Could Expensive Oil Rescue Carbon Capture?

What a difference a few years makes. Not long ago, power plants with carbon capture and sequestration (CCS) seemed to be the key to a low carbon future. Today, with no large-scale pilot plants operating, no appetite for big government subsidies, and no price on carbon in the offing, CCS barely registers in most low-carbon energy conversations.

I’ve recently been wondering, though, whether high oil prices might change that. The United States produces about a quarter-million barrels of oil each day by injecting carbon dioxide underground to enhance oil recovery. The scale of this endeavor, known as CO2-EOR, is limited primarily by CO2 availability, most of which comes from natural sources. That’s why estimates of the potential impact of various cap-and-trade bills often projected big gains in U.S. oil production: by penalizing greenhouse gas emissions, they would have incentivized CCS, and in doing that, helped boost oil.

But here’s the thing: at some oil price, it should be worth capturing CO2 from power operations purely so that it can be used to extract oil.

I’ve been meaning for a while to try and put some numbers to this hunch. I hadn’t followed through, but this past Monday, I visited an interesting company whose business strategy is based substantially on this bet. That’s enough motivation for me to drill down a bit more.

In a 2010 study, ARI 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 CO2 available 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.

This might sound attractive, but it is still a risky proposition. First of a kind CCS plants would face higher costs than those used here. (Oil prices around a hundred dollars or so, though, could still make the system work with $180/ton CO2.) It also relies on a big sustained gap between prices for oil and gas, but it’s not clear that investors could count on that.

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.