Denbury On Domestic Carbon Capture Utilization & Storage and Enhanced Oil Recovery

Chris Kedall, CEO and Matt Dahan, SVP of Business Development & Technology at Denbury Inc. join David Deckelbaum, Next Generation Materials and Oil and Gas Exploration & Production Analyst.

They discuss Denbury’s unique carbon capture infrastructure, CCUS opportunities in the Gulf Coast and the Rockies, and using CO2 safely and securely. Press play to listen to the podcast.

Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

David Deckelbaum:

Hello, everyone. I’m David Deckelbaum from Cowen’s energy team. In today’s installment of our Carbon Capture podcast series, I’m joined by Denbury’s CEO, Chris Kendall, and the SVP of Business Development and Technology, Matt Dahan.

            Maybe just to start off with an introduction for our audience, would you mind running through your backgrounds? It’s always interesting, I think, for people to hear how folks found their way to be involved with CCUS projects.

Matt Dahan:

Yeah, sure, David. I’ll start. This is Matt Dahan. I’m the SVP of Business Development and Technology for Denbury. I’m a petroleum engineer by background, Colorado School of Mines, worked for Mobile Oil a good chunk of my career, both in the US and overseas, worked many different types of recovery processes. Eventually, wound myself up in Saudi Arabia for a while, then Europe, and found my way back to Plano, Texas back in 2010. I’ve been with Denbury ever since.

David Deckelbaum:

Great.

Chris Kendall:

David, this is Chris, and thanks for having us on the call today. Really excited to talk about Denbury. Looking back, I have a, in some ways, similar experience to Matt, in some ways very different. Also went to Colorado School of Mines, also worked for Mobile coming out of college, but I’m a civil engineer by training. So my work in the first 15 years or so of my career was really focused on offshore structures and Marine systems.

            During the early part of the century, I moved to Noble Energy, and there I moved more into business operations I’d say, spent some time in South America, spent some good time in Israel with some of the work that we were doing there, but all along the way, David, I really saw this tricky balance that the industry had with how do we provide energy and how do we reduce carbon emissions and do it all in a way that works as well as it possibly could.

            For me, that was the real appeal of Denbury when I first heard about Denbury I’d say around 2015, which led to me joining the company and, of course, just thrilled to see what we’ve been able to do with the company here in that space and what’s yet to come, honestly.

David Deckelbaum:

Absolutely. Well, I think everyone has a common thread of being able to solve large problems. Maybe just to provide some context, I mean, Denbury has a fairly unique profile within the carbon capture landscape just given a lot of the existing infrastructure and being predominantly a what’s thought of as a pure play EOR story, but I guess, when did Denbury first begin envisioning a CCUS business?

Chris Kendall:

Sure, David. When you think about Denbury’s history and our first foray into enhanced oil recovery back in 1999, that is really when this all started. I talk about enhanced oil recovery in the context of being part of CCUS because I’m sure you know for many, many years, the only real means that worked economically for capturing CO2 and putting it underground was through EOR, and it succeeds in putting CO2 permanently underground, but it didn’t completely depend on government policy.

            So that’s when we started in these operations, but along the way as we saw the need for more CO2 to be captured and the trends of government policy eventually catching up and helping to support further capture, we continued to move in that direction. So if you think about 2010, give or take, when we began work on this green line, the 24-inch pipeline along the Gulf Coast that spans between Texas and Mississippi or into Louisiana, rather, we purposefully located that line to be very close to emission sources, which honestly at the time were primarily thought to be going into EOR ultimately, but now that we have enough policy support and we saw that coming in the whole I’d say last five to seven years for storage outside of EOR, we just saw that opportunity set, build to an even greater level with the 45Q tax credit where it is, and that really put us where we are today.

David Deckelbaum:

So maybe based on where you are today, can you divide the CCUS opportunities and then just give everyone the size of the scope maybe between the Rockies and differentiating that the Gulf Coast?

Chris Kendall:

Sure. So I started by talking about the Gulf Coast, and certainly, that’s where we began. Also, that is where the bulk of existing emissions are. Just the nature of that region is really suited for that. So that is the primary focus, especially in the near term for emissions that either are coming from existing plants that are converted or new plant that’ll be built really to build energy green energy type of fuels like the hydrogen projects that we hear about or the blue ammonia project that we have with Mitsubishi.

            So that is the primary focus, but along the way with the system that we also have in place in the Rockies and between the two of those totaling over 1,300 miles of CO2 transmission pipelines, which is the greatest amount of pipe in the country here handling CO2, we’re able to look at opportunities up in the Rockies as well, including the project that we announced in our last quarter earnings up in the Rockies. Certainly though, I see it weighted more towards the Gulf Coast with just the level of emissions and activity that we have there today.

David Deckelbaum:

That makes a ton of sense just given some of the industrial corridor there, and I know you’ve had some announcements around the ammonia industry and some others. Maybe can you talk a little bit about, you highlighted that you have the largest CO2 pipeline network, maybe discuss a little bit about some of the other competitive advantages that you think Denbury has as a lot of the folks that are out there, particularly in the E&P side, and maybe some of the midstream side who’s trying to come to market with different solutions. So maybe if you can talk through Denbury’s competitive advantages, and then maybe that can dovetail into what do you have to accomplish on just the capital side before we start seeing this opportunity really scaling.

Chris Kendall:

You bet, David. It’s a great question. I’d start by even going back to my comments about beginning operations in EOR back in 1999. The company is built to move CO2. We’ve been doing it since then in a greater scale and in a broader sense across the United States here. The strengths that we have in our workforce, technically, operationally, we’ve been doing this that whole time. So when many are talking about CCUS, we have been doing it. We began taking industrial source CO2 into the system almost 10 years ago with Nutrien on the Gulf Coast, their ammonia plant with their products. Also on the Gulf Coast, their hydrogen plant.

            So that’s just from an experience standpoint. From running into the challenges of working with CO2 and injecting it underground, that is under our belt, and as a result, we have workforce and systems that I just think are unmatched anywhere in the industry.

            Moving a little bit beyond that, I think about the infrastructure that we built to facilitate all of that. As I mentioned earlier, we have the longest CO2 pipeline network in the US, and that has taken time and expenditures and taken risk off the table, honestly, in terms of getting the pipe in the ground and operating.

            What we’re able to do now, David, is use that great backbone of the infrastructure that’s in place to build off of and, ultimately, to make our solution the most economic, I believe, for emitters, and one that can give them the most confidence in our ability to handle the CO2 safely and securely. So I think we have a couple of key advantages. One is in the huge experience base that we have, and second is in the great asset base that we have alongside that.

David Deckelbaum:

Yeah, absolutely. I think that’s pretty clear just given the history and certainly having a unique perspective as an EOR producer. What does it look like on the capital build outside or is everything at this point set to go because there are so many sunk costs historically especially around the pipeline side, which I imagine would be some of the most capital intensive parts of this? Is the remaining portion right now as you think about allocating capital, and we can get to this maybe a little bit later, but as you’re allocating capital to CCUS, how large is that at this point?

Chris Kendall:

Well, you’re right on point in the advantage of the capital that has already been put into the ground in getting that pipeline system in place, and it’s not just the capital that goes along with that, it’s just the risk that goes along with executing pipeline projects or, honestly, any kind of infrastructure projects in today’s world. There are no infrastructure projects that are easy. So we feel very good about having that in place.

            What we also like about it, David, is that the broad system allows us to have a lot of diversity in where we can move CO2 and to have redundancy so that an emitter can have a lot of confidence that if their CO2 comes into our system, we’re not going just to one dedicated storage site or one EOR field. We have the ability to move that CO2 to a variety of different places.

            So with that, we have this reach to just an extensive area where, to your point on the incremental capital that’s needed to build this business out, we have a bit, obviously, to reach into emitters, industrial emitters facilities. Typically, those are pretty short runs, honestly, just because of the purposeful location of our infrastructure, but there is some expenditure there, but that’s generally fairly minor.

            Then of course, even though we have a network of EOR fields that have tremendous capacity to take industrial CO2 really up to the neighborhood of 10 million tons a year or so, beyond that, we see a need for dedicated storage. So we’ll also be pointing capital towards dedicated storage generally right along our infrastructure to minimize the cost of reaching that storage and to provide the diversity that we want to have there.

            All in, we think the bulk of the capital and the bulk of the risk is behind us. Still some to spend. To the last part of your question, I think we’ve shared our expectations for this year to spend somewhere in the $50 million neighborhood, and a lot of that will be around the acquisition and initial steps on dedicated storage. We expect that to come up in the coming years, but one of the benefits that we have as a company that has this combination of EOR and CCUS outside of EOR is that we can generate free cash from the EOR side of the business that can be deployed this way. So we can do a lot of things without taking on debt, which we think is a powerful strength of the company as well.

David Deckelbaum:

Yeah, absolutely. I think you talked before, it sounds like the capital, obviously, finding poor space, finding a dedicated reservoir for storage, the long haul pipelines are already there. It sounds like a lot of it is just almost like a gathering line coming from a client site or an emitter. Is there anything that capital outlay that a customer would have to take on or are you sharing in that for them to actually help hook up to a pipeline?

Chris Kendall:

Sure. Really, David, we want to be the most economic solution. We want to provide the best solution to any of our industrial partners. The way we look at it is the expenditures that need to go into the project. Somehow, they have to be accounted for in how the ultimate agreement is pulled together. We’ve been quite flexible, honestly, on how we approach that. Honestly, we ultimately want to achieve a good return for our shareholders, and I think that we’ll be able to do that, but we also want to support scale in this industry, which I think is the most important thing here is just how big can we make it. So we’re flexible and thoughtful about how we deal with where those investments need to fall.

David Deckelbaum:

Yeah. So I guess maybe you can answer the next question there is, how large do you think you could create for this opportunity?

Chris Kendall:

Yeah. Well, if you step back a little bit and look at some of the projections that have been made by the IEA and other agencies, they’re showing that CCUS globally, to meet any sort of net zero type of aspirations, needs to exceed seven billion tons annually by 2050.

            Just to put that in some context, David, I think the last year that I’ve seen the world capture volume was around 40 million tons. So on a global sense, you couldn’t imagine a more upside potential in what the scale of this industry could be. If we narrow it down to our operations in the United States and just narrow down even further to the Gulf Coast and look at the opportunity set there, our early days of looking at this, David, with the 45Q tax credit at its current level of a $50 per ton credit, which only captures some of the lower cost industrial emissions, even that prompted us to announce the plans for expansion of our green pipeline system to 50 million tons a year because we saw the need for that.

            When I look at the potential for what can happen on the Gulf Coast, it’s only gotten greater. First, we were just looking at existing emitters and conversion to capture for many of those, and we were excited about that.

            Second, we started hearing from companies that wanted to build energy transition fuels, and Matt will talk about some of that, I’m sure, at some point during this call, but what we saw was the need for ammonia or biofuels and all of these other plants that would be greenfield type plants that would be built to take advantage of this great combination we have of huge poor space on the Gulf Coast, access to water for products that need to be shipped overseas, and then a regulatory structure that works and supports this industry, and then finally, the infrastructure that’s in place to move CO2 around.

            So I think that combination really supported a lot of new development that probably surprised some people, and I hope will continue to surprise people as we look at what is possible on the US Gulf Coast here. So that is where I got with just a $50 tax credit, but I feel good that the tax credit will increase potentially this year even, and all that will do is we’ll scale it up further. So bottom line, David, I think, talk about the expansion of the pipeline up to 50 million tons per year, I think that the opportunity for Denbury is much greater than that.

David Deckelbaum:

Absolutely. It dovetails, I guess, into next part of this, which is really discussing that revenue model because, obviously, there’s a pretty clear benefit from 45Q, and I know a lot of us expect the 45Q revenue aspect to increase here in the near term, and perhaps even beyond that, but how do you think about the economics? You said you wanted Denbury to be the low-cost solution here. How do you describe those economics as they are currently? Maybe just talk about the revenue model that you run and some of the expectations around that, and we can get into to some of the operating costs and how you guys might be thinking about improvements to that over time.

Chris Kendall:

Sure. What I’d say, David, is I still see the revenue model as being very much in line with the national patrolling council’s CCUS study. Generally, I’d say what they included in that study, which had brought industry participation of a combined transportation storage range around $20 per ton for CO2 that’s captured and put into dedicated storage. We see that number flexing probably $5 in either direction, depending on scale and proximity, but it still holds true with what seemed to be the case about a year ago and still seems to be the case.

            Ultimately, what I think, David, is that scale is fundamental here. Driving sufficient scale of capture to build the system, to build the number of storage sites that will be needed, to me that’s really what’s exciting about it because as you build scale, you improve all aspects of the financial model of this business, and you’re achieving the overall objective that the government policies in place originally, which is to make a big difference in industrial CO2 emissions. So that’s something I think is exciting.

            You mentioned tax credits going higher, and we’re excited about that as well, but what I’m primarily excited about that for is the new industries that will be incentivized under that, whether it is cement and steel manufacturer, which together accounts for about 16% of the world’s CO2 emissions, whether it’s hydrogen, post-combustion natural gas power generation, for example. There’s just a whole new world that’ll come in and truly of higher cost of capture emissions, but the scale that will be built will be significant. So we love where it is today. We love where it’s going or where we believe it’s going as well.

David Deckelbaum:

Absolutely. Does Denbury benefit at all or can you talk about any benefit that you might all be receiving from some of the LCFS credits? Is that ever applicable where you end up operating or can it be tied back to that?

Matt Dahan:

I mean, certainly, the LCFS credit is designed to incentivize folks to deliver low-carbon fuels to the West Coast. So the opportunity exists for Denbury to help in that, in taking CO2 off to create those fuels. Then you think about the issue, as Chris mentioned, about some of the higher cost to abate emissions when there’s the benefit of that tax credit. When you look at the entire value chain, there’s an opportunity that, “Hey, maybe some of those higher to abate emissions can be offset by the benefits of the LCFS credit.” So twofold, right? You’re there to help take the CO2, but then also, as the cost of capture increase, it’s a way to offset it in addition to potential increases in 45Q.

David Deckelbaum:

Yeah, absolutely. It certainly seems like an interesting commercial opportunity. Maybe thinking about the core business before CCUS, Denbury has, I think, almost 950 million barrels equivalent of proved and possible EOR reserves between the Gulf and the Rockies. Do you see this number changing significantly? Are you going to be accessing more rock or more reserves here just as your CO2 sources increase or should we just think about the EOR business overall evolving towards just using almost entirely anthropogenic sources going forward?

Matt Dahan:

Yeah. Maybe I’ll answer it in reverse, right? I think that certainly that’s our goal. It’s our stated goal that we bring more and more anthropogenic CO2 to the EOR business. That close to a billion barrels of resource in total, of course, that’s made up of our prove reserve plus our probable and possible and some contingent resources on top of that. I think what you’ll see in the near term is the conversion of those probable and possible reserves to prove. Our big CCA development is certainly the big one we got going right now, which is a huge, huge resource over 400 million barrels net to Denbury in that project alone over its multi-decades that’ll being developed.

            So the other thing is that as more anthropogenic CO2 comes into the system and pipeline infrastructure gets built out to service potentially the sequestration side of the business, you can take advantage of that infrastructure to add additional EOR targets. We announced an agreement with Mitsui to pursue some targets on the Gulf Coast, and we can see that opportunity set growing over time, as well as that conversion of our resources to proof reserves.

David Deckelbaum:

Thanks for that, Matt. Maybe just to drill into that a little bit more, when we think about the OPEX benefit to the EOR business, how do we think about, I guess, the dollar impacts or the economic impacts now of being able to sequester more CO2 and be able to source almost effectively your own feed?

Chris Kendall:

Sure thing, David. Thinking about just the economics of EOR and the nature of that business, certainly, just because of the use of CO2, the cost of CO2, as well as the energy that is needed to compress and pump the CO2, it tends to be a higher OPEX type of business than the typical E&P shale producer, for example. Of course, it comes along with the correspondingly lower capital intensity and a much more flexible capital spend that we think fits together very nicely, but certainly, the OPEX, excuse me, for EOR tends to be higher and to a large degree driven by CO2.

            So one thing that we look at is just where our naturally sourced CO2 has traditionally been a cost for us that a revenue-generating source of CO2 from an industrial captured facility can flip that to where the cost actually becomes a revenue, and it does some very nice things for the business. Certainly, it reduces that OPEX for those incremental cubic feet or tons of CO2 that come in from industrial sources, but it also helps the capital profile of the business.

            As you know, we inject a lot of CO2 at the beginning stages of projects that when it’s a cost, there’s a financial or an economic burden on the project. If there’s a revenue, it’ll help offset that. Bottom line, we see it making projects more economic or economic at lower thresholds than we’ve had in the past.

David Deckelbaum:

Absolutely. So what happens to Jackson Dome going forward? As you know, it’s been this benefit of a tremendous CO2 reserve. Obviously, that’s really sourced. Can Jackson Dome become a storage site? Can that be a reinjection site or it just ends up being more of an idled resource that you’re not tapping into?

Chris Kendall:

Sure. I think over time, as Matt said a few minutes ago, we expect that the proportion of our industrial source CO2 used in EOR operations will steadily increase. We have the great ability to use that Jackson Dome resource to balance the system, which is important in a big transmission system like we have on the Gulf Coast, but ultimately, I do see that going to a low level, and I do see it ultimately not being, David, at least for a supply.

            Now, if you look across all of the poor space opportunities that exist on the Gulf Coast, knowing that the reservoirs at Jackson Dome have securely held pure CO2 for millions of years, gives you a very high level of confidence that that will be a good storage site. Knowing that we’ve taken on the order a 200 million tons of CO2 out of that reservoir over its life, we’ve depleted it. So we’ve made space for CO2 to come back in.

            So physically, we think about that. We think about the transmission system that’s connected directly to those fields today. Ultimately, I believe it will be a storage site and it’ll be a very good one. Just for clarity, though, our existing lease agreements are based under mineral law in Mississippi. So we’ll have to work with land owners and mineral owners to reverse that, but I’ll tell you, David, I think that that would be something of great interest to those owners because we can take an asset that might ultimately look like there’s no remaining value and provide a significant value over many years into the future.

David Deckelbaum:

Makes plenty of sense. Maybe we can shift a little bit to talking about the customer side. You all have announced a number of customer agreements to date. Maybe you can talk about starting with Mitsubishi. I’d just be interested to hear what the demand side has looked like here. You talked about some of the more difficult to abate industries, but maybe just give a little bit of insight into the demand side, and then what’s some of the key pushbacks or questions you’re getting with this pitch?

Chris Kendall:

Well, the demand side, even at the $50 45Q tax credit level, has been very strong and, honestly, it has been what we have been focused on the entire time. Really, we’ve thought about increases to 45Q as being upside, but really not the focus until the government gets done going through its process to put something in place, but at that level, and partly going back to even Matt’s comment about the potential for credits like LCFS or otherwise that can really enhance the economics of these projects, there has been tremendous interest, and it resulted in us wanting to expand, announcing our plans to expand that pipeline to upwards of a 50 million ton per year capacity, and it’s been a mix of conversions of existing facilities and new facilities. So there’s just this broad mix.

            Your question about pushback, I’ll tell you that some of our conversations with investors have focused around a similar question like, “What is a pushback? What do people think? Are they waiting for a higher 45Q or are they waiting for approval of class six permitting?” We are not seeing either of those. I think the folks who are waiting for 45Q are just on the sidelines and they’ll come when that time reaches us, but that’s just upside. So what I see is the people who we’re working with right now are fully motivated and economically justified by the 45Q levels that you have today.

            Then the other question we get, David is, “Well, what about the timeframe of class six approval and how do we deal with that?” That’s something where I really think that Denbury has a magic bullet in being able to take such large volumes of CO2 into enhanced oil recovery in that interim period. Most of the agreements that we’ve worked through already, David, provide that flexibility, and in doing so, it gives the emitting industry the ability to move ahead with their capture projects earlier, not waiting for a class six approval.

            Then of course, in the background, and as we’ve announced, we’re working towards building out a portfolio of dedicated storage sites along our infrastructure that once that class six process is complete, they’ll be part of that system, and then the emitters who want to transition into that will be able to. So we think we can solve the whole equation and have the ability to go into EOR today as being something that’s very powerful.

            I’d also just add, many of our industrial partners are ambivalent toward EOR versus dedicated storage. They see that when their CO2 is used in EOR and can produce a barrel of oil that is carbon negative, has a negative carbon intensity, they see the value in that and are open to that as well. So I see a lot of support and really no meaningful pushback to answer your question there.

David Deckelbaum:

No, I appreciate that. Maybe you can discuss a little bit about this unique agreement with Infinium, this utilizing CO2, it’s not EOR, it’s not sequestration. What’s the opportunity set here?

Matt Dahan:

Sure. I’ll take that one. So for those who don’t know, Infinium is a company that produces what’s called an electrofuel. So it’s the conversion of CO2 using green hydrogen to make a hydrocarbon, and ultimately these drop in fuels for diesel or even airlines and as such.

            So if you think about it, we talk a lot about sequestration, and we talk a lot about EOR, this is the utilization end of CCUS. In a nutshell, it’s very similar to enhanced oil recovery, and that they’re taking CO2 and making a fuel out of it. It’s what we do in the EOR business. Ours just happens to be underground versus on the surface for Infinium.

            Chris mentioned the target the world needs to hit to make an impact on it, some seven billion tons annually. So I think we’re going to need to find as many homes as we can for industrial source CO2, and that’s the combination of storage, EOR, and utilization techniques like Infinium.

            We’re excited to partner with them. They got some great investors like Amazon and Mitsubishi Heavy Industries, and the ability to help them source that CO2 and move it to places close to our infrastructure. Also, we have the ability even to take equity stake in the project if that comes to be. So excited about it. I think you’ll see more of this coming in multiple forms, not just in fuels, but in other forms of utilization as well.

David Deckelbaum:

I guess that’s a good point because I think we are seeing that emerging demand center for sustainable sourcing of products and leveraging CO2 for that with obviously applications around sustainable fuels, but with several manufacturing operations. I guess maybe you can talk a little bit about just the class six wells. Chris, you brought up the fact that a lot of people point out the long lead times around class six permitting. How would you characterize the landscape right now for getting approval around class six? How’s Denbury navigating that process?

            There really haven’t been many permits issued, small handful historically. So do you think that, in general, the industry’s oversimplifying how difficulties might be to obtain for folks that are trying to become active in the CCUS industry? Maybe talk about just your experience there and some observations around the regulatory side permitting approvals.

Chris Kendall:

You bet. David, I’ll take it up one level and just talk about what the EPA is trying to achieve through the process and how that aligns with how I think about CCUS in general. With the 20 plus years of experience that Denbury has in injecting CO2, it’s an unusual fluid. It’s lighter than water. So if it is not securely stored, it will move and sometimes it will move to places where you don’t want it. That’s something that I think Denbury has become very good at through a lot of experience and, honestly, some things that haven’t gone well for us that we learned from and instituted into processes that make us that much better.

            As we think about what can happen with CCUS, and the really staggering numbers that Matt mentioned a moment ago, there needs to be a lot of CCUS, but it also needs to be done very, very well. It’s an industry that is very young and needs to maintain the public confidence and it needs to be done safely and securely and professionally. So I think that as a backdrop, when I look through the EPA’s eyes, I think of them thinking about all of that in their approval process.

            So the way that we have approached it, certainly as you mentioned, the data points for class six approvals are five to six years, and they’re only a couple three of those that I’m aware of. The guidance that we received from the various regions of the EPA that we’re working with is that we’re in a two-year or they’re targeting a two-year approval timeframe, and I think that that’s possible, but it’s yet to be seen, I guess, is what I’d say right now, David.

            So we are planning around that two-year timeframe. Honestly, we’re working to assist and really partner with the EPA in any way possible to help them understand and to provide them the information that they need to analyze and ultimately make their approvals. So we’re happy with that.

            Then of course, as I mentioned earlier, in the meantime, while that uncertainty still exists, having EOR as a completely separate established regulatory approved method of putting CO2 permanently underground and qualifying for 45Q along the way, we think that that measure provides the confidence that’s needed to really be moving in this direction today rather than waiting until we see the first permits come around.

David Deckelbaum:

That’s helpful insight. I think one of the things that’s been intriguing, you talked about the Infinium opportunity, right? Then on the other side of that, there’s this compelling argument around selling net zero barrels, the ability to sell a barrel that has a net negative carbon footprint just given some of the sequestration and storage on the other side. You’ve announced some headway with some of these initiatives, but how do you see that market developing for Denbury?

            Obviously, a lot of people ask about receiving a premium for those barrels, but might be interesting just to hear if you were to become constructive on either sustainably sourcing CO2 for the manufacturing of sustainable fuels versus selling net zero barrels with a pretty captive audience, how do you kind of differentiate the opportunity side just between the two?

Matt Dahan:

Yeah. Well, if you think about with the introduction of biofuels and renewable diesel, and even the electrofuels, there’s certainly a big growing demand for low carbon or net zero or, ultimately, net negative fuels that the blue barrel, as Chris coined here maybe a year and a half ago now, where we can deliver something that actually has a net negative carbon intensity for liquid fuel, I think, is really important not only because it’s a direct drop and it’s part of the current infrastructure, but it also has the ability to blend with some of these products, particularly on the aviation side, where there are regulations in place that limit the percentage of sustainable aviation fuels from the renewable sources.

            So if you think about blending that with a fossil fuel, if you could blend it with one that has a negative carbon footprint, you’ve just enhanced the value of that or you can, if you want to push it to net zero, you can increase the volume by blending other conventional barrels into it.

            So it’s really taking off. If you think about it, these are truly the transition fuels, right? It’s not a big burden on infrastructure. The airlines, the trucking industry, rail, they all need large quantities of liquid fuels, and they’re all trying to solve that problem, and we think we got a pretty good solution to that issue with the blue barrel.

David Deckelbaum:

A blue barrel contract, is that at a pretty decent stage right now? How do you think about structuring those off take agreements?

Matt Dahan:

Well, that’s a good question. Certainly, we’re in the education phase of things, right? You saw us announce at the end of the year that we actually got a third party to look at our two biggest EOR projects that use industrial CO2 to look at their carbon intensity from cradle to grave. So we’re happy they came back with stuff that was consistent with what we were doing in-house.

            Then once you get past the fact that, “Hey, okay, yes, it’s a fossil fuel, but it’s got a better carbon story than a lot of fuels out there, and it ideally does deserve a premium,” so how do you govern that? You’ve seen some announcements about single shipment of carbon neutral crude or the recent announcement from Oxy and SK on oil in the future coming out of some of their EOR projects, relatively small volumes. Currently, I think Denbury’s around 13,000-14,000 barrels a day of what we’d call blue oil. That number we see nearly doubling with CCA when it hits its peak here in a few years out.

            So we think we got the lion’s share of the product, and then it’s just a question of what’s the best way to market that. Do we bring those to a single point for refinement? Do we market it and get that premium on paper? That’s yet to be worked out. I think you could look at what would be the floor of a premium is probably tied to what you could get on the carbon offset markets.

David Deckelbaum:

That’s interesting.

Matt Dahan:

Then I think competition will drive that premium higher.

David Deckelbaum:

How do you think about CCUS? I know we’re almost at our time here, but, Chris, I think you talked about earlier there’s a tremendous amount of free cash coming out of the EOR business. It seems like Denbury’s carving a niche within this future E&P business model that obviously serves some of the climate initiatives, serves some of the carbon reduction and offset goals that are out there while also having what appears to be a growing oil business that’s beholden to this capital return model. Do you think about this? How do you think of CCUS complementing that free cash model out of the E&P business and how do you thread that needle here?

Chris Kendall:

You bet, and I think threading the needle is the right expression there, David. I think back on a conversation I had with one of our key investors last year, and he said, “When I look at Denbury, I think that I’m buying a value business and getting a growth business wrapped into it,” and that’s the way that I like to think about it. We have an aspect of what we do that is certainly a value business with what we can do with EOR, the growth that we’ll have in EOR, and then some of the other exciting things about the nature of the barrels that we produce like Matt just discussed.

            So that on its own would really set you up, especially in today’s oil environment or, honestly, even in prices well below today’s into a good position to be able to take on a profile like many of our peers in the E&P industry, but when we wrap in the CCUS opportunity, then it gets very interesting to me because CCUS will require capital, no doubt. Much of our capital is already spent, but there will be plenty yet to come a bit this year. Stepping up is we’re developing new sites and new projects in the coming years.

            So I see a period where, certainly, what I believe is the right priority for Denbury is to take any free cash that’s needed for investment in CCUS and pointed in that direction as a priority. I do think a couple things I’d add to that, we could have a case where ultimately the free cash is such that we can do everything we need with CCUS and have remaining free cash that we could then point towards a form of shareholder return, whether it’s share buybacks or dividends, for example. Certainly, we want to take care of that first priority initially.

            Then as I think further over the next several years as we start to see the first CCUS volumes flow through our system, which we expect will be under this new 45Q program, we expect that will be in the 2024 timeframe ramping throughout the remaining years of the decade, we see a point where it will also be driving free cash from that business.

            So I think that in the near term prioritizing CCUS investment is the right thing to do, and with the potential for additional free cash available to look at a returns policy. Longer term, I think that the business will be very strong in both sides there and we’ll be able to look even further at that.

David Deckelbaum:

Yeah, no, absolutely. It’s certainly a unique profile. Maybe we can close with a two-part question that is certainly talking about as it relates to Denbury, the things that you’re most excited about or most looking forward to along the CCUS milestones in the next year or so, but also as Denbury is in a unique situation, described so many of the reasons why just around having this legacy business with an enormous amount of CO2 pipeline infrastructure, which obviously is difficult to come by and you can’t retrofit old pipelines, but we are seeing a lot of initiatives I think from earnest places where people want to get involved in this industry.

            I guess as you look across the competitive landscape, what are the key risks do you think that are facing the industry progressing some of the CCUS ambitions because, certainly, it seems like we need all hands on deck here if we’re going to hit some of these CO2 reduction goals?

Chris Kendall:

Absolutely. We need all hands on deck. To get anywhere close to any of these goals, it will take a lot to get there, and it’s not just Denbury. Having said that, David, you asked what I’m most excited about as I think about the future, and what I think about is that the coming months and years will make it, in my view, very clear that Denbury will be the world leader in CCUS. With the great starting point that we have today and our pure strategic focus on building this and being a great partner to industrial emitters and actually making a difference in CCUS on a scale that is meaningful, that’s exciting, and it’s something that complements our existing business perfectly and our ability to have our employee base work across lines of EOR and CCUS and what all that can become is just incredibly exciting when we look at that opportunity set.

            Honestly, just the pure focus that we have on this and our ability to really be a partner with industry and making it happen is incredibly energizing. I think we’re going to see that just become more and more clear as time goes on here. So that’s exciting.

            The key risks that I think about, and I touched on them a bit on an earlier question, really thinking about just with so many potential entrants into the CCUS business, just making sure that we keep a very high standard, technically and operationally, for how CO2 is put underground.

            Honestly, like anything in America today, there are people who don’t like something about what anybody is doing, and there are some who honestly don’t like CCUS. I think that it’s a pretty small proportion of the population, but, David, we need to prove them wrong. We need to prove them wrong through excellent operations, through safe operations, and making an impact on how much pure volume of CO2 we’re able to keep out of the atmosphere. That will get there, but it’s going to take discipline and some rigor to make sure that the industry, as it evolves, it stays at that level.

David Deckelbaum:

Chris and Matt, I really appreciate the time. Wish both you and the Denbury organization a tremendous amount of success going forward. This is a pretty large mission that the world has in front of us, and I appreciate your time explaining some of the solutions that you have available and helping walk our audience through your story.

Chris Kendall:

Sounds great, David. Thanks for giving us the time. I really enjoyed it.

Matt Dahan:

Thanks, David.

David Deckelbaum:

Thanks, guys. Take care.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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