“fiscal mechanisms to promote co2 for eor in the north sea: understanding the co2 value chain”

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A company focused on developing projects, technology and commercial solutions to

mitigate CO2-emissions into the atmosphere.www.co2.no

““Fiscal Mechanisms to Promote CO2 for EOR in Fiscal Mechanisms to Promote CO2 for EOR in

the North Sea: Understandingthe North Sea: Understanding

the CO2 Value Chain”the CO2 Value Chain”

Presentation by

Carl-W. Hustad, CEO

CO2 - Norway AS, Kongsberg

________________________“Session J1 - Policy: CCS Opportunities / National Actions II”

Seventh International Conference on GHG Control Technologies08:30 – 10:10 September 08, 2004

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• Pure sources of CO2 (eg. refineries, hydrocrackers, ethanol, etc.)

• CO2-capture from power plants and industrial complexes

• CO2-gathering, handling, terminals and interim storage

• CO2-transportation (ships and / or pipelines)

• CO2-hubs, terminals and offshore export facilities

• CO2 for enhanced oil recovery (EOR) and large-scale sequestration

• CO2-credit generation, certification and trading

• CO2 risk-assesment, mitigation of corporate exposure, evaluation of opportunities + business development.

Overview of theOverview of theCO2 Value ChainCO2 Value Chain

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There are 3 main incentives for companies to invest and develop projects along this value chain. These are;

1. Possible use of CO2 for EOR (and also enhanced gas recovery).

2. Pending constraints on future carbon emissions.

3. Corporate due diligence (ie. exposure to future risk and public image).

HOWEVER

To date no company may attribute a value on the ‘physical’ CO2 substantially beyond $10/t. Whilst the cost of moving CO2 along the complete value chain is usually greater than $30 /tCO2.

Main DriversMain Driversalong the CO2 Value Chainalong the CO2 Value Chain

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Why is the CO2 value chain important?

It shifts the focus of CO2 and GHG emissions away from CO2 being a regulatory problem, over to creating a commercial resource / commodity.

Who are the Stakeholders?

Any person, company or societal body that may have a vested interest in the value chain functioning as efficiently as possible.

How can the CO2 value chain best evolve?

There are many ways by which it can evolve, and there are a few specific ways by which it can be impeded and evolve inefficiently. Initially, the role of government would appear to be to ensure that the market has incentives to choose the most efficient path.

Thoughts aroundThoughts aroundthe CO2 Value Chain (1)the CO2 Value Chain (1)

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Can this value chain contribute to the wealth of society and nations?

• The chain can be the bridge by which we move from our current fossil energy infrastructure through to a sustainable 'hydricity' (ie. with hydrogen and electricity as the energy carriers) based supply of energy.

• It can therefore extend the transition period by several decades to permit development and commercial implementation of renewable energy sources.

• Within a decade this value chain could be a major creator of new wealth within the OECD countries, and ...

• ... It will provide viable policy alternatives for governments to develop new industrial activity, ensure energy security and help combat climate-change.

Thoughts aroundThoughts aroundthe CO2 Value Chain (2)the CO2 Value Chain (2)

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CO2-EORCO2-EORDevelopment (1984-2004)Development (1984-2004)

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Assumed pipeline infrastructure supplying approx. 680 mtCO2 over

20 year period to six UK and five Norwegian fields.

Used “Best Available” techno-economic data to evaluate overall

project economics and total tax revenue for host governments.

The CEM permits changes in all significant economic parameters.

Project and sub-projects can be evaluated in terms of NPV and IRR.

Total project economics can be related to a “Break-Even” oil price.

Model permits analysis of different fiscal mechanisms that can be

evaluated in order to manage project risk exposure on behalf of all

project stakeholders.

The CO2-EORThe CO2-EOREconomic Model (CEM)Economic Model (CEM)

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Oil Price ($/bbl) $20

Special/PR Tax Rate % 50% / 50%

Corporate Tax Rate % 28% / 40%

Effective Tax Rate % 78% / 70%

Depreciation Term (years) 6 yr / 1 yr

Operating Cost ($/bbl) $4.50 / $5.50

Decommissioning Costs

– Large Fields $450 million

– Small Fields $150 million

Base Case CEMBase Case CEMassumptions for Norway / UKassumptions for Norway / UK

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Field Capital Costs ($/incr bbl) $2.25

Financed Debt (where applicable) 40%

Incremental Operating Cost ($/bbl) $2.00

Incremental Pump Costs ($/t CO2) $0.10

Incremental Production bbls/t CO2 3.2

Recovery Factor (% of OOIP) 6%

CO2 Delivered Price ($/tonne) $35

CO2 Support Price ($/tonne) $23

CO2 Purchased Price ($/tonne) $12

Base Case CEMBase Case CEMassumptions for Norway / UKassumptions for Norway / UK

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mitigate CO2-emissions into the atmosphere.www.co2.noCENS Project

• Potential delivery of CO2 for EOR through infrastructure at cost of < $35 /tCO2.

• Screening of the most mature EOR fields indicates poten-tial of > 30 mtCO2/yr for +20 year period.

• A combination of pipelines and ship transportation enhances flexibility and economics for initial EOR projects.

† Designated fields were “potential” CO2-floods.

Tampen Gullfaks

AreaBrent

Ekofisk

Grane

Brage

Dan/GormDan/Gorm

Ninian

Forties

Fulmar

ClaymoreClaymore

Draugen

Herøya

Snøhvit

CO2-sourcesPotential CO2 for EOR fields

KårstøCO2-hub

Mongstad

Sleipner

Brae

Brunsbüttel

Antwerp

Billingham

Pernis

EsbjergCO2-hub

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The North Sea The North Sea

CO2-EOR Project (Norway/UK)CO2-EOR Project (Norway/UK)

Oil Price v's CO2 - EOR Value (@ 10% IRR)

$15

$20

$25

$30

$35

$0 $10 $20 $30 $40 $50

CO2 - EOR Value ($/tCO2)

Oil

Pri

ce

($

/bb

l)

UK

Norway

NO - 3yr

With CO2-Purchase Price at $35 /tCO2 the basic (unsupported) EOR project requires averaged oil price in range $27,80 - $29,20 /bbl to achieve 10% IRR “After-Tax” within present taxation systems in NO / UK sectors.

With CO2-Purchase Price at $35 /tCO2 the basic (unsupported) EOR project requires averaged oil price in range $27,80 - $29,20 /bbl to achieve 10% IRR “After-Tax” within present taxation systems in NO / UK sectors.

In Norway the favourable effect of reducing depreciation from 6 to 3 years is shown by the dashed line.

In Norway the favourable effect of reducing depreciation from 6 to 3 years is shown by the dashed line.

Main observation is that with oil valued below $18 /bbl then the EOR-project alone can only afford to pay $10 - $12 /tCO2 given current economic framework. However this excludes a considerable upside that would accrue to the government if it also participated in the project.

Main observation is that with oil valued below $18 /bbl then the EOR-project alone can only afford to pay $10 - $12 /tCO2 given current economic framework. However this excludes a considerable upside that would accrue to the government if it also participated in the project.

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CO2 Price v's Break Even Oil Price

$0

$5

$10

$15

$20

$25

$30

$35

$10 $15 $20 $25 $30

Market Oil Price ($ /bbl)

Pur

chas

e P

rice

($/tC

O2)

-4

-3

-2

-1

0

1

2

3

Dis

c. G

ovt N

PV

($bn

)NO - Base

NO - 3 yr.

UK - Base

NO - NPV

NO - 3yr

UK - NPV

CO2-Purchase Price v’s “Break-Even” Oil Price

In UK-sector with market oil price $21,95 /bbl, the oil field operator can afford to pay $19,50 /tCO2. The remaining $15,50 /tCO2 is supported by UK-Govt that has zero discounted NPV on the EOR project.

In UK-sector with market oil price $21,95 /bbl, the oil field operator can afford to pay $19,50 /tCO2. The remaining $15,50 /tCO2 is supported by UK-Govt that has zero discounted NPV on the EOR project.

In NO-sector with 3-year depreciation and market oil price $21,00 /bbl, the oil field operator can afford to pay $20,50 /tCO2. The remaining $14,50 /tCO2 is supported by NO-Govt that has zero discounted NPV on the EOR project.

In NO-sector with 3-year depreciation and market oil price $21,00 /bbl, the oil field operator can afford to pay $20,50 /tCO2. The remaining $14,50 /tCO2 is supported by NO-Govt that has zero discounted NPV on the EOR project.

The dashed lines correlate ability to purchase CO2 at higher price (left axis) with increasing oil price. The solid lines is how government income (inverted on right axis) becomes +’ve as oil price increases and support level decreases.

The dashed lines correlate ability to purchase CO2 at higher price (left axis) with increasing oil price. The solid lines is how government income (inverted on right axis) becomes +’ve as oil price increases and support level decreases.

Main observation is that when government is included and actively supports the CO2-price then the Project can “survive” with oil price down to $20 /bbl. (NB! There is still no added value to government due to sequestration of CO2).

Main observation is that when government is included and actively supports the CO2-price then the Project can “survive” with oil price down to $20 /bbl. (NB! There is still no added value to government due to sequestration of CO2).



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-30 % -20 % -10 % 0 % 10 % 20 %

+10% in Oil Price

-10% Spec Tax Rate

-10% CT Offshore

-10% Cost of CO2

+10% in CO2 Efficiency

-10% CAPEX

+10% in Oil Recovery

+10% Oil Rec adj CAPEX

% Change in Govt Tax Income wrt. Base Case

Norway

UK

0 % 20 % 40 % 60 % 80 % 100 %

+10% in Oil Price

-10% Spec Tax Rate

-10% CT Offshore

-10% Cost of CO2

+10% in CO2 Efficiency

-10% CAPEX

+10% in Oil Recovery

+10% Oil Rec adj CAPEX

Change in Govt. Tax Income with respect to the Base Case

For each significant case considered the respective government tax income will change. Bars show %-change with respect to the Base Case.

For each significant case considered the respective government tax income will change. Bars show %-change with respect to the Base Case.

Main observation is that in both sectors oil price rise has the most direct impact on government income, while also the Norwegian government is most exposed to reduction in the offshore tax regime.

Main observation is that in both sectors oil price rise has the most direct impact on government income, while also the Norwegian government is most exposed to reduction in the offshore tax regime.



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Comparisons for aComparisons for aReservoir Production ProfilesReservoir Production Profiles

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For the oilfield operator it is;

(i) Perception of the market price of crude oil.

(ii) Risk exposure.

(iii) Security of CO2 supply.

Key issues for the CO2-supplier are;

(iv) Cost for capturing and gathering the CO2.

(v) Future legislation constraining CO2-emissions.

(vi) Cost of alternative options for CO2-avoidance.

Summary of theSummary of theKey Issues for CO2-EORKey Issues for CO2-EOR

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CO2 - From theCO2 - From theProblem to a Solution?Problem to a Solution?

OPPORTUNITIES

CO2CO2

CHALLENGES

SOLUTIONS

“Energy Security”, EOR, Hydrogen, Renewables, “Zero-Emission”.

Sustainable, Technology RD&D, Profitable Projects.

Climate-Change, “Energy Supply”, Costs, Incentives,Dialogue.

SOCIETY

Awareness, Respect, Communication, Education, Acceptance.

“fiscal mechanisms to promote co2 for eor in the north sea: understanding the co2 value chain”

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