Enhanced Oil Recovery EOR through Carbon Capture Utilization

Enhanced Oil Recovery (EOR) through Carbon Capture, Utilization and Sequestration (CCUS) Jon Mc. Kinney Chair, NARUC Clean Coal and Carbon Sequestration Subcommittee and Commissioner, West Virginia Public Service Commission Remarks made at the WV Public Energy Authority May 16, 2012

Background • I speak for myself not the WV PSC • I would like to recognize and thank my many different sources of information – Summit Power, Mississippi Power, Denbury, Consol, PTRC, AEP, USEA, WVU, C 2 ES, Advanced Resources • For decades coal has been the fuel for affordable and available electric energy which has allowed robust economic growth in the United States. • Now one of coals main attributes, low cost, is questionable because of rapidly changing environmental standards, adding uncertainty and capital/operational costs • As a result, coal fire generation is in doubt, but the emergence of CO 2 EOR may provide a workable solution

If Basic Fundamental Logic Means Anything • Renewable energy sources are not going to get us to the quantity or the reliability that we must have. • Nuclear energy is a viable source but the ‘fear factor’, especially since the tragedy in Japan, along with the capital cost and the spent fuel storage issues, will be difficult to overcome. • That leaves us with the fossil fuels, natural gas and coal to provide the base load and reliability to stimulate the economic growth in the United States. • Based on the past, we need fuel diversity, we need both natural gas and coal. • Natural gas prices are very low and supply has been increased with Marcellus Shale but predicting the future price is still questionable. • Coal is a known major source of energy with 250 years of supply left that does not need to be abandoned. • But for coal to be a viable resource, ways to resolve both cost and environmental issues will need to be developed and used.

Enhanced Oil Recovery (EOR) • A little about EOR – – – Forty year history of safe, successful CO 2 injections (geologic CO 2) EOR is a profitable business for oil producers Increased oil productions from CO 2 EOR is severely limited by CO 2 supply Tertiary CO 2 flooding - 2 barrels of oil per 1 ton of CO 2 Huge oil production using CO 2 remains (17 -25%) in the explored oil fields Enormous new oil production is possible using CO 2 in Residual Oil Zone (ROZ) For practical purposes, the ROZ is an infinite sink for CO 2 — the limiting factor will not be lack of remaining oil for production Most current EOR fields are in Texas and other western states but fields have also been identified in the Appalachia basin (OH, PA, WV) Very large volumes of CO 2 injected annually (both new and "recycled") No serious environmental issues (good data already available on permanence of sequestration – 95+%) Widespread acceptance by producers, environmentalists, and public Some favorable federal tax treatment exists for EOR and CO 2 pipelines

CO 2 -EOR provides permanent CO 2 Storage CO 2 Source Oil to Market Production Well CO 2 Injection CO 2 Recycled Swept Area Current Water Oil Contact Original Water Oil Contact 5 Oil Bank Unswept Area TZ/ROZ Saline Reservoir Stage #1 Stage #2 Stage #3

Demand for CO 2 by the EOR Industry • The economic demand from CO 2 -EOR – 25 to 32 GT of CO 2 • Current/planned CO 2 supplies can only provide 4 to 7 GT – Natural sources – 2. 1 to 2. 6 GT – Gas processing – 0. 7 to 3. 0 GT (high end includes La. Barge reserves) – Other industrial – 1. 1 GT • A large-scale national pipeline network is needed for linking the Ohio Valley and Southeast U. S. potential captured CO 2 emissions with Mid-Continent, Rockies and West Texas oil fields

U. S. CO 2 -EOR Activity – Oil Fields and CO 2 Sources 120 Natural CO 2 Source Dakota Coal Gasification Plant Industrial CO 2 Source Existing CO 2 Pipeline 6 Encore Pipeline 2 Mc. Elmo Dome Sheep Mountain Bravo Dome § 120 CO 2 -EOR projects provide 352, 000 bbl/day 13 Lost Cabin Gas Plant 1 Enid Fertilizer Plant 3 5 70 Val Verde Gas Plants CO 2 Pipeline Under Development Antrim Gas Plant 1 La. Barge Gas Plant Jackson Dome 2 17 Denbury/Green Pipeline § New CO 2 pipelines are expanding CO 2 -EOR to new oil fields and basins. § 320 mile Green Pipeline § 226 mile Encore Pipeline § ~3500 miles of CO 2 Pipe in US ~400, 000 miles for Natural Gas Source: Advanced Resources International, Inc. , based on Oil and Gas Journal, 2012 and other sources. 7 CO 2 -EOR Projects

Value of Incremental Oil Production from CO 2 -EOR Notes: (1. ) Assumes $85 per barrel of oil; (2. ) Royalties are 17. 5%; 1 of 6 barrels produced are from federal and state lands; (3. ) Production and ad valorem taxes of 5%, from FRS data; (4. ) CO 2 market price of $40/tonne, including transport; 0. 35 tonne of purchased CO 2 per barrel of oil; CCS would meet about 90% of CO 2 demand; (5. ) CO 2 recycle cost of $16/tonne; 0. 6 tonnes of recycled CO 2 per barrel of oil; (6. ) O&M/G&A costs from ARI CO 2 -EOR cost models; (7. ) CAPEX from ARI CO 2 -EOR cost models; (8. ) Combined Federal and state income taxes of 35%, from FRS data. 8

Enhanced Oil Recovery (EOR) • Using geologic (natural reservoir) CO 2 for EOR rather than capturing and using manufactured (anthropogenic) CO 2 generated by fossil fuels is a wasted opportunity. • So what will it take to change course? – Manufactured CO 2 is still surprisingly difficult to sell • Cost of capture versus the price of competing geologic CO 2 is an issue • Capture $~80/ton vs. geologic $20 -40/ton. – Oil producers are skeptical that enough CO 2 capture projects will be built – Producers worry about future EPA regulation of manufactured CO 2 for EOR - there is little regulation of geologic CO 2 for EOR at this time • Currently EOR producers can currently use Class 2 drilling under subpart RR for manufactured CO 2 (pure CO 2 sequestration requires Class 6 which is much more expensive) – Currently oil producers prefer geologic sources of CO 2 because • Flexibility in deliveries to accommodate fluctuations in injection rates (CO 2 domes act as surge tanks and storage reservoirs); • No expected liabilities or obligations for the users for geologic CO 2 • Pricing is settled - "market" for delivered CO 2 with terms that can vary • So how to proceed, there approved carbon capture projects with EOR that can be analyzed to determine how they succeeded.

Approved Projects • Texas Clean Energy Project (IGCC) – Fixed turnkey project, long term performance warrant, 400 MW, 90% capture with EOR – long term sales agreement for the Power, urea fertilizer and CO 2 – $450 M DOE grant, $313 M 48 A production tax credit, accelerated depreciation - over $1 B in total credits – Will serve as the new “model” for CCUS using 2. 5 million metric tons per year of captured CO 2 – CO 2 buyers received several benefits under Texas law • Oil severance tax cut 25% , sales tax exemption for CO 2 equipment • Liability issues in geological CO 2/EOR are settled under Texas law, to the satisfaction of most producers • In Texas, injection of CO 2 for EOR requires State approval – There is no liability for underground migration of the injected fluids (no legal trespass) under "reverse law of capture" doctrine – This creates effective immunity from trespass suits, and an effective legal right of storage, in the specific context of Texas EOR

Approved Projects • Kemper County IGCC Project - Mississippi – $2. 4 B, 580 MW, 65% capture with EOR, sale of CO 2 – 300 permanent jobs, average of 500 construction jobs – $270 M DOE grant, $133 M investment tax credit, $297 M 48 A tax credit – total credits of over $700 M • Weyburn - Canada – The Weyburn integrated CO 2 -EOR and CO 2 storage project with 5. 6 million metric tons per year is the existing “poster child”. • Decade of EOR experience using CO 2 • 21 tons of CO 2 injected over 10 years – Commissioned study by Trium of supposed leak • Soil gas, well integrity, Carbon 13 readings • Definitive evidence that CO 2 is naturally occurring and not from the injected CO 2

What is being done? • DOE Assistant Secretary of Fossil Fuel – Chuck Mc. Connell – – Pushing Carbon Capture Utilization Sequestration (CCUS) Promoting technology for both coal and natural gas Indicating in current DC political environment money is running out Needs more state support • National Association of Regulatory Utility Commissioners (NARUC) passed Resolution in July 2011 urging Congress and States to develop policies that encourage the use of manufactured CO 2 and increase funding for demonstration projects.

National Enhanced Oil Recovery Initiative (NEORI) • Broad coalition of officials from electric power, coal, chemical, oil and gas industries, legislators, regulators, environmental and union representatives. • Issued report recommending – New federal production tax credit for capturing and transporting CO 2 • Revenue positive in first ten years • Tax on incremental oil produced will result in positive $100 billion over 40 years • Competitively bid – State legislation • Severance tax reduction for oil produced with CO 2 -EOR • Cost recovery approval for regulated entities • Long term off-take agreements • Tax credits, exemptions or abatements for CO 2 -EOR • State level bonding of CO 2 pipeline projects/capture/compression projects • Inclusion in Portfolio Standards of % electrical generation from CCUS – Improvement functionality of 45 Q tax credits • Establish a registration, credit allocation and certification process • Define who can claim and authorize limited transferability • Remove the recapture language

Challenges for the CO 2 -EOR • Capture technology availability and capability – CO 2 capture technology need be • Economical, resulting in acceptable increase in electricity rates to public service commissions or competitive rates in deregulated markets • Produce low cost CO 2 for sales to CO 2 users – Guaranteed by vendors to meet performance standards and cost specifications • CO 2 EOR users need – Incentives to allow manufactured CO 2 price to be more acceptable – Regulatory frameworks evolving but not there yet • Issues include long term monitoring requirements, pipeline siting and access, long-term liability and pore space rights • No additional environmental burden for using manufactured CO 2 – CO 2 pipeline network from clusters of large coal fire generation plants to oil fields • Support by federal/state for CO 2 pipeline cost (current cost is $1 -2 M per mile) – Guarantee from producers that manufactured CO 2 will be continuously available • Balancing EOR field CO 2 requirements with CO 2 supplies creates challenges • Requires new collaborations between entities that have not collaborated before

Challenges for the CO 2 -EOR • Supportive enabling public policies that incent the CO 2 capturing entity – Tax incentives – we need a more level playing field with renewables • Three quarters of all energy tax credits go to renewables • Subsidies per MW for solar of $776, for wind $56 and for fossil $0. 64 – Cost minimization mechanisms such as state bonds, tax abatements, tax credits, job and economic development incentives, etc. are needed bridge current gap of CO 2 cost – Effective public-private or private-private partnerships • Continued DOE grants for development of innovative ideas – Canada public private partnership - $8 billion invested • State grants, tax credits, bonding for retrofit of carbon capture on existing generation • Innovative new relationships from states that will benefit from revenue and jobs, the coal industry/suppliers who will benefit from sales and the petroleum industry that needs greater volumes of CO 2 • Old fields require major infrastructure – The number of companies with CO 2 -EOR experience is limited - but growing – Cost of system recapitalization is significant – US Permian basin projects support ~$10 -$40/ton delivered at injection pressure because they leverage infrastructure. – Offshore projects challenged even with “free CO 2, ” storage credits and high oil prices.

Challenges for the CO 2 -EOR • Financing – Current economic woes – Long term stable financing needs to be assured by project cost recovery with a reasonable rate of return and quick recognition of construction costs – Value proposition not always apparent • Improved economics with revenue from CO 2 sales for EOR and for greenfield sites, revenue from other production – Urea, fuel, etc. – Other cost minimized mechanisms, such as tax incentives, grants, cost sharing with other parties, etc. • Public Perception – Education about EOR is necessary – Continuing education about benefits of coal with recognition of its need to improved environmental performance – US commitment to CO 2 reduction

So what does it take to get a EOR project approved from a PSC • Different for regulated and deregulated states • No approval needed in deregulated states – it is a economic decision – Rates need to be competitive with other sources in open market jurisdictions • For regulated states – ~ 80% of generation fleet – Retrofit or greenfield projects different – Both require a Certificate of Public Convenience and Necessity from most states • ‘Need’ is first determination • Approval of environmental regulators is typically separate from economic regulators – But proof of meeting the EPA standards will be necessary • Contrary to some beliefs, it does not have to be ‘least cost’ – Commissions can consider and balance several factors – Needs to have acceptable rates considering jobs impact, state and local economies, use of natural resources, reliability and diversity of fuel. – For greenfield plants in regulated states there additional hurdles to pass • Siting–more aggressive level of participation from interveners and more parties • EPA regulations – much tougher standards under new EPA rules

Conclusion • For certificate cases before the PSC, utilities need support from associations of coal producers, coal suppliers, railroads, industrial and residential users and unions to help balance the scale/record. • State legislation to promote CO 2 EOR is needed • Bottom line is EOR for Carbon Capture projects is the one bright spot into the future but much effort and more work needs to be done by States, Federal, Public Service Commissions, utilities and oil companies to make it a reality.

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