Meld. St. 33 (2019–2020)

Longship – Carbon capture and storage — Meld. St. 33 (2019–2020) Report to the Storting (white paper)

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6 Benefits and costs of Longship

6.1 Benefits

Longship’s goal is to contribute to Norway and Europe achieving their long-term climate targets at the lowest possible cost. The purpose of the benefit realisation work is to enable the project to generate the greatest possible benefits. Section 3 described market failure for the development of carbon capture and storage (CCS) and showed the potential cost reductions that would follow from more CCS projects being developed. This section deals with how Longship will address market failure and contribute to enabling cost reductions for subsequent projects.

The potential benefits of Longship can be divided into two main categories: 1) Climate effects and 2) Business development. These categories can also be seen in the impact goals, where climate effects correspond to impact goals 1–3 and business development corresponds to impact goal 4.

The extent of these benefits will depend, among other things, on future European climate policy and whether the emission reduction targets are followed up with policy instruments and measures. The business development effects are thus dependent on the climate effect being recognised and in demand. At the same time, successful demonstration of a full value chain for carbon capture, transport and storage will demonstrate a realistic solution for reducing emissions from important industries that have no alternatives to CCS. Longship will therefore make it easier to follow up the political ambitions for emission reductions with concrete measures, and therefore contribute to achieving Europe’s climate targets.

6.1.1 Climate effects

The climate effects of Longship come both directly in the form of emission reductions in Norway and indirectly through cost reductions generated by demonstration and development of CCS, and the development of infrastructure for subsequent projects; see section 3 on market failure.

The direct national emission reductions from the project will initially be around 400,000 tonnes of CO2 per year when Norcem’s capture project becomes operational, and will increase to around 800,000 tonnes of CO2 if Fortum Oslo Varme’s project is implemented as well. Of these, around 200,000 tonnes of CO2 from Fortum Oslo Varme can be counted under Norway’s obligations to the EU on reductions in sectors not included in the European Emissions Trading System (EU ETS). Norcem’s cement factory falls under a sector that is subject to the EU ETS and its emission reductions under the system will in time be countered by increased emissions in other areas within the maximum emissions stipulated by the EU ETS.

Indirectly, the project will generate climate effects by demonstrating a full and flexible CCS value chain, and the establishment of CO2 transport and storage infrastructure will contribute to reducing costs for subsequent projects [41]. This is illustrated in Figure 3.1. Longship contributes to reducing costs in several ways.

Firstly, learning and technology development from the project at Norcem and, if applicable, Fortum Oslo Varme, will contribute to reducing costs and risk for subsequent projects. DNV GL’s report on expected CCS cost reductions estimates reductions of around 10 per cent for each cumulative doubling of the CO2 volume captured [41]. Establishing carbon capture will contribute to this process. The cost reduction potential from the first projects is also greater than is the case when more projects have been developed. As such, the first projects contribute a relatively greater share of the cost reductions [25].

Secondly, establishing CO2 transport and storage infrastructure will also contribute to reducing costs. Establishing CCS infrastructure will also assure actors with industry emissions considering carbon capture that they can actually store CO2. It is therefore necessary to establish infrastructure in order to establish a market for CCS. A number of actors planning carbon capture in Europe are considering storing CO2 in a Norwegian storage facility. Proximity to the CO2 storage facility and the flexible transport solutions that sea transport provides, make Northern Lights’ infrastructure attractive for a number of emission sources around the North Sea. The infrastructure Northern Lights establishes has the potential to trigger carbon capture projects both in Norway and the rest of Europe.

Thirdly, establishing a carbon capture facility at Norcem with transport and storage provided by Northern Lights will also demonstrate a full value chain. A successful project will reduce the risk for subsequent projects, both because they will see that the solutions actually work and because specifications and procedures have already been developed. A failed project with high costs can have a negative effect since it may scare off future projects.

These effects enable industry to direct their efforts towards developing carbon capture, and more testing and utilisation of technology will result in a faster innovation cycle. More users can shorten the innovation process for new technologies, and new technologies can lower the threshold for using carbon capture technologies. The road towards achieving a critical mass of carbon capture projects that can create a cycle of technology development and use is long, but can be shortened by establishing a full carbon capture, transport and storage value chain.

International cooperation is imperative to solving global climate challenges and the Norwegian Government wants Norway to be a driver in international climate work.

Establishing a full carbon capture, transport and storage value chain will also demonstrate that CCS is an available climate measure, and will lower the threshold for the realisation of new carbon capture projects that can connect to Northern Lights. This will make it easier to follow up policy measures and instruments because the solutions have been implemented and are available. As such, it could be argued that the project also has a vital political demonstration effect.

Based on DNV GL’s analysis and the IEA’s expected CO2 price for the power and industry sectors in advanced economies in 2030 and 2040, CCS may be profitable from a business economics perspective between 2030 and 2040, depending among other things on how many carbon capture facilities have been established [41].

Investment in hydrogen is a key element of achieving the targets of the European Green Deal for a climate neutral Europe. Hydrogen can contribute to lower emissions from industry, transport, power production and buildings across Europe.

The European Commission launched a new hydrogen strategy on 8 July 2020 [57]. The strategy sets out how the EU can implement this potential through investments, regulation, market development, research and innovation. In the strategy, the EU prioritises hydrogen produced from renewable power, but in the short and medium term, there will be a need for large quantities of hydrogen from other sources.

Around 90 per cent of all hydrogen currently produced in Europe comes from reformation of natural gas without CCS. For the sake of comparison, only 4 per cent of hydrogen is produced from electrolysis of water, and only parts of this electrolysis is based on clean renewable energy.

Establishing CO2 storage infrastructure will make it possible to produce hydrogen with almost no emissions in Europe, produced from natural gas with CCS. Access to storage infrastructure has the potential to accelerate European hydrogen initiatives and reduce high CO2 emissions from existing and future hydrogen production. Gas produced efficiently with low emissions on the Norwegian continental shelf could contribute to covering the need for gas to produce low-emission hydrogen in Europe.

The Government presented its hydrogen strategy on 3 June 2020. The strategy, which is the first of its kind in Norway, sets out the basis for further work on hydrogen. Longship makes it possible to produce hydrogen from natural gas with low overall emissions. Longship is thus an important contribution to the success of the EU’s ambitious hydrogen strategy. The Government will follow-up the hydrogen strategy and Longship with a dedicated roadmap for hydrogen.

6.1.2 Business development

In addition to the climate effects described above, Longship may also have a positive effect on business development in Norway [9]. How such effects increase value creation in Norway is difficult to measure and will depend, among other things, on whether the world and Europe implement policies and measures in line with the global climate goals of the Paris Agreement. Longship aims to contribute to developing a measure that is necessary to achieve the global climate targets at the lowest possible costs.

It will be extremely challenging for the EU to achieve its long-term target of climate neutrality by 2050 without CCS being adopted in many areas. CCS must also contribute to large-scale negative emissions [17, 18].

Norway is the only country in Europe that currently stores CO2. We have developed great expertise, and Equinor is at the international forefront of offshore CO2 storage. Other European countries considering or planning CO2 storage are the Netherlands, the UK, Ireland and Denmark. This will generate demand for knowledge and experience of CCS that can lead to positive effects in Norway in three areas: 1) Transition of Norwegian industry to a low-emission society; 2) Business development that is dependent on access to CO2 storage and further development of the petroleum and energy supply and service industries; and 3) State revenues from CCS-related activities.

As described in section 2, some industries, such as cement and waste management, are unlikely to find alternatives to CCS that can substantially reduce their CO2 emissions. For other sectors, CCS can be a competitive alternative to other climate measures.

CCS can contribute to maintaining industry jobs that would otherwise be at risk in the transition to a low-emission society. These jobs are distributed across the country, because the processing industry and other activities that generate CO2 emissions are spread all over Norway. The industry cluster around Mo Industripark in Norland (including Alcoa Mosjøen, Elkem Rana and Elkem Salten), the Eyde cluster and several activities in the Øra area of Fredrikstad (including Borregaard in Sarpsborg and Saugbrugs in Halden) are examples of enterprises considering the development of carbon capture at their facilities and utilising Northern Lights’ transport and storage infrastructure.1 Returkraft in Kristiansand, together with Northern Lights and others, have applied for EU funding for studies on CO2 transport for storage in a potential Norwegian storage facility.

Development and operation of carbon capture and storage facilities will facilitate jobs and business development in Norway. The project is expected to employ around 1,500–3,000 full-time equivalents during the construction phase, and create around 170 jobs during the operational phase. Norway has developed a knowledge community and a supply industry with a high level of expertise in carbon capture, transport and storage over the course of more than 25 years. This has been based on a long-term focus on research, new technology and business development. In a future global CCS market, the Norwegian supply industry will be a strong contender to win contracts and take international market shares. This effect will be enhanced by having a head start. Participation in European projects will generate assignments for the Norwegian supply industry, strengthen Norway’s competence base, and further develop Norwegian business and industry in the field.

Textbox 6.1 CCS and Norwegian industry

A number of actors have assessed the role of CCS in relation to Norwegian industry and jobs.

In connection with the work of the Expert Committee on Green Competitiveness, the Norwegian processing industry drew up a roadmap for 2050, where value creation in the industry increased at the same time as the industry could contribute to negative CO2 emissions by 2050 [14]. According to the roadmap, for Norwegian industry to achieve its long-term national climate targets, as much as 33 per cent of planned emission reductions would come from CCS and around 20 per cent from CCS combined with combustion of biogenic matter.

In 2018, SINTEF, on assignment for the Confederation of Norwegian Enterprise (NHO), the Confederation of Norwegian Trade Unions (LO), Fellesforbundet, the Federation of Norwegian Industries, the Norwegian Oil and Gas Association and Industri Energi, prepared the report ‘Industrial opportunities and employment prospects in large-scale CO2 management in Norway’ [58]. The report summary focuses on the most optimistic picture for the scope of CCS and Norwegian opportunities relating thereto. The report also shows that even low estimates for development of CSS can create jobs in Norway. The number of jobs varies from a few thousand to many tens of thousands, depending on the extent of CCS implemented in Europe and the share of the market taken by Norwegian industry.

Textbox 6.2 Aker Carbon Capture

Aker Carbon Capture is an example of a supplier that has utilised Norwegian policy instruments to develop carbon capture technology. In 2008, Aker Solutions together with SINTEF started planning a research programme, ‘SOLVit’, to develop an environmentally-friendly capture technology with low energy requirements. The programme was funded by CLIMIT and lasted for eight years. While the SOLVit programme was ongoing, they started construction of a mobile test facility and were awarded a contract to construct an amine capture facility at Technology Centre Mongstad (TCM). Here, Aker tested several different amine compounds on an industrial scale for two years. Aker Solutions’ mobile test facility has been used in several places in Europe and the USA, and tested carbon capture from different emission sources. The facility is currently in Sweden to test Aker’s technology at PREEM’s refinery in Lysekil.1

Aker Solutions has also developed a modular and standardised capture facility called ‘Just Catch’. In 2019, Aker Solutions won a contract for carbon capture at a waste incineration facility in Twence in the Netherlands.2 In the summer of 2020, Aker Solutions decided to spin off its CCS activity to a new company, Aker Carbon Capture. Aker Carbon Capture was listed on the Merkur Market operated by the Oslo Stock Exchange on 26 August 2020.

1 https://www.akersolutions.com/news/news-archive/2020/aker-solutions-starts-ccs-test-program-at-preem-refinery-in-sweden/

2 https://www.twence.nl/en/twence/news/2019/aker.html

In its work on attracting third-party customers to the CO2 storage facility, Northern Lights has been in contact with actors that are considering moving to or starting new business activities in Norway as a result of access to CO2 transport and storage infrastructure. Dialogue is at an early stage and factors other than access to CO2 storage are decisive for the localisation of industry.

Examples of such industrial actors are CCB and ZEG Power, which have received funding from Enova to establish an industrial pilot facility for hydrogen production with CCS. The facility will be established near Northern Lights’ onshore facility.2

The project facilitates infrastructure development that can lead to substantial CO2 storage capacity in Norway. Sections 4 and 8 outline how CO2 transport and storage infrastructure will be developed in phases to enable the capacity to be increased. Northern Lights’ assessment of market potential is also outlined.

Assuming more projects follow suit, Longship and our investment in CCS over a long period of time will give Norway an advantage through its expertise, established infrastructure and the fact that Norwegian authorities and companies are in key positions in relevant international networks.

The state does not intend to be co-owner of the CO2 storage facility in development phases 1 and 2. The state’s role is primarily to provide financial support and share the risk as set out in the agreement. The state does not have costs related to development phase 2, nor does it receive any direct income from CO2 storage during these phases. If Northern Lights’ real return on invested capital exceeds 10 per cent, then part of the profit during the funding period including part of any profit from development phase 2, will accrue to the state.

If the capacity for the annual amount of CO2 stored is expanded after development phase 1 and 2, the established infrastructure will have to be further developed and further investment made in new infrastructure (development phase 3). The state may decide to initiate negotiations on ownership of the established infrastructure. In the event of high demand, new storage licenses will be required pursuant to the CO2 Storage Regulations. In accordance with the CO2 Storage Regulations, the state is entitled to enter into the partnership if new licenses are granted.

6.2 The state’s costs and risks

6.2.1 Cost overview

The state covers a large share of the actual costs of the project. The cost and risk distribution in the negotiated agreements entail a percentage distribution of actual costs. The cost overview in this section is therefore an estimate based on the front-end engineering design (FEED) reports and agreements. The state’s actual costs will depend on the actual costs of the project and will therefore increase if project costs increase, up to the agreed maximum limit. See section 4.2.6 for details about the funding agreements.

In Proposition No 1 to the Storting (2020–2021), the Ministry of Petroleum and Energy will propose to the Storting that the project be implemented with Norcem as the first carbon capture project followed by Fortum Oslo Varme’s carbon capture project, conditional on sufficient own funding and funding from the EU or other sources. Fortum Oslo Varme must clarify whether it wishes to implement the project on these conditions within three months of the funding decision from the second round of calls issued by the EU’s Innovation Fund, but no later than 31 December 2024. State aid awarded to Fortum Oslo Varme is limited to a maximum of NOK 2 billion in investments and NOK 1 billion in operating costs. This proposal will have overall expected costs for the state of NOK 16.8 billion and a Parliament’s cost frame for investment support of NOK 13.1 billion and operating support of NOK 6.1 billion.

Table 6.1 Estimated expected costs and Parliament’s cost frame for Northern Lights, Norcem and Fortum Oslo Varme

Bill. 2021 NOK with exchange rates at 2 June 2020

Expected costs (P50)

Parliament’s cost frame (P85)

Total QA21

Industry/

other sources

State aid

State aid

Northern Lights

14.2

3.8

10.4

Norcem

4.5

0.7

3.8

Fortum Oslo Varme

6.4

3.82

2.63

Total

25.1

8.3

16.8

Investments: 13.1

Operation: 6.1

1 Construction and ten years’ operation.

2 Based on the external quality assurers’ estimate excluding the Government’s recommendation

3 Based on the external quality assurers’ estimate excluding the Government’s recommendation

The figures do not include potential additional funding during the operational phases from 2024 for compensation for captured CO2 that is not included in the EU ETS. Carbon capture from non-fossil sources will not reduce costs or provide income for Norcem or Fortum Oslo Varme. The funding agreement therefore facilitates additional funding for capture of CO2 equal to the allowance price in the EU ETS per tonne of captured CO2 that is not included in the trading system.

The Norwegian Tax Administration has distributed a proposal for consultation concerning the introduction of a carbon tax on waste incineration. A tax will reduce the amount of additional funding. If a carbon tax is introduced on waste incineration, around half of the Fortum Oslo Varme facility’s emissions (those from fossil sources) will be subject to the tax. If the tax is introduced, carbon capture will reduce costs for Fortum Oslo Varme in that it will have to pay less tax. If the tax is lower than the allowance price, Fortum Oslo Varme will receive the difference between the tax and allowance price, while if the tax is higher than the allowance price, the difference will be deducted from the additional funding for CO2 from biogenic sources.

Around 12 per cent of Norcem’s emissions are not subject to the EU ETS because they come from biogenic sources and will therefore form the basis for additional funding.

If the state realised both Norcem and Fortum Oslo Varme without EU funding, the expected costs for the state would be around NOK 20 billion (P503). This includes the state’s share of investment costs and share of the ten-year operating costs. The difference in costs between Norcem and Fortum Oslo Varme is around NOK 2 billion.

Table 6.2 External quality assurers’ cost estimate

Overall costs and industry’s share at P50:

Mill. 2021 NOK with exchange rates at 2 June 2020

Expected costs (P50)

Industry’s share in pct.

Total

Industry

State aid

1. Norcem, transport and storage

18,700

4,500

14,200

24 pct.

2. Fortum OV, transport and storage

20,700

4,500

16,200

22 pct.

3. Two capture facilities, transport and storage

25,100

5,100

20,000

20 pct.

Overall costs and industry’s share at P85:

Mill. 2021 NOK with exchange rates at 2 June 2020

Parliament’s cost frame (P85)

Industry’s share in pct.

Total

Industry

State aid

1. Norcem, transport and storage

20,700

5,000

15,700

24 pct.

2. Fortum OV, transport and storage

22,800

5,000

17,800

22 pct.

3. Two capture facilities, transport and storage

27,600

5,800

21,800

21 pct.

In the agreement with Equinor on behalf of Northern Lights, the state commits to provide funding for cessation, monitoring and removal of up to 80 per cent of the costs of the proportional share of captured CO2 from the demonstration facility for full-scale CCS in Norway after ten years of operation. Monitoring costs are not included in the cost estimates. If the transport and storage operator does not manage to obtain third-party customers and the storage facility is therefore shut down without storing CO2 from sources other than Fortum Oslo Varme and Norcem, the state is obliged to cover 80 per cent of the costs related to cessation, monitoring and removal.

If the transport and storage operator is able to attract customers and continue commercial operation beyond the ten-year funding period, the proportional share of the stored CO2 from Norcem and, if applicable, Fortum Oslo Varme will gradually be reduced. The state’s share of the costs related to cessation, monitoring and removal will in such case be reduced and may reach zero if Northern Lights achieves a certain minimum return during the course of operations.

6.2.2 Funding from other sources

In addition to the share covered by industry companies in the negotiated agreements, the Ministry has looked into other co-funding possibilities for the project. The project will contribute to enabling industry and actors in the EU to reduce their emissions at a lower cost. Particular efforts have therefore been made to secure co-funding from the EU.

The biggest potential source of EU funding is the Innovation Fund. This fund is financed by the sale of allowances from the EU ETS. The fund can grant funding of up to 60 per cent of the relevant investment and operating costs of projects. See more about the Innovation Fund in Box 2.6.

The EU’s first round of calls for proposals was issued in July 2020 with a deadline for applications of 29 October 2020. Projects applying for funding in the first round can expect to receive a funding decision from the Innovation Fund in the last quarter of 2021. In the application, the actors must indicate whether they expect financial support from the national authorities. The Government’s proposal to implement the project gives Fortum Oslo Varme such an indication.

6.2.3 Risk

Cost risk

Based on the negotiated agreements, the state will cover around 80 per cent of the actual project costs. The state covers 80 per cent of investment costs related to development phase 1 of Northern Lights, with the exception of a potential additional ship and additional well, where the state covers a maximum of 50 per cent of the costs. The draft contract with the capture actors states that the state will cover 75 per cent of all costs above a given level. However, none of the parties will be obliged to cover investment costs that exceed the agreed level (P85). The project is complex, which is evident by the extensive funding agreements. Box 6.3 provides an overview of cost and risk distribution in the agreements.

There are certain exceptions from the maximum cost for transport and storage with potentially unlimited cost exposure for the state. If an extraordinary incident should occur, with a risk of leakage from the storage facility or harm to the environment or life and health, the state is required to cover 80 per cent of the costs of preventive and corrective measures related to the volume stored in phase 1 of the project (up to 1.5 million tonnes of CO2 per year). This responsibility applies throughout the storage facility’s operational period and is not limited by the maximum limit for the state’s cost responsibility stipulated in the agreement.

In the event of CO2 leakage from the storage facility, including after the funding period, the state’s costs will be 80 per cent of the costs related to the CO2 volume from Norcem and, if applicable, Fortum Oslo Varme. These costs will depend on the size of the leakage and the price of allowances. For the remaining 20 per cent, the state has also committed to assuming some of the risk for increased allowance prices by covering the allowance cost above EUR 40 per tonne of CO2.

There is a very low probability of CO2 leaking from the storage facility.4 Any CO2 emitted from other sources must be covered in full by Northern Lights. Responsibility will be distributed proportionately based on the total amount of CO2 deposited at the specific time.

However, this does not apply if the leaks are due to gross negligence or willful misconduct, or omissions by personnel in managerial, supervisory or particularly independent positions in Northern Lights or someone for whom they are responsible. The funding recipients will in such case cover all costs related to the leaks.

After a storage facility has been shut down, all obligations relating to monitoring and corrective measures pursuant to the regulations will be transferred to the state represented by the Ministry of Petroleum and Energy or a party authorised by it. The transfer of liability is regulated by the Regulations relating to exploitation of subsea reservoirs on the continental shelf for storage of CO2 and relating to transportation of CO2 on the continental shelf (the CO2 Storage Regulations). The rights and obligations of the state and operators pursuant to the Regulations are detailed in section 4.3.

External quality assurers have emphasised uncertainty in some of the remaining processes. Emission licences constitute one such process. This applies to all three actors, but Gassnova and the external quality assurers highlight this uncertainty as being greatest for Fortum Oslo Varme’s facility, since at the time of assessment, they had not completed all of the necessary documentation for the emission licence.

Fortum Oslo Varme has since obtained the necessary documentation. Gassnova has followed this work closely and on the basis of tests carried out at the pilot facility, the Statement of Qualified Technology from DNV GL, and the diffusion and trickle down calculations that have been conducted, it believes that there is a high probability that the emissions will satisfy the requirements the Norwegian Environment Agency is expected to stipulate to issue an emissions licence.

It is not common for an emissions licence to be issued before an investment decision has been made for a project. However, the fact that the emissions licence has not been issued poses uncertainty that can lead to delays and/or increased costs.

Textbox 6.3 Risk matrix – the state’s costs, responsibility and risks

The state’s costs – funding model

Transport and storage

Capture

Investment costs

The state is required to provide the following funding to establish transport and storage:

Basic investment funding: The state will cover 80 per cent of the costs of establishing an onshore facility, pipeline and two ships, up to the maximum budget.

Additional investment funding: The state will in addition cover 50 per cent of the costs of establishing a third ship and, on certain conditions, also drilling an additional well, up to the maximum budget.

The state is required to provide the following funding to establish capture facilities:

Investment funding:

Norcem: The state will cover costs up to a stipulated level. Above this level, the state will cover 75 per cent of the costs up to the maximum budget.

Fortum Oslo Varme: Fortum Oslo Varme will cover costs up to a stipulated level. The state will cover 75 per cent of the costs above this level and up to the maximum budget. The state’s maximum investment funding for Fortum Oslo Varme is NOK 2 billion.

Operating costs for the funding period (10 years)

The state is required to provide the following funding for transport and storage operations for a ten-year operational period:

Operational funding: The state will annually cover a gradually decreasing share from 95 per cent to 80 per cent (average 83 per cent) of the operating costs of the facility with an annual capacity of 1.5 million tonnes of CO2 up to a ten-year maximum budget.

Extraordinary costs: The state will also cover 80 per cent of certain extraordinary and unanticipated costs relating to the subsurface that exceed the maximum budget. This liability is unlimited.

Sharing of operating costs: By increasing the annual capacity above 1.5 million tonnes of CO2, the total operating costs will be distributed in line with the total amount of CO2 stored. This may reduce the state’s costs.

The state is required to provide the following funding for operation of the capture facilities for the funding period, which for Norcem is ten years. The funding period for Fortum Oslo Varme depends on when the facility becomes operational.

Norcem: The state will cover 100 per cent of all annual operating costs up to an agreed level. The state will cover 75 per cent of all operating costs above the agreed level, up to the ten-year maximum budget.

Fortum Oslo Varme: Fortum Oslo Varme will cover all costs up to a stipulated level. The state will cover 75 per cent of all costs from this level up to the maximum budget. The state’s maximum funding for the operational period is NOK 1 billion.

Additional funding: The state will also pay additional funding for CO2 that is not subject to the EU ETS. The additional funding will correspond to the allowance price, but any savings ascribed to a carbon tax will be deducted. If the carbon tax is equal to the allowance price, the additional funding will therefore be zero. If the carbon tax is higher than the allowance price, the difference will be deducted from the additional funding for any CO2 volumes that are not subject to the carbon tax, e.g. those from biogenic sources.

Costs after the operational period has expired

The state is required to cover the following costs accrued after the ten-year operational period has expired:

CO 2 emissions: In the continued commercial operation of transport and storage, the state will continue to cover a fixed share of the costs of CO2 emissions received from Norcem and, if applicable, Fortum Oslo Varme, that are stored in the course of the funding period (but not for other CO2).

Cessation funding: When operations have been concluded, the state will provide funding for cessation, monitoring and removal corresponding to 80 per cent of a proportionate share of volume from Norcem/Fortum Oslo Varme in the funding period and the overall amount of stored CO2 (the state’s share of the costs will thus be reduced with increased commercial volumes). This funding obligation lapses if Northern Lights reaches an agreed level of return on investment.

The state is not required to cover costs after the operational period has expired (except in the event of the state terminating the agreement before expiry).

Profit sharing during the funding period

If Northern Lights in the course of the ten-year period of operation achieves a defined return on investment level 1, 50 per cent of the net cash flow from that point in time is to be shared with the state. If the returns exceed a defined return on investment level 2, 75 per cent of the net cash flow will go to the state.

This is similar to the system in place for transport and storage, but with the distinction that when the level of return on investment is initially reached, the operational funding is reduced and eventually stopped entirely. Fifty per cent of net cash flow over and above the agreed level of return 1 is shared with the state and 75 per cent of net cash flow over and above level of return 2 is shared with the state.

Guarantee

Each of the three participants in Northern Lights must furnish a guarantee to secure Northern Lights’ obligations under the funding agreement. The guarantees have a maximum guarantee amount each of NOK 1 billion, which is gradually reduced throughout the operational period.

Norcem will furnish a guarantee to secure its obligations under the funding agreement. The guarantee has a maximum guarantee amount equal to their share of the maximum budget for establishment and operation, with a gradual reduction throughout the operational period. Fortum Oslo Varme will also furnish a guarantee on similar principles.

Scenarios that influence the state’s costs

Higher construction costs

Increases the state’s costs since the state must cover 80 per cent of construction costs up to the agreed maximum budget.

Increases the state’s costs since the state must cover 75 per cent of construction costs above a stipulated level up to the agreed maximum budget.

Delayed completion

Delays will normally lead to higher construction costs and thus increase the state’s costs; see the point above.

Delayed completion in one part of the chain (either capture or transport/storage) will also mean that Norcem and Northern Lights’ ten-year funding periods will no longer correspond. This will require a longer funding period for the other part of the chain not subject to a delay, thus increasing the state’s costs. If the capture actors are delayed, the state must cover 100 per cent of Northern Lights’ additional costs.

The same as for transport and storage. If Northern Lights is delayed, the state must also provide funding to cover all of the capture facilities’ emissions costs.

Higher operating costs

Increases the state’s costs since the state will on average cover 83 per cent of operating costs up to the agreed maximum budget.

Increases the state’s costs since the state must cover 75 per cent of operating costs above a stipulated level up to the agreed maximum budget.

Larger quantities of CO 2

Impacts the state’s costs to a limited degree since operational funding is provided independent of the quantity of CO2 received and stored, within the agreed capacity of 1.5 million tonnes of CO2 per year.

By increasing the annual capacity above 1.5 million tonnes of CO2, the total operating costs will be shared in line with the total amount of CO2 stored (which may reduce the state’s costs).

Increases the state’s costs for additional funding up to the maximum limit of 400,000 tonnes of CO2 per year (thus reducing the state’s costs for additional funding for lower quantities of CO2).

CO 2 emissions

Leads to additional costs for the state since the state commits to covering 80 per cent of the costs of emissions from the storage facility for volumes from Norcem and, if applicable, Fortum Oslo Varme, that have been stored during the operational period.

The state will also cover 100 per cent of the costs over and above an allowance price of EUR 40 per tonne of CO2 for CO2 emissions from Norcem and, if applicable, Fortum Oslo Varme, that have been stored during the operational period. This entails a limitation to Northern Lights’ responsibility.

These obligations to cover emission costs continue into a subsequent period of commercial operation, but the state’s responsibility will not then increase further.

Will not in principle lead to additional costs for the state, since this is Norcem/Fortum Oslo Varme’s responsibility (with the exception of emissions caused by the transport and storage operator’s failure to receive CO2; see below).

No or limited delivery of CO 2 from the capture actor

May increase the state’s costs since any additional operating costs will lead to higher operational funding. The state therefore bears the largest part of this risk (interface risk).

It is not possible to claim compensation from Norcem/Fortum Oslo Varme for increased transport and storage costs due to failure to deliver CO2. It will not be necessary to pay any additional funding, but Norcem/Fortum Oslo Varme will otherwise be entitled to operational funding. The state therefore bears the largest part of this risk (interface risk).

Failure to receive CO 2 on the part of Northern Lights

In the event of Northern Lights failing to receive CO2, the state may reduce operational funding by the same amount as the state must pay in compensation to Norcem/Fortum Oslo Varme. There is an annual limit to how much operational funding may be reduced. In the event of force majeure or other matters that provide exemption from liability (including extraordinary weather conditions and maintenance), the state is not entitled to reduce funding. There are also certain other limitations to the right to reduce funding. Overall, this means that the state bears the largest part of this risk (interface risk).

Failure to receive the agreed amount of CO2 will increase the state’s costs since the state has committed to compensate Norcem/Fortum Oslo Varme for financial losses in connection with having to emit CO2. The state’s responsibility applies regardless of whether Northern Lights is held liable, and means that the state bears the largest part of this risk (interface risk).

CO 2 deliveries that fail to meet specifications

May increase the state’s costs since any additional operating costs will lead to higher operational funding.

The state therefore bears the largest part of this risk (interface risk).

Norcem/Fortum Oslo Varme’s responsibility for CO2 deliveries that fail to meet specification requirements is limited to NOK 15 million per year. The capture actors are not entitled to pay compensation for transport and storage costs over and above this. This means that the state bears the largest part of this risk (interface risk).

Instructed changes

The state is obliged to cover 100 per cent of additional costs accrued due to changes instructed by the state related to the establishment or operation of transport and storage facilities.

The state is obliged to cover 100 per cent of additional costs accrued due to changes instructed by the state related to the establishment or operation of capture facilities.

Breach of contract on the part of the funding recipient

In the event of breach of contract on the part of Northern Lights, the state’s right to reduce funding will be limited to the following:

During the establishment period, basic investment funding and additional investment funding may be reduced by a maximum of NOK 500 million.

During the operational period, operational funding may be reduced by a maximum of NOK 40 million per year.

In the event of breach of contract on the part of Norcem/Fortum Oslo Varme, the state’s right to reduce funding will be limited to the following:

During the establishment period, investment funding may be reduced by a maximum of NOK 75 million.

During the operational period, operational funding may be reduced by a maximum of NOK 15 million per year.

Regulatory amendments, delays or amendments to licences

Increased costs resulting from delayed licences or amendments to public law regulations/awarded licences will increase operating costs and thus increase funding.

The same as for transport and storage.

Exchange rate fluctuations

The agreement allows for inflation adjustment of the maximum budget. Otherwise no exchange rate adjustments.

Funding is adjusted for changes in exchange rates. The mechanism entails that the exchange rate risk is divided proportionately between the parties by their share of the costs.

A similar mechanism applies to adjustments to operating costs caused by changes in power prices and inflation during the operational period.

Force majeure

The state may not reduce funding for delays or non-performance of the agreement due to obstacles that constitute force majeure. Force majeure does not entail a right to funding over and above what follows from the funding model, but increased costs resulting from force majeure will increase the state’s costs. The maximum budget still applies.

The same as for transport and storage.

Covid 19 force majeure

No separate regulation.

In principle, the same procedure as ordinary force majeure. The state may not reduce funding for delays or non-performance of the agreement due to obstacles that constitute Covid 19 force majeure, and increased costs will lead to increased funding in accordance with the funding model. If Covid 19 force majeure leads to the maximum budget for construction costs being exceeded, Norcem/Fortum Oslo Varme may also demand the maximum budget to be adjusted corresponding to the excess costs resulting from Covid 19 force majeure.

Other unforeseen circumstances

Unforeseen circumstances may lead to increased costs, which in general may lead to increased operational funding.

Northern Lights (and in principle also the state) may request re-negotiation of the agreement in the event of unforeseen circumstances, the consequences of which cannot be avoided/overcome, and that lead to imbalance in the agreement.

The same as for transport and storage.

Termination on the part of the state

The state does not have the right to terminate the funding agreement with Northern Lights and is thus obliged to provide funding as agreed for establishment and ten years of operation of the facility.

The state may terminate the agreement but is obliged to cover the following costs in the event of termination during the establishment period:

The state will cover 100 per cent of accrued construction costs.

The state will cover 100 per cent of the costs of removal of the capture facility.

In the event of termination during the operational period, the state is obliged to cover a proportionate share of the company’s own contributions for establishment and removal costs.

Major cost increases

Construction costs reach the maximum budget

If the costs of basic investments (onshore facility, pipeline and two ships) reach the agreed maximum budget, neither of the parties are required to contribute further financing or complete the project.

Unless the parties agree to continue, or one of the parties assumes sole responsibility to finance completion of the project alone, the project will be abandoned and each of the parties will bear its own costs.

If Northern Lights assumes responsibility to finance completion of the project, the state is obliged to provide operational funding in accordance with the agreement.

The same as for transport and storage.

See the exceptions relating to Covid 19 force majeure and exchange rate adjustments above.

Operating costs reach the maximum budget

If the operating costs reach the maximum budget, the parties will meet to discuss the situation. However, Northern Lights is not entitled to halt operations or discontinue the project.

See the exceptions for extraordinary costs above.

If operating costs reach the maximum budget, Norcem and, if applicable, Fortum Oslo Varme have the right to adapt operations and, if necessary, stop operation of the capture facility.

Interface risk

A basic principle in the project, based on the results of the pre-feasibility study, is that the state assumes the role of intermediary between Norcem and, if applicable, Fortum Oslo Varme and Northern Lights. This entails an interface risk that can lead to high costs for the state if, for example, project completion in part of the chain is delayed. The state must in such case cover the costs for the actor that has to wait for other actors in the chain. This also increases the risk of higher costs during the operational period if CO2 from the capture actors does not meet the specifications, or they do not deliver CO2 as expected. In the same way, the state’s costs may increase if Northern Lights cannot receive the CO2 that has been captured, which must instead be emitted; see Box 6.3. With certain exceptions, the impact on the other parts of the chain are generally the responsibility of the state. The interface risk makes good project management essential on the part of the state.

Other matters that entail risk in the project

Health, safety and the environment

The industry actors have stated that mapping and management of HSE risk has been well studied and conducted in accordance with good practice. A serious HSE incident is unlikely, but if such an incident should occur, it may in addition to the serious direct consequences damage the state’s reputation.

The industry actors downscale activities

The carbon capture projects are dependent on industry activity being maintained at the facilities. Both Norcem and Fortum Oslo Varme are in a situation where downscaling is unlikely. The funding agreements require the companies to operate their capture facility, but in the event that meeting the funding agreement entails an unreasonable burden, they may demand re-negotiation.

Problems during start-up

Injection of CO2 in the storage location is dependent on a generally stable flow of CO2. If the flow is unstable, it may mean that the facility needs to stop and start more often, which will lead to higher costs. This is a likely risk during the start-up phase, but this will be reduced in step with more capture facilities and with operational experience.

Patent risk

The company International Energy Consortium (IEC) has had a CCS patent approved. IEC has contacted Gassnova and Equinor several times concerning alleged infringement of their patent in connection with the Norwegian project.

Objections have been made in relation to the patent, and the case is under consideration by the European Patent Office (EPO).

The patent bureau Zacco, on behalf of Gassnova, sent an objection concerning the IEC’s patent for full-scale CCS to the EPO on 10 October 2018. A further two objections were submitted before the deadline, among others from Equinor. The grounds for the objections are unlawful amendments, insufficient feasibility and insufficient novelty/inventive merit. These are separate conditions, and will therefore be assessed individually.

The EPO convened an oral hearing in the Netherlands on 24 March 2020. In the summer of 2019, the EPO issued its provisional (non-binding) assessment of the patent based on the three objections, the IEC’s response and the comments submitted to the response.5 The EPO’s provisional assessment of the case supports the objectors’ position to a great extent. The EPO’s consideration of the case has been postponed until 2021 due to the coronavirus situation.

In Zacco’s assessment, there is a high probability that the EPO will either retract its approval of the patent or narrow its scope so that it does not conflict with the interests of the CCS actors.

6.3 Measures to manage risk in the project

6.3.1 The industry’s incentives in the agreement

The most important risk management measure in the project is the clear responsibility of the companies to own and develop the carbon capture, transport and storage projects, and that they cover a share of the actual costs when they accrue. The companies therefore have incentives to keep the costs at a minimum. The companies also have incentives to complete their projects on schedule since a delay will increase their costs and delay the revenues or savings they generate.

Northern Lights’ business model is to provide CO2 transport and storage services to industry companies with CO2 emissions in return for negotiated tariff payments. Northern Lights will not generate revenue from CO2 storage from Norcem and, if applicable, Fortum Oslo Varme, and without commercial volume, Northern Lights will operate at a continuous loss. Northern Lights therefore has a strong incentive to develop the market for CO2 storage and to offer tariffs that industry companies are capable of paying.

Norcem and Fortum Oslo Varme will generate savings by reducing the need to buy emission allowances, tax obligations and additional funding per tonne of captured CO2. They therefore have strong incentives to operate their carbon capture facilities efficiently.

6.3.2 Project management

Longship is complex and therefore challenging to manage. The project requires good follow-up by the state and particular attention to any changes in the sub-projects. The industry actors in the project are international companies with established project management and quality assurance procedures. This also includes processes to establish risk-reducing measures. The funding agreements between the state and the actors regulate obligations, liability and rights.

The state’s risk is regulated by the agreements. The industry actors’ compliance with the agreements will be important to the outcome. This means that the state will exercise its access and audit rights provided for in the agreements. It is nonetheless likely that cases will arise where the state and industry disagree about specific technical assessments, and this must be resolved by dialogue with the companies.

There are no commercial agreements between Norcem and, if applicable, Fortum Oslo Varme, and Northern Lights. The state’s representative must therefore be qualified to manage the interface between the actors since this risk is mainly borne by the state. The state also has the right of instruction in cases where measures are needed in part of the chain to reduce costs in another part. The state must in such case bear the cost consequences of the instruction. The state’s cost and risk exposure mean that the state will need to follow up more than payments and funding.

The Ministry of Petroleum and Energy will be responsible for following up the funding agreements. Steps have been taken to allow Gassnova on behalf of the state to follow up the actors’ project management through agreed reporting. According to the plan, Gassnova will also coordinate the work on benefit realisation and facilitate the sharing of relevant experience with other projects and stakeholders.

6.4 The project’s socioeconomic profitability

Several assessments have been made of the socioeconomic profitability of Longship. In QA1, external quality assurers conducted an assessment of socioeconomic profitability [45]. On the basis of the QA1 analysis, Gassnova together with DNV GL conducted an updated assessment of the project’s socioeconomic profitability ahead of QA2 [59]. External quality assurers have not conducted an independent socioeconomic analysis as part of QA2, but have based their analysis on that of Gassnova/DNV GL and reviewed methods and assumptions [56].

A socioeconomic analysis should in principle be limited to the effects on groups in Norway. However, a global perspective has been used in this case since the project is designed to reduce emissions and realise cost reductions that may also be generated at the international level.

Textbox 6.4 Scenarios in the socioeconomic analyses

Two different scenarios have formed the basis for Gassnova’s analysis and QA2; the ‘Paris Agreement’ and ‘Current European climate policy’. The difference between the scenarios is primarily expected price pathways for CO2 and the number of subsequent projects.

The Paris Agreement scenario is based on the assumption that the Paris Agreement’s temperature goals will be achieved, and that policy instruments and measures are implemented that correspond to the targets Norway, the EU and the world have stipulated for climate efforts. The scenario has a price pathway for CO2 emissions that reflects what it will cost to limit the average temperature increase to 1.5–2 degrees Celcius by 2100. The price pathway is the median of all SSP (Shared Socioeconomic Pathways) scenarios that correspond to the 1.5 and 2 degree target [60]. The scenario also assumes a CCS project development rate leading up to 2050 in line with the IEA’s ‘Sustainable Development’ scenario. In this scenario, projects are developed that capture and store 735 million tonnes of CO2 per year in 2030 and 2,748 million tonnes of CO2 per year in 2050 in addition to the amount captured and stored today.

The scenario ‘Current European climate policy’ is based on the application of policy instruments in line with what is currently implemented and a less ambitious 2050 target than that adopted by the EU in December 2019. This scenario distinguishes between sectors included in the EU ETS and those that are not.

Sectors not included in the EU ETS are subject to national obligations to the EU and ambitions to cut national emissions towards 2030, as expressed in the Granavolden platform. Until 2030, the CO2 price in sectors not included in the EU ETS increases from the current level to NOK 2,000 in 2030. This figure was selected on the basis of an anticipated alternative cost to meet national climate targets.

For sectors included in the EU ETS, the expected allowance price in the EU ETS is used as a price pathway up to 2030. A tightening of the allowance market as a consequence of the European Green Deal is not taken into account. In this scenario, the CO2 price leading up to 2050 moves towards a level corresponding to the expectation that the EU will achieve an 80 per cent emissions reduction by 2050.

This scenario assumes a development rate of carbon capture and storage projects up to 2050 based on the IEA’s scenario ‘Stated Policies’. In this scenario, projects are developed that capture and store 43 million tonnes of CO2 per year in 2030 and 126 million tonnes of CO2 per year in 2050 on top of the amount captured and stored today.

1 The assumptions of current European climate policy were made before the European Green Deal was presented and before the meeting of the European Council adopted the goal of climate neutrality.

Gassnova’s analysis and QA2 show the same picture. The project is socioeconomically profitable if based on a climate policy in line with the global temperature goals of the Paris Agreement. The need for many projects to follow suit shows the importance of European countries following up Norway’s project with their own initiatives. In a scenario with current European climate policy, the project is not socioeconomically profitable and the analysis shows negative net quantified effects of the project.

The quantified socioeconomic cost of realising the project is the sum of investment and operating costs and the tax-financing cost. The analysis is based on the project having a lifetime of 25 years, while tax-financing costs are only for the ten years of state aid in addition to investment costs.

The socioeconomic benefits of implementing the project have two quantified elements: The value of emission reductions and productivity effects. Productivity effects mean that subsequent CCS projects can be implemented at lower costs as a result of the implementation of this project. Productivity effects can again be divided into two parts: Effects that follow from learning and knowledge transfer (learning effect) and effects that follow from increased use of the CO2 storage capacity (scale effect). The QA2 report assesses the productivity effects as option values. This means that the effects depend on others also making decisions, beyond implementing the project addressed in this report, in order for them to have an impact. Specifically, the benefit realisation effect is dependent on other projects making investment decisions and being realised. The analyses show that subsequent projects in Europe and globally are prerequisities for CCS becoming an efficient and competitive climate policy instrument.

In addition to the quantified benefits, Gassnova’s analysis and the QA2 report identify and assess a number of non-quantified effects. The project will demonstrate that CCS is a feasible and safe climate measure, it will have a facilitating effect on subsequent projects and provide regulatory and commercial learning.

Longship will also facilitate utilisation of the storage capacity on the Norwegian continental shelf and facilitate low emissions from the use of Norwegian natural gas through conversion to hydrogen with CCS.

Table 6.4 summarises the assessment of the project’s socioeconomic profitability in the QA2 report. The non-quantified effects are assessed on a scale from +++++ (large-scale positive effect of major importance to society) to ----- (large-scale negative effect of major importance to society).

In the scenario where the world achieves the global temperature goals of the Paris Agreement, the alternative where only Norcem is realised and the alternative where Norcem and Fortum Oslo Varme are realised have almost the same socioeconomic profitability. If option values are included, the project is highly socioeconomically profitable in this scenario.

In the scenario ‘Current European climate policy’, the project is very unprofitable from a socioeconomic perspective, but the alternative with Fortum Oslo Varme is least unprofitable. This is because the scenario distinguishes between sectors included and not included in the EU ETS, and the CO2 prices it is based on are much higher in sectors not included in the EU ETS than those that are.

The QA2 report indicates that the project can be socioeconomically profitable, given an ambitious international climate policy that results in CO2 prices that are around ten times higher than current allowance prices. The assumed point in time that CO2 prices reach a level ten times higher than the current level is vital to the analysis. Table 6.4 shows the situation where CO2 prices are ten times higher in 2040 than today. This indicates a very socioeconomically profitable project after option effects. If a flat CO2 price is assumed for the first ten years followed by prices rising to ten times as high in 2050, the project is marginally socioeconomically profitable after option effects. There will at the same time be other effects that also influence profitability, such as the size of cost reductions that stem from the project and the number of subsequent projects. The effect of Norway’s project is that the next projects will require a lower CO2 price to be profitable, and that these projects will be socioeconomically profitable without CO2 prices that are ten times the current level.

The QA2 report also provides an analysis of how much these results change if the assumptions are changed. These analyses show that the measure can also be very unprofitable if based on lower, but still rising, CO2 price pathways, if the lifetime is limited to ten years or if a purely national perspective is used in the analysis, or if fewer facilities follow and utilise learning from the project. In the analysis of sensitivity to higher CO2 prices, the project becomes more socioeconomically profitable.

Table 6.3 Assessment of the socioeconomic profitability of the project from the QA2 report

Current European climate policy

The Paris Agreement

Alt. 1: Transport and storage 1.5 mt, Capture Norcem 0.4 mt.

Alt. 2: Transport and storage 1.5 mt, Capture FOV 0.4 mt.

Alt. 3: Transport and storage 1.5 mt, Capture Norcem and FOV 0.8 mt.

Alt. 1: Transport and storage 1.5 mt, Capture Norcem 0.4 mt.

Alt. 2: Transport and storage 1.5 mt, Capture FOV 0.4 mt.

Alt. 3: Transport and storage 1.5 mt, Capture Norcem and FOV 0.8 mt.

Investment costs

10,840

11,690

14,580

10,840

11,690

14,580

Operating and maintenance costs

7,540

8,900

10,490

7,540

8,900

10,490

Tax financing costs

2,520

2,780

3,420

2,520

2,780

3,420

Overall costs

20,900

23,370

28,490

20,900

23,370

28,490

Value of emission reductions

4,910

11,030

15,940

9,340

9,840

19,180

Net quantified benefits before option effects

-16,000

-12,340

-12,550

-11,560

-13,530

-9,310

Productivity effects (learning effects)

2,800

2,800

2,800

19,140

19,140

19,140

Scale effect in connection with full utilisation of storage capacity (1.5 million) tonnes)

4,610

4,510

2,510

4,610

4,510

2,510

Net quantified benefits after option effects

-8,580

-5,030

-7,240

12,190

10,120

12,340

Demonstrate carbon capture and storage as a feasible and safe climate measure

++++

++++

+++++

++++

++++

+++++

The project’s facilitating effect

+++

+++

+++

++

++

++

Regulatory learning

++

++

+++

+++

+++

++++

Commercial learning

+

+

++

++

++

+++

Utilisation of Norway’s geological resources

++

++

++

++++

++++

++++

Innovation and application of carbon capture and storage

+

+

++

++

++

+++

Competence-raising and supplier industry for carbon capture and storage

++

+

++

+++

++

+++

Increased value of Norwegian gas

+

+

+

++++

++++

++++

Environmental impact

-

-

--

-

-

--

Source Gassnova, and Atkins and Oslo Economics

Footnotes

1.

https://www.mip.no/2018/lanserer-co2-hub-nordland-og-far-millionstotte-til-co2-fangst-og-lagring/

2.

https://www.vnr.no/far-stotte-til-pilotanlegg-for-hydrogenproduksjon/

3.

P50 is the estimated cost level for which there is an estimated probability of 50 per cent of not exceeding.

4.

The Petroleum Directorate’s assessment of the plan for development, installation and operation. See section 8.

5.

https://register.epo.org/application?documentId=E3E8L43G3541DSU&number=EP12830562&lng=en&npl=false

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