Boosting Oil Recovery While Storing CO2: Win-Win or Red Herring?

Oil companies can find a few nuggets to cheer about in the Obama energy plan. One proposal would create incentives for injecting captured industrial carbon dioxide emissions into oil reservoirs in order to improve oil recovery. This would boost domestic energy production while addressing climate change via carbon sequestration. Is this apparent win-win plan for oil companies workable?

Oil producers have been injecting CO2 into fields to increase recovery of crude for more than 30 years. The gas reduces the oil’s viscosity, rendering it more mobile, and moves it more readily to the producing wellbore. Output from CO2-enhanced oil recovery projects now accounts for more than four percent of U.S. oil production.

Here’s the catch: Most CO2 injected into oil fields is naturally sourced and produced via drilling, production, and transportation methods long familiar to the oil industry. Carbon capture and storage from industrial sources is a somewhat newer technology and a much costlier proposition. Industry and government have poured billions into R&D to cost-effectively implement CO2 capture at power plants.

A number of oil industry projects today already incorporate industrially sourced CO2 in projects to bolster recovery of oil — mainly in Canada, Europe, and the US. Outside of a few special cases, however, these projects rely heavily on financial incentives — either credits or the avoidance of carbon taxes.

Even with the downturn in oil prices, oil companies still see huge potential in CO2-enhanced oil recovery. The new twist with incorporating carbon capture is that it secures carbon emissions offsets in a carbon-constrained world while obtaining an economic new source of CO2 for injection into oil reservoirs. Or oil producers can just use the industrial CO2 for a pure-play carbon offset strategy via storage in depleted fields.

A study conducted for the Department of Energy found that global sequestration capacity in depleted oil and gas fields equates to 125 years of current worldwide CO2 emissions from fossil fuel-fired power plants. That same study estimated that the US could recover an additional 39-48 billion barrels of oil (effectively more than doubling current US proved reserves) via a broad program of enhanced oil recovery using industrially sourced CO2. Sales of CO2 captured at power plants to oil producers could in turn help defray electric utilities’ CO2 capture costs.

The trick is in bringing down the cost of the CO2 to producers so that using it to bolster oil recovery is cost-effective, especially with today’s oil prices. That’s where a tax credit, like the one envisioned in Obama’s energy plan, comes in. Such a tax credit was implemented in the US beginning in 1980 to encourage unconventional gas production. The result? Unconventional gas, including shale gas, now accounts for more than 40 percent of US natural gas production.

Vello Kuuskraa, president of Advanced Resources International and co-author of the DOE study, has said that a $5 per barrel tax credit to oil producers injecting CO2 into reservoirs could add another million barrels per day to US oil production during 2012-20. In theory, the credit would be revenue-neutral because of the added taxes and royalties from the increased oil production.

The other trick is getting past environmental groups who oppose anything that perpetuates the continued use of fossil fuels. Not to mention the PR hurdle of giving a new tax break to the oil industry once oil prices have rebounded in a recovering economy.

So bolstering US oil recovery with CO2 captured at power plants could well be a win-win, but it won’t be a slam dunk.