PET-460 · Lesson 12 of 12 · 20 min

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.

The Matagorda Bend development basis, drawn from the earlier lessons.
ElementBasisLesson
CO₂ captured, avoided3.00 Mt/yr captured; 2.73 Mt/yr avoided1–3
Stream specification95% CO₂ minimum, 50 ppmv water, 10 ppmv O₂4
Trunk lineNPS 16, 70 miles, 2,175 to 1,970 psia5
Storage formationFrio, 6,000 ft, 150 ft net, 26% porosity, 300 mD6
Capacity (DOE, hub area)21 / 82 / 225 Mt at P10 / P50 / P908
Wells4 injectors sharing the rate, any 3 able to carry it; 2 deep and 4 above-zone monitors8, 10
Pressure at worst injector, 25 yr450 psi against 1,146 allowed (open formation)9
Transport and storage capital700 million USD12
Policy support per metric ton93 USD for 12 years, 66 averaged over 2511

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.

Break-even tariff, NPV at the offered tariff and sensitivities for the transport and storage business.
# 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}")
Output
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.

A tornado chart of break-even tariff in US dollars per metric ton around a base of 34.6. Capital +30 percent raises it to 41.8 and capital −20 percent lowers it to 29.9. A one-year delay raises it to 36.6. If the smallest source never joins it rises to 39.6. With two sources only it rises to 55.8. If third parties fill the line to 5 Mt per year it falls to 25.6.
Sensitivity of the hub's break-even tariff. Losing volume costs more than a capital overrun.

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.

Worked problem

A simple levelized tariff

Check the break-even tariff with a levelized calculation. Transport and storage capital net of any capital credit is 700 million US dollars. Fixed costs are 28 million a year, the levy or assurance is 0.5 per metric ton, and steady throughput is 3.0 Mt/yr for 25 years. Use a capital recovery factor of 0.0937 for 8 percent over 25 years.

Show solution
  1. Annual capital charge = 700 × 0.0937 = 65.6 million.
  2. Annual cost = 65.6 + 28 = 93.6 million.
  3. Tariff = 93.6 / 3.0 + 0.5 = 31.7 per metric ton.

Answer: About 32 US dollars per metric ton, lower than the code's 34.6 because the levelized calculation ignores the two construction years, the ramp-up and closure costs. Simple checks like this catch errors in a full cash flow model, but they flatter the project.

Risks

The Matagorda Bend risk register, abbreviated.
RiskConsequenceMitigation
Storage capacity at the low endtoo little room for 75 Mt in the hub areatest well and injection test before FID; reserve second area
A source does not build capturebreak-even tariff rises by 15–60%take-or-pay capacity contracts; seek third-party sources
Credit value lower than assumedemitters cannot afford the tarifflong-term offtake for credits; tariffs stepped after year 12
Permit delayone year adds about 2 per metric tonearly regulator engagement; complete application
Pressure interference from other projectscapacity and injection limits reducedjoint modeling with neighbors; brine extraction location reserved
Legacy well leakageremediation cost, credit loss, reputationwell inventory, remediation before injection, above-zone monitoring
Community oppositiondelays to pipeline and wellsearly engagement, shared monitoring data, community benefits

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.

Common mistakes

  • MistakePresenting a single NPV without ranges or volume sensitivities.

    InsteadShow the break-even tariff and its sensitivity to volume, capital, delay and price; volume often dominates.

  • MistakeCommitting to construction before storage is appraised.

    InsteadStage the investment: appraisal first, with clear criteria for proceeding or stopping.

  • MistakeTreating the hub's economics apart from the emitters'.

    InsteadCheck that each source can afford the tariff with its capture cost and policy support; the hub fails if they do not join.

  • MistakeHiding uncertainty to make the case look stronger.

    InsteadState ranges and conditions; decision-makers fund well-defined uncertainty reduction.

Summary and key terms

  • A storage hub plan combines capture by emitters with transport and storage by an operator paid through tariffs.
  • Storage appraisal is the longest lead item and comes first in the schedule.
  • The break-even tariff is most sensitive to volume; anchor contracts and third-party sources matter more than capital accuracy.
  • Emitters' margins depend on capture cost, tariff and policy support; high-purity sources carry the early hub.
  • The recommendation stages investment: appraisal with clear go and stop criteria before development.
Transport and storage tariff
The fee per metric ton emitters pay the hub operator.
Take-or-pay
A contract under which the customer pays for reserved capacity whether or not it uses it.
Break-even tariff
The tariff that gives a net present value of zero at the chosen discount rate.
Decision gate
A planned point where the project proceeds, changes or stops based on set criteria.
Anchor source
An emitter whose committed volume makes a hub viable.
Appraisal
Work that reduces subsurface uncertainty before a development decision.

Practice problems

Work each problem on paper first, then reveal the answer to check.

  1. Which sensitivity in the tornado chart has the largest effect, and what does it imply?

    Show answer

    Losing sources (two sources only); volume commitments must be secured before development.

  2. Why might a high-purity source accept a tariff that a flue gas source cannot?

    Show answer

    Its capture cost is much lower, so the same support and tariff leave it a positive margin.

  3. Name two criteria the team set for a final investment decision.

    Show answer

    P50 capacity of at least 75 Mt confirmed by the test well; signed agreements for at least 2.4 Mt/yr; confirmed credit arrangements.

  4. Why does the levelized tariff come out lower than the cash flow model's break-even?

    Show answer

    It ignores construction years, ramp-up and closure costs.

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