Enhanced Oilfield Opportunities

FROM THE MAY ISSUE: The amended 45Q tax credit makes selling carbon dioxide for enhanced oil recovery a viable strategy for some ethanol plants. With an interconnected pipeline infrastructure, the opportunity grows.
By Lisa Gibson | April 23, 2018

Changes to the Section 45Q tax credit, signed into law Feb. 9 as part of the Bipartisan Budget Act of 2018, will inspire more widespread carbon capture and storage techniques in the ethanol industry, say members of a coalition that pushed for the 45Q changes. Those techniques include enhanced oil recovery.

The original 45Q, enacted in 2008, included multiple provisions that effectively barred the ethanol industry from taking advantage of it, for either geologic storage through enhanced oil recovery operations or for storage in saline aquifers. To qualify, operations had to capture 500,000 or more metric tons of carbon dioxide per year. The new version drops that threshold to 100,000 for industrial facilities. The original credit also had a lifetime cap of 75 million tons, prompting investors to assume the cap would be hit by the time their projects were under construction, disqualifying them for any credits. That cap is removed, and any project that starts construction in the next six years can qualify and claim the credit for 12 years once it is placed in service.

But perhaps most important, the credit amounts have been boosted. Straight storage of CO2 in saline aquifers was credited at $20 per ton, but now will increase incrementally to $50 by 2025. For storage of CO2 through EOR and for CO2 used to produce other fuels, chemicals or products, the old $10-per-ton credit will incrementally increase to $35. The credit is transferrable, flexible for use by all parties along the value chain, and is performance-based so no credits will be issued unless a project successfully captures and permanently stores CO2.

“This policy and this whole pathway of capturing and utilizing biogenic CO2 from fermentation is an enormous opportunity for the ethanol industry,” says Brad Crabtree, vice president of fossil energy for the Great Plains Institute. “That tax credit was not doing what a tax credit should. It wasn’t driving private investment into this technology.

“Steps were taken in the design of this tax credit to make it easier to use,” he continues. “I think the ethanol industry is very aware this flexibility will be especially important because these projects are capital intensive.” 

Eric Mork, director of business development for ICM Inc. and founder of EBR Development LLC, agrees, pointing out that many parties involved will invest in the expensive projects upfront for pipelines, compressors, etc. “To be able to negotiate that credit so everybody can win, that’s important. Every project is going to have its own cost centers.”

That upfront capital has been one of the larger challenges to the ethanol industry implementing EOR operations, says Steve Melzer, founder of Melzer Consulting and expert on the EOR industry. “It’s been a pretty tough set of hurdles to get over.” But 45Q represents a paradigm shift for the ethanol industry in EOR. “I think (ethanol) is where the real value lies, actually. I’m very upbeat.”

EOR Explained
Using CO2 in enhanced oil recovery isn’t a new concept. It’s been done on a large scale since the early 70s. Good thing, because the projects generally require years of planning. “So there’s a lot of expertise on how to do it,” Melzer says. And the idea of conversion of a waste product to a commodity just makes sense, he adds.

CO2 injection is essentially phase three of oil recovery. Primary recovery involves drilling a well and using the gas and pressure in that reservoir to extract the oil. That recovers about 10 to 20 percent of the oil in the reservoir, Melzer says. Next comes the water flood to help repressurize the oil and double volume. “But water and oil don’t mix, so the way to get more is to have something that mixes with oil and changes its properties. CO2 is one of the most effective ways to do that.” Adding another 15 to 20 percent to the recovered amount, the total now reaches 35 to 60 percent.

Additionally, that CO2 is eventually stored underground in those oilfields. Dan Keiser, manager of commercial development for Occidental Petroleum Corp., addressed the topic at Christianson’s Biofuels Financial Conference last September in Minneapolis. He said Occidental Petroleum Corp. injects about 2.5 billion cubic feet per day of CO2 into oil reservoirs for EOR. It sweeps across the reservoir and picks up hydrocarbon in the rock, delivering it to the production wells. Some CO2 stays in the well, some comes out, he said. The portion that comes out is separated from the gas and is reinjected into the reservoir. “The amount of CO2 that’s delivered to the field to begin with is equal to the amount that gets stored underground,” Keiser told his audience. 

It is a perfect opportunity for ethanol, with its carbon-emitting fermentation process, he said. But not all ethanol plants are in ideal locations.

“There are EOR opportunities in ethanol,” Crabtree tells Ethanol Producer Magazine. “They’re just not widely distributed.”

Pipelines and Proximity
While 45Q completely removes some barriers to the ethanol industry’s economical participation in EOR, it doesn’t solve them all. Proximity to oilfields is a tremendous factor in project feasibility, and, for the most part, oil country doesn’t align with ethanol country. “Suffice it to say that some plants in Kansas, Nebraska, Texas, Colorado, North Dakota, Illinois, Michigan and Ohio might be close enough to local oil fields for EOR CO2 supply consideration on a one-off basis,” Mork says.

He adds that, to his knowledge, two plants currently are selling CO2 to oil companies for EOR: Arkalon Energy in Liberal, Kansas, and Bonanza BioEnergy LLC in Garden City, Kansas. Both plants are owned by Conestoga Energy Partners LLC, and Chief Operating Officer Dusty Turner says the partnerships are beneficial for all parties.

Arkalon began producing ethanol in 2007, and had a CO2 sale agreement in place with Chaparral Energy LLC at startup, he says. The oil company had contacted Conestoga as soon as it got wind of the proposed ethanol plant. It also invested in Arkalon. “It was a pretty good partnership from day one.”

Chaparral installed a compressor on-site and constructed about 22 miles of pipeline to hook up to an existing line and send 300,000 metric tons of CO2 annually to its field near Booker, Texas. The CO2 is compressed into a liquid, Turner says. Chaparral owned and operated the compressor and pipeline up until it sold its EOR operations to Perdure Petroleum in October 2017.

Similarly, Bonanza sells about 160,000 metric tons per year through eight miles of pipeline to a Petro Santander oilfield. When Petro Santander heard about the operation in Liberal, the company approached Conestoga about a similar partnership, Turner says.

He would recommend the model to other ethanol plants, but acknowledges proximity to the reservoirs is crucial. “The process is great. It does not negatively impact our fermentation. There’s no back pressure. It’s all pretty easy.”

But the potential for a long, interconnected pipeline that draws CO2 from multiple plants along its route is greater with the 45Q tax credit, Melzer says. “If we can connect some, we can get a good amount of CO2.” Scale is important, he says. “The larger the project, the more economic it becomes. … You have a more complex project with multiple players, but you also have better economics.”

Price modeling done by the National Enhanced Oil Recovery Initiative—a group that had dedicated itself to updating and improving 45Q—show compression, dehydration and pipeline transport to the Permian Basin in Texas costs between $54 and $73 per ton, Crabtree says. With a $35-per-ton credit and the revenue from CO2 sales, an ethanol plant could get itself within that price range. It’s just a model, he cautions, and a real-world project would be far more complex, but it’s illustrative of the opportunity 45Q creates for an entire industry to participate in carbon management along a pipeline infrastructure. It was economically impossible before the credit.

“The real challenge going forward is not the carbon capture side, because technologically and cost-wise, the ethanol industry has a large advantage,” Crabtree says. “The challenge is much more one of infrastructure.”

The tax credit will have to provide enough value for all the parties who will need to work together to justify that infrastructure being built to move CO2, he adds. But once that’s in place, individual ethanol plants can join the network at a much lower cost.

Business Generator 
The push toward lower transportation fuel emissions is strong. California’s Air Resources Board currently is finalizing its quantitative management rules for EOR and capture and storage. Mork says it’s crucial that the ethanol industry be as involved as it can be in those rulemaking processes, to ensure the resulting regulations are workable and economical.

Still, Melzer, Crabtree and Mork agree that the new 45Q could be a game changer for the ethanol industry’s entry into the EOR sector, and even into saline aquifer storage, lowering carbon intensity scores and making ethanol more competitive in the fuels market.

And now that the work of the National Enhanced Oil Recovery Initiative is done, it’s rebranded itself as the Carbon Capture Coalition.

“I tip my hat to the folks that put this together,” Melzer says. “They did a wonderful, thoughtful job of talking to the various potential users of the credit to figure out how it could prompt business, and I think they’ve got it in this bill.” Melzer and Crabtree add that bipartisan support led by Sen. Heidi Heitkamp, D-N.D., Sen. Shelley Moore Capito, R-W.V., Sen. John Barrasso, R-Wyo., Sen. Sheldon Whitehouse, D-R.I., and Sen. Mike Conaway, R-Texas, was crucial in getting the votes.

“You’ve got to make the economics work and this bill does that,” Melzer says. “It really allows an incentive for taking what would otherwise go into the atmosphere as a waste product, and making more oil. … I think it’ll be a business generator, especially for ethanol, and it’s just a matter of getting the word out and getting the projects started. The time clock is ticking.”

EOR is just one more evolution in providing value in the corn ethanol industry, Crabtree says. “I actually think that there’s a real prospect that, because of the 45Q tax credit, the U.S. ethanol industry may become the first industry in the world to capture a majority of its CO2 emissions, which is really kind of extraordinary.”

Of course, he notes, it’s impossible to know until the industry and investors respond to the tax credit, perhaps through a slew of new project proposals and pipelines.


Author: Lisa Gibson
Managing Editor, Ethanol Producer Magazine
701.738.4920
lgibson@bbiinternational.com