The ESG perspective: What is happening to carbon?

MARK PATTON, CONTRIBUTING EDITOR 

This year the U.S.EPA made a landmark decision to overturn the 2009 “Endangerment Finding” (EF). This was the basis of regulating CO₂ and led to a weakening in the Carbon Credit market. I’ve discussed this finding before, and it was always based on bad science, so I’m not surprised. 

However, there is a distinction between the 45Q Tax Credit program and the Carbon Credit market. The 45Q program has been around since 2008 and has nothing to do with the EF. Under 45Q, you receive a tax credit for the amount of CO₂ you remove from the environment, but you also get to sell those carbon credits on the open market. An active carbon credit market made the economics for Carbon Capture and Storage (CCS) work. 

As a result of the EF, the carbon credit market has softened, so what does that mean for CCS? Just a year ago, all of the super majors—including ExxonMobil, BP, Oxy, Chevron and ConocoPhillips—were investing heavily into CCS. Recently, BP and ExxonMobil even announced that cost will be the driver for further CCS investment. 

So, what does this mean? Well, likely, investment will be based on the 45Q only, without a clear driver for the carbon credit market, at least in the U.S. There also continues to be some momentum for public companies to march towards Carbon Zero, with the expectation it will positively impact their stock price. 

What is interesting is that the rest of the world is still moving towards carbon zero. Here are some highlights of recent carbon market announcements: 

• TD Bank just announced a 10-year agreement with Deep Sky in Canada. 
• Amazon has launched a carbon credit sourcing service in the UK for their suppliers to find low carbon options. Amazon also launched this service in the U.S. last year. 
• DHL just invested over US$100 M in decarbonization Infrastructure in France. 
• Microsoft just announced the purchase of 36,920 tons of CO₂ removal credits in India, from Alt Carbon. 

In general, the takeaway is that global market for carbon credits continues to be active. 

What about other impacts? Let’s talk about the Cross Border Adjustment Mechanism (CBAM). CBAM is an EU regulation that requires low carbon products from specific industries, currently oil and gas is not included, but the program has announced new industries will be added. Global oil prices—despite dropping as of this writing—will likely prevent oil and gas products from being added. We also have methane intensity regulations from the EU, which are directed at oil and gas. So, there will be some influence on CCS externally on the U.S. market and as I have stated there will continue to be a carbon zero focus with some public companies. We won’t see a slow death of the U.S. carbon credit market, but we will see a softening. 

Are we seeing a change in the importance of ESG in the oil and gas industry? While the EF is one indicator of change, extending the deadline for methane regulations is another. However, because we are expecting a growing export of oil and gas, these external forces will continue to move our industry into methane reduction and carbon reduction. 

I recently read an interesting take on the ESG program. We often forget the “social” and “governance” part of ESG. Today, the economy is at the forefront of everybody’s mind, specifically when it comes to gas prices. The social part of ESG is to help reduce gas prices and improve the economy, so it’s not that we’re abandoning ESG—just becoming more focused on the social aspects. We are seeing a refocus on improving the economy and job creation as we move in that direction. Putting our economy first isn’t abandoning ESG, it’s focusing on the social pillar of ESG. 

I know this is a stretch, but there is also a governance pillar in ESG, and traditionally, we understand this to be corporate governance. However, we are seeing a movement across the country through decisions like reversing gerrymandering and establishing voter ID rules. We are seeing a shift from a system driven by political parties trying to pick their voters and a system driven by voters allowed to pick their politicians. This is really a shift in governance across the country. 

ESG isn’t dying, it’s shifting, and it’s shifting where we need it to. People are less concerned with environmental issues when they can’t afford to fill up their cars, and this is really the motivation behind this shift. 

I started this column with a question: what is happening to carbon? It isn’t going away, and it’s also shifting. It’s shifting away from a carbon credit-backed program into one that can survive: the 45Q program. We are seeing more attention being spent on EOR and getting CO₂ into those programs. For the life of the 45Q program, it has primarily been an EOR program, and even though it allows for other options, the most prevalent has been EOR. Recently, the Trump administration increased the tax credit for EOR from $60/ton to $85/ton, and this will only continue to drive the EOR parts of the 45Q program. 

I have talked to many companies in the CCS space and from them, I have received very similar responses. If their project relies too heavily on carbon credits, they are being stopped or slowed down. If their project is more reliant on the 45Q program, they are able to continue. 

The wild card here is data centers. Many data center developers are looking for a low-carbon or zero-carbon footprint, and many of them are also looking towards Texas, due to low-cost energy and the friendlier regulatory environment. If these data centers pursue low-cost natural gas, then this could revitalize the CCS market. If they stay committed to their zero or low-carbon approach, they will need carbon credits to get there, if they pursue natural gas. 

We are seeing a slowdown on the carbon side, but there continue to be internal and external drivers to keep it going, thus preventing the slow death people are predicting. Personally, I don’t ever see a death, as the 45Q remains fundamental to most U.S.-based CCS projects, and it will continue to be so. The game changer will be what the data centers do with their commitments to zero-carbon goals. 

 Another interesting impact on the oilfield is water consumption for data centers. Amazon, for example, has committed to be “Water Positive” by 2030 in their data centers. They claim to be 75% there. We’ve covered this topic before and will cover it more in the future, but this is essentially making more water than you use, and in the oilfield, we have an abundance of water we dispose of, creating the perfect opportunity for data centers. I’m excited how this will play out.