Carbon Capture Closer to Profit in Oil Rally: Energy Markets

Carbon Capture Closer to Profit in Brent Rally
An E.On AG flag flies in front of the carbon dioxide (CO2) capture and storage unit at the E.On AG Staudinger coal-powered plant in Grosskrotzenburg, Germany. Photographer: Hannelore Foerster/Bloomberg

Capturing pollution from European power plants and using it to force oil from underground reservoirs may turn a profit for the first time as crude prices rise toward $100 a barrel.

Gathering carbon dioxide and pumping it into deposits to extract more crude for so-called enhanced oil recovery became too costly for companies after Brent crude fell 73 percent between its record high in July 2008 and December that year, according to Thomas Greenwood, an analyst at Bloomberg New Energy Finance. The 115 percent rebound since then may make it profitable even without government subsidies that are designed to curb the emissions, he said.

E.ON AG, Germany’s biggest utility, and Sweden’s Vattenfall AB are among companies seeking about 4.3 billion euros ($5.7 billion) in European Union subsidies for carbon capture and storage. Regulators want to introduce the technology to help curb the greenhouse gases blamed for global warming.

“Projects are not far from becoming profitable,” Greenwood said from London. “If carbon-dioxide-based enhanced oil recovery were to take off in the North Sea it would be a major boost to carbon capture and storage in Europe.”

North Sea Brent crude, used to price two-thirds of the world’s oil, will rise to $88 a barrel next year and $92 in 2012, according to the median of 23 analyst forecasts compiled by Bloomberg. It was at $82.61 a barrel at 4:10 p.m. in London, having advanced 10 percent in the past year.

‘Makes Sense’

Enhanced oil recovery involves pumping carbon dioxide into underground reservoirs to extract more crude than would otherwise be obtained through natural pressure. The process has the advantage of extending the lifespan of an oilfield while permanently burying the pollutant.

“Initial projects all have to be around enhanced oil recovery,” said Lewis Gillies, chief executive officer of 2Co Energy Ltd., a London-based company studying the development of carbon-capture projects. “Given the current financial environment, it actually makes sense for quite a number of these projects to have the same carbon-dioxide solution.”

Five power stations in Yorkshire, northern England, could pipe carbon dioxide into a single North Sea field, according to Gillies. 2Co has already hired investment banks to consult with oil producers on the best storage locations, he said.

The first carbon-capture projects may be years from completion, according to Greenwood. Much of the spending on the capture plants will probably be paid for by governments or with the help of EU grants, he said.

Three Years Away

“Power stations will take at least three years to build so we wouldn’t expect them online until 2014 or 2015,” Greenwood said. European Union countries have capacity to store more than 60 years of emissions, he said.

EU carbon allowances for 2010 delivery were at 14.35 euros a metric ton on London’s European Climate Exchange as of 4:02 p.m. local time. The permits, which enable polluters to emit greenhouse gases, will trade at about 22 euros a ton in 2014, according to New Energy Finance.

Power stations capturing carbon dioxide could earn revenue by selling the gas and cut costs by reducing purchases of carbon permits. As crude prices rise, the incentive for oil companies to pay more for the gas would increase.

“If the CO2 permit price goes up, the power plant does not need to sell physical carbon dioxide for so much,” because of its strengthened competitive position against rival stations that still need to buy permits, Greenwood said. A rally in oil to $100 a barrel would negate the need for a carbon price at all, he said.

Risk, Reward

The enhanced oil recovery plant is in a strong bargaining position in its relationship with the utility after the pipelines are built, because the power station can’t easily switch to another field, Greenwood said. So construction and transport contracts between utilities and the oil company will likely share the profits from any increase in the carbon and oil prices, as well as share risks should prices fall, he said.

Societe Generale oil analyst Mike Wittner, whose estimates last year were the most accurate of 21 analysts surveyed by Bloomberg, forecasts a price of $108 a barrel for Brent in 2014.

Scottish & Southern Energy Plc, Britain’s second-largest power generator, said July 8 it plans to demonstrate the capture and storage of carbon emissions at a natural gas-fired plant in Scotland. Its previous partner, BP Plc, abandoned an earlier proposal for enhanced gas recovery in 2007.

SSE is already capturing carbon dioxide at its Ferrybridge coal station in Yorkshire to test the technology and then releasing it, Justin Smith, a spokesman for the Perth, Scotland-based company said by phone on Aug. 2.

“If a viable solution for storing that carbon was proposed, we would be interested,” he said.

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