Thursday, May 28, 2009

Sequester Oil Instead of CO2?

I've been following developments in carbon capture and sequestration (CCS) for more than a decade, so I was intrigued to run across a novel suggestion for an entirely different approach, involving the "sequestration" of undeveloped oil instead of the CO2 emitted by power plants and other industrial facilities. Even allowing for the likelihood that this trial balloon by Ecuador is either intended to enhance its government's leverage in negotiations with potential oil developers, or constitutes an outright scam--the resources in question apparently lie beneath a designated national park--the idea of selling emissions offsets based on the carbon content of forgone oil output is just plausible enough to merit a bit of analysis.

The basic idea seems clever. If it's so hard to capture the CO2 from burning fossil fuels and prevent it from accumulating in the atmosphere, why not leave the carbon in the ground and take credit for that by selling emissions offsets? The benefit of such a transaction, in both environmental and economic terms, would hinge on two key parameters: the carbon content of the specific grade of oil involved and the extent of the reservoir holding it. In other words, how many barrels would be spared, and how many tons of CO2 would be avoided for each barrel? Neither figure could be determined with certainty without some actual drilling, but non-invasive seismic techniques might supply an estimate of the approximate size of the potential reserves involved, while the quality might be guessed by analogy to actual producing fields elsewhere in the country. With these estimates in hand, we could arrive at an approximate value for the avoided emissions.

Lacking detailed information on these Ecuadoran oil reserves, I'm going to punt on quantity and focus on quality and its implications for the unit price of the resulting emissions offsets. If there's enough oil there to be of commercial interest, then that ought to be a sufficient starting point to assess the merits of leaving it in the ground as a means of combating climate change. As a first approximation on quality, let's assume the oil is similar to the Oriente crude that makes up most of Ecuador's output. Oriente is a medium-sulfur, medium-gravity crude similar to the oil produced on the Alaskan North Slope and run in many US West Coast refineries. Its API gravity is listed at 29.2, corresponding to a density of approximately 308 lb. per barrel. Applying a little basic chemistry suggests that each bbl burned would emit roughly 1004 lb. of CO2, so if we knew what the oil was worth, we could easily derive a cost per ton of CO2.

Because the oil in question is still under the ground, its price can't be looked up on an exchange. However, companies are bought and sold on the basis of reserves that have yet to be produced. A recent report from IHS Herold and Harrison Lovegrove & Co., Ltd. indicated that the average value of such M&A transactions in 2008 implied a value of $11.51/bbl for proved reserves and $5.25 for "proved plus probable." The latter figure seems more relevant to the current situation, since the reserves in question couldn't be fully proved without precisely the kind of development work this idea is designed to avoid. Applying the lower "2P" figure to the CO2 calculation above results in an equivalent value of about $11 per metric ton of CO2 offset. That's roughly the same as the estimate for the proceeds from cap & trade implicit in the federal budget the Obama administration submitted to Congress and lower than the price at which offsets are trading on the European Climate Exchange.

The basic flaw in this analysis stems from the large difference between what a company might pay for the rights to oil still in the ground, compared to its ultimate value to both the resource owner and society once produced. Fundamentally, that value is much higher than the externality cost of the greenhouse gases that would be emitted along the way. If that weren't true, Europeans wouldn't pay the equivalent of $293/bbl to fuel their cars. Even if the oil in question were only worth today's long-dated futures price of around $75/bbl less production costs and a discount for quality versus West Texas Intermediate, the price of emissions offsets would have to approach at least $100/ton CO2 before the Ecuadoran government would be truly indifferent to leaving it undeveloped. At $100/ton, many other emissions reduction strategies would look more attractive, including the brute-force, industrial capture and sequestration of CO2 from smokestacks. However high the parasitic energy cost of such CCS, it would still allow most* of the energy content of fossil fuels to be applied to providing the global economy with electricity or transportation fuels, until other sources can expand enough to replace them.

The Washington Post article on this story concludes with a quote from a program director at the Nature Conservancy who characterized the idea as "probably ahead of its time." I'd go the next step and suggest that its inherent contradictions render it generally impractical. There are many reasons to forgo the development of some oil, and if Ecuador's Yasuni National Park is truly the marvel of biodiversity and unspoiled wilderness described, then leaving its oil untouched shouldn't require financial inducements extrapolated from guesses about the resources under its surface. At the same time, it's hard to see a country contemplating development of a less sensitively situated hydrocarbon resource being able to raise enough money from the sale of emissions offsets to make up for the opportunity cost of forgone profits, royalties and taxes from a production-sharing contract, not to mention the employment and other benefits to the national economy. Schemes like this shouldn't distract us from the urgent and important work of figuring out how to make true carbon capture and sequestration practical and cost-effective.

*(A good friend pointed out that my use of "most" here could be miscontrued to imply 90% or more. In fact, current estimates indicate that CCS would consume 1/4-1/3 of the energy output of a fossil-fuel fired power plant. That's consistent with the thermodynamics of combustion and CO2.)

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