Case Study
Real Options for Developing a Carbon Capture & Storage Hub
Mark J. Tozzi
September, 2022
This thesis explores the strategic application of flexible design and execution choices in the development of carbon capture and storage (CCS) systems, focusing on a proposed CCS hub in the Gulf Coast industrial corridor. By applying real options analysis, the study assesses various execution and technology strategies against fixed investment approaches, demonstrating that flexible, progressive technology investments can yield superior project outcomes amidst policy and commercial uncertainties. The findings advocate for a flexible, conditions-based development approach, enhancing the ability to scale efficiently and mitigate risks, ultimately supporting more effective carbon capture initiatives.
image by Marcin Jozwiak @ Unsplash
Key Idea:
Resilience
Resilience
Methodologies:
Discounted Cash flow (DCF), Real Option Analysis, Scenario Planning, Screening Models
Discounted Cash flow (DCF), Real Option Analysis, Scenario Planning, Screening Models
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Key Idea Description
Performance Optimization in carbon capture initiatives, employing real options analysis to enhance decision-making under uncertainty. The thesis evaluates scalable carbon capture and storage (CCS) technology implementations to determine optimal investment paths given fluctuating policy and market conditions.
- Broad Area: Environment, Carbon-capture, Oil producers, Climate change
- Main issues of case: Technology Choice, Investment Strategy, Economies of Scale, Discounted Cash Flow (DCF), US Gulf Coast
- Main analytic topics: High level screening model, multiple objectives, high-level tradeoffs
Insights
- Employing screening models in early project stages can help identify and implement flexibility and real options, enhancing the value of CCS projects.
- The importance of progressive technology investment and policy adaptation for CCS development.
Training
Relevant lectures:
- Paradigm change in engineering systems and planning
- How to optimise design and decision-making under uncertainty
- How to manage the design process
Gallery
Point Source Locations and Potential Hub Design in Houston Gulf Coast adapted from 
Illustration of CCS Hub Elements 
NPV Results from CCS Hub Sensitivity Analysis 
CCS Hub NPV Target Curves Under Different Uncertainty Scenarios 
Illustration of Real Option Asymmetric Benefit of Technology Investment to CCS Hub Outcomes 
Final Flexible Strategies with Execution and Technology Choice vs. Base Case 
Multi-dimensional Performance Metrics and Assumptions
Abstract
This thesis addresses the strategic issue of how best to develop large-scale investments in carbon capture and storage (CCS). It compares flexible designs with real options for execution and technology choice, to fixed investments associated with a proposed CCS ‘hub’. Climate change and global aspirations to reduce CO2 emissions are generating increasing interest in accelerating investment in CCS. This thesis focuses on how to value and frame development of one of the world’s largest proposed CCS hubs in the Gulf Coast industrial corridor.
Flexibility in design and real options analysis were applied to this proposed hub, as a case study, to demonstrate that progressive technology investment and pilot-based capture deployments with scale optionality, generate the best project outcomes across the wide range of policy and commercial uncertainties impacting CCS development. Through system decomposition, the proposed hub was modeled as a dynamic techno-economic system. Monte-Carlo simulation and multi-dimensional project evaluations were performed for a range of potential scenarios.
Results of this analysis indicate that a flexible strategy that deploys capacity as policy and technology improve, and scales capacity as costs decline, is preferable to large-scale, fixed investments in a CCS hub. This flexible, conditions-based approach to development mitigates the extent and probability of downside outcomes, de-risks sensitive capture costs, and enables value-accretive scaling – all while achieving similarly high cumulative volumes of CO2 captured.
The intent of this effort was to illustrate the high-level tradeoffs and opportunities within CCS development through creation and use of a screening model. This front-end modeling approach to strategy development is recommended in the early stages of CCS (or analog) projects, where identification and implementation of flexibility and real options can yield the largest value to the prospective project opportunity. Model assumptions and results are intended to be notional in nature and not for investment or decision-making purposes. Future work could focus on improving the accuracy of the model parameters and relationships to reconfirm insights with project-specific data, as well as further test these recommendations through extension to analog cases supporting decarbonization.
Flexibility in design and real options analysis were applied to this proposed hub, as a case study, to demonstrate that progressive technology investment and pilot-based capture deployments with scale optionality, generate the best project outcomes across the wide range of policy and commercial uncertainties impacting CCS development. Through system decomposition, the proposed hub was modeled as a dynamic techno-economic system. Monte-Carlo simulation and multi-dimensional project evaluations were performed for a range of potential scenarios.
Results of this analysis indicate that a flexible strategy that deploys capacity as policy and technology improve, and scales capacity as costs decline, is preferable to large-scale, fixed investments in a CCS hub. This flexible, conditions-based approach to development mitigates the extent and probability of downside outcomes, de-risks sensitive capture costs, and enables value-accretive scaling – all while achieving similarly high cumulative volumes of CO2 captured.
The intent of this effort was to illustrate the high-level tradeoffs and opportunities within CCS development through creation and use of a screening model. This front-end modeling approach to strategy development is recommended in the early stages of CCS (or analog) projects, where identification and implementation of flexibility and real options can yield the largest value to the prospective project opportunity. Model assumptions and results are intended to be notional in nature and not for investment or decision-making purposes. Future work could focus on improving the accuracy of the model parameters and relationships to reconfirm insights with project-specific data, as well as further test these recommendations through extension to analog cases supporting decarbonization.
Summary
Introduction
The thesis addresses the strategic development of large-scale carbon capture and storage (CCS) investments. The focus is on comparing flexible designs using real options for execution and technology choice with fixed investments in a proposed CCS hub in the Gulf Coast industrial corridor.
Project Motivation:
The motivation for this project stems from the global push to reduce CO2 emissions and the potential role of CCS in achieving these targets. The Gulf Coast CCS hub, proposed by ExxonMobil and supported by several major industrial companies, aims to capture 50 million metric tons of CO2 by 2030 and 100 million metric tons by 2040.
Methodology
- Flexibility in Design: The thesis employs flexibility in design and real options analysis to manage uncertainties in policy and technology.
- Monte Carlo Simulation: Used to model the techno-economic system of the CCS hub under various scenarios and uncertainties.
- Multi-Dimensional Project Evaluations: Assess the value of progressive technology investments and pilot-based capture deployments with scalability options.
Key Findings:
- Flexible Strategy Benefits: Deploying capacity as policy and technology improve and scaling as costs decline is more advantageous than large-scale fixed investments. This approach reduces downside risks and enhances economic robustness.
- Cumulative CO2 Capture: The flexible strategy achieves similarly high cumulative volumes of CO2 capture compared to fixed strategies, but with better financial outcomes.
Implementation:
- Execution Flexibility: The study recommends implementing flexible execution strategies that adapt to evolving policy and technology landscapes.
- Technology Investment: Progressive investment in carbon capture technologies is critical for cost-effective and scalable CCS development.
Conclusion:
The research demonstrates that incorporating flexibility into CCS project designs can significantly improve economic and environmental outcomes. By leveraging real options analysis, stakeholders can better manage the uncertainties associated with large-scale CCS investments, leading to more sustainable and financially viable projects.