The passage in August of the Inflation Reduction Act (IRA) includes $369 billion over ten years to expand the use of electric vehicles, jump-start renewable energy, such as solar and wind power, and develop newer energy sources, like clean hydrogen. The bill targets energy security and climate change with a goal of reducing emissions by 40% below 2005 levels by 2030. Other measures, including market response and EPA regulation, will be looked upon to help reach the administration’s goal of a 50% emissions reduction by 2035.
With respect to the oil and gas industry, one aspect which may be impacted is CO2-Enhanced Oil Recovery (CO2-EOR). Today’s Energy Market Insight will take a look at the existing technology that is CO2-EOR and how it could participate in the IRA’s goal of increased carbon capture.
In 2019, the IEA reported that approximately 2 MM barrels of oil are produced daily using EOR globally, of which, 500 M barrels, or 20%, was produced with CO2-EOR.
In the CO2-EOR process, a portion of volumes initially injected in tertiary recovery remain sequestered in the reservoir. Approximately 40% to 60% by volume of the injected CO2 is produced with the oil, separated, then recycled and reinjected back into the reservoir. This closed-loop process means that, at the end of the injection period, nearly all the injected CO2 is sequestered in the reservoir. Less than 1% of the originally injected volume is lost to fugitive emissions and operational losses.
Currently in the US, approximately 80% of carbon dioxide utilized in the CO2-EOR process is obtained from naturally occurring sources. The remaining, labeled “anthropogenic CO2,” is derived from industrial activity (think power plants or DAC projects—see below). The 45Q tax credits are available for the sequestration of anthropogenic CO2.
In the US, federal and state tax credits have been available to enable this up-front, capital-intensive method of oil recovery for decades. The new law increases the tax credit rate available for carbon capture and sequestration (CCUS) via the 45Q credits, quadrupling their value pre-IRA for the sequestration of CO2 to be captured by the nascent DAC projects under development and nearly doubling the value for non-DAC projects. BTU recently wrote on the pre-IRA state of the 45Q tax credit, which can be found here. The bill also significantly lowers the volume threshold to qualify for the credit, allowing for smaller projects to be eligible for the credits as well. The addition of direct payment for the first five years of the project equal to the tax credit amount should also positively impact project economics of either type.
Not only is CO2-EOR an existing method for sequestering carbon, but an added benefit is that the oil recovered may help the US achieve carbon-neutrality. According to the IEA, “between 300 kg CO2 and 600 kg CO2 is injected in EOR processes per barrel of oil produced in the United States (although this does vary between fields and across the life of projects). Given that a barrel of oil releases around 400 kg CO2 when combusted, and around 100 kg CO2 on average during the production, processing and transport of the oil, this opens the possibility for the full lifecycle emissions intensity of oil to be neutral or even “carbon-negative.”
So, how significant a role can CO2-EOR play in meeting carbon sequestration goals under the IRA? In a 2021 report, the National Petroleum Council estimated that, with the current state of technology, the storage capacity for CO2 associated with CO2-EOR is 55-105 Bt onshore US. With advances in technology, and the development of Economic CO2 through a build-out of infrastructure, their estimate increases to 203-325 Bt.
Onshore and offshore in the United States, there is an estimated 414 B barrels of remaining oil in place that would be left in-situ without application of tertiary recovery operations such as CO2-EOR. Of this volume, 177 B barrels of oil is technically amenable to recovery through CO2-EOR. This would require injecting 51 Bt of CO2, though only a portion of this is economical to pursue at present.
Another important question is whether or not the significant infrastructure needed to expand the use of EOR for carbon sequestration will be built.
This is an area where the importance of Sen. Manchin’s permitting reform deal, which he required in exchange for supporting the passage of the IRA, impacts the advancement of the intent of the bill with respect to carbon capture by connecting industrial centers with CO2-EOR opportunities far enough afield where it can be utilized or encouraging the build-out of DAC in the field. Both aspirations could conceivably benefit from a streamlined permitting process.
As can be seen in the map below, existing pipelines and industrial infrastructure currently favor natural sources of CO2, with only a handful of localized industrial centers connected.
Possibilities for new infrastructure could connect anywhere from industrial centers to additional areas to support EOR activities, but new pipelines are, traditionally, a “heavy lift” in many areas of the country and will likely continue to be so.
Perhaps, more likely are integrated projects like Occidental’s (NYSE: OXY) 1PointFive DAC plant in Pecos County, TX. This project aims to eventually remove 1 Mt CO2 per year with a start-up date in late 2024. A portion of the captured carbon will be used in Oxy’s Permian CO2-EOR production. Oxy has also reached an offtake agreement with SK Trading International for an opportunity to purchase net-zero oil.
Whether the IRA spurs additional CO2-EOR activity outside of existing EOR, operators able to take advantage of the 45Q credits will be influenced by market conditions over the long runway of the IRA and other factors, including the long-term price of oil, whether an eventual price is placed on carbon, and the long-term production curve from the Permian and other shale plays.
Will we one day look to CO2-EOR to help sustain our crude and natural gas needs? Only time will tell.
For a more comprehensive look at North American oil and natural gas production dynamics, including expected impacts of the IRA and other policy incentives, request a sample of BTU’s Upstream Outlook.