US energy companies are the best placed to accelerate carbon capture and storage (CCS) projects in the short-term, according to analysts at RBC, though they note that funding in Europe and the UK is proving much slower to come through.
Analysts from RBC Capital Markets compared the outlook for CO2 storage in the US and Europe, and highlighted the differences in permitting, availability, and incentives for CCS projects.
There have been more US applications for class 6 wells made in July 2023 than the whole of 2022, they noted, "which we think reflects a significant backlog which could take much more than the targeted 18-24months per well to approve".
To explain, there are two types of wells that can be used for injecting CO2 following capture: class 6 wells, which offer permanent storage and higher tax credits, and class 2 wells, which are mainly used for enhanced oil recovery (EOR) and interim storage.
However, due to the regulatory delays and bottlenecks for Class 6 wells, the analysts said delays to permitting for class 6 wells across the US have resulted in plans for class 2 wells to be used and acceleration of the offshore CO2 storage industry.
They also noted that some states are seeking to expedite the permitting process for class 6 wells, which could establish CCS hubs on a longer-term basis
As a result of permitting delays and uncertainty around timing of available storage, they believe that suitable projects located close to existing oil or gas production are likely to use class 2 wells as an interim solution, and these projects could accelerate more rapidly.
"We think this puts energy companies at the forefront of CCS storage with the capabilities and licences to accelerate CO2 storage," the analysts said, particularly those that have pipelines or pipeline agreements in place.
This has been seen this in the Red Cedar project in Colorado where Kinder Morgan plans to transport the CO2 to an existing Class II well in the Permian Basin.
In contrast, they observed that Europe and the UK are lagging behind in CCS development due to limited funding and storage options, although they expect some improvement by 2024 with the operation of the Northern Lights Project in Norway and the rise of carbon prices.
"With more hubs being planned at other locations in Norway plus in the Netherlands, the Black Sea and offshore Italy, we anticipate similar models could be followed and Northern Lights could help pave the way for these to become commercial operations," the analysts said.
The UK's is also pursuing an offshore CO2 hub-strategy to meet its CCS targets of aiming to capture and store 10 million tonnes of CO2 per year by 2030, and up to 100 million tonnes per year by 2050 - but faces funding challenges.
The UK Department of Energy and Net Zero estimated that the UK Continental Shelf could safely store 78 billion tonnes of CO₂, which might be the equivalent of 200 years of the UK’s annual CO₂ emissions.
However, the UK government has not yet committed to clear funding for CCS projects and infrastructure, which is delaying the final investment decisions (FID) and the development of the hubs.
The UK has identified four potential hubs: the East Coast Cluster, HyNet North West (backed by companies including Eni, Essar, Cadent, Unilever and many more), Acorn (where Shell PLC (LSE:SHEL, NYSE:SHEL) and Harbour Energy PLC (LSE:HBR) are leading the project), and Viking (backed by Harbour and BP PLC (LSE:BP.)) - each of which is located on the coast, with close proximity to suitable geological storage offshore.
The East Coast Cluster and HyNet North West are expected to be the first two hubs to be operational by the mid-2020s, while Acorn and Viking are expected to follow by the end of the decade.
Drax Group (LSE:DRX) also has plans in place to retrofit its north Yorkshire-based biomass energy plant with carbon capture technology in order to restrict emissions.
"The main catalyst that is awaited in the UK is clear government funding for CCS projects to take FID and for infrastructure spending to commence," the analysts said.
A government report in February showing that CCS storage sites have low leakage risks, helped to accelerate licence awards ahead of the development of CCS hubs.
In July this year, the North Sea Transition Authority (NSTA) issued carbon storage licenses in the North Sea for the first time, awarding 13 companies with 21 licenses.
This included BP, which was awarded a license for the Endurance site in the Southern North Sea, where it plans to store CO2 captured from the Humber region, and Shell, which was awarded a license for the Goldeneye site in the Central North Sea, where it plans to store CO2 captured from the St Fergus gas terminal in Scotland.
Enquest was awarded four licences, privately-owned Neptune Energy was awarded three licences, France's TotalEnergies and Norway's Equinor won two, with Italy's Eni getting one.
Spirit Energy, whose biggest shareholder is Centrica (CNA.L), was awarded one licence, it said. Perenco was also awarded licences, a company spokesperson said.
Issued licenses include offshore sites by Aberdeen, Teesside, Liverpool and Lincolnshire, with the first injection of CO2 expected to occur within the decade in line with the CCS Hubs being developed. Once developed, these storage sites will have the potential to store a potential 30mtpa captured CO2