Small oil producer stands to gain from Biden’s climate bill

Denbury has incurred significant debt over the past decade by acquiring oil properties and building pipelines, which transport CO2 to depleted oil fields and extract more crude. In 2019, debt equivalent to around 11 times its profits weighed on the producer’s finances, before Covid-19 shutdowns and falling oil prices pushed it into bankruptcy.

The company has since branched out into waste management, with plans to transport CO2 from emitters through hundreds of miles of pipelines and bury it in rock reservoirs, for a fee. Its stock trades around $88, more than four times its price when Denbury went up for sale in late 2020. And analysts say the company’s entrenchment in the carbon sector makes it an attractive acquisition target for the big oil companies.

“I would definitely say it’s moved faster than expected,” Denbury chief executive Chris Kendall said of the company’s takeover.

Behind Denbury’s revival: billions of dollars in public money for carbon capture. The Cut Inflation Act tax credits, which President Biden signed into law last year, reward companies that store CO2 underground. Denbury will not receive government funding directly in most cases – it will go to customers who capture the carbon – but the company will charge customers for managing their emissions.

Stimulated in part by incentives, Exxon Mobil Corp.

chevron Corp.

and Occidental Petroleum Corp.

said they would spend billions of dollars to increase their carbon collection capabilities in this decade. Few companies, however, have as much of a lead as Denbury, analysts say.

About 900 miles of pipeline that Denbury owns on the Gulf Coast winds through manufacturing centers that emit hundreds of millions of metric tons of CO2 each year, and past future factories that will capture the emissions to produce low-emission fuel of carbon. Crop Nutrient Company Nutrien ltd.

hydrogen company Clean Hydrogen Works and Mitsubishi Corp.

have already signed major contracts with Denbury to collect CO2 from the planned facilities.

Denbury’s pivot was made possible, in part, because a few decades ago it poured more than $1 billion into pipelines that could transport carbon, executives and analysts said. When it emerged from bankruptcy at the end of 2020, it had a healthy balance sheet and 1,300 miles of pipelines in six states, allowing it to produce around 45,000 barrels of oil per day in the last quarter.

About a year later, the bipartisan infrastructure package has funneled around $10 billion into carbon capture projects. Then, in 2022, the Inflation Reduction Act, or IRA, increased credits for industrial carbon capture and storage to $85, from $50 previously. Credits for capturing CO2 and using it in a process called enhanced oil recovery, in which carbon is injected into aging reservoirs to extract more oil, have risen to $60 per metric ton from $35 previously.

Tax credits and incentives will cover more than 70% of the cost of capturing CO2 from smokestacks, according to a November report from Goldman Sachs Group Inc.

“The IRA… just opened up a whole new band of industries,” Mr Kendall said.

Yet the economics of sequestering huge volumes of carbon underground remain unclear, and the feasibility of doing so at scale remains unproven. Additionally, some environmental groups argue that carbon capture prolongs the use of fossil fuels and diverts investment away from clean energy.

A Denbury spokesperson said industrial carbon capture is used today and improved to reduce costs. He said the company’s experience in managing CO2 will allow it to store massive amounts of gas and more than offset the emissions associated with the oil it produces.

Historically, Denbury had used almost entirely CO2 for enhanced oil recovery. Now he says he wants to build something like a CO2 highway on the Gulf Coast. He says he expects to find enough customers to ship and store between 50 million and 70 million metric tons of CO2 produced at industrial sites by 2030 – roughly what he handled in 2021 in its enhanced oil recovery business – and deposit it in storage and petroleum sites. fields, from Alabama to Houston. The company has secured seven underground storage sites with the potential to trap 2 billion metric tons of gas, he said.

By the end of 2022, Denbury has announced eight contracts to transport and store around 20 million metric tons of CO2 per year, mostly from ammonia and hydrogen plants. It targets these factories as customers because of the cost-effective collection process, Denbury said. CO2 collection is expected to be between $15 and $55 per metric ton, compared to a range of $40 to $75 for cement plants and refineries, according to estimates from the Great Plains Institute, a think tank that promotes carbon capture.

Denbury told investors it expects to generate average revenues of between $15 and $25 per metric ton of CO2 transported and stored, and up to $10 per metric ton used to extract oil.

Until now, Denbury paid companies such as Nutrien and Air Products & Chemicals Inc.

to take their CO2 for enhanced oil recovery. Now Nutrien will pay Denbury to take in and store 1.8 million metric tons of gas per year from a planned ammonia plant in Louisiana, according to the companies.

“It seems clear that there has been a massive increase in activity from developers, businesses and the investment community in carbon capture,” said John Rapaport, chief investment officer at investment firm Keyframe. Capital Partners, which is invested in Denbury.

In addition to the Gulf Coast, Denbury plans to expand its CO2 business in Wyoming, where it has signed an agreement with a hydrogen production plant. It plans to spend between $1.6 billion and $2 billion through 2030 to fund its CO2 processing business, largely from revenue from oil production, company executives said.

The new venture faces challenges, analysts said. For example, obtaining permits to pump CO2 into geological reservoirs can take between 18 and 24 months, said Brian Velie, analyst at Capital One Securities, which creates uncertainty about when Denbury can start sequestering carbon. gas underground.

A Denbury spokesperson said the company is working with federal agencies to have sequestration ready by 2025.

The prospect of delayed cash flow could also dampen investor appetite, said Gabriele Sorbara, analyst at investment firm Siebert Williams Shank & Co.

“You have to find that perfect, patient, long-only investor,” Sorbara said.

Write to Benoît Morenne at benoit.morenne@wsj.com