MRP 99: Carbon Capture and Enhanced Oil Recovery

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CO2 sequestration or carbon capture and sequestration (CCS) is the process of capturing CO2 from the atmosphere or before it reaches the atmosphere and injecting it underground or capturing it using biological methods.   Enhanced Oil Recovery (EOR) is the process of injecting fluids like CO2 into the reservoir to increase production.  In this episode we talk about the intersection between carbon capture and EOR and the benefits to mineral owners.

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What is CO2 Sequestration?

CO2 sequestration or carbon capture and sequestration (CCS) is the process of capturing CO2 from the atmosphere or before it reaches the atmosphere and injecting it underground or capturing it using biological methods.  The hypothesis is that by capturing the CO2 before it reaches the atmosphere, we can limit the amount of carbon emissions thus preventing further warming of the earth.

What are the Types of Carbon Sequestration?

Biological carbon sequestration is storage of CO2 in plants as well as the soil or the ocean.  As you may know, plants use the process of photosynthesis utilizes water, CO2, and sunlight to create nutrients and the by-product of this process is oxygen.  In fact, photosynthesis is one of the primary ways oxygen enters the atmosphere.

The other type of carbon sequestration is geological carbon sequestration which is the process of storing CO2 underground in rock formations.  That is what we are going to focus on today as it relates to mineral rights and whether or not mineral owners can benefit from CO2 sequestration projects that might be built in your area.

In the future, there may be other technological forms of carbon capture and sequestration whereby CO2 could be converted into an engineered molecule like graphene.  But that is outside our scope.

Types of Geologic Carbon Sequestration

Geologic carbon sequestration can actually be quite useful when it comes to increasing oil and gas production.  Specifically, injecting CO2 into an oil reservoir can be quite useful when it comes to Enhanced Oil Recovery.  Before we talk about that, let’s take a step back and talk about the three phases of oil and gas recovery.  

The Three Phases of Oil and Gas Recovery

First is primary recovery, which utilizes the natural reservoir pressure to drive oil and gas into the wellbore which is often combined with things like pumps to bring the oil to the surface.  Did you know that only about 10 percent of a reservoir’s original oil in place is actually produced during this primary recovery phase?

The next phase is called secondary recovery.  This is the process whereby an operator may convert existing oil wells into injection wells or they may drill injection wells in a pattern around the producing wells and they then inject water into these injection wells and use that to displace the oil in the reservoir and drive it to the producing wellbore.  Secondary recovery can yield 20 to 40 percent of the original oil in place.  So you are still left with the situation where 60% of the original oil in place is still trapped underground and it makes sense to try to recover as much of that as possible, you will never get to 100% but sometimes it is possible to produce more than you would get with secondary recovery.

Tertiary Recovery in Oil and Gas Reservoirs

Which brings us to tertiary recovery which falls into three major categories. 

1. Thermal Recovery (e.g. injecting steam underground to thin out heavy viscous oil like is done in California and in parts of Canada).  By heating the oil up it can flow more easily through the reservoir to the production wellbore.  According to the DOE, this accounts for over 40% of US Enhanced Oil Recovery production.
2. The next is Chemical Injection which is often combined with waterfloods and uses chemicals that help oil move through the reservoir.  This represents a small percentage of EOR production.
3. The last one is Gas Injection which uses gas like natural gas or CO2 to drive oil through the reservoir towards the production wellbore, similar to water flooding.  In a different manner than thermal recovery these gasses can dissolve in the oil which also reduces the oil’s viscosity and allows it to flow more easily.  This is the most common form of EOR and accounts for almost 60% of EOR production in the US, again according to the DOE.  This is what we are going to focus on today because this is one way that CO2 can be beneficially used to both increase oil production while capturing those CO2 molecules and storing them underground. 

As you can imagine there is an overlap between CO2 Sequestration and Gas Injection Enhanced Oil Recovery (EOR) since CO2 flooding as a method of EOR has been used for almost 50 years.  In fact, CO2 EOR was first tried in 1972 in Scurry County, Texas.  In fact, there are several CO2 Enhanced oil recovery projects throughout the Permian Basin, which in the past had been focused on conventional oil and gas reservoirs.

Originally, the CO2 was obtained from naturally occuring sources.  One of the largest sources of CO2 in the world occurs in the McElmo Dome in southwestern Colorado, near Cortez.  That field has over 20 trillion cubic feet of CO2 in place.  Kinder Morgan operates this field as well as the Cortez pipeline which is capable of transporting 1.5 billion cubic feet of CO2 per day down to West Texas for use in EOR.

So, in the past, companies drilled CO2 wells and then transported the CO2 to the oilfields for use in Enhanced Oil Recovery.  With CO2 sequestration, we instead take CO2 from the atmosphere and inject it underground for storage or for use in Enhanced Oil Recovery.

The Future of Carbon Capture and Enhanced Oil Recovery

The benefits of taking CO2 from emissions from power plants or or other industrial sources is these are likely located much closer to the oilfield where the CO2 is to be injected underground.  For example, the Petra Nova coal-fired power plant in Houston, Texas utilizes CCS to capture Co2 from the flue gas slipstream which is then used for enhanced oil recovery in nearby oil fields.

For our discussion today in terms of the impact on mineral owners, we’re going to focus on two types of CO2 sequestration, the first is geologic CO2 sequestration without Enhanced Oil Recovery and the second is geologic CO2 sequestration with EOR like what is done in West Texas.

As you know, mineral owners own mineral rights and that right includes the right to extract the oil and gas and other minerals from under the ground.

Conversely, the surface owners own the rights to the surface estate and can do what they want with the surface, within reason.  In fact, both are subject to the accommodation doctrine which we’ve talked about before, which provides for mineral owners to explore and develop the mineral estate, but must not unreasonably interfere with the rights of the surface owner (and vice-versa).

Who Owns The Empty Space Underground?

Before we talk about the two types of CO2 sequestration and how it impacts mineral owners, it is important to discuss who owns the pore space in the rock underground.  The pore space is the empty space within the rock.  In fact, water and oil and gas or any substance doesn’t usually exist in large underground lakes or rivers, instead the oil and gas or water exists in the empty spaces between the grains of the rock.  The amount of empty space within a material is called the porosity.  So what we are talking about is who owns that empty space (not the oil or gas that might be there, which belongs to the mineral estate).

Surprisingly, most of the legal cases involving the right to inject and store natural gas underground and this question of who owns the pore space have sided with the surface estate.  The reasoning behind this is “because the pore space represents the absence of minerals, and the surface owner therefore owns the geologic storage rights.”  This conclusion is sometimes referred to as the “American rule” because English courts actually came to the opposite conclusion.  While many states have adopted the American rule, interestingly Texas law is not as clear.

In contrast, in cases where underground caverns have been created by solution mining subsurface salt formations, ownership of the empty space that is created is often attributed to the mineral estate.

The point being that this is a very nuanced part of the law so be sure to contact your attorney to get advice as to how this might apply in your state if you are in the situation where a Carbon Capture and Sequestration project is going in where you own mineral rights.

The American Rule vs. The English Rule

So in cases where the mineral rights have been severed from the surface rights, in what is called a “split estate”, this is likely to be a contentious issue as more and more CO2 sequestration projects are built.  This American rule may get tested in the courts as conflicts arise so this will be an area of the law to pay attention to as more CCS projects start up.

So assuming the American rule continues, then the surface estate would likely benefit from CCS projects where CO2 is injected underground for storage purposes only, in other words, no EOR.  If they own the pore space, they would have the right to decide how it is used and presumably could benefit financially from any arrangements with companies that lease their “pore space”.  That said, a caveat to the American rule states that surface estates must allow the mineral estate “to complete their extraction of minerals and completely deplete the subsurface area before leasing the pore space to another” entity.

Now, my personal opinion (this is not legal advice, consult with your attorney) is that it may be hard to prove that the subsurface area is completely depleted and in fact as we talked about before, if there is a known oil and gas reservoir then I don’t think it can technically ever be fully depleted.  Practically speaking, it might not be economic to go beyond the 40% recovery point but the fact remains that some of the oil in place would still be trapped underground.

Plus, the use case for CCS in those areas would likely be for Enhanced Oil Recovery anyway, so as a mineral owner you would benefit from the royalty payments from the additional oil that is produced.  So perhaps you are not directly benefiting by being paid for the injection of CO2 into the reservoir but you are benefitting indirectly due to the increased oil production.

Now, for other areas where there is no history of oil production, maybe dry holes were drilled and there is no evidence of oil, the 100% depletion argument might not hold up because it could be argued that no oil or gas exists underground. Perhaps there is only water and other non-beneficial minerals or salts in the pore space.  Then the surface owner may have a stronger argument to be able to lease the pore space for CCS.

The Future of EOR and CO2 Sequestration

So to wrap up, in most cases where states follow the American rule, the surface owner would be the one who could lease the pore space for storing CO2 underground.  That said, most of the use cases for this involve trying to put the CO2 to beneficial use through things like Enhanced Oil Recovery.  As more CO2 sequestration projects come into being, I think we will see an increase in EOR projects because of the increased supply of CO2 that can be injected into conventional oil reservoirs to increase recovery.  The royalty owners in these areas would benefit from increased oil production and the potential extension of the life of these older oil wells.

Additionally, because more than 90% of the oil may remain in the shale and tight formations that have seen the bulk of horizontal drilling activity over the past decade, there may be an opportunity to leverage EOR in these formations as well.  That said, there are some additional technical challenges because shale formations have extremely low permeability to allow the injected CO2 to flow through the reservoir to drive out oil.  Also, many horizontal wells experience what is called interwell communication which is where the hydraulic fracturing between two adjacent horizontal wells connect which may make CO2 injection less effective.  That said, the size of the prize is huge so I imagine that the smart folks in the oil and gas industry will find ways to make it work for some shale reservoirs.

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