995 billion.
Wellford emphasized the importance that tax benefits have played in bringing TCEP to reality. The project has tapped three separate federal tax incentives, the combined long-term benefit of which totals roughly US$1.49 billion. Here’s how they break down, according to Wellford’s slide:
- US$313 million: Advanced Coal Program investment tax credit (ITC) at or before COD, awarded in 2010 and contract signed with IRS;
- US$253 million: carbon sequestration tax credits possible over first 10 years; and
- US$925 million: MACRS accelerated depreciation tax benefits over first 5 years.
Long-term prospects for CCUS
Wellford made a case that, longer term, CO2 demand in TCEP’s market will continue to rise, further improving TCEP’s financial performance. Responding to a question after his presentation, Wellford explained TCEP modelled its revenue projections at a price of around $20 per ton of CO2, but that market prices since then have risen to over $30 per ton.
In the Permian Basin, which includes West Texas and a few bordering regions, using CO2 for EOR has been going on for more than four decades. Currently, CO2 is moved throughout the region in a network of pipelines operated by Kinder Morgan, Trinity Pipeline and others. The bulk of CO2 transferred into the region comes from geological reservoirs in the Rockies or from CO2 stripped from methane during refinery. Annually about 33 million tons of CO2 is shipped into the region for injection; another 60 to 70 million tons is re-injected back into wells, from CO2 that surfaces with oil and gas.
Each ton of CO2 yields two to three barrels of oil. Some of the region’s drillers such as Occidental Petroleum produce all of their oil using EOR. Yet the market is short of CO2, and apart from TCEP, there are no other viable sources of anthropogenic CO2 in the region at such a late stage of development. Current geologic CO2 sources are in decline, and while new geological sources have been identified, they are too distant to be economically delivered to the region.
Wellford Energy background
By way of background, Wellford Energy is a financial advisor to clean energy companies and projects in the US, Europe, China, and Latin America. The firm focuses on matching projects with private investment from domestic and international sources, and on non-dilutive public funding. The company focus on climate-friendly technologies, including CCUS, compressed air and other technologies to store renewable energy, and low-carbon transportation technologies. Its partners include Summit Power (which is developing TCEP), Kleiner Perkins Caufield & Byers, and Prometheus Capital Partners.
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