Plugging Oil Wells for Carbon Credits – Sam Arnold

Peter Perri 0:04

Hey, everybody, welcome to Energy Superheroes. I’m excited today to have Sam Arnold, and he is the founder and CEO of CarbonPath. And they’re doing something very interesting, which is trying to solve the fugitive methane emissions problem in the oil and gas industry, which I know is a big thing. Sam, welcome to the podcast.

Sam Arnold 0:24

Thanks for having me, Peter. Really appreciate the time.

Peter Perri 0:28

So glad to have you and happy to learn about CarbonPath. I know that methane has about 25 times a global warming potential compared with CO2, which is big deal. And I know that we obviously are still extremely dependent on oil and gas. So I think part of this energy transition is going to be to reduce any sort of impact from the oil and gas industry. And so obviously, fugitive methane emissions is a big deal. Tell us more about that. How you guys came to your solution at CarbonPath. Give us a little backstory about how you decide to address this challenge. And what’s different about your approach?

Sam Arnold 1:10

Yep. So yeah, these are all great questions. So the overall problem we’re trying to solve, I think it threads the needle with what you’re talking about is, we all are still going to use oil and gas, it will take time to migrate over to other energy sources. But the good news is we can actually reduce methane emissions quite a bit without having a major market impact. But what I mean by that is there’s over 4 million wells in the US, only 800,000 of them produce anything. And of those 800,000, north of 500,000 produce less than 15 barrels a day. So there’s a huge tailed distribution of wells that only make up roughly 5% of oil and gas production in the country. But they’re responsible for upwards of 75% of all methane emissions. Wow, you can shut those down responsibly, you can make a huge dent in methane emissions, at the same time have a marginal impact on supply, and therefore the consumer.

Peter Perri 2:20

Now that’s big. And I haven’t heard people really focused on that opportunity. Because everyone’s more focused on let’s call it new things. There’s so many new technologies in the world of energy transition, I think most people are focused there. So that is an interesting problem. Haven’t heard about that. So how do you go about sort of closing down those wells? Who owns them? What are the legal implications? And how do you get owners to agree to sort of shut down because I imagine you they’re producing a small amount to them, it matters because they’re, they’re the owner and its revenue stream,

Sam Arnold 3:00

right? Well, that’s right isn’t. So you have to financially incentivize oil and gas companies to properly plug in abandon. Rather than go ahead and sell them down the food chain to a smaller operator with a lower cost structure. So the way you do that is through a carbon credit from the voluntary offset market. And that’s really how CarbonPath was born. I semi retired from Citadel, I worked in the financial industry for a long time as a portfolio manager running oil and gas investments, started my career as a petroleum engineer with Exxon. So I’ve been around the oil and gas industry for a long time, kind of know how it works. And as I was looking at personal investing, I became fascinated with the carbon markets for a couple of reasons. One, all these companies that have made pledges that we’re going to be net zero by whatever, pick your day 2030 2040 2050. And they’re all in various stages of figuring out what they can do. They’ve all hired the right teams, they’re starting to go out with their operations folks, and try to figure out what they can change within their day-to-day operations. And I think what they’re finding is not a whole lot right now with current technology. If you’re American Airlines, yeah, you can buy some renewable fuel. But you can’t, you can’t even hope to do 10 basis points of the total amount of fuel burned. So I think a lot of companies are coming to the same conclusion that they need a lot of carbon credits to be able to achieve their stated goals. Now, when you look at that the majority of them are forestry based or sustainable ranching, farming. And those are fraught with a lot of problems and my view is I was looking to buy them one. Most of them are project specific and bilateral agreements. If you want to buy them as an individual, you have to bring a lot of money to the table and work with a broker. Through with, you know, very large fees, I kind of liken it to buying bonds in the 1980s, huge big aspirin, very little market transparency. So as I was reviewing the carbon credit market, I thought, wow, this is great, because there’s going to be a massive demand for credits, and very little supply. So I wanted to be a part of that, but really found that it was difficult to do so. So I was like, Wow, this market is really ripe for disruption. Meanwhile, talking with the former management team of Bruin a large oil and gas company in the Bakken, they were thinking about, hey, you know, this is a problem with methane emissions, we shut down some of these wells. So we got hooked up together, formed CarbonPath and decided to, you know, incentivize operators, to shut down walls prematurely by getting a carbon credit. And we think it does great things for all players and participants in this market. So from the corporate standpoint, they didn’t want a credit like this, because it provides a scale that they need, at a cost that they can afford, we’re talking 20 to $30 a ton, you can generate significant amounts of credits. And you can do it on an oilfield timeline where you need a million credits, and you need them spread out over 12 months, you can deliver that because the average was going to be five to 10,000 tons. And you’re setting that in at a price tag of 50 to $100,000. So we think it makes sense for corporates who need offsets, because we think this is real, it’s permanent, it’s additive, nobody’s going to do this unless the credits available. We also think it’s great for environment, the environment in general, because as we said, stated earlier, and as you stated, methane is a huge, one of the actual nerves within the overall spectrum versus carbon dioxide. So it’s a huge problem that we can solve. And the consumer should like it too, because it’s not really going to impact them financially at the pump, or, you know, if the gas plant, but it’s still going to make a material difference to the environment. So we think it’s something that this it’s a weird Trifecta where everybody should be on board with this, you know, it solves a problem for the oil and gas companies, too. So they can actually find the plug and abandon and don’t have to just try to sell it to a smaller operator. So I think everybody was in the scenario. So is that all positive? Is that all makes sense?

Peter Perri 7:46

It makes complete sense. I think you’ve thought through it really intelligently. And I’ve thought about the forestry management programs. And of course, it’s a good idea to preserve trees. But you know, trees, really surprisingly, even for a large amount of trees don’t eat that much carbon dioxide. So it’s a real challenge to meaningfully impact the greenhouse gas emissions issue just with forestry management. We obviously already have a lot of trees, and the US has been preserving trees for a long time under various federal programs. So I think your point about the wells is well taken, makes a lot of sense. So CarbonPath is a company, then how do you guys attack this market? And sort of, you know, I’m thinking about it from a competitive advantage standpoint, how do you roll out and be able to reach all these wells, and sort of lock them up in your, in your programs so that you’re able to reap the benefits of your concept? Your idea here?

Sam Arnold 8:53

Yep, so we have two different methodologies. The first is, and the one that we first rolled out is wells that are already producing, that are actually making money for operators. So these are the wells that are producing less than 15 barrels a day, they are making money, so the government can’t force you to take them, you know, shut them down. That would be appropriation of benefits. So you know, they’re going to keep operating. But with a 20 to $30 credit, you can incentivize them to spend the money to plug in a band and create the credit sell it to a corporate entity that’s looking to meet their mission goals. So we’re helping with that we have the process. And we’re also putting everything on blockchain. So what we’re going to do is provide complete transparency, which I think is one thing that the forestry type predator is missing. And it’s just difficult by the nature of forestry. I’m not. I don’t think anything negative about existing registries are how they do it. It’s just how do you go out and measure if you’re looking at 1000s of acres of forestry land if trees were growing and is the tree gonna go, you know from 10 inches in diameter to 12 It’s, it’s a difficult problem. And it’s one that a lot of smart people are working to solve. But for now, you know, we can tackle this low hanging fruit. And we can provide complete transparency; this will be the only carbon credit, where it’s going to come with either a state or federal certificate that says that the work was actually done. So we think by putting on blockchain by having this state approval, having federal approval, and by you know, putting all of the data on chain, people, we’re going to anybody, this could be Indios, this could be the SEC, this could be, you know, investors like myself in my previous life, we’ll all be able to go and look and say, yep, Company X was able to generate these credits, we can see them. And then once it’s on blockchain, you have complete transparency as to the chain of sale, as well as retirement. So that’s really how we’re trying to do that is provide that infrastructure for companies to be able to abandon and plug wells prematurely rather than selling them to, you know, the smallest operator, generate the credit and generate some revenue to offset expense.

Peter Perri 11:14

Yeah, that I mean, that that makes a lot of sense. So how long have you been at this so far with CarbonPath? And when did your team get together? How long have you guys been doing? Yeah,

Sam Arnold 11:24

yeah, it’s been about a year. So we came up with the idea, you know, probably about a year ago started working on it, we just closed our seed funding. So we’re in full tech build out mode, you know, we had a lot of interest. So it’s been great. And thanks to all of our investors out there. But you know, we’re expecting we’re doing a pilot project in Montana now. And so we’re gonna put all that on chain and put it at least on the test net, initially, and get ready to go from there for full launch.

Peter Perri 12:01

That’s great. So the project you’re working on, there’s a well, I imagine that you’re going to be helping to close down and does the have you do you guys go out to the corporates and get that commitment to essentially buy those credits ahead of going to the, to the well operator themselves? Is that the sort of flow.

Sam Arnold 12:23

I mean, that’s, that’s the initial dance, right. And what we’re hoping to do is because you can generate a lot of scale very quickly, hope to create a real marketplace, through blockchain. So we’re tokenizing a ton of carbon from this, we think we can really democratize it. And so anybody that has the ability to buy any type of cryptocurrency, will be able to have the ability to go buy our currency. And you’re going to know and have complete transparency that the tongue that I bought, came from this well in Texas, at this time that was shut in, and it started in the States, so you’ll be able to know everything about it. And once you we have created that marketplace, we hope that, you know, we won’t have to have as many conversations with companies as well as corporates, because we can just provide the platform for them to engage with each other.

Peter Perri 13:25

Yeah, for sure. That makes that makes sense. In the beginning, it’ll take some manual labor to get it off the ground. But then once it’s up and running, it should it should be a lot more seamless. Yep, that’s right. Yeah. Wait, so you mentioned your seed funding? When? When do you expect to launch your series A capital raise?

Sam Arnold 13:43

So we’ll see how this goes. I mean, I think if we start generating some revenue here pretty quickly, um, you know, maybe in a year, we’ll see, it just depends on how fast this takes off and how much tech we need to build. We’re building it initially, with the expectation, expectation of scale, with the expectation of 1000s of levels. As I said, before, you know, there’s 400,000 walls, we’re producing less than a couple barrels a day. And so the market opportunity is massive. You know, so we want to solve that problem, though. There will be others and that’s okay. Because our mission is actually shut down all these wells, get those fugitive, because there’s two really problems right, there’s the fugitive methane emissions, there also can be if a Wells sitting there either producing a little bit or idle, or it might be you know, producing, but you know, the operator turns it on for, you know, one day a month for a barrel and then shuts it back in. Meanwhile, you can have, you know, h2 is growing from bacteria, you could have casing failures, then you can get methane leaks up the annulus and into water supplies and other bad things. So, you know, we You want this problem to get solved, because we think it’s it’s very, can be very disastrous for the environment for people living around them. And so however that takes, if we, if we win great if somebody else wins, too, but the goal is achieved.

Peter Perri 15:20

That’s great to know. That sounds great. And so your technology built out from your, your seed funding is a primarily digital technology, are you also building sort of some kind of monitoring system where you go out and take some, I don’t know, if you take methane, air samples or something at the site, figure out how much the emissions are before you close it down, all that sort of stuff.

Sam Arnold 15:41

Yeah. So that’s the way we designed it is with the end goal in mind. So you could go out, there are people talking about methodologies, where you kind of put a tent around it and try to measure the methane. And we’re saying, that is going to be a very precise measurement. But unfortunately, nothing’s going to happen. Because you have to have a large capital commitment for people to go out and spend money to find out if they’re this wells leaking enough methane to shut it down. But we know just from statistical analysis, that that will might not be a bad one. But collectively, if we solve this, it’s going to have a material impact. So the way we’re approaching it is more of a reservoir engineering. So we’re saying we know, and we’re actually being conservative, by looking at it from more of like a scope three saying, Here’s what these wells will produce over the next 10 years. But we know this because we have hundreds of, or 100 years of reservoir engineering and calyx on our side. And we also have a third party verified by one of the reserve auditors that have commonly worked with the SEC and others that should be comfortable with their work. So we have this ability to know how many hydrocarbons and therefore how much carbon is going to come out of the ground. So we can look at it from a methane from a statistical standpoint. But that actually gives us a larger amount of credits, than if we just said, Hey, let’s just assume it’s all burned and create the carbon credit that way. So we’re trying to be the most conservative, but it still gives you the best answer, that it’s a reasonable price of carbon, to allow the full shutting down of these wells and have operators be indifferent as to continue to operate in them or selling them versus taking that PNA liability permanently off their balance sheet, which could become a big issue for them in the future. If laws change, you know, maybe you sold it to mom and pop AX, they went bankrupt and then now has to come back to the mid cap, who has the balance sheet in the financial capability to properly plug in abandoned? And, you know, like you kind of have in federal waters? For sure.

Peter Perri 17:57

Yeah, for sure. And it makes a lot of sense from a risk standpoint. So if you can at least, are you looking at the compensation to the well owner to be some sort of discounted cash flow against their future cash flows? Or do they actually? Do they actually make money over what they normally would have made? Or is it about breakeven?

Sam Arnold 18:16

Yeah, we, I mean, we want it to be about breakeven. I mean, eventually, we think the market is going to dictate that price. Right? But, you know, initially with bilateral sales, we want it to be kind of an Indian Point of indifference. So the the operators like okay, well, this is probably a better path for me from the intangibles of doing what’s right for the environment, taking that liability permanently off my balance sheet rather than, you know, kind of kicking the can to somebody else.

Peter Perri 18:47

It sounds awesome, Sam, it’s really, really a cool idea. And it makes it makes logical sense. And it’s a win for everybody that’s in the sort of the value chain. So I think ideas like that tend to actually get executed. It certainly fits. So tell me other than run CarbonPath, what else do you do for you have any hobbies or what do you do for fun?

Sam Arnold 19:12

Well, you know, I have three children. So I coach my middle son’s travel team, coach, my oldest son’s house team. I’m the commissioner for their little league baseball. I may assistant Scoutmaster. So, I do. Whatever they keep

Peter Perri 19:34

you super busy. Yeah, yeah, absolutely. No, that’s that is great. And this is all baseball related stuff.

Sam Arnold 19:41

Baseball Boy Scouts. Yeah, they do. I you know, my sports they will do they don’t want to have anything to do with so.

Peter Perri 19:52

So what are your What are your sports?

Sam Arnold 19:55

I always did golf in the wrestling. Growing up. So all

Peter Perri 19:59

right. Yeah, I had brothers up in Ohio they wrestled I played football, baseball. So baseball is a time consuming sport. There’s no doubt about that. There’s a lot of games and you’re always going somewhere other.

Sam Arnold 20:12

Yeah. And when we first did it, it was kind of in the middle of COVID. Where, you know, everybody was looking for something to do. There wasn’t anything. It was outdoor. So I think we played like 60 games last year, because, you know, teams were just calling calling up, hey, you guys want to do a scrimmage? Somewhere? Sure. There’s plenty of fields available.

Peter Perri 20:34

I mean, it’s nothing to do. Right. And I always thought it was interesting because baseball as the as a sport is just, it’s naturally socially distanced, because the players are all spread out.

Sam Arnold 20:46

Exactly. Then they, you know, they did the mask of a dugout and everything like that. But yeah, winter on the field over batter was pretty, pretty easy. So, you know,

Sam Arnold 20:55

we definitely spend a lot of time doing that. Which has been great. I mean, I, you know, it’s

Sam Arnold 21:02

I think it teaches a lot of great lessons. I mean, I hope none of my kids are listening to this, but I don’t think anybody’s going to be an MLB player. But, you know, they, it gives them good life lessons.

Peter Perri 21:13

Hey, you never know. People know. You can have some late but I mean, I think there’s a guy, Michael Jordan. He’s a little bit of a late bloomer, you know? Right, right. And another one, Steph Curry who went to my college, which is Davidson College up in North Carolina, big time Late Bloomer got passed over by all the big schools went to Davidson. And then they made the Elite Eight. And then he continued to really just he took off after he was in the NBA, so hey, you never know, right? Ever. No, no. Well, this has been great, Sam. We’re about a time here. Sam Arnold, founder and CEO of CarbonPath. And they have come up with a really unique way to solve the fugitive methane emissions problem from oil and gas wells by making this advantageous to all parties in order to do the right thing. So I think that’s awesome, Sam, thanks for coming on energy superheroes today and look forward to following up in the future with your progress at CarbonPath.

Sam Arnold 22:11

Thank you for having me. Appreciate it.