Revenue-Positive Incentives to Accelerate Deployment of EOR Using CO 2 Captured from Coal Generation and Other Industrial Sources:

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1 Revenue-Positive Incentives to Accelerate Deployment of EOR Using CO 2 Captured from Coal Generation and Other Industrial Sources: Recommendations of the National Enhanced Oil Recovery Initiative Brad Crabtree Policy Director Great Plains Institute August 16, 2012

2 Benefits to Increasing CO 2 -EOR Increase U.S. oil production by accessing domestic reserves with captured CO 2 ; U.S. CO 2 -EOR potential equals 27 to 62 billion barrels with existing technology, 67 to 137 billion barrels with next generation techniques; current U.S. proven reserves are around 20 billion barrels Lower trade deficits/strengthen America s national security by reducing dangerous dependence on unstable and/or hostile regimes supplying the world oil market; An increase in oil production from EOR has the potential to reduce net crude oil imports by half and provide up to $210 billion in increased state and federal revenues by EOR could reduce the U.S. foreign trade deficit by $11-$15 billion dollars in 2020 and $120- $150 billion by Create new, high-paying American jobs and retain and attract private sector investment in the U.S. economy for capturing CO 2, transporting it, and boosting U.S. oil production; Cumulatively by 2030, this reduction in oil imports would keep $600 billion here at home, generating additional economic activity, high-paying jobs and revenues, rather than flowing out of the U.S. economy to other countries. Enable commercial deployment of CCS industry to the long-term benefit of coal, natural gas, ethanol and other domestic industrial sectors; Facilitate compliance and participation in low-carbon fuels markets by oil, natural gas and ethanol producers; and Achieve significant net carbon reductions through sequestration in depleted oil fields.

3 Overview of NEORI NEORI was formed to help realize CO 2 -Enhanced Oil Recovery s (EOR) full potential as a national energy security, economic, and environmental strategy. In early 2012, NEORI released consensus recommendations for targeted federal and state incentives to expand CO 2 -EOR. If implemented, these recommendations would significantly increase U.S. domestic oil production while generating incremental tax revenues for the federal government and states to help fill budget gaps and strengthen our nation s economy. NEORI participants and observers consist of a 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. Organized and staffed by the Center for Climate and Energy Solutions (C2ES) and the Great Plains Institute (GPI)

4 Project Participants & Observers Coal and Coal-Based Generation Arch Coal Basin Electric Power Cooperative Summit Power Group Tenaska Energy Industrial Suppliers of CO 2 /Technology Vendors Air Products Archer Daniels Midland C12 GE Energy Jupiter Oxygen Linde Praxair Environmental NGOs Clean Air Task Force Natural Resources Defense Council Ohio Environmental Council Wyoming Outdoor Council State Officials Illinois, Indiana, Michigan, Mississippi, Montana, New Mexico, Texas and West Virginia Academic Institutions Enhanced Oil Recovery Institute (University of WY) Observers Oil and Gas Chaparral Energy Core Energy Associations Interstate Oil and Gas Compact Commission North American Carbon Capture and Storage Association Project Developers Leucadia Energy Labor AFL-CIO United Transportation Union

5 Bipartisan Congressional Support The following Members of Congress provided statements of support welcoming the NEORI recommendations Senator Kent Conrad (D-ND) Congressman Mike Conaway (R-TX) Senator Max Baucus (D-MT) Congressman Rick Berg (R-ND) Senator John Hoeven (R-ND) Senator Richard Lugar (R-IN) Participated in NEORI media event to release recommendations

6 Background on CO 2 -EOR Commercial CO 2 use to enhance oil recovery is happening now, and it s bigger than most people realize: The CO 2 -EOR industry has 40 years of commercial operational experience (began at significant scale in West Texas in 1972). Today, CO 2 -EOR produces nearly 300,000 barrels of oil per day (100 million barrels annually), or about 6 percent of U.S. domestic production.

7 And the oil production potential is vast Projected CO 2 - EOR Resources: Incremental Technically Recoverable Oil (Billion Barrels) Incremental Economically Recoverable Oil (Billion Barrels) Best Practices Next Generation Best Practices Next Generation Lower 48 Onshore Total Source: U.S. Department of Energy (2011), Improving Domestic Energy Security and Lowering CO 2 Emissions with Next Generation CO 2 -Enhanced Oil Recovery (CO 2 -EOR), DOE/NETL-2011/1504. An additional 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 billion barrels, and storing billion metric tons of CO 2 that would otherwise be released into the atmosphere in the long term. 7

8 Source Type (Location) Current CO 2 Supply for EOR Some CO 2 for EOR already comes from industrial sources Today, the U.S. EOR industry uses 72 million tonnes of CO 2 per year profitably and without serious reported injuries, accidents or environmental harm. CO 2 Supply (Mt/year) Natural Anthropogenic Colorado, New Mexico (Geologic) 33 - Texas (Gas Processing) Wyoming (Gas Processing) Mississippi (Geologic) 22 - Oklahoma (Fertilizer Plant) Michigan (Gas Processing) North Dakota (Coal Gasification) - 3 Total U.S. Department of Energy (2011), Improving Domestic Energy Security and Lowering CO 2 Emissions with Next Generation CO 2 -Enhanced Oil Recovery (CO 2 -EOR), DOE/NETL-2011/1504, citing Advanced Resources International (2011). 8

9 Map of Current U.S. CO 2 -EOR Activity Source: NETL,

10 But, we need more CO 2... and we need to bring the costs of capture and transport down... NEORI CO 2 Capture & Transport Cost Assumptions ($/tonne) Transportation Cost Core Scenario Capture Cost Core Scenario + Transp. Costs (A) Power Plant Tranche ($/tonne) ($/tonne) ($/tonne) (30-year Payback) Pioneer - First of a Kind Projects $10 $60 $70 Projects #2-#5 $10 $50 $60 Nth of a Kind (Projects #6-onward) $10 $45 $55 Industrial - Low Cost Tranche ($/tonne) ($/tonne) ($/tonne) (15-Year Payback) Pioneer- First of a Kind Projects $10 $28 $38 Projects #2-#5 $10 $28 $38 Nth of a Kind (Projects #6-onward) $10 $28 $38 Industrial - High Cost Tranche ($/tonne) ($/tonne) ($/tonne) (15-Year Payback) Pioneer- First of a Kind Projects $10 $55 $65 Projects #2-#5 $10 $45 $55 Nth of a Kind (Projects #6-onward) $10 $35 $45 10

11 More anthropogenic CO 2 can become available at higher prices... (Illustration with EIA 2011 data, prices differ from previous slide) Power plant CO 2 supply potentially larger 11

12 Incentives are needed: For the largest CO 2 supply sources, high oil prices will not be enough... Core Scenario + CO 2 Market Price (*Starting 2013, Representative EOR Incentive (for Transp. Costs Willingness To Pay) illustration purpose) (A) (B) (A-B) Power Plant Tranche ($/tonne) ($/tonne) ($/tonne) Pioneer - First of a Kind Projects $70 $33 $37 Projects #2-#5 $60 $33 $27 Nth of a Kind (Projects #6-onward) $55 $33 $22 Industrial - Low Cost Tranche ($/tonne) ($/tonne) ($/tonne) Pioneer- First of a Kind Projects $38 $33 $5 Projects #2-#5 $38 $33 $5 Nth of a Kind (Projects #6-onward) $38 $33 $5 Industrial - High Cost Tranche ($/tonne) ($/tonne) ($/tonne) Pioneer- First of a Kind Projects $65 $33 $32 Projects #2-#5 $55 $33 $22 Nth of a Kind (Projects #6-onward) $45 $33 $12 12

13 NEORI s Phase I Agenda Completed 1. Developed consensus recommendations for incentives and other policies to support commercial CO 2 -EOR deployment that are self-financing through revenues from additional incremental oil production. 2. Prepared key analyses to inform and support incentive policies for anthropogenic CO 2 -EOR 3. Increased policy-maker, media and public awareness of CO 2 -EOR, its benefits and the need for deployment incentives. However, much more work to be done!

14 Key Elements Federal Production Tax Credit for CO 2 Capture Provided to owners of CO 2 capture equipment installed on a broad range of power plants and industrial processes, with the potential to supply significant volumes of CO 2 to the EOR industry; Limited to covering the additional incremental costs of new CO 2 capture, compression, and transport; Allocated through competitive bidding process, by source category Awarded to qualifying projects over a ten-year period based on performance; Designed with transparent registration, credit allocation, certification, and public disclosure; Provided with no limits on project scale or on the aggregation of different CO 2 sources into a single project to enable participation of smaller industrial facilities; Designed to ensure that the program achieves ongoing technology innovation, CO 2 emission reductions, and cost reductions for CO 2 capture, compression, and transport; and Designed with explicit safeguards to penalize non-compliant projects, limit taxpayer expenditure, and modify the program to ensure net positive federal revenues.

15 Cost gap analysis Analytical Study Determine difference between willingness to pay by EOR operators and cost of carbon capture, storage and transportation Revenue neutrality analysis Compare cost of new CO 2 -EOR incentives with new federal revenues directly resulting from incremental new CO 2 -EOR production in the form of royalties on Federal lands plus severance and corporate income taxes. Analysis suggests revenue neutrality within 10-year window and significant net positive revenues over long term

16 Program revenues greatly exceed costs over time

17 CO 2 -EOR production doubles within 20 years

18 Time Phase Cumulative Incremental CO 2 -EOR Oil Production (Barrels) NEORI Analytic model suggests significant oil production and revenues over time Cumulative Net Present Value ($) Cumulative CO 2 Storage (tonnes) million $2 billion billion $31 billion billion $73 billion ~4 billion billion $100 billion

19 Enhancements to Existing and Funded Federal 45Q Tax Credit To avoid stalling important commercial CO 2 capture projects under development, there is an urgent need to improve the functionality and financial certainty of the 45Q federal incentive. Key Elements: Designate the owner of the CO 2 capture facility as the primary taxpayer; Establish a registration, credit allocation, and certification process to provide for investment certainty in projects that is currently lacking; Change recapture provision to ensure that future regulations issued after storage of CO 2 shall not enable recapture of credits already awarded under previous regulations; and Authorize assignment of the credit within the CO 2 chain of custody to the entity responsible for storing the CO 2

20 State-level Recommendations Model complementary policies to federal incentives Severance tax reduction and/or extension of existing severance tax reduction for oil produced with CO 2 from anthropogenic sources. Cost recovery approval for regulated entities. Off-take agreements. Tax credits, exemptions, or abatements for CO 2 capture State-level bonding of CO 2 pipeline projects and/or capture and compression facilities. Inclusion of CCS with EOR in electricity portfolio standards. See full report to see examples from specific states

21 Education and Outreach Materials for policy-makers, media and public: Address lack of awareness of commercial CO 2 -EOR and its economic, energy security and environmental benefits: Full NEORI report; Two pagers on: overview of CO 2 -EOR, economic benefits, environmental benefits, opportunities for agriculture (ethanol and fertilizer production), and safety; and Forthcoming: two-pagers on importance and benefits of CO 2 -EOR to the coal industry, natural gas industry, and potentially other sectors.

22 PHASE II: Implementation of Recommendations 1. Federal action to improve existing incentives and enact NEORI s broader policy recommendations; 2. Broader awareness nationally and in key regions of the economic, fiscal, energy security and environmental benefits of CO2-EOR; 3. Adoption by more states of model state policies supporting CO2- EOR; and 4. Additional analysis to better assess the benefits of CO2-EOR to the economy, energy security and the environment.

23 PHASE II Potential Partners and Audiences Additional companies to join NEORI and support the recommendations Additional organizations already focusing on CCS or EOR Industry associations, chambers of commerce, civic associations, labor, and environmental organizations Local, state and federal officials (both legislative and executive) Broader public

24 PHASE II Accomplishments to Date NEORI federal 45Q tax credit recommendations drafted as amendment language Bipartisan amendment filed with Senate Finance Committee in August and sponsored by Senators Kent Conrad (D-ND), Mike Enzi (R-WY) and Jay Rockefeller (D-WV) Work underway to introduce bipartisan legislation in the U.S. Senate in September Strategic outreach underway to members of House Way and Means Committee and to House leadership Groundwork being laid for introduction and consideration of Congressional legislation in 2013 to implement NEORI s larger, more comprehensive federal production tax credit proposal for CO2-EOR deployment

25 Contacts Brad Crabtree Great Plains Institute (701) Judi Greenwald Center for Climate & Energy Strategies (703)