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The gas is the major contributor to global warning. Now major energy companies are looking for ways to capture and sell it
From Standard & Poor's Equity ResearchA steady drumbeat of news articles proclaiming the dangers of global warming have focused public attention on the issue of carbon dioxide emissions as never before. It now seems likely that the U.S. will join Europe, Japan, and Canada in imposing a cap on the release of carbon dioxide into the atmosphere. The issue is beginning to draw a response from major energy companies, who are pursuing a number of small but potentially important pilot projects that aim to uncover the costs and technical feasibility of capturing carbon dioxide and locking it away where it won't trap more heat.
Statoil (STO), the oil giant that's 70% owned by the Norwegian government, operates at least four different projects that involve capturing the carbon dioxide that would otherwise be released from its oil production and refining operations, and is still pursuing more.
Pioneers in the Field
At the company's Sleipner oil field in the North Sea, which Statoil claims is the world's first major carbon dioxide "sequestration" project, some 2,800 metric tons of carbon dioxide found together with natural gas are reinjected into a saltwater deposit under the seabed every day. By doing so, the company avoids having to pay Norway's carbon emissions tax, which would total about 1 million Norwegian kroner per day ($125,000), though the cost of capture is roughly the same.
"Statoil is a pioneer in the area of carbon capture," says Christine Tiscareno, a Standard & Poor's equity analyst in London. She has a strong buy recommendation on Statoil shares. The projects, she says, are positive for the company, because they intend to turn this by-product into a green, profitable commodity. "By 2010, Statoil expects to reduce the carbon dioxide emissions from its operations by about one-third, while reducing separation and capture costs by 50% to 75%."
While burying the carbon dioxide deep below the ocean floor appears to be a viable—if expensive—way of neutralizing it, the process would certainly be improved if the CO2 could be both locked away from the atmosphere and put to some constructive use.
Building on the oil industry's extensive experience using carbon dioxide to improve recovery rates from mature oil wells, EnCana (ECA) has contracted with the Great Plains Synfuel plant—an Energy Dept.-sponsored facility that is owned by the Basin Electric Power Cooperative—to buy carbon dioxide produced by the plant and ship it via pipeline to its Weyburn field in southern Saskatchewan. EnCana injects the gas into its oil field, where it reduces the viscosity of the oil, allowing the company to increase its recovery from the field. EnCana says the CO2 injections have raised output from the field by 60%.
Supply and Demand
Ironically, the biggest problem with using carbon dioxide to enhance oil recovery is the lack of available CO2 supply, something that could be cured quite quickly if a way is found to capture some of the 2.5 billion tons of carbon dioxide released by U.S. power generators alone each year. "If you are burning coal to generate power, you are producing a lot of carbon dioxide," Tiscareno says. "All that CO2 could be used to enhance oil recovery."
The Energy Dept. estimates that an improved and expanded carbon dioxide oil recovery program could add 89 billion barrels to the 22 billion barrels of recoverable oil reserves believed to exist in the U.S., and possibly much more. If 89 billion barrels were added, the U.S. would move up in the world's rank of oil reserves to fifth place from 10th.
While the EnCana project combines two government-sponsored pilot projects, a similar project that's privately funded and is expected to turn a profit is under way on the shore of the Gulf of Mexico near Natchez, Miss. There, Rentech (RTK) plans to build a plant that converts coal into 25,000 barrels per day of liquid fuels like diesel, and will produce carbon dioxide as a by-product. Denbury Resources (DNR) will buy the carbon dioxide and ship it through a pipeline to oil fields it operates in the area.
Denbury says it has signed two other contracts to purchase carbon dioxide from planned coal gasification plants in Louisiana. Interestingly, the carbon dioxide it purchases from Rentech will be more expensive than the CO2 that Denbury produces now from natural deposits. Denbury expects it will be able to make up the cost difference by selling emissions credits it gains from its activities in the future.
Cutting out coal
Peabody Energy (BTU), the largest U.S. coal producer, is partnering with Rentech on that project and another, for which it has agreed to pay the first $10 million in engineering and development costs for the conversion of a fertilizer plant in Illinois to coal use from natural gas. According to Chris Lippincott, an S&P equity analyst, Peabody and other coal producers engaged in these types of projects stand to benefit both from the operational experience and from government subsidies included in legislation now pending in Congress.
"Though the technologies are in the development stages, they have been proven effective," Lippincott says. "With the demand for energy rising along with public pressure for clean energy sources, coal producers that get involved with these projects are entering at the early stages of what may be a long-term effort."
The projects are based on coal gasification or coal-to-liquids plants, because they give off a stream of highly concentrated carbon dioxide that can be gathered and transported by pipeline relatively easily. Taking the CO2 from the flue gas of a coal-fired power plant poses an additional technical challenge. It's one that the French engineering company Alstom hopes to solve by developing a process that uses chilled ammonia to absorb the carbon dioxide found together with air or other gases.
American Electric Power (AEP), the largest coal burner in the U.S., plans to install the Alstom chilled ammonia system at a coal burning power plant in West Virginia next year as a pilot project. If the technique proves successful, the utility plans to expand it to full commercial scale at an Oklahoma plant in 2011. Alstom is also working with Statoil on a project to use its chilled ammonia technology at one of Statoil's refineries in Norway, as well as with German utility E.ON (EON) at an oil-fired generating station in Sweden. Many of the new fossil fuel-burning power plants being planned in the U.S. are designed as "carbon capture ready."
One company that could become a major force in a future carbon dioxide industry is pipeline owner Kinder Morgan Energy Partners (KMP), which owns 1,100 miles of carbon dioxide pipeline that supplies the gas to oil fields in Texas and New Mexico from naturally occurring deposits. The company is studying whether it could expand its business to bring carbon dioxide to the massive oil sands deposits in Alberta, Canada.
"It's one of their four main businesses," says Stephen Ham, an S&P equity analyst. "It's a big deal for them," he adds, saying the company is spending $500 million to expand its carbon dioxide business. "They're not thinking about it from the environmental perspective. They're looking at it from a business perspective."