The small oil producer stands to win big from Biden’s climate bill

Denbury has taken on significant amounts of debt over the past decade by acquiring oil properties and building the pipelines, which ferry CO2 to depleted oil fields and attract more crude. In 2019, debt equal to about 11 times his earnings weighed on the producer’s finances, before Covid-19 lockdowns and falling oil prices drove it into bankruptcy.

The company has since expanded into waste management, with plans to transport the CO2 from the emitters through hundreds of miles of pipeline and bury it in rock ponds, for a fee. Its shares are trading at around $88, more than four times its price when Denbury was relisted in late 2020. And analysts say the firm’s foothold in the carbon business makes it a target interesting acquisition for major oil companies.

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

Behind Denbury’s renaissance: Billions of dollars of public money squeezing carbon capture. Tax credits in the Inflation Reduction Act, which President Biden signed into law last year, reward companies that store CO2 underground. Denbury won’t receive government funding directly in most cases — it will go to customers who capture the carbon — but the company will charge customers to manage their emissions.

Driven in part by incentives, Exxon Mobil Corp.

Chevrons Corp.

and Occidental Petroleum Corp.

they said they will spend billions of dollars this decade to increase their carbon harvesting capabilities. Few companies, however, have as much of an edge as Denbury, analysts said.

About 900 miles of pipeline Denbury owns on the Gulf Coast meander through manufacturing centers that emit hundreds of millions of tons of CO2 each year and future plants that will capture the emissions to churn out low-carbon fuel. Nutrien crop nutrient company srl.

hydrogen company Clean Hydrogen Works and Mitsubishi Corp.

have already signed large contracts with Denbury to collect CO2 from the planned plants.

Denbury’s pivot was made possible, in part, because it has poured more than $1 billion into pipelines that can transport carbon since a couple of decades ago, executives and analysts said. When it exited bankruptcy in late 2020, it had a clean balance sheet and 1,300 miles of pipeline in six states, which allowed it to produce about 45,000 barrels of oil a day in the most recent quarter.

About a year later, the bipartisan infrastructure package has funneled about $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. Credits for CO2 capture and its use in a process called improved oil recovery, in which carbon is injected into aged reservoirs to expel more oil, rose to $60 per ton, from $35.

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. Inc.

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

However, the economics of trapping huge volumes of carbon underground remain unclear, and the feasibility of doing so on a large scale remains unproven. Additionally, some environmental groups argue that carbon capture prolongs fossil fuel use and redirects investment away from clean energy.

A Denbury spokesman said industrial carbon capture is in use today and is being improved to reduce costs. He said the company’s expertise in managing CO2 will allow it to store huge quantities of gas and more than offset the emissions associated with the oil it produces.

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

By the end of 2022, Denbury has announced eight contracts to transport and stowage approximately 20 million tonnes of CO2 per year, mainly from ammonia and hydrogen factories. It’s targeting these plants as customers because of the convenient harvesting process, Denbury said. CO2 harvesting is expected to be between $15 and $55 per ton, compared with 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 he expects to generate average revenue of $15 to $25 per ton of CO2 transported and stored and up to $10 per ton used to extract the oil.

Until now, Denbury has paid companies like Nutrien and Air Products & Chemicals Inc.

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

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

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

The new business faces challenges, analysts said. For example, obtaining permits to pump CO2 into geological reservoirs can take 18 to 24 months, said Brian Velie, an analyst at Capital One Securities, creating uncertainty about when Denbury can start sequestering the gas underground.

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

The prospect of delayed cash flows could also dampen investor appetite, said Gabriele Sorbara, an 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 [email protected]