WSJ: Small Oil Producer Stands to Win Big From Climate Bill

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Middling oil producer Denbury Inc. emerged from bankruptcy in September 2020 with a collection of aging wells, pipelines to move around carbon dioxide and uncertain prospects.

Today, the Dallas-based company is one of the big winners of the Biden administration’s signature climate bill.

Denbury took on significant amounts of debt over the past decade acquiring oil properties and building out the pipelines, which ferry CO2 to depleted oil fields and coax out more crude. By 2019, debt equivalent to around 11 times its earnings was weighing on the producer’s finances, before Covid-19 lockdowns and falling oil prices pushed it into bankruptcy.

The company has since expanded into waste management, with plans to carry emitters’ CO2 through hundreds of miles of pipelines and bury it in rocky reservoirs—for a fee. Its stock is trading around $88—more than four times its price when Denbury relisted in late 2020. And analysts say that the company’s foothold in the carbon business makes it an attractive acquisition target for large oil companies.

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Behind Denbury’s renaissance: billions of dollars of public money juicing carbon capture. Tax credits in the Inflation Reduction Act, which President Biden signed into law last year, reward companies that store CO2 underground. Denbury won’t receive public funding directly in most cases—it will go to customers who capture the carbon—but the company will charge customers for handling their emissions.

Spurred in part by the incentives, Exxon Mobil Corp., Chevron Corp. and Occidental Petroleum Corp. have said they would spend billions of dollars increasing their carbon-collecting capacities this decade. Few companies, however, have as much of a head start as Denbury, analysts said.

About 900 miles of pipelines Denbury owns on the Gulf Coast snake through manufacturing hubs that emit hundreds of millions of metric tons of CO2 every year, and past future plants that will capture emissions to churn out low-carbon fuel. Crop nutrient company Nutrien Ltd., hydrogen company Clean Hydrogen Works and Mitsubishi Corp. have already signed large contracts with Denbury to gather CO2 from planned facilities.

Denbury’s pivot was made possible, in part, because starting a couple of decades ago it poured more than $1 billion into pipelines that can transport carbon, executives and analysts said. When it exited bankruptcy in late 2020, it had a clean balance sheet and 1,300 miles of pipelines in six states, allowing it to produce about 45,000 barrels of oil a day in the most recent quarter.

About a year later, the bipartisan infrastructure package funneled about $10 billion into carbon-capture projects. Then, in 2022, the Inflation Reduction Act, or IRA, increased credits for industrial carbon capture and storage to $85, up from $50. Credits for capturing CO2 and using it in a process called enhanced oil recovery, in which carbon is injected into aging reservoirs to push out more oil, rose to $60 a metric ton, up from $35.

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Still, the economics of trapping huge volumes of carbon underground remain unclear, and the feasibility of doing so on a large scale, remains unproven. Moreover, some environmental groups argue that carbon capture prolongs the use of fossil fuels and redirects investments away from clean energy.

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Historically, Denbury had used CO2 almost entirely for enhanced oil recovery. Now, it says it wants to build something like a highway for CO2 on the Gulf Coast. It says it expects to find enough customers to ship and store between 50 million and 70 million metric tons of CO2 produced at industrial sites by 2030—roughly what it handled in 2021 in its enhanced oil recovery business—and deposit it in storage sites and oil fields, from Alabama to Houston. The company has secured seven underground storage sites with the potential to trap 2 billion metric tons of the gas, it said.

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Until now, Denbury has been paying companies such as Nutrien and Air Products & Chemicals Inc. to take their CO2 for enhanced oil recovery. Now, Nutrien will pay Denbury to take and store 1.8 million metric tons of the gas a year from a planned ammonia plant in Louisiana, according to the companies.

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The new business faces challenges, said analysts. For instance, obtaining permits to pump CO2 into geological reservoirs can take between 18 and 24 months, said Brian Velie, an analyst at Capital One Securities, creating uncertainty about when Denbury can start sequestering gas underground.

A Denbury spokesman said that the company was working with federal agencies to have sequestration ready by 2025.

The prospect of delayed cash flows could also damp the appetite of investors, said Gabriele Sorbara, an analyst at investment firm Siebert Williams Shank & Co.

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