North Sea's Future Could Be a Matter of CENS

Abstract: Smaller new discoveries and quickly depleting existing reservoirs signal lost prominence as a major petroleum province, but widely applied CO2 injection--if started soon--could extend offshore reserve life by decades.

Analysis: Despite some recent equity swapping that gives a number of larger independent producers a chance to work their low-overhead mojo on existing fields, particularly in the U.K. sector, the North Sea is without doubt a "mature" oil and gas province. Generally, new oil discoveries there are much smaller than their predecessors in the 1970s and 1980s.

Even though only about half of its recoverable oil and gas reserves will have been developed by the end of this decade, North Sea production by all accounts is cresting. Almost all of the "easy" oil has been extracted. Some major companies have recognized this and are selling major assets to independents, who in turn hope to scrimp here and patch up there to make money through efficiency (see "Final North Sea Yarn," Oil and Gas Advisory, Jan. 20, 2003). Of course, that could extend the basin's productive life to some degree. But once primary depletion has peaked, it won't take long for margins to shrink as reservoir maintenance costs rise. And the tremendous financial burden of decommissioning offshore infrastructure over them looms quite large, too. Overall, there's not much incentive to throw really big money at reservoirs that ultimately will become economically impractical.

Sure. It's a dreary outlook. Loss of North Sea oil and gas production will have multiple effects. In addition to requiring huge capital outlays associated with operators who shut down and pull out, it will do the following:

  • Render to a total loss roughly half the unrecovered oil and gas left behind after decommissioning
  • Eliminate a major tax revenue source for North Sea governments
  • Force new dependence by North Sea nations on foreign oil and gas producing countries after decades of energy self-sufficiency
  • Jettison a lot of high-paying jobs and compel "oil towns" like Aberdeen, Scotland, Stavanger, Norway, and Esbjerg, Denmark, to reinvent themselves

But there's still hope, brother. It stems from the Kyoto Accords and the efforts by signatory nations to stem carbon dioxide (CO2) emissions as an industrial "greenhouse gas" byproduct. In fact, stabs at creating useful ways to sequester industrially generated CO2 could have a decisive effect on the future of North Sea oil. For that, there's still time as well, brother. But not much.

About a year ago, a multinational group of oil, pipeline, and utility companies got in cahoots with certain entities of the three main North Sea national governments-–the U.K., Denmark, and Norway-–to investigate collecting CO2 generated by onshore industries, piping it to North Sea fields, and injecting it into producing reservoirs for enhanced oil recovery (EOR). At the same time, says the group, much of the industrial CO2 would be removed from the atmosphere and sequestered in the "empty" portions of the depleted oil reservoirs, among other benign geological formations. This would help meet governments' respective Kyoto responsibilities.

Founders of the group–-called the CENS (CO2 for EOR in the North Sea) project-–are Houston-based Kinder Morgan CO2 Co. (KMCO2), a subsidiary of Kinder Morgan Energy Partners, and ELSAM A/S, Denmark's chief power company. The former is the world's largest and most experienced owner of CO2 infrastructure, owning and operating much of the 930-mile (1,200-km) CO2 pipeline system that delivers around 162 million barrels per year (mmbbls/y) of CO2 to about 70 EOR floods in the Permian Basin of West Texas/Southeastern New Mexico. The latter partner, ELSAM, owns five highly efficient, combined heat and power plants in Denmark, fueled principally by coal. A U.K.-based company, INCO2, also is involved, as are a number of U.K.-based independent producers and both U.K. and Norwegian utilities.

In Houston, KMCO2 executive Russell Martin said the company was asked to do cost studies for building and operating a trunk pipeline system that would begin in Denmark and route through the North Sea along the Norway/U.K. median line, bisecting important offshore oilfield clusters from the south (Ekofisk and Fulmar) to the north (East Shetland Basin). Fields farther east and west could be reached with large branch lines.

Initially, KMCO2 and ELSAM scoped a project to use new capture technology to take CO2 from the Danish plants to one or two large North Sea oilfields for EOR. However, the U.K. company, IMCO2, advised broadening the scope to include CO2 from both the U.K., where many coal- and gas-fired plants exist, and Norway, where the government hopes to build utility plants fired by natural gas brought to shore from the Norwegian sector. Ultimately, in addition to Denmark, the trunk line would connect with both the northern and southern U.K. coastlines, as well as with Norway.

"Combined, we believe we can do it-–build the pipelines and convey CO2 under pressure to offshore fields-–in the $35-per-tonne (7.33-bbl) range, including operating costs, debt repayment, and taxes," said Martin. "But that converts to about $1.35 per thousand cubic feet (mcf) of CO2 which, on the surface, will not produce a positive return on capital, even with oil in the mid-$20/bbl range."

However, he continued, the plan could be made viable if an oil company would step up and do serious engineering and subsurface work to design a CO2 flood in a large North Sea field, and if the three governments could find ways to determine a "value" for sequestered CO2, which currently has none.

The governments, he said, each of whom have a stake in both oil tax revenues and security of supply from an oil resource that's only been half-produced, need to come up with some form of tax relief or CO2 credit system with which producers could pay for the CO2 "product" they would use for EOR.

As for the aforementioned "serious" oil company, Martin indicated that one such producer exists, but he would not comment further. As for CO2 emissions, only Norway has officially proclaimed its desire to meet Kyoto limits, he added.

In any case, according to one scenario put forward by CENS, CO2 capture equipment could be installed on 10 power plant units in Denmark and the U.K. over a four-year period. These could be connected through an expanding pipeline network to EOR projects at 12 offshore oilfields over an additional eight years. During project life, the plants would provide about 700 million tonnes of CO2 to produce an incremental 2.1 billion bbls of oil. Based on a conservative $20/bbl oil price, this would generate $42 billion in incremental oil revenue. With a production and transportation cost of $7.50/bbl, the operators would spend some $15.75 billion to produce that oil.

But the estimated $35/tonne for CO2 delivery would add an additional $24.5 billion to the operators' cost, leaving almost nothing to repay the significant investment required to implement the EOR program.

However, the CENS scenario observes, if captured and sequestered CO2 had an economic value through whatever mechanism is agreeable to industry and government, the results could be quite different. If, for instance, sequestered CO2 were to be given a value of $23/tonne, the net cost effect to operators would be $12/tonne, thereby lowering the CO2 cost to $8.4 billion. That would leave operators with $17.85 billion to pay for investments, taxes, and a return on capital.

Martin said the CENS project presents a significant investment opportunity for KMCO2 Co. in pipeline infrastructure and long-term CO2 supply contracts. It's their strong suit, and they would be prepared to participate if everything fell into line. The major concern, however, said Martin, is time. There isn't much left.

CENS project members acknowledge that the window of opportunity in which to launch the project will be open for only about 10 years. During that time, governments will have to solidify their sequestered CO2 value equations, while oil companies will have to plan for widespread EOR and equip their fields for it-–all of which will take years to pull off. Meanwhile, the power plants must be equipped for efficient CO2 capture, and the pipelines financed and built.

But it will take more than just money. Unless there is a major cooperative effort among CO2 suppliers, transporters, and users, as well as governments, to plan and execute a project like CENS, and pretty quick, the North Sea stands to lose most of its prominence as a significant petroleum province, even though half of its recoverable oil reserves remained beneath its stormy waters.

For more about the CENS project and the possibility of using industrial CO2 for North Sea EOR, connect with The U.K. Department of Trade and Industry's Sharp Newsletter on EOR at http://ior.rml.co.uk/issue4/co2/inco2/CO2_Costs.htm.

Associate Editor: Robin Beckwith

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