World's Largest Carbon Capture and Sequestration Project Commences Construction

On July 15, 2014, NRG Energy, Inc. ("NRG") announced that it is building a $1 billion project to capture carbon dioxide emissions from the W.A. Parish coal-fired power plant in Texas and ship them 82 miles away to help boost an oil field's production. Construction for the project broke ground on September 5, 2014. The Petra Nova Carbon Capture Project ("PNCCP"), a joint venture between NRG and JX Nippon Oil & Gas Exploration in Japan ("JX"), will be the largest in the world to use a process that scrubs away the carbon dioxide ("CO2") after coal has been burned to produce electricity.

This is a revolutionary approach to reduce millions of tons of CO emissions from the atmosphere in a manner that, for the first time, attracted private, for-profit investment from the energy industry and that is likely to be repeated in the next few years. 

PNCCP is innovative in four very significant ways. 

First, the project acts as a bridge between the power industry and oil and gas industry. The power industry increasingly requires CO to be managed, while there is a huge demand for CO in the oil industry. 

Second, the construction of PNCCP will not result in any unplanned outage at the W.A. Parish generation facility and will otherwise have no impact on the operation of the power plant. This is a significant accomplishment in light of the nature of the project's construction and a testament to the innovative engineering that went into its design. 

Third, PNCCP is the first carbon capture and sequestration project anywhere in the world to be developed and constructed by an independent power producer without the support of ratepayers of taxing entities. While the balance of the world's other projects relied upon either a regulated public utility placing the project into rate base or a state-owned company developing the project on a state-subsidized basis, NRG created a structure to develop and finance PNCCP in a competitive marketplace.

Finally, the capital for the project was sourced from several entities to the extent that each participant was suited to manage the deal's various risks. A $167 million grant from the U.S. Department of Energy's Clean Coal Power Initiative Program covers the cost of the noncommercial demonstration aspects of the project. In addition, $300 million in equity came from JX to manage the oilfield exploration and production risks, along with $300 million from NRG to manage the power plant and regulatory risks of the deal. And finally, $250 million of project debt from the Japan Bank for International Cooperation and Mizuho Bank (with a NEXI guaranty) was structured to finance the less risky aspects of this combined carbon capture and sequestration/enhanced oil recovery project. 

From a borrower's perspective, and due to attempting to implement a novel technology on a large scale, NRG and JX were required to supplement the DOE grant to provide a very significant portion of the project cost as equity financing. 

The lenders, on the other hand, needed to view what appeared to be a complicated project with multiple components principally through the lens of a loan made on the somewhat more traditional revenues from enhanced oil production. 

Operationally, the project is designed to capture approximately 90 percent of the CO2from a 240MW slipstream of flue gas from NRG's W.A. Parish power generation facility and to use or sequester 1.6 million tons of this greenhouse gas annually. 

The captured CO2 will be used to enhance production at mature oil fields in the Gulf Coast region. The first site to use CO2 from the W.A. Parish carbon capture system is Hilcorp's West Ranch Oil Field. Through enhanced oil recovery ("EOR"), oil production is expected to be boosted from around 500 barrels per day to approximately 15,000 barrels per day during the project's peak years. This field is currently estimated to hold approximately 60 million barrels of oil recoverable from EOR operations.

The impetus for the project was born from the growing realization that CO2 emissions will be significantly regulated in the United States sooner rather than later. For example, EPA proposed in June 2014 a rule to cut carbon emissions, a regulation that is really targeting coal power plants, which emit more CO2 than natural gas power plants.

Carbon capture technology is one way for power plant owners to comply with any new rules that may eventually be enacted. But the technology remains largely in the research and demonstration stages, mainly because it is very expensive with no offsetting increase in revenues or cost efficiency to pay for the capture systems.

That's where this project breaks through the status quo. PNCCP is the first carbon capture project that will pay for itself with incremental revenues (from oil sales) created by the project. NRG is already making plans to offer carbon capture development and construction to other coal power plant owners worldwide and will also encourage commercial lenders to enter the project finance market for CCS/EOR projects.

On balance, the project further reduces the carbon footprint of an otherwise highly efficient coal-fired generation facility, benefits the global environment by reducing CO2generally, and reduces the nation's dependence on foreign sources of oil by enhancing domestic oil production from legacy oil fields. From the perspective of JX, it permits the company to increase the amount of oil available domestically in Japan while furthering its presence in the U.S. market. Perhaps most importantly, it positions NRG and JX to offer the market a blueprint for bridging the commercial gap between the power industry and oil and gas industry in a manner that benefits both.

— Jerry Farano (+1.202.879.4691, gfarano@jonesday.com), Danielle Varnell(+1.202.879.4696, dvarnell@jonesday.com), Jim Salerno (+1.212.326.3436,jjsalerno@jonesday.com), and Robert Ashley (+1.212.326.7886,rdasilvaashley@jonesday.com)