May 10, 2004

First test projects chosen for enhanced oil recovery using CO2

Four test projects designed to help Alberta fulfill its commitment to reducing greenhouse gas emissions, while enhancing sustainable development of its energy resources, are now set to go ahead. The provincial Department of Energy has approved $14.1 million in royalty credits for the projects which will demonstrate the use of carbon dioxide (CO2) in maximizing the extraction of oil and gas from mature operating wells.

The projects include:

Anadarko Canada's Enchant Arcs oil pool project in southern Alberta;

Apache Canada's Zama Keg River oil pool project in northwestern Alberta;

Devon Canada's Swan Hills oil field (unit 1) project in central Alberta; and

Penn West Petroleum's Pembina Cardium oil pool project in central Alberta.

A program announced in 2003 by Alberta Energy Minister Murray Smith will make up $15 million in royalty credits available over five years to companies demonstrating the use of carbon dioxide (CO2) in the development of Alberta's oil and gas resources. Producers were invited to submit applications describing potential projects; successful applicants can earn royalty credits for up to 30% of approved costs. Last month the federal government also announced a program to help develop a market for CO2.

"The use of CO2 to improve oil and gas recovery is of great interest to the oil and gas industry," Smith said. "This government has been working closely with industry to promote innovation and technology that will enhance the sustainable development of the province's abundant energy resources.

"These pilot projects are further evidence government and producers recognize their individual and common responsibilities, as well as the need to work together to achieve CO2 emission reductions," he added.

CO2 injection for enhanced oil recovery (EOR) is a proven process which has been used around the world for the past 30 years. The technique enhances oil and natural gas production from mature wells, while reducing CO2 emissions into the atmosphere by storing CO2 in the oil and gas reservoirs. Various compounds injected into the reservoir act as a solvent to loosen trapped oil still remaining once conventional production methods have been used.

Within Alberta today, there is a significant opportunity to link the supply of CO2 from various sources with the demand for CO2 from oil and gas producers. Oil sands upgraders are a potentially large and reliable source of pure CO2, as are oil refineries and power plants. A producer's ability to undertake novel projects, however, may be limited by the related technical and financial risk.

CO2 projects in Alberta face high initial costs associated with capturing CO2 from large sources and due to the lack of pipelines to move the CO2 to the oil or gas field for injection. Costs are further increased by the need for additional injection wells in the field and upgraded metallurgy to handle CO2.

The Alberta government has moved to reduce the level of financial risk by reducing royalties in order to offset some of these risks and encourage producers to undertake demonstration projects. As an initial step in creating a CO2 EOR industry in Alberta, the Department of Energy has introduced its program of royalty credits for projects demonstrating the use of CO2 for petroleum and natural gas recovery in Alberta. It also revised royalty deductions in the Enhanced Recovery of Oil Royalty Reduction regulation for EOR projects injecting CO2.

These initiatives are expected to generate at least $30 million in incremental royalties over 20 years, and could result in CO2 storage of at least 22 megatonnes (MT), equivalent to an average of 1.1 MT per year.

The CO2 Projects Royalty Credit Program is a temporary component of Alberta's royalty systems and is one of the carbon management actions proposed in the provincial climate change action plan. To improve project economics, companies could earn royalty credits for up to 30% of approved costs in an approved CO2 EOR project. The credits are not restricted to production from the EOR project; they can be applied against a company's total oil and natural gas royalty liability.

More information is available from Nadine Barber at Anadarko, 403/231-0509; Bill Jackson at Apache, 403/261-1321; Bill Sawchuk at Devon, 403/232-7011; and Bryan Clake at Penn West, 403/777-2510.

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