Bill Spence is vice-president for CO2 at Royal Dutch Shell. David Hone is the company's climate change advisor.
Why is Shell interested in carbon capture and storage (CCS) as a way to fight climate change? Is CCS not like wiping the dust under the carpet?
David Hone: In our view, CCS is about putting options on the table. If we look at all the energy options that are out there – renewables, nuclear and fossil fuels, fossil fuels are today by far the most abundant, with a huge potential for the future. But we have identified a big environmental issue related to those – climate change. The objective of CCS is to level that playing field, to effectively introduce a technology that can address that environmental issue and then to let the market sort out the energy mix for the future. That's one thing.
Second, with the energy mix that we have got, we are heavily dependent on fossil fuels, collectively as a society - up to 80-90%. And to turn that over in a very short space of time is almost impossible. So, another approach is to introduce technologies to help that situation and CCS falls into that category as well.
Today we have 380 ppm [parts per million] CO2 in the atmosphere. Many now want to ensure that we don't exceed 450 ppm - a difference of only 70 ppm and with concentration rising at more than 2 ppm per annum. Every year that we delay widescale use of CCS by not taking early steps now will add more than 1 ppm to the end concentration - in effect putting a satisfactory outcome just that bit further out of reach.
So, you are in fact saying that CCS is a transition technology to carry on exploiting finite resources that will eventually dry out. But doesn't that divert vital investments that could otherwise be made in long-term solutions such as renewables, in which Shell is also investing?
Bill Spence: There is a fundamental piece here: do we actually have choices with energy? Is it energy A or energy B as opposed to energy A and energy B? We're coming from a position where, by 2050, to double the energy that this planet is going to need, we're not convinced we have the choice between A or B. We think it's going to have to be both.
We're looking at renewables growing as fast as we can and still expecting hydrocarbons to carry 60 to 70% of the burden. So, it really isn't about choosing a winner and chasing after it, it's about keeping all the options on the go. And that's where the carbon capture and storage keeps the hydrocarbon option on the go and early subsidies are keeping the renewables option on the go until it is cost-competitive.
So in a nutshell, CCS is a bridging technology and it will be a very significant piece of the bridging.
Hone: But it may bridge us for a long time. The scale of the fossil resources around the world – some of which we have not even started to tap because they are not economically viable – is still very significant. It is about putting another option on the table. It looks like the world needs A, B and C and D. And they all have to be environmentally acceptable.
Does that mean you think politicians are too optimistic concerning our capacity to transit to a low-carbon economy? Are the EU's scenarios to have 20% renewables by 2020 too optimistic in your view?
Spence: We need to realise that - even in 20, 25 years - to get 10% wind and solar into the economy, that is a five to six-fold growth. That is enormous. Very few industries have been able to achieve that, apart from the microelectronics industry for example.
I think the targets are realistic - it is just that you are starting from such a small base, so far behind, that it will need that hard push from policymakers.
Hone: Even technologies that we think happened very quickly did not. The internet, for example, was first invented in the mid-sixties. These technologies do take a quite significant time. But once they start to ramp up, you can get extraordinary progress in relatively little time. So talking about renewables targets in 2020, these are very ambitious targets. Not out of reach, but very ambitious.
Spence: Technologies really take off when they get into the deployment phase. But they have to go through preliminary phases before that, to go through what we call the "4Ds": 'Discover, Develop, Demonstrate and Deploy'. And we haven't got any CCS into that deployment phase yet, there are just a few people trying to get it through the demonstratation phase.
Hone: And we have an additional challenge which is customer adoption. We do not have any i-phone customers that are just dying to use CCS-type electricity. Those people just do not exist. Yet there are people willing to spend 500 dollars and buy the first i-phone and help demonstrate that technology.
Energy technology is much more difficult and that has always been the case. I guess in the development of nuclear technology in France there were probably significant government interventions. But that was the choice that was made.
Going back to the specifics of CCS - the process is complex and involves mainly three phases: catching the emissions from chimneys and separating the CO2 from other fumes, then transporting the CO2 and finally injecting it in liquid form into geological formations deep underground. These three steps in the process obviously require energy, which produces CO2 as well. How can you make sure that the overall balance is still positive? How do you reduce energy consumption and CO2-emissions from the process itself?
Spence: The energy consumption comes mainly from the capture phase. We've got CO2 coming out of a facility and the more dilute that is - the more it is mixed with nitrogen or oxygen - the more difficult it is to separate it out.
And that is where the efficiency is struggling at present. We have a lot of good processes that are used on a small scale but not on a larger scale. But we are only now starting to see a number of new entrants come in with these separation technologies.
As for pipeline technologies for CO2, they are quite mature. Drilling technologies are very mature, injection technology is very mature, so it is the capture piece where the energy is consumed which is most problematic.
We are starting to see that the growth of new solvents for doing this and new processes. I think it is just the beginning of what will be a wave of new technologies in separation. I think that will be a really interesting space to watch and that will determine the net energy efficiency.
Roughly, nowadays, what is the average energy efficiency of CCS? Could you give basic proportions?
Spence: Something like 10%, in addition to the overall CO2, comes from the capture, transport and storage phases. So it definitely does not tip the overall energy balance.
Some people in the industry say the biggest challenge in CCS is actually the transport phase because existing coal-fired power plants may not be situated close enough to a suitable underground geological site. So if the CO2 has to be transported for long distances, the transport costs can fire up to pretty high levels…
Spence: In the near-term, when you are looking at retrofitting a facility, you do not really have the choice of moving your coal plants. You have to move the CO2 by pipeline.
In the future, there has to be an economic trade-off: what is the easiest thing to move - to move your electrons, to move your coal or to move your CO2?
So you actually have to rethink where [coal-fired] power stations are situated because currently, they are often situated where you have some cooling capabilities or near a coal mine. But in future, you might actually start to see [coal-fired power-stations] moving closer to where the acquifiers are for the long-term storage [of CO2]. It becomes a new element in deciding where to locate power facilities.
Hone: That is why we are looking at trade environments as well. Imagine in the future we have a global carbon market but that certain regions of the world are building coal-fired stations where there is no CCS at all. These regions will be buying allowances from regions which have CCS and so you will have a much more intensive use of CCS and other technologies there to compensate. That can all happen but of course it does require that big, flexible market to allow that to happen.
What about mature economies like in Europe? I hear the Commission is considering imposing compulsory 'retrofitting' of CCS technology to existing coal-fired plants as of 2020. How realistic is this considering the very high transportation costs? Are we going to build a whole new network of CO2 pipelines?
Spence: These pipeline networks do exist in the United States for example. They bring CO2 from CO2 sources down to the oil fields using enhanced oil recovery. These are routinely run.
Regarding development of new pipelines, it is not altogether different from what we saw in the North Sea. The first company to build the pipeline has to take on an awful lot of costs, but you then find that you can tariff others to use that pipeline. It becomes a trunk line for other developments. So if that pipeline is optimally located, you actually get other industry participants. So you want to see one that has been optimised on size to take in more CO2 than its own projects.
Hone: There are also redundant pipelines that already exist. Most of the pipelines that we use to take CO2 from [Shell's] Pernis [refinery] to the greenhouses in the Netherlands already existed. Now, that won't be the case everywhere. But maybe in areas where less natural gas is used, we may be able to reuse those pipelines. The markets will help that process along. But this won't be free, there will be significant investments required.
Moving on to the EU policy framework. What do you expect from the directive coming out in December on CCS?
Spence: What we do need to see is support to get us through that demonstration phase. What we want to see is a policy that will give us these 10 to 12 demonstration projects into the demonstration phase so that we can test that all of these work at scale. And we have enough statistically sound data across a number of technologies to convince you that the technology is deployable and that, by 2020, it is a realistic goal to ask people to retrofit.
We are looking for a policy that recognises that learning curve and then starts to worry about the long-term of capture and storage.
How do you see CCS fitted into the EU emissions trading scheme? How can it be made worthwhile from a business point of view?
Hone: There are two approaches. One is that if you put the CO2 into the ground, then it is not counted as an emission. The second is to count buried CO2 as an emission but that CCS projects can receive a credit [on the EU's carbon market].
What sort of price, in terms of emissions allowances under the EU-ETS, would make it interesting from your point of view?
Hone: In these early days, we may want a credit more than it is worth. So, something like two allowances for one tonne [of CO2] saved or something like that. Because CCS is a technology that is clearly not mature.
Longer-term, a tonne of CO2 will have to be a tonne of CO2. So, what you want the emissions trading system to do is a) to recognise CCS – which is not the case today, but it is coming – and b) you want the recognition around the measurement and reporting so that it is clear how you measure and monitor it in the long-term and how you do any calculations or assumptions around leakage, for example. The third one is long-term liability issues. So that has to be sorted out as well.
So it is not just a question of supporting ten power plants and then seeing what happens. It is about putting in a legal infrastructure for the future, for the longer term - such that companies have the confidence to build it knowing where they stand on all aspects of liability measurement, reporting and finance.
Spence: Similarly, people need to be comfortable that we are willing to have CO2 a 1,000 or 2,000 metres beneath us in an acquifier. That is the whole public acceptance piece that is still very much in its early days.
Hone: But it is not unprecedented. CO2 has existed naturally in the ground for millions of years. And in fact, some of the CO2 emissions that we have in the world today come from the fact that these have been released in the search for natural gas.
Many natural gas wells have small percentages of CO2. Some natural gas wells have really high percentages of CO2, like 60-70% CO2. They have been there forever and it has not leaked out. So it is not some new, scary thing that we all should be worried about. It is about making sure we do it properly. The industry wants to achieve those goals.
The EU is preparing these 10 to 12 demonstration plants, which will cost about five billion euros, according to the Commission. Is Shell willing to invest in these demonstration plans?
Spence: We certainly are part of the shaping of the programme. We are very active already. The question with the plants going forward really comes down to understanding what in our portfolio could be a match to those 10 to 12 demos. That is a piece we still need to do – to see which are the right demonstration plants and which of our facilities might be a good match. We all would like to see that we have a match in a participating programme but we cannot try to bias the process towards ours.
Hone: We all tend to imagine that, at some point, the government is just going to write a cheque and then hand it over to somebody, which is not how governments function. What governments will do - we hope - is set up some type of framework within which companies will feel the confidence to operate and make a case to their boards that this piece of business is a reasonable thing to go forward with.
For instance, they might declare – let's just take this as an example - "Three for one". So, for the next ten years, every time you capture a tonne of CO2, you can credit it three times in the EU-ETS. So what we would then do is do some calculations around that project. We will look at our forecasts, we will talk with our traders, we will put together a business case around all this. We will take it to the board and we will say: "These are the risks, these are the returns, this is how we can hedge this. We can use the carbon market that exists today to hedge it to this extent. That leaves this exposure. We think that we can do this" and the board will hopefully say "Yes, that is a good deal" and off we go.
So in that case, you have not had the government just writing a cheque for five billion dollars. Equally, Shell would have just used the markets to put capital in because what we will be doing of course is generating carbon reductions which other people will effectively be selling us allowances to underwrite. So, we have used the market, the government has not specifically written a cheque, somewhere in society that payment has been made because we bought this thing. But that risk has been spread around and hopefully ends up in a project which is viable and running.
Spence: But there is no cheque upfront, there is no cheque in the post. There is the idea that, if the promise of three credits is made, in the future we will put the capital upfront. The cheque upfront will have to come from us and the reward will have to be in the allowances after our investment. And we have to trust each other. Governments have to trust that we are going to build the facility and we will have to trust governments that those allowances stay out there.
And there are lots of debates to be held about the future prices of CO2 that are needed to stimulate CCS. Is it two allowances, 2.6, four? We don't know.
Hone: That is why we have been an advocate now for many years of a robust carbon market in Europe. We are one of the early companies that stood up there and said "we should have the EU-ETS, it should be mandatory, it should be absolute across the economy and everybody should participate". Because the ETS is what provides the opportunity to do these types of projects and because we cannot just sit there and ask for a cheque in the post.
Do you feel the EU-ETS is robust enough currently to carry out these kinds of long-term projects?
Hone: Yes, all the pieces of it are there, and it is working.
The price is a bit low at the moment, isn't it?
Hone: No, the price is 25 euros.
But that is for the second trading period in 2008-2012.
Hone: But that is where the market is. The EU-ETS has delivered its goal for the first period. In 2005-2007, the Commission has put this many allowances on the table – that has been met and that is why the price is now effectively zero. But that does not mean that it failed, in effect quite the opposite - it means that it has succeeded.
Now, one can argue that the Commission put too many allowances on the table. But imagine the other way round - that they had put 25% less allowances on the table. We would be sitting here with a 300 euro price for a tonne of carbon and power stations would be saying that they are going to shut down. Do you think the EU-ETS would have survived that? Not a chance.
I am not going to comment on the exact number of allowances but I think the way it has gone has actually been successful. It demonstrated what it had to demonstrate, that it has a solid price for the next period, the market is growing and more allowances are being traded every day. The ETS is creeping down through society, through electricity prices, so it is starting to bring about changes. It sits on our refinery managers' desks, prompting them to think about projects to reduce CO2.
You can never expect all of these things to happen within six or 12 months. Projects in refinery take five to ten years. Not because we are slow and stupid but because refineries do not shut down every day. A big refinery like Pernis may shut down every five years. So if you are going to make a major change to energy use you make planning for the next shutdown which may be three or fours years away. And then you have to get it going and start it up so the whole project might take five years. And we have not even had five years of this system yet.
Spence: The first three years were where the quick wins could be made, now come the difficulties.
Hone: If we are sitting here in ten years time and the price in the EU-ETS happens to be zero again, that might be because the market has met the constraints that were on the table. It might happen. It is not a bad thing.