Capstone: a storage hub project

Six months after Lena's first question, the study team gathered to assemble the answer for Prairie Crest's board. Ethan had the subsurface results, Sofia the pipeline and compression design, Gwen the capture estimates for each source, Amara the monitoring plan and Nadia the regulatory path and the draft contracts. Farid set the rule for the work. “The board will not read eleven reports. They want to know three things: can it be done safely, what does it cost and earn, and what do we have to decide now. Everything else is an appendix.” This lesson follows the team as it puts the pieces together into a development plan and a recommendation, using the methods of the previous lessons.

The scope

The Matagorda Bend storage hub as studied has four parts. Capture is owned by the emitters: the Brazosport hydrogen plant captures about 1.2 million metric tons a year from shifted syngas; the Tidewater ammonia plant compresses about 0.9 million metric tons a year from its high-purity vent; the Sargent gas plant compresses about 0.5 million metric tons a year from its amine units; and the Brazos Bend refinery heaters add an amine plant for about 0.4 million metric tons. Transport, owned by Prairie Crest, consists of short laterals, compression at the larger sources, a central pump station and an 16-inch trunk line 70 miles long. Storage, also owned by Prairie Crest, is in the Frio Formation at about 6,000 ft, through four injectors that normally share the rate, any three of which can carry it, with two deep monitoring wells, four above-zone monitoring wells and the surface and seismic program of Lesson 10. The total is 3 million metric tons a year for 25 years, about 75 million metric tons, with the trunk line sized for growth to 5 million.

Schedule and phases

Storage takes longest to prove, so the schedule starts there. Appraisal, covering 3D seismic, a stratigraphic test well, an injection test and laboratory work, takes about two years. Front-end engineering of the pipeline and storage facilities overlaps its second year. The regulatory application, for a Class VI permit from the RRC, follows the appraisal results, and approval is assumed to take about two years. Construction of the trunk line, pump station and wells takes about two years after a final investment decision. That puts first injection about six years from the start of appraisal, with the high-purity sources first and the flue gas sources joining as their capture plants are built. The emitters' own capture decisions run in parallel and must be timed so that CO₂ arrives as storage becomes ready; a hub with no CO₂ or CO₂ with no hub both lose money.

Economics of the hub

Prairie Crest's business is transport and storage, paid by a tariff per metric ton. Its costs are the capital of the pipeline, pump station, wells and facilities; fixed operating costs, including monitoring; a financial assurance cost per metric ton; and closure costs at the end. There is no capital credit for transport and storage; 45Q is claimed by the emitters, who pay the tariff out of it. The code finds the tariff that gives a net present value of zero at an 8 percent real discount rate, the hub's NPV at the tariff offered to emitters, and the sensitivities.

# Transport-and-storage hub economics: break-even tariff, NPV at the offered tariff, and sensitivities.
# Real terms, 8% discount rate, local currency in millions. Illustrative numbers for the capstone.
SI = False     # True: Canadian hub (ITC on transport and storage capital), False: US hub (no ITC; emitters take 45Q)

if SI: P = dict(capex=750.0, itc=0.375, opex=24.0, mmv=6.0, closure=90.0, tariff=30.0, cur="million CAD", fund=0.5)
else:  P = dict(capex=700.0, itc=0.0, opex=22.0, mmv=6.0, closure=80.0, tariff=36.0, cur="million USD", fund=0.5)
R, LIFE = 0.08, 25
ramp = [1.5, 2.5] + [3.0] * (LIFE - 2)                 # Mt/yr injected in operating years 1..25

def npv(tariff, capex=None, vols=None, delay=0):
    capex = P['capex'] if capex is None else capex; vols = ramp if vols is None else vols
    cf = [-capex * 0.4, -capex * 0.6]                  # two construction years
    cf += [0.0] * delay
    for i, v in enumerate(vols):
        c = v * tariff - P['opex'] - P['mmv'] - v * P['fund']    # fund: post-closure stewardship levy per metric ton
        if i == 0: c += capex * P['itc']               # ITC received in the first operating year
        cf.append(c)
    cf += [-P['closure'] / 3] * 3                      # three years of closure, plugging and monitoring
    return sum(c / (1 + R) ** t for t, c in enumerate(cf))

def breakeven(**kw):
    lo, hi = 0.0, 200.0
    for _ in range(60):
        mid = (lo + hi) / 2
        lo, hi = (mid, hi) if npv(mid, **kw) < 0 else (lo, mid)
    return (lo + hi) / 2

unit = "CAD/t" if SI else "USD/t"
print(f"Capital {P['capex']:.0f} {P['cur']}, ITC {P['itc']:.1%}, fixed costs {P['opex'] + P['mmv']:.0f} {P['cur']}/yr")
print(f"Break-even tariff: {breakeven():.1f} {unit}")
print(f"NPV at the offered tariff of {P['tariff']:.0f} {unit}: {npv(P['tariff']):,.0f} {P['cur']}")
print("\nSensitivities (break-even tariff):")
print(f"  capital +30%                          {breakeven(capex=P['capex'] * 1.3):6.1f} {unit}")
print(f"  capital -20%                          {breakeven(capex=P['capex'] * 0.8):6.1f} {unit}")
print(f"  one-year start-up delay               {breakeven(delay=1):6.1f} {unit}")
print(f"  smallest source never joins (2.6 Mt/yr) {breakeven(vols=[1.5, 2.2] + [2.6] * (LIFE - 2)):4.1f} {unit}")
print(f"  two sources only (1.8 Mt/yr)          {breakeven(vols=[1.2, 1.8] + [1.8] * (LIFE - 2)):6.1f} {unit}")
print(f"  third parties fill to 5 Mt/yr, year 8 {breakeven(vols=ramp[:7] + [5.0] * (LIFE - 7)):6.1f} {unit}")
# emitter's view: capture cost + tariff against the policy value per metric ton (from Lesson 11)
cap_cost = 72.0 if SI else 55.0
for label, support in ((("whole project", 101.0),) if SI else (("credit years 1-12", 93.0), ("whole 25 years", 66.0))):
    m = support - cap_cost - P['tariff']
    print(f"Emitter margin, {label}: support {support:.0f} - capture {cap_cost:.0f} - tariff {P['tariff']:.0f} = {m:+.0f} {unit}")

Capital 700 million USD, ITC 0.0%, fixed costs 28 million USD/yr
Break-even tariff: 34.6 USD/t
NPV at the offered tariff of 36 USD/t: 38 million USD

Sensitivities (break-even tariff):
  capital +30%                            41.8 USD/t
  capital -20%                            29.9 USD/t
  one-year start-up delay                 36.6 USD/t
  smallest source never joins (2.6 Mt/yr) 39.6 USD/t
  two sources only (1.8 Mt/yr)            55.8 USD/t
  third parties fill to 5 Mt/yr, year 8   25.6 USD/t
Emitter margin, credit years 1-12: support 93 - capture 55 - tariff 36 = +2 USD/t
Emitter margin, whole 25 years: support 66 - capture 55 - tariff 36 = -25 USD/t

The break-even tariff is about 35 US dollars per metric ton, and at the offered 36 the hub earns a modest positive NPV of about 38 million US dollars. The sensitivities, shown in the tornado chart, tell the story the board needs to hear. Volume risk dominates: if only two sources join, the break-even tariff rises by about 60 percent, far more than the effect of a 30 percent capital overrun. Third-party volumes, filling the trunk line to 5 million metric tons a year from year 8, would cut the break-even by about a quarter. A one-year delay costs about two dollars per metric ton.

The emitters' side is tighter. During the 12 credit years, 93 US dollars of support against an average capture cost of 55 and a 36-dollar tariff leaves the average emitter a margin of about 2 dollars per metric ton; over 25 years the margin is negative unless policy or markets supply value after the credits end. The high-purity ammonia and gas plant sources are comfortably profitable; the refinery heaters are not. That asymmetry is the central commercial fact of the hub: the sources that make the hub viable are the cheap ones, and the expensive ones need more support than current policy reliably gives.

Risks

Farid insisted on ranking the risks by what the next stage could do about them. The capacity, injectivity and seal risks could be reduced quickly with a test well and seismic, at about 40 million US dollars. The volume and credit risks could not be reduced by Prairie Crest at all; they depended on the emitters' decisions and on governments. That distinction shaped the recommendation.

The recommendation

The team's recommendation to the board was to proceed to appraisal, not to development. It asked for approval to shoot the 3D seismic survey, drill and test one stratigraphic well, complete the laboratory program and build the simulation model, at a cost of about 40 million US dollars, over two years. In parallel, Nadia would negotiate capacity reservation agreements with the four sources, with a target of at least two signed take-or-pay agreements, including the Brazosport hydrogen plant, before a decision to file the Class VI application and begin front-end engineering. The final investment decision would require the test well to confirm a P50 capacity of at least 75 million metric tons in the hub area, signed agreements covering at least 2.4 million metric tons a year, and confirmation of the credit and tax credit transfer arrangements the emitters needed.

Lena asked one more question. “What would make you recommend stopping?” Ethan had prepared for it. “If the test well shows a much thinner or tighter Frio than the regional data, or the seal has a sandy interval over a large area, or fewer than two sources sign, we stop and keep the data. The appraisal money buys the answer. It does not commit us to the rest.” The board approved the appraisal. That is how most storage projects begin: not with a decision to build, but with a decision to find out, staged so that each step reduces the largest remaining uncertainty for the least money.

Presenting the result

The team's board presentation followed a pattern worth copying. The first slide stated the recommendation and the cost of the next step. The next three gave the evidence on the three questions: the storage case, with the capacity range, pressure margin and seal; the economics, with the break-even tariff, the tornado chart and the emitters' margins; and the risks, with what the next stage would and would not resolve. The last slide set out the decision gates and the conditions for each. Every number on the slides could be traced to a calculation in the appendix, and every calculation stated its assumptions and range. A board that understands the uncertainty is more likely to fund the work that reduces it.