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Co-optimization of Enhanced Oil Recovery and Carbon Sequestration

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  • Andrew Leach
  • Charles F. Mason
  • Klaas van't Veld

Abstract

In this paper, we present what is to our knowledge the first theoretical economic analysis of CO2- enhanced oil recovery (EOR). This technique, which has been used successfully in a number of oil plays (notably in West Texas, Wyoming, and Saskatchewan), entails injection of CO2 into mature oil fields in a manner that reduces the oil's viscosity, thereby enhancing the rate of extraction. As part of this process, significant quantities of CO2 remain sequestered in the reservoir. If CO2 emissions are regulated, oil producers using EOR should therefore be able to earn sequestration credits in addition to oil revenues. We develop a theoretical framework that analyzes the dynamic co-optimization of oil extraction and CO2 sequestration, through the producer's choice at each point in time of an optimal CO2 fraction in the injection stream (the control variable). We find that the optimal fraction is likely to decline monotonically over time, and reach zero before the optimal termination time. Numerical simulations, based on an ongoing EOR project in Wyoming, confirm this result. They show also that cumulative sequestration is positively related to the oil price, and is in fact much more responsive to oil-price increases than to increases in the carbon tax. Only at very high taxes does a tradeoff between oil output and sequestration arise.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15035.

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Date of creation: Jun 2009
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Publication status: published as Leach, Andrew & Mason, Charles F. & Veld, Klaas van ‘t, 2011. "Co-optimization of enhanced oil recovery and carbon sequestration," Resource and Energy Economics, Elsevier, vol. 33(4), pages 893-912.
Handle: RePEc:nbr:nberwo:15035

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  1. Dermot Gately & Hiliard G. Huntington, 2002. "The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 19-55.
  2. Davis, Graham A & Cairns, Robert D, 1999. "Valuing Petroleum Reserves Using Current Net Price," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 37(2), pages 295-311, April.
  3. de Coninck, Heleen, 2008. "Trojan horse or horn of plenty? Reflections on allowing CCS in the CDM," Energy Policy, Elsevier, Elsevier, vol. 36(3), pages 929-936, March.
  4. Thompson, Andrew C., 2001. "The Hotelling Principle, backwardation of futures prices and the values of developed petroleum reserves -- the production constraint hypothesis," Resource and Energy Economics, Elsevier, Elsevier, vol. 23(2), pages 133-156, April.
  5. Adelman, M A, 1990. "Mineral Depletion, with Special Reference to Petroleum," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 1-10, February.
  6. Robert D. Cairns and Graham A. Davis, 2001. "Adelman's Rule and the Petroleum Firm," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 31-54.
  7. Dermot Gately, 2004. "OPEC's Incentives for Faster Output Growth," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 75-96.
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Cited by:
  1. Niko Jaakkola, 2013. "Monopolistic Sequestration of European Carbon Emissions," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 098, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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