Introduction

Amidst economic uncertainty, fiscal crisis and political division over energy policy, carbon dioxide enhanced oil recovery (CO₂-EOR) offers a safe and commercially proven method of domestic oil production that can help the United States simultaneously address three urgent national priorities:

• Increasing our nation’s energy security by reducing dependence on foreign oil, often imported from unstable and hostile regimes;
• Supporting job creation, increasing tax revenue, and reducing our trade deficit by keeping dollars now spent on oil imports here at home and at work in the U.S. economy; and
• Protecting the environment by capturing and storing CO₂ from industrial facilities and power plants, while getting more American crude from areas already developed for oil and gas production.

A largely unheralded example of American ingenuity, CO₂-EOR was pioneered in West Texas in 1972 as a way to sustain oil production in otherwise declining oil fields. It works by injecting CO2 obtained from natural or man-made sources into existing oil fields to free up additional crude oil trapped in rock formations. In this way, CO₂– EOR can significantly extend the lifespan and revitalize production of mature oil fields in the United States.

Today, over 3,900 miles (Dooley, et al., 2009) of pipelines in the United States annually transport approximately 65 million tons of CO₂ (Melzer, 2012) that the oil industry purchases for use in EOR, producing 281,000 barrels of domestic oil per day, or six percent of U.S. crude oil production (ARI, 2011). The EOR industry has captured, transported, and injected large volumes of CO₂ for oil recovery over four decades with no major accidents, serious injuries or fatalities reported.

America has the potential to expand CO₂-EOR significantly. Advanced Resources International (ARI) estimates that an additional 26-61 billion barrels of oil could economically be recovered with today’s EOR technologies, potentially more than doubling current U.S. proven reserves. Moreover, “next generation” EOR technology could yield substantially greater gains, potentially increasing recoverable domestic oil from EOR to 67-137 billion barrels, and storing 20-45 billion metric tons of CO₂ that would otherwise be released into the atmosphere (ARI, 2011).

The National Enhanced Oil Recovery Initiative (NEORI) was formed to help realize CO₂-EOR’s full potential as a national energy security, economic and environmental strategy. Organized and staffed by the Center for Climate and Energy Solutions (C2ES) and the Great Plains Institute (GPI), the Initiative brought together a broad and unusual coalition of executives from the electric power, coal, ethanol, chemical, and oil and gas industries; state officials, legislators and regulators; and environmental and labor representatives.

NEORI was launched on July 17, 2011, in Washington, D.C., with bipartisan support from four U.S. Senators and a member of Congress. Project participants met on three occasions to define the scope and expectations of the project, provide feedback on technical matters, and offer policy guidance. They gathered in Washington, D.C., with the launch of the project on July 17, 2011; in Traverse City, MI, on September 21-22; and in Houston, TX, on November 1-2. The latter two meetings included field visits to commercial EOR operations and to a CO₂ capture facility.

NEORI participants also formed subgroups focused on developing policy recommendations, analysis and modeling, and communications and outreach materials. The subgroups held conference calls over several months, often on a weekly basis, to develop, refine, and reach consensus on recommendations and work products.

This report presents NEORI participants’ consensus recommendations for targeted federal and state incentives to expand CO₂-EOR. If implemented, these recommendations would significantly increase U.S. domestic oil production while generating net new tax revenues for the federal government and states struggling to fill budget gaps and jumpstart our nation’s economy. 

Rationale for Incentives to Support CO2-EOR The Challenge: Limited Supply of Man-Made CO2 for Use in EOR Today’s supply of CO2 available for purchase by the oil industry is simply inadequate to achieve the tens of billions of barrels of additional domestic oil production possible through EOR. In a fortunate, if ironic, twist of fate, a key to increasing America’s domestic energy security lies in capturing and productively utilizing a portion of our nation’s industrial CO2 emissions, thereby meeting a critical domestic energy challenge, while also helping to solve a global environmental problem. Expanding the supply of CO2 available for EOR depends upon wide-scale deployment of carbon capture and compression equipment at a broad range of industrial sources, including natural gas processing; ethanol fermentation; fertilizer, industrial gas and chemicals production; gasification of various feedstocks; coal, natural gas and biomass-fueled power generation; and the manufacture of cement and steel. In addition, a substantial build-out of the existing CO2 pipeline network will be required to deliver CO2 from industrial facilities where it is produced to existing oil fields where it is needed. The Solution: Reducing the Cost of Capturing and Transporting Man-Made CO2 NEORI’s federal and state incentive recommendations aim to bring down the cost of man-made, or anthropogenic, CO2 capture and transport over time to a level that private capital can finance without additional government support and based solely on crude oil prices and the economics of commercial EOR operations. The EOR industry currently purchases CO2 on the open market. Market prices support using anthropogenic CO2 only in those cases where the costs of capture from a particular industrial source are low, and the amount of CO2 produced justifies private financing of pipeline infrastructure. However, CO2 capture technologies for some applications, notably electric power generation and some other industrial processes, are not yet fully commercialized and remain expensive to deploy, even at today’s oil prices. Also, the costs of building trunk pipelines to deliver CO2, especially from smaller industrial sources, often exceed the scope of what individual EOR projects can privately finance without the addition of incremental incentives recommended in this report.

Overview of Recommendations

Federal Production Tax Credit for CO₂-EOR: A Revenue-Positive Policy for Domestic Energy Security 

NEORI’s centerpiece recommendation is a competitively awarded, revenue-positive federal production tax credit for capturing and transporting CO₂ to stimulate CO₂– EOR expansion. Crucially, this federal tax credit would more than pay for itself. Indeed, analysis of the incentive outlined below indicates that federal revenues from existing tax treatment of additional incremental oil production would exceed the fiscal cost of the incentive itself by $100 billion over 40 years. Further, modeling shows that this incentive program, properly designed, would become revenue-positive within the ten-year timeframe typically used by Congressional budget score-keepers.

Analysis undertaken by NEORI suggests that this tax credit would result in the production of an additional 9 billion barrels of American oil over 40 years, quadrupling CO₂-EOR production and displacing U.S. oil imports. At the same time, the proposed incentive would save the United States roughly $610 billion in expenditures on imported oil, while storing approximately 4 billion tons of CO₂ captured from industrial and power plant sources, thereby reducing total U.S. CO₂ emissions in the process.

Focusing Incentives on Industrial Suppliers of CO₂, not the Oil Industry 

With oil at around $100 per barrel, world-class experience and expertise in the U.S. oil industry, and private capital available to invest, why are new financial incentives needed to expand CO₂-EOR? To be sure, EOR represents an American can-do commercial success story, and the U.S. oil industry does not need or seek additional financial incentives to sustain EOR production at present levels.

While the business model of the U.S. EOR industry has worked profitably for decades utilizing existing sources of natural and man-made CO₂, the principal constraint on the EOR industry’s ability to expand domestic oil production is the lack of sufficient additional CO₂ at current market prices. Therefore, NEORI recommends that incentives be primarily directed to capture and pipeline projects serving industrial facilities and power plants, rather than to EOR operators.

This approach will enable a variety of industry sectors to market new sources of CO₂ to the oil industry and develop the technological and operational experience that will drive innovation and cost reduction in CO₂ capture, compression, and transport over time. In addition to increasing CO₂ supply for the oil industry, these projects will benefit participating industries by helping them to reduce their carbon footprint in response to emerging and expected state and federal regulatory requirements and by making them more competitive in a global marketplace that increasingly values lower-carbon products and services. Finally, the deployment of CO₂ capture and pipelines for use in EOR will establish a national infrastructure that can eventually be utilized by many industries for long-term carbon capture and storage (CCS) in geologic formations beyond oil and gas fields.

Complement Federal Policies with State Incentives 

States also have an important role to play in fostering CO₂-EOR deployment by implementing incentive policies that can complement the federal production tax credit recommended in this report. A number of states have already taken the lead, filling the current vacuum left by the absence of adequate federal policy. Therefore, this report identifies existing state policies that NEORI members believe should serve as models for policy-makers in other states to adopt and tailor to their particular needs.

Multiple Benefits of CO₂-EOR Can Marshall Broad Support for Policy Change 

The federal and state policy recommendations in this report will, if implemented, create a virtuous circle of linked and growing benefits to the American people: expanding CO₂ supply, increasing domestic oil production and associated job creation, expanding federal and state  revenues, and declining CO₂ emissions. Thus, at a time when our nation’s energy policy is mired in regional, partisan and ideological debate, CO₂-EOR can help lay the groundwork for a different policy path forward, one that weaves together a broad coalition of Americans united by common interests.