March 05, 2006
Enhanced oil recovery
The Department of Energy issued a series of optimistic reports on Friday about the potential for carbon-dioxide-based enhanced oil recovery methods (CO2-EOR) to lead to huge increases in U.S. crude oil production.
The Department of Energy (DOE) released today reports indicating that state-of-the-art enhanced oil recovery techniques could significantly increase recoverable oil resources of the United States in the future. According to the findings, 89 billion barrels or more could eventually be added to the current U.S. proven reserves of 21.4 billion barrels.
"These promising new technologies could further help us reduce our reliance on foreign sources of oil," Energy Secretary Samuel W. Bodman said. "By using the proven technique of carbon sequestration, we get the double benefit of taking carbon dioxide out of air while getting more oil out of the earth."
The 89 billion barrel jump in resources was one of a number of possible increases identified in a series of assessments done for DOE which also found that, in the longer term, multiple advances in technology and widespread sequestration of industrial carbon dioxide could eventually add as much as 430 billion new barrels to the technically recoverable resource.
Which is it, 89 billion or 430 billion, or something much smaller? When one gets into the details of the reports, there are quite a few alternative numbers that one could choose to highlight. The key document notes that about 200,000 barrels/day are currently being produced in the U.S. from CO2-EOR, and cautions that:
Even with application of "state-of-the-art" EOR technology, the economically recoverable oil from CO2-EOR remains modest, at about 7 billion barrels. This is because current investment decisions for CO2-EOR and competing projects are made under "price expectations" of about $25 per barrel.
Among the report's recommendations:
Financial "risk mitigation" policies (such as royalty relief, reduced state production taxes and increased federal investment tax credits for EOR, that together have the effect of lowering the minimum required "oil price expectations" for economically feasible capital investment by $10 per barrel), when applied with improved CO2-EOR technology and affordable supplies of CO2, are a key step for capturing the full potential from CO2-EOR.
Here we go again. As I commented last week, these forecasts of $25 a barrel strike me as unlikely to materialize. I further don't see why oil companies can't insure themselves at least in part against these risks by selling oil futures. And if oil indeed does go down to $25 a barrel, it's not clear that we need these investments anyway.
This is surely a case where the market can and should be counted on to sort this out. If there are indeed huge quantities of oil that can be brought profitably to market at $40 a barrel, and if the price of oil remains above $40 a barrel, then there is every reason to expect oil companies to figure out how to do this all by themselves.
I hope these reports are correct in their assessments of the huge potential for CO2-EOR. But I'm persuaded they are not correct in their conclusions about the policy recommendations that the analysis would support.
Posted by James Hamilton at March 5, 2006 12:47 PMdigg this | reddit
Listed below are links to weblogs that reference Enhanced oil recovery:
» New Energy Currents: 2006-04-05 from Winds of Change.NET
The weather's finally looking up out here on the east coast, the Yankees are totally ridiculous this year, and New Energy Currents is back on its monthly grind, helping you keep up on the latest developments in energy technologies and their evolving ap... [Read More]
Tracked on April 4, 2006 09:52 PM
I keep hearing that oil companies continue to use $25/bbl to plan for CapEx, but also hear about all sorts of new production methods, both conventional and unconventional, that are purported to be economical at under $60. Have you gotten a sense of how much additional investment would be made were firms to use $30/bbl, $35/bbl, etc. for planning? And how much output growth that could produce?
Posted by: Marc Shivers at March 5, 2006 02:17 PM
That's a good question, Marc. I have to admit I find this whole $25/barrel planning a very confusing notion and am not sure I've really gotten to the bottom of it.
One rough estimate might be that if the oil companies were fully persuaded that $60 oil is here to stay, they'd be reinvesting essentially all of their profits rather than piling up cash and buying back stock. For ExxonMobil, my earlier calculations with their 2004 income statement suggested that they could basically triple their investment budget if they viewed the $60 as permanent and had that many projects that could be profitable at that price.
As for how much it would increase supply if they did that, this seems to me to be a very open question. Depends in part on how much confidence you have in assessments like this latest from DOE.
Posted by: JDH at March 5, 2006 04:28 PM
"these forecasts of $25 a barrel strike me as unlikely to materialize. I further don't see why oil companies can't insure themselves at least in part against these risks by selling oil futures."
Because the risks are not symetrical. If you plan on low prices and the price goes way up, you make less money than you would have, but you still make money.
If you plan on a high price and make investments on that basis, you are bankrupt. Since the current managements of the oil companies went through that scenario in the 80s, they don't want to do it again.
Posted by: Robert Schwartz at March 5, 2006 04:32 PM
By accident I came across your discusion while checking on the current use of the term fungible.I wasn't able to resist adding to this most interesting discusion. Maybe you should connect with Douglas at ODAC. In any event
it is my view that peak oil is a fact as the commodity is finite on the planet. A debate about the when is mostly a waste of time. Also,that the notion of market driven pricing will in the end create a stable relationship between supply and demand seems reaching for an ideal, not reality.
It is being made clear almost dialy that oil and gas producers believe they have a hammer to use for economic or political gain and they are using it . This condition would be almost immpossible to create a risk calculation for. With rebels in Nigeria threatening to shutdown the country's production how big does the premium get to be for oil futures? To my mind it could result in a prolonged paralysis of markets worse than expieienced when the Russian bonds went no bid in the trading rooms of the world.
Posted by: Erik at March 5, 2006 05:37 PM
A point I've raised before: in order for oil companies to invest in new production, there must be a supply of whatever is necessary to create that new production. By that I don't mean supply of oil in the ground. I mean all the service industries (or even departments that exist within oil companies) that set about producing that increased production. How many billions can one throw at that? E.g. this year. And next year? How many contracts can they actually let in the next year or two or three?
Posted by: T.R.Elliott at March 5, 2006 07:47 PM
But with that perspective, T.R., don't you agree with me all the more that new tax incentives for the oil companies aren't a sensible solution?
Posted by: JDH at March 5, 2006 07:55 PM
Of course the tax incentives aren't a sensible solution. Todays leaders first decide what the laws should be; then they create the rationale needed. This is why they introduce the $25/barrel explanation.
Posted by: e sciaroni at March 5, 2006 08:36 PM
JDH: Yes, I hadn't indicated my opinion on your main point. I see absolutely no reason for tax incentives. I don't think they solve anything. If anything, I'd go with the Economist which has recommended for probably ten years the need for carbon taxes--though granted a distortion.
I think the only role that govt, at this time, should be playing in energy is to be funding R&D for technologies that might fall outside the scope of the energy company planning windows, whether it be hydrogen derived from name-your-favorite-bacteria, solid state physics for superconductivity and solar cells, next generation battery technology, etc. Plus economic and geological modeling analysis.
Posted by: T.R. Elliott at March 5, 2006 10:10 PM
I agree that tax incentives seem out of place. You have occasionally commented on California political issues. What do you think of the proposed initiative to tax California oil production, the "Clean Alternative Energy Act"?
L.A. Times article from last month:
"Proponents of the alternative energy measure contend that California, the third-biggest crude oil producer in the nation, should begin collecting a so-called extraction tax, as do Texas, Louisiana, Alaska and other petroleum-rich states. The initiative would bar oil companies from passing the tax on to consumers in the form of higher pump prices, though enforcing the prohibition could prove difficult, the legislative analyst's office said in a Jan. 25 review of the initiative....
Income from the tax would be administered by a new state agency, which could raise additional funds by selling bonds backed by future revenue from the tax, said Ralph Cavanagh, the Natural Resources Defense Council's energy program director in San Francisco.
"The new independent agency would earmark 60% of the money for programs designed to develop alternative vehicles and fuels to reduce gasoline and diesel use, 27% to pay for research at California universities, and the rest mainly to help companies put new products on the market."
Summary from the state of California:
"Establishes $4 billion program to reduce oil and gasoline usage by 25%, with research and production incentives for alternative energy, alternative energy vehicles, energy efficient technologies, and for education and training. Funded by tax of 1.5% to 6%, depending on oil price per barrel, on producers of oil extracted in California. Prohibits producers from passing tax on to consumers. Program administered by California Energy Alternatives Program Authority. Prohibits changing tax while indebtedness remains. Revenues excluded from Proposition 98 calculations and appropriation limits. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local governments: New state revenues annually � depending on the interpretation of the measure�s tax rate provisions � of either about $200 million or about $380 million from the imposition of a severance tax on oil production, to be used to fund a variety of new alternative energy programs. Reductions of unknown amounts in: local revenues from property taxes paid on oil reserves, potentially partially offset by state payments to schools to make up their revenue loss; state revenues from income taxes paid by oil producers; and, potentially, state and local revenues from gasoline and diesel excise and sales taxes."
Text of the initiative (long! pdf):
Posted by: Hal at March 6, 2006 09:58 AM
I have the feeling we've gone over this before, my memory you know...
But, if I owned an oil company, I don't feel it would be in my best interest to be able to rapidly pump out all that oil at -- lower prices --.
I really don't see the motivation, leave my oil in the pit, it's better than money in the bank, I'll be real slow at improving my production ratios, it benefits me by keeping oil expensive and in my wells...
What's the rush to pump my oil out at low prices? No way.
If global oil inventories are under a certain level, and they are, refiners get very antsy, at the first hesitation in supply, Nigeria, Ecuador, blast in Saudi, oil prices shoot up $2+ or more.
Reading Tertzakian's book, I get a very solid impression that the oil situation is in crisis; we're at the phase of getting oil from Timbuktu (geographically and geopolitically), and that's a telltale sign of approaching the end of the rope for any nonrenewable.
On the other hand, I see the US economy could very well handle $4 /gallon or more than $100 /barrel; so there's still a lot of room before seriously affecting the US economy. We'd be inconvenienced, yes, because most of the oil in the US is used as gas for transportation; 230 Million cars, mostly.
So, my WTI high quality oil is scarce and will be in demand, no matter what new, - but more expensive processes - are implemented.
As an oil producer, I really don't have an incentive to bust my chops (and spend my money?) to pump myself into lower prices...
Posted by: Joe Rotger at March 7, 2006 08:42 PM
Petroleum is currently an oligopoly industry ruled by producing countries, not companies. The oil companies are using a $25 profitability hurdle because the oligopolists might cut their prices to force out competing suppliers. In other words, the oil companies are projecting a predatory price for crude set by OPEC et al.
Posted by: chsw10605 at March 8, 2006 06:07 PM
If I was an oil company and saw the massive expansion into oil recovery technology, biofuels, hybrids, and battery technology. I would set the long term price at $25 as well.
It doesn't matter that any of the above aren't economically competitive, they will be well subsidized.
Posted by: Russ at March 9, 2006 08:00 AM
The reason that the oil companies use what looks like a low oil price as a test to base their investments on is because it makes little difference. What I mean by that is that even using $25/bbl or $30bbl they have more profitable projects than they can manage with their current staff and resources, so raising the test price will not increase the number of projects that are done. It takes decades to train people to manage the multi-billion dollar projects that are needed - which has created a situation where the oil companies (or the countries that they operate in) can extract excess rent without it being competed away (at least for a good while). This situation has arisen because the oil industry (like many other commodities) was staffed up for a low growth rate and along came the BRICS and increased that growth rate. I think my point about constrained resources driving investment amounts is missed by some commentators because they mistakenly think of oil company investments as financial investments (bonds or share for example). In the case of financial investments increasing the amount invested requires very little additional resources.
Posted by: ChrisA at March 12, 2006 07:23 AM