Could expensive oil rescue CCS? A talk with energy expert Michael Levi | Global CCS Institute

As oil prices continue to skirt all-time highs, there’s been a gusher of coverage about how oil producers are turning to ever more costly technologies—from going to ultra deep, to mining tar sands—to eek more oil from the earth. Against this backdrop, I wondered if the case for using CO2 for enhanced oil recovery (EOR) is gaining mind share, or maybe even market share?

To get a better understanding on the impact of sustained high oil prices I turned to Michael A. Levi, The David M. Rubenstein Senior Fellow for Energy and the Environment at the Council on Foreign Relations in New York City. A frequent author (his new book, The Power Surge, is due out this month) and a regular contributor to the CFR’s energy, security and climate blog, Levi is a prolific voice on energy issues, often quoted on the complex interplay between conventional energy, renewables, climate, and politics.

Levi first explored the linkages between high oil prices and EOR-CCS’ prospects last June, a time when oil prices were around 10 per cent lower than recent averages. In his post, Levi steps through a back-of-the-envelope assessment of the potential rewards of scaling up EOR-CCS.

In a 2010 study, Advanced Resources International estimated that a typical CO2-EOR project would require about one ton of CO2 for each 3.8 barrels of produced oil (assuming some recycling). Assuming CO2available at $15/ton and an oil price of $112 they figured that a typical project could make a profit of about $30/bbl after returning 25% on capital.

Alas capturing and delivering CO2 from power plants costs a lot more than $15/ton. How much more? A lot depends on how much natural gas costs. A recent paper in Environmental Science & Technology uses a central estimate of $6.55/MMBtu and estimates that captured CO2 could be delivered at $73/ton. If prices are instead $5/MMBtu, which is a reasonable expectation in the United States, this would drop by about ten percent, to around $65/ton.

The authors also look at the question probabilistically. They find that there’s a 70 percent chance of being able to deliver CO2 for $100/ton or less. If you shift their natural gas price assumptions down a bit, it’s reasonable to drop this to about $90.

What would this mean for the economics of oil production? Estimated profits at $112/bbl oil would fall to about $18/bbl (part of the extra cost of CO2 would be offset by lower taxes). Once again, though, this is profit in excess of a 25 percent return on capital. Excess profits would be wiped out if oil prices fell to about $75.

Notably, the study to which Levi refers is focused on the cost of CO2 capture from natural gas processing plants—the largest industrial-scale sources of CO2 currently available. Levi’s calculation holds for proposed CCS-from-coal facilities, where planners are aiming at a similar target of delivering CO2 at less than US$100 per ton.

Back to oil prices, then. Given that crude has held steady at around US$100 per barrel in the past few years, Levi’s calculus makes CCS-EOR look like a pretty good proposition. Levi’s bottom line: “I wouldn’t count on high oil prices rescuing power plant CCS. But I wouldn’t write it off entirely either – and, even if there’s only limited deployment, the impact on technological progress could be large”.

In short, the longer the price of crude remains high, and the higher it goes the stronger the case for EOR-CCS. While it may be perilous to speculate on oil prices, the balance of indicators point towards high prices over the long term. Energy-hungry emerging markets such as China and India increasingly drive long-term demand. A recent OECD report speculated that prices could rise as high as US$270 a barrel by 2020, due largely to demand growth in emerging markets.

To keep output rising, companies are already digging deeper—literally and financially—to lift each new barrel of oil. Exxon, for example, will spend a record US$41 billion in 2013 to buoy its long-term output of oil and gas, which it expects to fall by one per cent this year. As oil companies reach for more tools to eek out every last molecule of petrol, especially from wells they already control, it seems that the case for EOR-CCS is only improving.

I caught up with Levi in March to get his take. Here’s an edited version of our conversation.

In the years since the financial crisis hit, oil prices have remained stubbornly high, despite slow growth in much of the developed world. Do sustained high prices reinforce your take on the prospects for oil’s growing role in the future of CCS?

I’ll leave it to others to make predictions on future oil prices. But it is clear that high oil prices make it more attractive to use CCS in EOR. The higher oil prices go, and the longer they remain high, the more incentive there is to invest in CCS EOR.

Short-term variances in oil prices are fairly immaterial. What matters most is that prices have been sustained. This gives people more confidence that prices will remain high over a longer spread, over a longer period of time.

No one invests for the long term based on today’s prices, especially not oil companies, which plan on multi-decade time scales. Power companies also think on very long time scales. Both are capital-heavy industries—familiar with assessing risk, pricing and financing big projects. The difference is that oil companies are more likely to be comfortable taking risks.

Given anemic US growth, why have oil prices remained near their all time highs, when adjusted for inflation?

With the exception of the immediate aftermath of the financial crisis, when oil fell sharply, prices have been historically high. Prices also returned to high levels very soon after the global financial crisis.

When it comes to prices, the slow growth in the United States, following the recession, doesn’t matter in so far as we’re part of the world economy, taking a world price on oil. There’s a lot of growth in demand happening elsewhere, particularly in developing economies like China.

At the same time, even though there’s been a lot made of rising US oil output, in the global market the new sources add up to only modest supply growth. The net result is relatively high, sustained prices. Rising US oil output can help restrain prices at the margin, but it’s unlikely to crash prices on a sustained basis.

That’s partly because marginal North American oil production is fairly expensive. Whether it’s fracked oil in the Dakotas, or oil sands in Canada, these unconventional new sources are relatively costly to exploit, so require fairly high prices to be viable.

Some environmentalists have objected to the idea of CCS-EOR, maintaining that it’s perverse to pump anthropogenic CO2 into the ground to lift out fossil CO2 in the form of oil. For example Joe Romm—a former US DOE official and a leading voice on climate policy via Climate Progress—has argued that CCS-EOR will lead to more net CO2 emissions. Here he is, writing in 2007:

Capturing CO2 and injecting it into a well to squeeze more oil out of the ground is not real carbon sequestration. Why? When the recovered oil is burned, it releases at least as much CO2 as was stored (and possibly much more). Therefore, CO2 used for such enhanced oil recovery (EOR) does not reduce net carbon emissions and should not be sold to the public as a carbon offset…. In short, the CO2 used to recover the oil is less than the CO2 released from that oil when you include the CO2 released from 1) burning all the refined products and 2) the refining process itself.

How do you see this issue on the net GHG impact of EOR-CCS?

Focusing only on each CO2 ton in the near term is short sighted. There are two things worth keeping in mind. The first is that at the margin, US oil production tends to primarily displace other oil production rather than supplement it. So if lifting the US barrel, in that case, leaves even a little more CO2 in the ground than the alternative, then it’s a plus. That alone reduces the impact of this practice on net emissions of greenhouse gasses.

The other perhaps more important aspect is, in the short run, what you should be focused on when it comes to CCS and EOR is the opportunity to develop the technology. The goal is to bring down its cost, which will let you apply it on a much larger scale to other industries. If you don’t start somewhere, it’s very hard to get to the point where this technology is cost-effective.

So even if applying CCS to boost EOR doesn’t create a big carbon benefit in the short run, it’s a good bet to deliver a big payoff in the longer run. It’s perhaps the most economically viable path, to ready CCS for commercial use in the electric power sector around the world.

The point is that technologies need niches to scale up, and to bring down costs. If you only focus on technologies that can solve all our problems right now at low cost, it turns out that you don’t have any.

Don’t get me wrong. It’s obviously critical that we reduce net greenhouse gas emissions. But I’m more interested in being able to make huge reductions ten years from now than in the micro-level changes that might happen before this technology is scaled up.

We’ve touched on high priced oil already. The other bogeyman in global energy markets these days is cheap North American natural gas. In early March, a Canadian coal-to-syngas project that was slated to deploy advanced CCS was mothballed in part because of low natural gas prices. Does cheap natural gas alter the calculus on CCS-EOR in any way?

If we’re talking about CCS for synthetic liquid fuels, which you asked about, those require relatively high prices to be viable. Without massive over-investment in that space, I don’t see a stampede toward synfuels. So no, even if we see more synfuels, the shift will not crash the price of oil.

On that note, keep in mind that the one thing that might change the calculus of CCS-EOR is if oil prices crash. But it’s very difficult to crash the price of oil from the supply side, especially when it’s already this expensive, unless you massively overinvest in oil production—which is very capital intensive to do—or develop a very large-scale supply of alternatives.

As far as natural gas-fuelled cars and trucks go, my answer is the same. Yes, natural gas is being used to fuel a growing—but still small—share of fleet vehicles, and yes EVs will consume more natural gas indirectly, in the form of electricity. But will the penetration of natural gas into the US transport sector fundamentally change the economics of oil? I don’t see that in the next 10 years, at least. I think it’s hard to make predictions further beyond that.

With the failure of many publicly backed CCS projects around the globe, do you see EOR as a best bet to push CCS technology ahead?

I think that may well be right. With EOR-CCS, it may not be possible to make money at a large scale without new policy, but it may at least be possible to imagine that one can, and to come closer to cover the costs of scaling up the technology in the process. Conversely, it is impossible for anyone to imagine that they can make money taking the CO2 exhaust from a coal-fired power plant and burying it underground—unless there’s a policy incentive. It’s a pure additional cost.

Entrepreneurs who put money into EOR-CCS may be right, or they may be wrong, but at least a few may be willing to push ahead. In short, CCS-EOR provides short-term economic support for innovation. If you’re concerned about the long-term prospects of CCS, you should be thinking about EOR as the way to support innovation in the technology.

What are the key hurdles then to seeing EOR-CCS progress further, faster?

Will companies have the confidence to invest in this? Are there too many risks that are confusing? Is there too much uncertainty? Are there too many technological unknowns? I think those are bigger factors compared to whether oil prices might crash, or whether the global transport system might flip to natural gas.

There’s some evidence of progress out there. There’s interest in tweaking some tax credits that exist in order to support CCS-EOR. And in his State of the Union address, the president mentioned a US$25 million prize for the first combined cycle natural gas plant to implement CCS. It’ll be interesting to see whether that prize is defined to include projects that use the CO2 for EOR.

~

Check out the original post here:

http://www.globalccsinstitute.com/insights/authors/adamaston/2013/03/26/could-expensive-oil-rescue-ccs-talk-energy-expert-michael-levi