Co-Optimization of Enhanced Oil Recovery and Carbon Sequestration

31 Pages Posted: 3 Jun 2009 Last revised: 23 May 2014

See all articles by Andrew Leach

Andrew Leach

University of Alberta - Department of Marketing, Business Economics & Law

Charles F. Mason

University of Wyoming - College of Business - Department of Economics

Klaas van't Veld

University of Wyoming - College of Business; University of Michigan at Ann Arbor

Date Written: June 2009

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.

Suggested Citation

Leach, Andrew and Mason, Charles F. and van't Veld, Klaas, Co-Optimization of Enhanced Oil Recovery and Carbon Sequestration (June 2009). NBER Working Paper No. w15035. Available at SSRN: https://ssrn.com/abstract=1413599

Andrew Leach

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

Charles F. Mason

University of Wyoming - College of Business - Department of Economics ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-5336 (Phone)
307-766-5090 (Fax)

Klaas Van't Veld

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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