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Exploration & Production: The Oil & Gas Review - 2005

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CO2 for Enhanced Oil Recovery Needs - Enhanced Fiscal Incentives
J Michael Austell

Originally printed in:
Exploration & Production: The Oil & Gas Review - 2005

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The use of carbon dioxide (CO2) for enhanced oil recovery (EOR) in the North Sea offers a unique opportunity to extend the use of existing oil and gas infrastructures while providing solutions to increasing fossil fuel demand, climate change and commitments to reduce greenhouse gas (GHG) emissions. Implementation of such projects requires alignment of commercial interests along a complete CO2 value chain and creation of incentives that may go beyond international boundaries. Now is the time for governments around the North Sea Continental Shelf (NSCS) to implement fiscal incentives to encourage CO2 capture and storage (CCS) for EOR.

Identifying the CO2 Value Chain

The concept of a carbon dioxide ‘value chain’ with large-scale commercial use of CO2 is well established in the US oil industry where naturally occurring CO2 has been cost-effectively used as miscible injection gas for increased oil production during the past 30 years. In the past three to five years, through work on the CO2 for EOR in the North Sea (CENS) project, the techniques by which international commitments to reduce GHG emissions have extended the potential scope of the value chain have also been shown to encompass;

  • pure sources of CO2 (e.g., refineries, hydrocrackers, ethanol production etc.);
  • CO2-capture from power plants and industrial complexes;
  • CO2-gathering, handling and interim storage;
  • CO2-transportation (ships and/or pipelines);
  • CO2-hubs, terminals and export facilities;
  • CO2 for enhanced oil recovery (EOR) and largescale sequestration; and
  • CO2-credit generation, certification and trading.

The CO2 value chain is important because it shifts the focus of GHG emissions away from being a regulatory problem to creating a commercial resource. Wherever a value chain exists, a market will evolve and with stable policies and a ‘level playing field’ the most efficient pricing mechanisms will be established and foster further CO2 reductions.

To date no company may seriously attribute a value on the ‘physical’ CO2 that is substantially beyond €8/tCO2 as seen in the EU Emission Trading System (ETS); however, the cost of moving CO2 along the complete value chain is usually greater than €25/tCO2. In the next decade this chain could be a mechanism for wealth creation and provide viable policy alternatives for governments to develop new industrial activities, ensure energy security and help combat climate change.

The CO2 EOR Experience in the US and Texas

It is the unique properties of supercritical CO2 that improves oil production in the final (tertiary) phase of reservoir life, which allows operators to recover oil that would otherwise remain in the ground after the end of conventional water-flooding. This was first exploited in the mature fields of the Permian Basin, west Texas, during the early 1970s.

To defray higher costs associated with CO2 for EOR projects, the US tax code has included ‘tertiary incentives’ since 1979 including an exception that allowed CO2-EOR crude to be sold at then free market prices, an exemption from the US windfall profits tax and a credit for production fuels from non-conventional sources. Finally, the US Federal EOR Tax Incentive was codified in 1986 enabling a 15% investment tax credit. There are currently eight states that offer additional EOR tax-incentives on incremental oil. CO2 EOR floods recover 206,000 barrels of oil per day (BOPD) representing 12% of the US oil production.

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