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■ Date: Aug 12, 2022
【CCUS in China: Unlocking the Potential Opportunities of Carbon Utilization and Storage】
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[Snapshot]
1. To achieve carbon neutrality, CCUS decarbonization technology will be necessary for hard-to-abate sectors such as cement, steel etc. For instance, in the cement sector, the replacement of green electricity and green fuels could only cut 40% of emissions. The rest 60% cut might only be reduced through CCUS, carbon conversion technology etc.
2. Considering the high cost needed during the capture process, except for driving down high capture costs, usage of captured CO2 can be of vital importance to increase the overall revenue.
3. In the short term, EOR will continue to be one of the most economical feasible carbon utilization methods. Under a high oil price situation, such as now, oil revenue from CCUS-EOR (~USD 270/ton) is able to offset CCUS operation cost which is estimated to be around USD 130/ton.
4. Although currently dominated by big SOEs, private and foreign companies play key roles in China’s CCUS project development. Dunhua and Shell are two examples.
5. EOR can be a transitional method in the short term, but the development of other storage resources shall also be put on the agenda, otherwise, it raises the risk of slowing down CCUS deployment due to a lack of data and experience on storage resources.
Keywords: #CCUS #EOR #ETS #EWR #source-sink #carbonneutralproduct #carboncredit
Importance of CCUS:
*DACCS (Direct Air Carbon Capture and Storage) is to capture CO2 directly from ambient air using chemicals.
*BACCS (Bioenergy with Carbon Capture and Storage) is the process of capturing and storing CO2 from biomass and bioenergy.
*BECCS and DACCS can be considered carbon negative if the full lifecycle is carbon neutral. Both have considerable potential in the future.
Net-zero emissions by 2060. That is what China needs to deliver to fulfil its commitment to the Paris agreement. CCUS will play a critical role in achieving that, here is why:
On the industry level, CCUS has demand as it seems the only way for certain industries to achieve 100% decarbonization. In 2020, the industry sector accounted for 28% of China’s total CO2 emissions. According to several research articles, the iron and steel industry accounts for roughly 15% of the total annual emissions, making it the largest industrial emitter. And the demand for industrial products is still growing. However,
industries like iron & steel are hard to decarbonize
solely through capacity adjustment or energy efficiency improvements. On the one hand, it is challenging to be cost-effective under China’s young steel industry infrastructures since reduction methods such as hydrogen Direct-reduced iron (DRI) or switching to Electricity Arc Furnace (EAF) usually requires a large amount of capital for retrofitting. On the other hand, some industries such as cement simply cannot achieve zero emission only by improving their energy efficiencies or using green energy. According to Anhui Conch Group 安徽海螺集团, one of the largest cement producers in China, said that “even if we replace with 100% green electricity and green fuels, only 40% of the CO2 can be cut, the rest 60% might only be reduced through CCUS, carbon conversion technology etc”.
Besides, new technologies such as hydrogen DRI or renewable energies are still under development and have their unsolved issues (e.g., limited product types, poor quality, fluctuations). Not to mention that even though renewable energy will dominate in the future, a certain amount of fossil fuel power is still needed to ensure the stability of the grid. And CCUS can deal with this part of fossil fuel emissions. All in all, evidence shows that CCUS is necessary for certain industries to achieve decarbonization except for buying carbon credits. China’s CCUS Annual Report 2021 (figure 2) has forecasted CCUS adoption potential will be 1.4 billion tons per year by 2060 to reach zero emission. (The article about carbon credit in China: China's Emissions Trading: The Opportunities Ahead)
On the macro level, the Chinese government/institutions seem increasing the strategic position of CCUS. The 14th Five-Year Plan has suggested that CCUS technology will be supported by China by conducting major demonstration projects. Although CCUS has been included as an important emission reduction measure in previous policies, it is the first time that CCUS was mentioned in a national five-year plan. Among all, the industrial sector (especially the petroleum industry) has been highlighted for carbon utilization where
EOR technology
will be applied. There has also been increased research on CCUS. As predicted by both Chinese and European institutions, CCUS will account for around 15% of China’s reduction cut. If we don’t deploy CCUS technology, total costs to achieve carbon neutrality will increase by 118%. However, at the current stage, China still lacks strong economic incentives (like US’s 45Q tax credit system) for CCUS deployment. Most supporting policies remain focusing on R&D and rarely involve large-scale applications. To accelerate the deployment of large-scale CCUS projects, stronger supporting policies such as FITs to coal-fired power generators that imply CCUS technologies are needed.(The article about the electricity price in China: China Raises Cap on Electricity Price: What has Changed and Possible Impact for Business)
Current development of CCUS in China
Project development - Currently, there are about 30 CCUS projects (22 are in operation) in China, with a total capture capacity of 3 million tons per year. It mainly focuses on the small-scale demonstration of EOR in petroleum, coal chemical and electric power industries, but lacks large-scale demonstration of full-process industrialization with multiple technology combinations. In all, oil and coal-fired power companies hosted 70% of the CCUS projects in China (see figure 4). For oil companies, they may need an “excuse” to continue expanding oil recovery. For coal-fired power generators, they are facing urgent decarbonization tasks as they are the first batch to join the national ETS (emissions trade scheme). Thus, a rapid transition is necessary for these two industries. Among all, Sinopec developed the most CCUS full chain projects where CO2 is captured from its subsidiary chemical companies and utilized for oil recovery. While for coal-fired power plant developers, existing projects mainly focus on CO2 capture where captured CO2 is likely to be sold for industrial use and food consumption.
As for project size, most domestic CCUS projects are dominated by 100,000t-level capture capacity. Compared with the US and Europe, China’s project size is relatively small. This is mainly because China’s CCUS has developed late and still lacks sufficient policy support and economic incentives. Thus, at the current stage, those that can afford to maintain CCUS operations in China are mainly large state-owned enterprises or a few large enterprises with related industrial chains. To date, the largest CCUS project with a capacity of 1 million tons capture amount is launched by Sinopec Shengli Oilfield. The size of this project also aligns with China’s 14th five-year plan where megaton level CCUS projects are mentioned to be demonstrated. It can be foreseen that more million-ton level CCUS projects will be introduced in the next 5 years.
Cost issues - High costs, especially high capture costs (which consist of 60-80% of the total costs) remain the biggest obstacle in developing large-scale CCUS projects in China. Capture costs vary largely by CO2 sources based on their concentrations; lower CO2 concentrations usually require higher costs. In industries such as coal-to-chemical, natural gas processing or ethanol production where highly concentrated CO2 streams can be captured, carbon capture costs can be as low as USD 18/tCO2 (RMB 120/tCO2). However, in cement production and power generation where CO2captured is often at very low concentrations, the costs can be higher than USD 103/tCO2 (RMB 700/tCO2). Unfortunately, these are also the companies that are under the most pressure to reduce emissions.
Carbon utilization & storage
Considering the high cost needed during the capture process, except for driving down high capture costs, usage of captured CO2 can be of vital importance to increase the overall revenue.
Enhanced oil recovery (EOR)-most promising method in the short term
One of the most attractive CO2 utilizations in the short term is CO2-EOR. It is the process of injecting high-pressure CO2, sometimes with a pulse of water, into existing oil fields to rejuvenate the production of oil. Part of the carbon will be kept deep underground after the extraction process for long-term storage. In China now, water injection (secondary recovery) has mostly been applied in oil fields due to its low costs and ease of injection. In theory, according to the US Department of Energy, CO2-EOR can increase the recovery rate from secondary recovery (35%) to 75%. In reality, the oil recovery rate is usually improved by 15-20%.
So far, about 67% of CCUS projects in China are CCUS-EOR.
The main reason why EOR is popular in China (and the rest of the world) is because it is one of the most economically feasible methods.
As opposed to CCUS usually being seen as losing money at the current stage of technology development, EOR can be profitable. When the oil price is high, oil profits are able to offset the cost of deployment. Currently, the gas to oil rate of EOR projects in China is about 0.1-0.4 t/t, which means with the injection of 1 ton of CO2, as high as 0.4 tons of oil (2.8 barrels) can be extracted. Calculated with August 2022’s oil price, USD 96 per barrel,
injection of 1 ton of CO2 leads to approximately USD 270 oil revenue
(CCUS capture, transport and storage costs is around USD 130/tCO2, assume transportation distance is 100km and by tank). It thus offers a lower-cost opportunity to deploy CCUS projects.
For China’s oil companies, this represents an opportunity for them to continue expanding EOR activities in light of declining conventional oil production while at the same time also storing CO2 and reducing emissions. Until August 2022, three of China’s four largest petrol companies (CNPC, Sinopec and Yanchang Petroleum) have undertaken CO2-EOR projects.
One of the CCUS business models in China is the “oil company mode” in which the full chain process from carbon capture, transportation, oil injection to storage is all operated by oil companies. This business model allows for smooth business flow in revenue and risk management and resulting in lower transaction costs.
Compared to a “CCUS operator mode” where carbon capture and storage are run by different players, the oil company mode is better at surviving when the oil price is low. Nevertheless, revenue streams of CCUS-EOR projects remain uncertain and limited (the only revenue stream is oil revenue). There is a need for government incentives and more comprehensive market schemes such as the carbon market to support future progress. Including CCUS into the national ETS are able to help companies that adopt CCUS technologies to further offset the current high project price.
Despite the fact that most EOR projects are dominated by giant oil SOEs, private domestic companies and foreign companies have also shown up on the project list. The most notable one is a private company named Dunhua Green Carbon Technology 新疆敦华绿碳技术股份有限公司. The company is located in Xinjiang. Its group company Dunhua Oil Company 敦华石油 is a domestic oilfield technical service company which later expanded its operation into CCUS by initiating a CO2-EOR project in Xinjiang in 2015. Now as we are aware, Dunhua is the only private company in China that has established a full value chain of CCUS technology including low concentration CO2 capture (self-developed amine solvent), carbon transportation (supercritical CO2 transport pipeline), EOR injection technologies, CO2 recycling technologies etc. Its CCUS-EOR project in 2015 includes capturing 100,000 tons of liquid CO2per year from the CNPC Karamay methanol plant and then trucked for EOR in the Junggar basin in Xinjiang. Although CNPC was the project owner, Dunhua played a more critical part as carbon capture and EOR operator.
Dunhua’s case has provided some thoughts on early opportunities for private companies and foreign entities to benefit from China’s CCUS expansion. It might seem hard to enter CO2-EOR directly from the oil demand side, but it seems possible to access the market from the carbon supply side (capture, transportation etc) by providing advanced technologies. Areas such as low-cost chemical absorption technology, carbon capture facilities, supercritical CO2 pipelines and corrosion inhibitors could be potential opportunities for private and foreign members.
Enhanced water recovery (EWR)-huge future potential
Although EOR is the most economically feasible method in the short term, its storage potential is simply not sufficient to cover all of China’s emissions by 2060. Thus, other storage resources shall also be deployed early so as to enrich the experience and database for future large-scale deployment. Among all geological utilization and storage methods, except for EOR, EWR is another key. Similar to EOR, EWR is the process of injecting CO2 into deep aquifers to recover water resources and store carbon permanently underground. Currently, due to its much higher cost (offshore EWR is 6 times more expensive than onshore EOR) and low return (water is cheaper than oil), project number remain limited.
Yet, EWR is still strategically critical because: (1) as mentioned, EOR storage capacity solely is not enough to cover all future emissions. China’s geological CO2 storage potential is about 1.21 to 4.13 trillion tons. Among all, the CO2 storage capacity of the deep saline aquifers in China is expected to reach 2.3 trillion tons, thus it would caputure significant demand in the future. (2) Source-sink mismatch issue left East Chinese cities as one of the few choices. In the figure below, it can be observed that there is a geological mismatch between China’s carbon sink and carbon source. The region with the highest potential for acceptable environment suitability for CCS site selection in China is mainly located in the west while the largest emission sources are concentrated in the east. Constructing low-cost pipelines could be one solution, however, 250 km is often used as the distance limit in China where it is the longest pipeline distance that does not require a CO2 relay compression station to maintain a low construction cost. But no suitable sites are available within the range of 250km for most east and southern cities. Therefore, the construction and operation of pipelines might be too expensive. In this case, offshore EWR storage becomes an alternative option for especially east coastal cities.
Currently, CNOOC is the key player in China’s offshore EWR deployment. In August 2021, CNOOC launched China’s first offshore EWR project in the South China Sea, with a capacity of 1.46 Mt CO2. This year June, it signed an MoU with Shell, the Guangdong government, and ExxonMobil to explore the feasibility of developing another offshore CCUS project (likely to be offshore EWR or EOR) in Guangdong.
Under the fact that EWR or offshore EOR is still too expensive for the industry, one solution for oil companies to add one more revenue stream is by creating “carbon neutral products”. As an example, Shell has been creating “carbon neutral liquefied natural gas (LNG)” to expand its revenue from its fossil fuel products. To simply explain the process: firstly, Shell acquires carbon credit from forest projects (carbon sinks) now, then attached these carbon credits to its fossil fuel product to offset emissions and create this so-called “carbon neutral product”. After that, Shell will sell this “carbon neutral product” to its customers (e.g., CNOOC) for them to fulfil their carbon neutral targets. During this process, their fossil fuel products are further marketized and the price difference between the bought and sold carbon credits becomes a revenue stream for Shell. Similarly, with CCUS, one hypothesis is Shell could get carbon credits from CCUS projects, attach them to its products to create “carbon neutral products” and sell them to its customers in China. Another possible solution that can be considered is to provide carbon capture or storage service to emitters in the area. In Europe, such companies (e.g., Northern light) already exist. With Northern Lights, CO2 from emitters nearby or across the border will be transported by ships to an intermediate storage site in Norway, then be transported by pipeline for permanent storage 2,600 meters under the seabed. (The article about carbon credit in China: China's Emissions Trading: The Opportunities Ahead)
Other carbon utilization
In addition to geological utilization, resource utilization is another form of the downstream industrial chain, including using CO2 as raw material in the production of chemicals and fuels. For instance, hydrogen methanation, CO2 cured concrete production, algae production etc. In this article, we introduce “hydrogen methanation” as one potential.
Hydrogen methanation is the process in which captured carbon dioxide and hydrogen are converted to methane. This utilization method is potential because methane is a widely used chemical that can be applied in various industries including fuel cells, liquid fuels, hydrogen, plastic, protein, medical etc. If renewable power is used, methane produced will be green methane thus creating more carbon neutral options for users.
Globally, Japan is one of the leading countries in hydrogen methanation. In 2020, Hitachi Zosen has teamed up with Chinese domestic chemical company – Yulin Chemical to build a hydrogen methanation project in Shaanxi province. In this project, Hitachi Zosen is the constructor of methanation equipment. Yulin Chemical will provide by-product hydrogen and CO2 source from its Economic and Technological development zone. The methane produced by Hitachi Zosen will then be sent back to industrial plants for reuse. Emitted CO2 will be captured again and form a gas recycling cycle. Once accomplished, reproduced methane will be able to meet about 30% of the industrial park's demand.
Two bottlenecks of the hydrogen methanation project in China are: (1) lack of highly efficient catalyst. (2) high hydrogen price. One of the main reasons that Yulin choose to cooperate with Hitachi Zosen is because Hitachi Zosen has world-leading in-house technology for catalysts used in the manufacture of methane. But if hydrogen and carbon used are purchased from the commercial market, the methane production costs could be more than doubled. However, by utilizing local by-product hydrogen and CO2, this project is assumed to be profitable. By referring to Hitachi Zosen’s project, other Japanese and foreign companies could also seize an opportunity in China’s hydrogen methanation projects through cooperating with domestic Chinese emitters.
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[11] 火星骑士瞭望，2021，中日在清洁能源上合作，能源与汽车领域能否迎来新变局？
[12] 北极星大气网，2021-5，负碳排CCUS技术的商业化前景与机遇.
[13] 北极星碳管家网，2022-1，市场潜力千亿规模 中国CCUS技术为何难以推广.If you like this article, please also refer to our comprehensive analysis report "CCUS in China" in our database.
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