Kinder Morgan (KMI 1.95%) formed a new business unit in 2021 to capitalize on commercial opportunities as the global economy transitions to lower-carbon energy. The initial focus of its new Energy Transition Ventures group has been building a renewable natural gas platform. It has also been evaluating opportunities in other sectors, including carbon capture, utilization, and sequestration (CCUS).
The company recently took its first step toward exploiting that potentially massive opportunity. It's leveraging its existing infrastructure and expertise in carbon dioxide to capitalize on the first of what could be many opportunities in the space.
NYSE: KMI
Key Data Points
Capturing its first opportunity
In its fourth-quarter earnings report, Kinder Morgan announced that it had signed a deal with the Red Cedar Gathering Company (a 51/49 joint venture between the Southern Ute Indian Tribe Growth Fund and Kinder Morgan) to provide carbon dioxide services on its existing Cortez Pipeline. The company will also permanently sequester the captured carbon at a well in the Permian Basin.
The partnership will enable Red Cedar to move forward with a carbon capture project at two natural gas treating facilities in Southern Colorado. The project will capture up to 400,000 metric tons of the greenhouse gas annually.
The company's management discussed the project on its fourth-quarter earnings call. It noted that the project is relatively small. The company would move about 20 million cubic feet of carbon dioxide per day, a fraction of the over 900 million cubic feet per day currently flowing through Cortez.
This large carbon dioxide pipeline moves the gas from naturally occurring underground formations in the Rockies to the Permian Basin for use in enhanced oil recovery. But despite the small scope, the company expects to earn attractive returns on the project comparable to its traditional energy businesses.
CEO Steve Kean said:
This is a good opportunity for us. CCUS is going to have to be part of the solution over the long term. And we have the capability to transport it and put it in the ground and keep it in the ground. And so, there's a good longer-term opportunity there. And this is a highlight that you can do these things and you can do them economically. And so, we're happy about this transaction. It's the first, we hope, of many, but there are a number of things that have to be worked out.
Drilling down into the CCUS opportunity for Kinder Morgan
Oil companies believe CCUS will emerge as a major global market in the coming years. ExxonMobil (XOM 0.78%) sees it becoming a $4 trillion market by 2050, while Occidental Petroleum believes it could be a $3 trillion to $5 trillion opportunity.
Given the current costs, most carbon capture opportunities aren't yet economical. But upcoming tax credits will make it economical for more facilities:
Image source: Kinder Morgan.
That is leading energy companies to start sanctioning CCUS projects with solid economics. For example, Exxon signed a landmark agreement to capture and transport carbon dioxide from an ammonia factory that CF Industries (CF +2.79%) is building in Louisiana.
This largest-of-its-kind project would capture up to 2 million metric tons of carbon dioxide annually, the equivalent of replacing 700,000 gasoline-powered cars with electric vehicles. It would enable CF Industrial to market "blue" ammonia, allowing it to supply that low-carbon energy source to help decarbonize other industries.
Meanwhile, refining giant Valero (VLO +1.18%) is working with investment behemoth BlackRock and midstream company Navigator Energy Services on an industrial-scale carbon capture pipeline system in the Midwest. Valero is the anchor shipper on the system backed by carbon captured at its ethanol plants. The project could store up to 5 million metric tons of carbon dioxide per year.
With vast existing infrastructure and expertise, Kinder Morgan is in an excellent position to capture these types of CCUS opportunities as they emerge. As costs come down and credits take effect, more potential projects will become economically viable.
The first of what could be many opportunities
Kinder Morgan is working to capture its first CCUS project. While it's a small undertaking, it would earn attractive returns. The project would also put the company in an even better position to capitalize on the potentially enormous CCUS market, which could become a key long-term growth driver.
