The Value of CO2: Framework and Results
Authors: Wolsky A.M. , Jankowski D.J. 
Published: December 2007

We present an engineering economic framework for estimation of the affordable price an EOR project can pay for CO2. Geologic and financial factors are considered. Two hypothetical reservoirs illustrate the framework. We describe the sensitivity of permissible cost to flooding efficiency, oil price, and internal rate of return (ROR) for each reservoir.

Introduction

Despite the recent decline in the price of petroleum and the present uncertainty over its future price, CO2 flooding for EOR is being considered for more and more fields. A total of $4 billion is being invested to supply the Permian Basin with CO2 - As experience is gained there, Permian Basin with CO2 - As experience is gained there, the risk for projects in other regions will be considered less. At present, CO2 flooding appears to be the least capital-intensive method for increasing reserves. However, little has been published on the project economics for CO2 flooding-in particular, the price that could be paid, or "permissible cost," for CO2 delivered to the paid, or "permissible cost," for CO2 delivered to the wellhead. This permissible cost is the subject of this paper. (An earlier paper by the authors and collaborators offered a simple, approximate approach that is superseded by the discussion presented here.)

The permissible cost of CO2 depends on many factors. We will describe all the important ones, show how they can be grouped, and discuss the sensitivity of permissible cost to those factors over which the project manager permissible cost to those factors over which the project manager has least control-e.g., internal ROR. The after-tax cash flow for a generic CO2 flood is constructed. The cash flow is discounted, and the permissible cost of purchased CO2 is deduced in terms of the discounted revenue and all the other discounted costs.

Our discussion is presented on two levels. First, we lay out the necessary ideas and then plug in reasonable numerical values to arrive at our quantitative results. The reader who wishes to base his or her results on different numerical values should have no trouble using our theoretical framework with those values.

After-Tax Cash Flow

To find the permissible Cost of CO2, we must consider the discounted, after-tax cash flow from the EOR project. We introduce this quantity and give particular project. We introduce this quantity and give particular attention to taxes. Throughout this paper, we are considering a project that is financed by 100% equity. In practice, financing may include a mixture of equity and corporate debt. However, EOR is still viewed as risky by commercial banks, and they are reluctant to lend money for it.

The cash flow for each year, P, is defined to be the sum of profits, P, and depreciation, Dp, for that year:

................................. (1)

Cash flow depends on revenue, costs, and taxes, as shown below:

......................... (2)

Cash flow can be positive or negative. Working-interest revenue, V, equipment purchases, B, operating costs, cot, and taxes, tau, are discussed below.

Working-interest revenue is defined as the oil firm's portion of revenue from oil sales. Typically, a lease portion of revenue from oil sales. Typically, a lease agreement includes a royalty payment to the owner of the oil property. Working-interest revenue is equal to (1 -i ) property. Working-interest revenue is equal to (1 -i ) (revenue), where iR is a fraction expressing the royalty rate.

Equipment purchases include drilling of new injection wells, conversion of existing producer wells to injection wells, installation of additional surface flowlines, and construction of a CO2 recycling plant. A useful identity is given by the following:

............................ (3)

The distinction between "capitalized" purchases, Bcap, and "expensed" purchases, Bex, is made by tax law. Capitalized purchases reduce current and future taxes through the investment tax credit and depreciation allowances, whereas expensed purchases diminish current taxes.

Operating costs include direct costs (labor, auto usage, and operating supplies), well workovers, purchase of new CO2, recycling of produced CO2, and cleanup and disposal of produced water.

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