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 manmade 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. (See Project Participant List here.)
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.
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.
II. 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 (See Figure 1). 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.
A. OVERVIEW OF THE PROPOSED FEDERAL PRODUCTION TAX CREDIT FOR CO2CAPTURE AND TRANSPORT
U.S. federal policy has long encouraged the capture and geologic storage of CO2 emissions, or CCS, from power plants and other industrial facilities. This support has been consistently bi-partisan and extended across several Presidential Administrations. Grants, loan guarantees, and federal assistance from agencies such as the U.S. Department of Energy (DOE) have played a vital role in advancing research, development, and demonstration of key CO2 capture technologies. The commercial and operational experience of the CO2-EOR industry in capturing, transporting, and injecting CO2 for oil production has greatly informed and contributed to the federal CCS effort. Indeed, DOE has increasingly come to view commercial EOR as a key pathway to facilitating CCS deployment.
Thanks to the efforts of private industry and DOE, many CO2 capture technologies are already commercially proven, and only a modest incentive is needed to help close the gap between the market price of CO2 and what it costs to capture and transport that CO2. In the case of emerging technologies, companies need a larger incentive to help shoulder the additional financial and operational risk of deploying new, pioneer capture projects for the first time in a commercial setting.
Therefore, NEORI participants recommend a carefully targeted and fiscally disciplined production tax credit program to be administered by the U.S. Department of the Treasury. Performance-based and competitively awarded, the program is designed to provide just enough incremental financial support, and nothing more, to enable important CO2 capture and pipeline projects to come into commercial operation and begin supplying CO2 to the EOR industry.
The tax credit includes the following key features designed to foster the commercial deployment of anthropogenic CO2 capture and pipeline projects, while ensuring project performance and a revenue- positive outcome for American taxpayers. It would be:
  • Provided to owners of CO2 capture equipment, installed on a broad range of industrial processes, with the potential to supply significant volumes of CO2 to the EOR industry;
  • Limited to covering the additional incremental costs of CO2 capture, compression, and transport at new and existing industrial facilities and power plants;
  • Allocated through competitive bidding in pioneer project, electric power and industrial tranches (so that like technologies with similar costs bid against each other);
  • Awarded to qualifying projects over a ten-year period based on performance (the credit can only be claimed upon demonstrating the capture and oil field storage of the CO2);
  • Designed with transparent registration, credit allocation, certification, and public disclosure (to provide project developers and private investors the financial certainty they need to move forward with projects);
  • Created with no limits on project scale or on the aggregation of different CO2 sources into a single project (to enable smaller industrial CO2 suppliers to participate effectively);
  • Measured to ensure that the program achieves ongoing technology innovation, CO2 emission reductions, and cost reductions for CO2 capture, compression, and transport; and
  • Designed with explicit safeguards to penalize noncompliant projects, limit taxpayer expenditure, and modify the program to ensure net positive federal revenues (within the ten-year Congressional budget scoring window and over the long term).

 

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