Morgan Stanley
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  • Mar 4, 2022

Is Carbon Capture the Energy Sector's Answer to a Net-Zero Future?

Carbon capture and storage could represent one of the best solutions for achieving a net-zero future while still meeting the world’s growing energy needs.

As the world struggles to wean itself off fossil fuels, carbon capture and storage (CCS) could represent a viable solution for transitioning to a net-zero future.

While the idea of preventing carbon—a common byproduct of energy-related and other production processes—from being released into the atmosphere isn’t new, the urgency many governments, corporates and interest groups feel to decarbonize by 2050 is creating opportunities for alternative applications, such as direct air capture. The push is also opening doors for established players—namely energy companies—to improve their CCS capacity and efficiency, create new revenue streams and lower their own emission footprints.

“We see this potentially supporting a premium for 'sustainable' oil and gas volumes—and in a more bullish scenario, extending demand for these commodities, which represent more than a $4 trillion global market," says Devin McDermott, Equity Analyst and Commodities Strategist. "This could present a 'free option' around successful execution of low-carbon growth."

Natural gas processing currently accounts for most carbon captured.

Source: Global CCS Institute, Morgan Stanley Research

U.S. Energy Leads the Way

The U.S. energy sector is already ahead of the curve when it comes to carbon sequestration. In fact, for decades the gas industry has captured carbon and transported it by pipeline to oil fields to be used for enhanced oil recovery.

Consequently, more than 50% of the world's carbon capture capacity is in the U.S., and that share could increase. “CCS has received a wave of investment from U.S. Energy building on already established market leadership," says McDermott. “The sector is well-positioned to scale CCS, underpinned by key competitive advantages, including geologic expertise and ample access to sequestration capacity."

Based on existing infrastructure, approximately 1.2 billion tonnes per year of carbon can be captured and stored in the US. at a cost of $150/tonne or less, according to the National Petroleum Council. This represents nearly 25% of total US emissions and nearly half of all emissions from stationary sources, and it assumes no further cost reductions.

Still, there is significant room for reductions, including the build-out of shared infrastructure, development learnings, and modular design.

The U.S. represents more than half of global carbon capture capacity.

Source: Global CCS Institute, Morgan Stanley Research

Creating a New Category of Clean

One of the biggest potential customers could be the energy companies themselves. At the same time carbon capture could create a new category of “sustainable” oil and gas, it provides additional avenues for growth related to synthetic fuels, aggregates and chemicals.

In fact, one underappreciated opportunity is to apply carbon capture at large stationary sources, such as fossil fuel–fired power plants. They account for 50% of U.S. carbon emissions and some are well suited for CCS. “While these sources are distributed across the country, many are located near geologic formations suitable for storage," says McDermott. Clusters of stationary emissions, such as in the Gulf Coast, offer the opportunity for large-scale carbon hubs that use shared infrastructure and storage facilities.

The Next Frontier: Direct Air Capture

Capturing carbon at large stationary sources addresses only part of the problem. Sequestering carbon from planes, automobiles, commercial buildings and other sources will require different technologies.

Direct air capture (DAC), while still nascent, may hold the key to carbon neutrality. Generally speaking, DAC pulls in atmospheric air and uses a series of chemical reactions to extract carbon dioxide and convert it into a pure, compressed form that can then be stored underground or reused.

Sourcing from ambient air, which has a low relative concentration of carbon, requires expensive and sophisticated technology than traditional CCS. Exactly how costly is still not clear, but progress toward commercial development provides visibility—and viability.

“As corporates increasingly pledge to reduce emissions, we believe the carbon offset market could become a growing source of monetization for DAC," says McDermott.

For more Morgan Stanley Research on carbon capture and storage, ask your Morgan Stanley representative or Financial Advisor for the full report, “The Turbulence of the Transition" (Nov. 8, 2021). Plus, more Ideas from Morgan Stanley's thought leaders.