Insight: The US economic locomotive is gathering pace, power by coal, oil and gas.

Monday, February 27, 2012

One intriguing aspect of media commentary on the 'turnaround' in the economic fortunes of the USA is a perception that the energy industry is playing a key role - see for example 'US economy is stepping on the gas' where one focus is on shale gas (the 'Shale Gale'), the investment it is attracting and the new jobs it is creating.

When coupled with the next wave - that of shale oil - not only is a considerable drain on the US currency to foreign shores going to be avoided but the USA can begin to contemplate domestic energy security, not to say self-sufficiency, for the first time in over 40 years.

No doubt Washington will claim that all this results from some sort of government 'master plan' - but viewed from the outside, it looks like it is the result of the operation of market economics.


When it comes to 'master plans' of course we naturally look to Brussels - OK, OK, I was joking!!

What about the UK?

Well, I have been digging around in the websites that exist under .gov.uk beginning with that for DECC, or to give it it's full title, the Department for Energy and Climate Change which gives somewhat of a clue as to this body's priorities. It's a bit of a struggle to detect anything that could be called an Energy Strategy but I did find the 2011 Annual Energy Statement by the then (since resigned) Minister.

Apparently, DECC's vision is of steering us away from excessive reliance on fossil fuels and onto clean, green and secure energy; there will be a thriving and globally competitive low-carbon economy.

On the supply side, it foresees an interesting mixture of energy sources - renewables, new nuclear, and fossil fuels. Recognising that renewables may be marginal - at least for a while - and 'new nuclear' will take a while, gas features strongly and there is reference to 'clean' coal via carbon capture and storage; I'm sure the word 'oil' is in there somewhere, I just can't find it!

Turning to other government departments, the Treasury has introduced tax changes for North Sea oil & gas which are important of course to economic recovery in the UK; but have the unfortunate side effect - given the number of fiscal changes the industry has seen in the last decade, of the UKCS becoming one of the less predictable fiscal regimes for petroleum exploration and production. And perhaps the Treasury is completely sanguine about the increasing size of the cheques we will be sending overseas...

Finally, it's difficult to find anywhere on .gov.uk some clear thinking about the security connotations of the decline of North Sea oil & gas production twinned with the increasing need to import coal, gas and oil from - to name a few - the Middle East, Russia, North Africa; and the increasing global 'scramble for resources' led by China, India…..

So we need some 'joined up' thinking.

I want to link two strands here:

Firstly, 'clean' coal - taking the carbon (CO2) out and eventually storing it safely - is going to be a key part of our energy future

Secondly, Enhanced Oil Recovery (EOR): utilising CO2 - said to be the most efficient and effective of the improved recovery/EOR mechanisms available to us (others are steam flood; chemicals; low salinity water flood; microbial).

The UK has a unique position and opportunity - at the moment - because it has a vibrant offshore oil & gas industry adjacent to on-going and planned coal-fired electricity generation.

What is the opportunity?

Consider US analogues first. EOR based on CO2 is very common, even common place. Technical 'Know How' exists in the oil & gas companies, not only in the Majors but is available to companies of all sizes: subsurface assets are available. Some 50 million tonnes of CO2 is injected annually, in miscible and immiscible floods, generating 350-400,000 barrels of oil per day or some 5% of US production, with some 1 billion 'extra' barrels recovered to date. Increases in STOIIP recovery factors are in the range 4-12%; some would estimate 'extra' reserves to be as much as 240 billion barrels. Much CO2 is recycled but it is estimated that 1/3 tonne of 'new' CO2 is needed per produced barrel of oil; thus a lot of CO2 is needed. So far, CO2-based EOR has been applied to relatively low quality, shallow and therefore cool, reservoirs: significantly better reservoirs are available in the Gulf Coast and offshore.

The UKCS has these higher quality deep reservoirs. Again the technical 'Know How' is available, more concentrated perhaps in larger companies than in the US. Also there is some experience of moving conventional gas around the North Sea, for example from the Schiehallion field to the Magnus field, in the Miller area, and in Morecambe Bay. Although EOR based on CO2 is untested in the UK, with mainly miscible floods one could anticipate an average increase in STOIIP recovery factors of 5% or more, corresponding to at least 3 billion barrels of 'extra' reserves. As a first step, pilot Carbon Capture & Storage projects in the UK could supply between 5 and 11 million tonnes per annum of gas (probably via Humberside) to UKCS Central North Sea fields, by 2020. A field with circa 800-1500 million barrels STOIIP could consume around 80 million tonnes of CO2 in 20 years and deliver 120-240 million 'extra' reserves.

What is the cost base for a complete project, involving a new power station supplying CO2 to an existing field?

The numbers are quite large - ~£1.5 billion for a power station plus ~£0.5 billion for (pre-combustion?) CO2 capture plus £1 billion for a pipeline plus another £1billion for modification of the existing field, for ~£4bn in total quickly putting such projects into the realm of needing a Major's balance sheet as well as its financial expertise, and requiring close cooperation between such a Major and a power company.

Is any of this likely to be economic?

A good place to start is to say that at current and foreseen gas prices, a 'clean' coal-fired power station, with Carbon Capture and Storage fitted, is significantly less attractive economically than a combined cycle gas-fired power station and this seems likely to be so no matter what governments may do about carbon prices.

Thus using CO2 for EOR delivers an extra, potentially highly lucrative, revenue stream that may outweigh the extra costs of implementation, in particular the costs of upgrading existing oil production facilities, improving pipeline protection against corrosion (CO2 and water is an especially aggressive mixture)and so on. Also, and very importantly, the Utilisation of CO2 for EOR and then - perhaps its ultimate Storage at the same site - pushes out, perhaps for decades, the moment for decommissioning and its associated costs.

So the economic modelling for an onshore-to-offshore CO2-enabled EOR investment is relatively sophisticated, critically dependent on an assessment of the risks involved. As I have indicated, the technology, the technical 'Know How', the favourable rocks, the finances all exist in the UK and for its offshore. The main issue, the main stumbling block, is getting such a project moving when there are potentially so many players - the Majors, big power companies, the UK Government (the Treasury on the one hand and DECC on the other), local government and local communities. The key may be for the UK Government to provide short term funding, perhaps a tax-based incentive, anticipating a future tax stream from increased UKCS oil production. A Durham University study found that CO2 captured through CCS and used for EOR could lead to £150 billion of 'extra' oil being obtained from existing oil fields in the UKCS North Sea, oil that would not otherwise have been produced.

This would be of significant economic value to the UK, as it would add around £60 billion in revenue to the UK Treasury, as well as also having tangible political benefits (moving in the direction of energy self-sufficiency once more).

There should be a sense of emergency. This opportunity exists 'at the moment' but the other side of the decommissioning coin is that the 'age of abandonment' in the UKCS is almost upon us - too much dilly-dallying and the existing infrastructure will have all but disappeared.

Article Tags United States North America Production Update Carbon Capture Decommissioning North Sea Nuclear Shale Gas Unconventionals University

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