# Presentation: 237417

## Opportunities for Increasing Revenues from State and Federal Lands:  Pursuing the “Stranded Oil“ Prize

**David J. Beecy**
**Director, Future Oil and Gas Resources**
**Office of Oil and Natural Gas/Office of Fossil Energy**
**U.S. Department of Energy**
**david.beecy@hq.doe.gov**
**Phone: (202) 586-5600      Fax: (202) 586-6221**
**EASTERN LANDS AND RESOURCES COUNCIL AND **
**WESTERN STATES LAND COMMISSIONS ASSOCIATION**
**Joint Spring Conference**
**Washington, DC**
**April 17-20, 2005**

## Summary Outline of Presentation

**Domestic Oil Resources**
**The “Stranded” Oil Prize/Six Basin Studies**
**Managing the CO2-EOR Process**
**Balancing the Risk-Reward Structure and Correcting Market Imperfections**
**Rationale for Public-Private Partnerships**
**A Win-Win-Win Strategy**

## The Domestic Oil Resource Pyramid

**Residual Oil in Transition Zones**

**Heavy Oil**

**“****Stranded” Oil in Future Resources**

**“****Stranded” Light Oil**

**The Domestic Oil Resource Pyramid**

- Source:  Advanced Resources International, Inc. 2005

_**Original Resource in Place: 1,335 Billion Barrels**_
**Undeveloped Oil In Place: 1,130 Billion Barrels**

**Already Produced or **
**Proved Reserves **
**(205 Billion Barrels)**

**Undiscovered and Undeveloped Reserve Growth Resources**
**(190 Billion Barrels)**

**Tar Sands**

## Domestic Oil Resources

**Currently **
**Unrecoverable **
**Oil In-Place**

**Cumulative Production**
**183 Billion Barrels**

**Proved Reserves**
**22 Billion Barrels**

- JAF2005021.XLS

*Source: Advanced Resources International, 2004*

**Additional Recoverable with Enhanced Oil Recovery**
**148-210 Billion Barrels**

**Undiscovered/Reserve Growth **
**(Onshore & Offshore)**
**190 Billion Barrels**

**Includes light oil, heavy oil,  tar sands and residual oil in transition zones.*

**Domestic Oil Resources**

## Domestic “Stranded” Oil Resources: Six Basins/Areas

**Original Oil In Place: 309 Billion Barrels**

*Source: Advanced Resources International, 2005*
*JAF2004075.XLS*

_**Cumulative Production**_
**92 Billion Barrels**

_**Proved Reserves**_
**12 Billion Barrels**

_**Remaining Oil In-Place**_
**205 Billion Barrels**

**“****STRANDED” OIL**

## Recoverable Oil Can Add 43 Billion Barrels to U.S. SupplySix Reports Examine Additional Domestic Oil Production

- “State-of-the-art” practices successfully applied today in a few U.S. basins were defined and their feasibility was assessed in the six basins studied.
- Developing these resources would provide significant revenues to state treasuries, provide thousands of additional domestic jobs, and improve the U.S. trade balance by reducing imports.
- Emerging, advanced EOR technologies could double the incremental oil recovery and the associated revenue/economic impacts.

## Economic Implications

**If 43 billion barrels of additional domestic production substituted for oil import at $40/bbl:**
- Over $1.7 trillion reduction of U.S. wealth transfer to oil exporters, through trade deficit reduction;
- Over 500,000 high-paying domestic jobs from direct and indirect economic effects of increased oil production;
- Over $400 billion of state and local revenues generated in lieu of other revenue sources;
- Broad-based state oil development investments.
**The robust domestic oil production sector could be producing more oil (and public revenues) in 2025 than at present time.**

## CO2-EOR Technically Recoverable Resource Potential From Favorable Domestic Oil Reservoirs (Six Areas Studied To Date.)

| Basin/Area | No. Large
Reservoirs Assessed | All Reservoirs |  |  |
| --- | --- | --- | --- | --- |
|  |  | OOIP
(BBbls) | ROIP
(BBbls) | Technically Recoverable
(BBbls) |
| California  | 88 | 83.3 | 57.3 | 5.2 |
| Gulf Coast  | 205 | 60.8 | 36.4 | 10.1 |
| Oklahoma  | 63 | 60.3 | 45.1 | 9.0 |
| Illinois  | 46 | 9.4 | 5.8 | 0.7 |
| Alaska  | 32 | 67.3 | 45.0 | 12.4 |
| LA Offshore (Shelf) | 99 | 28.1 | 15.7 | 5.9 |
| Total | 533 | 309.2 | 205.3 | 43.3 |

## Managing vs. Operating CO2-EOR

- Application of horizontal wells for improved reservoir contact
- Use of 4-D seismic to track CO2 flow
- Automated field monitoring systems for “flagging” problems
- Much larger volumes of CO2

**“****State-of-the-art” CO2-EOR management practices involve:**

**“****Managing” a CO2 flood gives promise of oil recovery efficiencies of 20% of OOIP, double the results from past practices of “operating” the flood.**
**Application of advanced CO2-EOR technologies - - gravity-stable flooding, mobility control agents, real-time monitoring and modeling systems, and advanced imaging of the CO2 plume - - would further increase recovery efficiency.**

**For more information please see the following websites:**

**-  **_[http://www.spe-pb.org/en/cms/?1](http://www.spe-pb.org/en/cms/?1)_** **
**-  **_[http://](http://fossil.energy.gov/)__[fossil.energy.gov](http://fossil.energy.gov/)__[/](http://fossil.energy.gov/)_

## Using Horizontal and Vertical Wells for CO2-EOR

**Using Horizontal and Vertical Wells for CO2-EOR**

**Oil/Water**
**Contact**

**Vertical**
**Producers**

**Hz **
**Producer**

**Hz CO2**
**Injector**

**Vertical **
**Injectors**

**CO2/Water**

**Water/CO2**

**Residual Oil**

**Reservoir #1**

**Reservoir #2**

## Balancing the Risk-Reward Structure

- At a $25 per barrel of oil (Case A), Federal, State and local governments capture revenues of $5.00 per barrel from royalties, production and corporate income taxes.  The oil company receives $3.30 per barrel from the CO2-EOR project; an insufficient return on the $8.50 per barrel capital investment and purchase cost for CO2.
- Should oil prices drop to $15 per barrel (Case B), the CO2-EOR project becomes uneconomic with losses of $1.50 per barrel.  However, Federal, State and local governments continue to receive $2.00 per barrel.
- Should the oil price increase to $35 per barrel (Case C), the CO2-EOR project provides a reasonable return on investment to the oil company.  However, the Federal, State and local governments still capture the majority of the net revenues of $8.40 per barrel.

**Currently, the oil industry assumes most of the investment risk for CO2-EOR projects, while Federal and State governments capture the bulk of the rewards (see table).**

## FOR CO2-EOR; THE OIL INDUSTRY ASSUMES THE RISK; FEDERAL/STATE GOVERNMENTS CAPTURE MAJORITY OF  PROFITS  

**(Model of Direct Benefits from CO****2****-EOR Production)**

- (1)	Assumes $25 per barrel w/$1 per barrel reduction for quality and transportation.
- Royalties are 15% and include 12.5% to 16.7% Federal/State and 15% to 17.5% private.
- Production tax includes ad valorem taxes of 5% from FRS data.
- CO2 purchase cost of $0.75/Mcf and recycle O&M cost of $0.25/Mcf; 5 Mcf purchased and 5 Mcf recycled CO2 per barrel of oil.
- Production and other expenses based on FRS data.
- Includes costs for wells, well rework and CO2 recycle plant.
- Federal and State income taxes on domestic production of 32% based on FRS data.

|  |  | Oil  Industry | Private Minerals  | Federal/
State |
| --- | --- | --- | --- | --- |
| 1 | Net Domestic Oil Price ($/B) | $24.00 (1) |  |  |
|  | Less: Royalties | (3.60) (2) | $1.80 | $1.80 |
| 2 | Operating Revenues | $20.40 |  |  |
| 3 | Operating Expenses |  |  |  |
|  | a.  Production Taxes | (1.00) (3) | (0.10) | 1.10 |
|  | b. CO2 Purchase/Recycle | (5.00) (4) |  |  |
|  | c. Other Operating Expenses | (6.00) (5) |  |  |
|  | DD&A (Capital Investment) | (3.50) (6) |  |  |
| 4 | Income, Before Tax | $4.90 | $1.70 | $2.90 |
| 5 | Income Taxes | (1.60) (7) | (0.50) | 2.10 |
| 
Case A | Net Income ($/B) @ $25/B | $3.30 | $1.20 | $5.00 |
| 
Case B | Net Income ($B) @ $15/B | ($1.50) | $0.70 | $2.00 |
| 
Case C | Net Income ($B) @ $35/B | $7.60 | $1.70 | $8.40 |

## Multiple Possible Pathways to CO2-EOR Correct the Rick-Reward Structure

**The**
**Prize**

**CO2-EOR **
**Economic **
**Viability**

**Today’s Conditions**

**Lower Risk Premium, Adequate **
**Volumes “EOR-Ready” CO2**

**Section 43 (@ 25% ITC) & State Severance Tax **
**Relief (Private Lands)**

**Section 43 (@ 25% ITC) & Royalty Relief **
**(Public Lands)**

**Lower Cost and Large Volumes of CO2**
**(@ 2% of oil price)**

**$**

**$25/Bbl**
**25% IRR (Risk Premium)**

- _Preconditions_

- CO2 Cost (4% of Oil Price), Current Section 43, No State Incentives

## Cumulative Cash Flow For Representative Project

**5**

**10**

**15**

**20**

**0**

**Cumulative Cash Flow For Representative Project**

**($20)**

**($10)**

**$0**

**$10**

**$20**

**$30**

**$40**

**$50**

**Cumulative Cash Flow (Millions $)**

**Years**

**Section 43 @ 25% ITC, Severance Tax Relief**

**No Risk Mitigation**

**w/CO2 Cost Reduction**

## Correcting the Market Imperfection

- Stimulating supply availability of affordable “EOR-Ready CO2” to candidate fields
- Stimulating use of CO2 injection to increase recovery of oil from existing, mature oil fields
- Stimulating “basin-entry” field projects in high potential basins
- Improving the state-of-the-art technologies through cost-sharing R&D

**The Risk-Reward market imperfection for potential CO2-EOR opportunities can be addressed through public/private partnerships:**

## Correcting the Market Imperfection

**Addressing A and B would involve cooperation among public entities**
- Various Federal agencies
- Administration and Congress
- States
**It could also be facilitated by the industrial and financial community through innovative business models and financing approaches**
**For the public sector to address C and D would require establishing a funding source for research and cost-shared field projects.**

## Rationale for Public/Private Partnerships

**Large Potential Public Benefits – Public Goods**
- Increased domestic oil production and energy security
- Significant economic stimulus and increased employment
- Balance of trade/payments impacts
- More efficient stewardship of in-place oil and gas resources
**Existing Section 43 Tax Credits Too Limited**
**Further “Risk Mitigation” Measures are Needed**
- Balancing public/private risks and benefits balanced
- Targeted to achieve “public goods” efficiently
- Performance–Based rather than Activity–Based
- Transparent and fair
- Political acceptability – e.g., “scoring” of revenue impacts

## A “Win-Win-Win” Strategy

**Improvements to Section 43 focused on CO2-EOR could be an important first step, e.g.,**
- Increase 15% investment tax credit to 25%
- Exclude from AMT
**Royalty and state severance tax relief to allow faster recovery of initial capital investment:**
- Both Federal and state
- Relief until “payout” of initial investment
**Aggregated markets for “EOR-Ready CO2” to reduce costs.**
**Public/Private cost-shared partnerships for “basin-entry” and advanced technology field projects.**

## The regional and national economic and energy security impacts far exceed the costs: 
Domestic economic stimulus, high value jobs and improved trade balance.
Improved domestic energy security from  incremental domestic oil production of 2 to 3 million bbl/d (by 2025).
Positive public sector (Federal, state, local) revenues.
Significant private sector royalty incomes, investor returns and corporate incomes.
Advanced technologies could more than double the positive impacts if R&D is pursued aggressively.
Gaining improved financial and tax regimes will require forming public/private partnerships.
This would truly be a “win-win-win”.

- Domestic economic stimulus, high value jobs and improved trade balance.
- Improved domestic energy security from  incremental domestic oil production of 2 to 3 million bbl/d (by 2025).
- Positive public sector (Federal, state, local) revenues.
- Significant private sector royalty incomes, investor returns and corporate incomes.
**Advanced technologies could more than double the positive impacts if R&D is pursued aggressively.**
**Gaining improved financial and tax regimes will require forming public/private partnerships.**
**This would truly be a “win-win-win”.**

**A “Win-Win-Win” Strategy**