9 The Ministry of Petroleum and Energy’s assessment

According to the UN Intergovernmental Panel on Climate Change and other authoritative sources, carbon capture and storage (CCS) will be necessary to reduce emissions from industry and power production and contribute to negative emissions, thereby reducing global greenhouse gas emissions in line with climate targets along the least-cost path. There are currently relatively few facilities in operation on a global basis, and to make CCS an effective and competitive climate measure, it is necessary to lower costs and improve efficiency. More and new projects that bring learning, technological development and economies of scale will reduce costs.

The current market does not provide industry with sufficient incentives to implement and develop CCS. This is partly due to high investment costs, low income potential in the short term and high risk. Furthermore, the price of emitting CO₂ is lower than the cost of CCS, and the development of climate technology is a public good where those bearing the costs of technology development must share the profits with others. The current state of technology and the market make it necessary for states to contribute to the development of CCS. A Norwegian project will further develop CCS technology and through this reduce costs for future facilities. It will also make it possible to create a market for CCS.

Norway is in pole position to contribute to the development of CCS. For many years, various governments have supported the testing of technology, test and pilot projects, and communicated the role of CCS as an important tool in international climate negotiations. The Government has followed up this work and made targeted efforts in line with the government's strategy for CCS since 2014. These efforts have been fruitful and in this report, the Government now presents a decision-making basis to the Storting for a robust and mature project for full-scale carbon capture, transport and storage in Norway.

The project has followed an industry project maturation process. In line with this process, extensive work has been conducted through different assessments and studies, comprising pre-feasibility studies, feasibility studies, concept selection studies and front-end engineering design studies. The industrial companies have matured their projects with financial support from the state. A step-by-step approach of this kind means that the project has become more thoroughly defined and specified for each project phase, while reducing uncertainty and establishing more precise cost estimates. In 2018, the Government presented the project to the Storting in Proposition No 85 to the Storting (2017–2018). It was decided that the project would be continued into the front-end engineering design phase. The Government also pointed out important factors to be evaluated in conjunction with the final investment decision:

• Information from the front end engineering and design phase, including cost development, risk, learning effects in relation to use of resources, and whether a carbon capture and storage project in Norway will be an effective contribution to the overall global climate efforts.

• The budgetary constraints that makes it challenging to finance the project without significant funding from other sources.

• That equivalent spending on other climate measures can give much larger emission reductions.

The Ministry believes that the project has matured to the level required for an investment decision. The companies will own and develop the project. The project the Government intends to realise has been named Longship, and comprises carbon capture from Norcem’s cement factory in Brevik in Porsgrunn municipality as the initial capture facility, transport of CO₂ by ship to a reception terminal in Øygarden municipality, and by pipeline to a well, in which CO₂ will be injected into a storage formation beneath the seabed. Northern Lights, which is a collaboration between Equinor, Shell and Total, has planned the CO₂ transport and storage part of the project. The Government also wants to realise the carbon capture facility at Fortum Oslo Varme’s waste incineration facility in Klemetsrud in Oslo municipality, on the condition that Fortum Oslo Varme contributes a sufficient amount of own funding and funding from the EU or other sources.

The companies will own and develop the project. State aid agreements have been negotiated regulating cost and risk sharing between the state and the companies. These have been designed to provide good incentives for keeping costs low and keeping to the schedule.

The results of the front-end engineering design (FEED) show that all parts of the project are feasible. Realising carbon capture at Norcem will contribute to developing carbon capture in the cement industry, which represents around seven per cent of global CO₂ emissions. The use of residual heat from cement production reduces energy needs, and it thereby contributes to important technology development. Based on the set criteria for the project, the Ministry of Petroleum and Energy ranks Norcem significantly higher than Fortum Oslo Varme.

Fortum Oslo Varme also contributes important elements to the development of CCS by demonstrating carbon capture in waste incineration, where a large share of emissions come from the combustion of biogenic matter. The project will thus demonstrate how CCS can lead to negative emissions. CCS from Fortum Oslo Varme will also reduce emissions in a sector not included in the European Emissions Trading System, where Norway has ambitious targets.

The economic room for manoeuvre is weakened in the long term by the ongoing Covid-19 pandemic. However, the Government still recommends prioritising Longship. The basis for the Government’s decision also shows that the Norwegian CCS project contributes to lowering the long-term costs of reducing climate emissions.

The Government therefore believes that implementing Longship is an effective way for Norway to contribute to reducing global greenhouse gas emissions in the long term at the lowest possible cost. However, the project also entails significant risks and uncertainty. The Government nonetheless believes the risks and uncertainty associated with not implementing the project to be higher.

In the Ministry of Petroleum and Energy’s Proposition No 1 to the Storting (2020–2021), the Government will recommend that the Storting allocate funds to ensure the implementation of Longship. The Government will recommend that state aid be awarded in accordance with the negotiated agreements. Furthermore, the Government recommends implementing Longship with Norcem as the initial carbon capture project, followed by Fortum Oslo Varme’s carbon capture project, on the condition that they receive sufficient own funding and funding from the EU or other sources. Fortum Oslo Varme must clarify whether it wants 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. The Government will also propose necessary authorisations.

The total costs for the project are estimated to be NOK 25.1 billion. The Government’s recommendation will have overall expected costs for the state of NOK 16.8 billion with a cost frame of NOK 13.1 billion and operating support of NOK 6.1 billion. This means that the state expects to cover around two thirds of the project costs.

Longship is complex. The costs are high and the state bears risk through funding agreements with the industrial companies. There is also uncertainty beyond the state’s control that affects whether the project succeeds, including developments in the climate policy of other countries and the number of subsequent projects implemented.

Risk is still associated with a number of factors, despite the fact that the technology in the individual parts of the project has been rigorously tested. The state bears a substantial share of this risk. There will be risk associated with the interfaces between the different parts of the project. There will also be risk related to cost development, project schedules and whether all parts of the project function as intended. It is a matter of striking a balance between reducing risk and keeping costs at a minimum. If Longship is to have a good demonstration effect, the costs must be kept as low as possible. We must therefore expect, for example, to run into problems in connection with start-up of operations and to experience periods with low capture rates. The learning achieved from resolving such problems will form an important part of the project.

At the same time, a successful Norwegian project for carbon capture, transport and storage will make a significant contribution to the development of CCS as an effective climate measure, and lead to technological development in an international perspective. Longship demonstrates that CCS is safe and feasible, it facilitates learning and cost reductions for subsequent projects and it establishes infrastructure that other projects can use. Hence, the threshold for establishing new carbon capture projects will be lowered. Longship can also facilitate business development through protecting, restructuring and creating new industry and business activities in Norway. The project will employ around 1,500–3,000 full-time equivalents in the construction phase, depending on whether Fortum Oslo Varme is implemented. According to industry stakeholders, the project will create around 170 jobs during the operational phase.

If the world is to reach the global temperature targets, there is a need for international cooperation on technological development and emission reductions. This is also important in order for Longship to have the desired effect. The project is a contribution to an international collective effort to develop a necessary climate measure, and will only succeed if subsequent projects use the infrastructure and learning it generates.

The project should first and foremost be considered on the basis of whether it contributes to reaching the targets set for the project and the Government’s work on CCS. In the short term, this could be measures that lead to a greater reduction in emissions for equivalent spending, but a short-term national emissions reduction is not the main aim of the project. A number of analyses show that CCS is a necessary and cost-effective climate measure in the long term. The Ministry is of the opinion that Longship facilitates cost reductions that can contribute to making CCS an effective climate measure if other countries also follow suit with concrete policies. The project underlines the need for and value of international cooperation on technological development and emission reductions.

Northern Lights’ work on creating a market for CCS in Europe demonstrates that several projects are considering using the infrastructure Norway has developed. The state aid agreement for the transport and storage part of the project has been designed to bring in new projects. All Northern Lights’ revenues will come from CO₂ storage from new projects. Northern Lights therefore has a strong incentive to develop the market for CO₂ storage. The Ministry considers it important that Northern Lights’ capacity is utilised by industry stakeholders that are not financed directly by the Norwegian state. If this succeeds, it will be clear evidence that the project has had the desired effect.

We are dependent on the EU and other European nations also contributing to developing CCS as a climate measure. The Government therefore has a clear expectation that Europe will now follow suit and that the remaining capacity in the storage facility will be utilised by third parties that are not directly financed by the Norwegian state.

The Government will continue to contribute to developing technology for carbon capture, transport and storage. The Government will also work to build on established policy instruments and schemes and will:

• Participate in designing policy and instruments at the European level to facilitate CCS in Europe.

• Continue CLIMIT and Technology Centre Mongstad as key instruments for the CCS efforts.

• Follow up the benefit realisation work in Longship in close cooperation with the industrial companies and take steps to ensure that knowledge, learning and efficiencies from the project make positive contributions to the development of CCS in Europe and the rest of the world.

• Contribute to the possibility of using the CO₂ storage infrastructure in other projects through enhanced cooperation with relevant European countries.

• Require that any future CCS projects in Norway will have to compete for investment and operational funding from general funding schemes such as Enova and the EU’s Innovation Fund. The state will not engage in direct negotiations on state aid with individual stakeholders.

• Follow up the hydrogen strategy and Longship with a dedicated roadmap for hydrogen.