Capital budgets for enhanced oil recovery (EOR) projects have grown in tandem with rising oil prices, but very little of that money is flowing into traditional waterflood recovery. That's because the large waterfloods in the U.S. have been done, says Steve Melzer, a leading EOR consultant based in Midland, Texas.

"There's quite a bit of activity going into these old fields—to repressure them and get them ready for tertiary recovery—but I'm not seeing a lot of evidence of a waterflooding revival," he says.

Instead, tertiary projects receiving attention are those using techniques that change the property of the oil to make it more mobile. Growing in usage is CO2 injection to coax more oil out of declining reservoirs. Chemical agents and steam flooding are other techniques being used in lieu of, or after, waterflooding plays out.

"You've got to change the properties of the oil," says Melzer, who for 15 years has co-directed the EOR Carbon Management Workshop in Houston and directed the CO2 Flooding Conference in Midland. "We've got a lot of target oil. That's the key."

Enhanced oil recovery consultant Steve Melzer, above, says anyone with a good inventory and the knowledge to do EOR is probably actively doing it or figuring out how to get started.

And higher oil prices do tend to help these projects come out of the ground. One industry executive observes that at the beginning of this year, it was as if a starter's gun had gone off. "People that had long planned to develop projects have hit the on switch. Anyone who has a good inventory and the knowledge to do EOR is probably actively doing it now or figuring out how to get it started. It's definitely a hot spot at the moment."

While not a new technology, CO2 projects in particular are receiving capital infusion, as supply, long a point of constraint, increases. "Water is ubiquitous, CO2 is not," says Melzer.

"We haven't done a lot of CO2 EOR in a lot of places because there hasn't been any CO2 supply."

Still, supply remains an issue, even as CO2 producers struggle to keep up with increasing demand. Upstart projects near existing pipe­lines are advantaged. The movement to capture greenhouse gases from industry emissions could be a boon to such projects if technology and legislation support it. "There's a lot of opportunity in the marketplace as we capture CO2 off of industrial sources," Melzer says.

Permian CO2

Kinder Morgan is known as one of the largest pipeline transportation and energy storage companies in North America, including CO2 delivery, but it may come as a surprise that the company is the No. 2 producer of onshore crude in Texas. Via its subsidiary, Kinder Morgan CO2, the company produces some 54,000 barrels of oil per day, second only to Occidental Petroleum Corp. in Texas, by using CO2 flooding in aged fields depleted by other operators.

"The most effective tertiary recovery technique in my opinion is CO2, by far," says Kinder Morgan CO2 president Tim Bradley. He estimates an extra 10% to 15% of original oil in place can be recovered. "Very few people have the expertise, the capital or the CO2 supply to be able to do an enhanced oil recovery project."

Kinder Morgan extended its Eastern Shelf Pipeline to its Katz Field in Knox County, Texas, which began CO2 flooding with 30 million cubic feet per day in December 2010.

Kinder Morgan has two producing CO2-injection projects in the Permian Basin and a third being flooded: Sacroc Field (Scurry Area Canyon Reef Operators Committee) in Scurry County; Yates Field in Pecos County; and Katz Field in Knox County, all fed by its own CO2 supply delivered by the Central Basin Pipeline from southwestern Colorado.

And although oil prices have accelerated over recent months, the run-up has not changed Kinder Morgan's capital allocation of more than $464 million for 2011, Bradley says, due to long lead times in developing CO2 EOR projects. "We have a plan and we're adhering closely to the plan."

Tim Bradley, Kinder Morgan C02 president, says, "We think another 25 million barrels of additional oil can be produced from Katz Field as a result of CO2 injection."

Approximately 87% of the company's crude production is hedged for 2011, for a blended average of about $70 per barrel, assuring a stable margin. Bradley estimates the breakeven in the current price environment is between $40 and $50 per barrel, but emphasizes that the number changes proportionally with the price of oil. "We were doing these projects when oil was at $20 a barrel 10 years ago," he notes.

Sacroc is the oldest CO2 flooding project in the world, originally begun in 1971. When acquired by Kinder Morgan in 2000, it was producing 8,500 barrels per day with 60 million cubic feet (MMcf) per day of CO2 injection. Today, Sacroc produces almost 30,000 barrels of oil daily on approximately 200 MMcf of purchased CO2 injection, with three rigs still drilling. "We've gotten very aggressive at it," says Bradley.

Two-thirds of the division's budget will be spent completing development of this field, with another 8% slated for Yates, a low-cost gravity-drainage project.

Kinder Morgan CO2's newest project is Katz Field in Knox County, 90 miles northeast of its prolific Sacroc Field. Owned by at least eight other operators in its storied past, Katz has been the target of more than 20 years of waterflooding to draw out its reserves, with current production of 200 barrels of oil per day.

Such fields are where Kinder Morgan sees opportunity.

"We tend to gravitate to properties that have been owned by others for a long time," says Doug McMurrey, Kinder Morgan CO2 vice president of marketing and business development. Specifically waterflood projects, he says, which are the best predictors for a good CO2 flood. "You know something about how the reservoir is going to work."

The company estimates Katz holds more than 200 million barrels of oil originally in place, and "we think another 25 million barrels of additional oil can be produced from Katz as a result of CO2 injection," says Bradley.

Katz came as the gem in a larger package of Permian properties acquired in 2006; most of the rest were subsequently sold off. Following an evaluation for EOR that included seismic, pressure testing and reservoir studies, Kinder Morgan faced the critical go-forward decision in the midst of the 2009 economic downturn. Oil had been as low as $30 and as high as $70. Economics for the project were tricky. Basing its economics forecast at $60 oil and with a positive outlook, it made the decision to move forward.

The company extended its Eastern Shelf 10-inch pipeline 91 miles from Sacroc and built out injection facilities on the property, a $200-million upfront investment. Delivery of CO2 to Katz began in December 2010, an initial 30 MMcf that will ultimately peak at 70 MMcf.

Doug McMurrey, vice president of marketing and business development for Kinder Morgan CO2, says waterflood projects are the best predictors for a good CO2 flood.

Currently, six workover rigs are redrilling existing wellbores and one rig is drilling new wells. Fifty-three "five spot" patterns are planned, in which one injection well is surrounded by four producers. Ten injectors are now active.

Typical response time from beginning of injection takes about six months. The company projects year-end production to exit near 1,400 barrels per day and peak at 7,000 in several years, with a field life of two to three decades.

"We're expecting to grow production by over 1,000 barrels a day this year," Bradley says.

Yet supply, as always, remains the crux of successful CO2 projects—even for a company that supplies its own. Following a 30% expansion in 2009, Kinder Morgan now produces 1.3 billion cubic feet per day of CO2 out of McElmo Dome and Doe Canyon in southwestern Colorado. Of its net 700 million cubic feet, the company plans to use 44% of its volume for its own operations in 2011 with the rest going to third-party contracts.

"Our CO2 supplies are tapped out right now," Bradley says. "Most people would like to have more. The growth in oil prices has increased the demand for CO2, and we've contracted out our supplies for the next year or two."

The company is now running economics on expanding capacity by another 200 MMcf. "The basin is tight on CO2 supply right now," he says, "but if the demand is there we'll do it."

Follow the money

Private-equity investors see upside in CO2 EOR as well. Privately held Legado Resources LLC was formed in 2007 with a $200-million equity commitment from EnCap Investments LP specifically to pursue such tertiary oil recovery projects. The Houston-based company is staffed with an industry-recognized team of tertiary recovery specialists that have collectively worked on 20% of every CO2 flood that's been done in the U.S.

Kinder Morgan's Sacroc Field, in Scurry County, Texas, is the world's oldest CO2 flood, and it's still going strong, producing nearly 30,000 barrels of oil per day with three rigs continuing development.

Legado bought the Goldsmith-Landreth San Andres Unit in Ector County, Texas, in early 2008 when oil prices were moving up, with the intent to flood it with CO2. At the time of acquisition, Energen Corp., the previous owner, was in the late stages of a waterflood.

When the economy and oil prices tanked in late 2008, the team didn't lose sight of the objective.

"We pushed through that," says Dane Cantwell, Legado senior vice president of development. "We continued to invest through the $30-to-$50 price environment, realizing that it was unsustainable. We felt oil prices were going back up."

Prices have rebounded in the three years since, and the company is now in the initial stages of CO2 flooding.

"We like to be deliberate about planning and execution. When oil prices fell, had we given up or lost our vision, then we wouldn't have phase one installed now. We'd be behind the eight ball."

Goldsmith-Landreth was producing just 170 barrels of oil per day from an assortment of 300 producing and nonproducing wells when Legado took it over. During the downturn, Legado built a short four-mile offshoot from Kinder Morgan's Central Basin Pipeline and installed a four-injector pilot, which is now flowing at 650 barrels daily.

With that knowledge in hand and a restored price environment, the company pushed ahead CO2 development, investing $45 million to date into the pipeline and recycling facility as well as replacing batteries, tanks and other infra­structure. "Everything's new," he says.

Privately held Legado Resources LLC was formed in 2007 to pursue tertiary oil recovery projects. Dane Cantwell, Legado senior vice president of development, notes the company "pushed through" the $30-to-$50 price environment.

Phase one began injecting 50 MMcf per day in December and is still awaiting response, expected in early summer. It anticipates peak production in a couple of years.

At full buildout, the company anticipates some 150 producing wells stimulated by 124 injectors. Injection will max at about 250 MMcf of CO2, including recycled capacity.

Four workover rigs are now busy in the field, reentering abandoned and plugged wells to make them fit for either injection or production. Cost per well ranges from $30,000 to $300,000, depending on the condition of the well. One rig is plying the play, targeting the San Andres at a 4,000-foot depth, with six to eight new wells in the queue for 2011. The company plans to spend about $30 million this year.

Peak production should top 10,000 barrels of oil. Cantwell projects the strategy will coax another 12% to 17% of oil in place from the reservoir. "We believe that with full development with CO2 we'll recover an additional 70- to 100 million barrels over the next 25 to 30 years."

At what break point is it economic? "We believe we can do this at prices ranging from $30 to $40 per barrel." He notes, though, at that price "you wouldn't be very excited about the rate of return, but you wouldn't lose money."

Cantwell says Legado is "absolutely" in the market for acquisitions. And, "we're not necessarily sticking with the Permian Basin. We're lucky to have a team that's done CO2 floods in multiple basins."

Why an EOR business model? "If you believe oil is going to be long-term positive, it makes sense. EOR will help maintain U.S. oil production. Certainly, at today's prices, you can get a good rate of return."

Foamed oxygen

NiMin Energy Corp. adds a twist to CO2 and steam injection.

Veterans of heavy oil extraction in Venez­uela, the founders of the Carpenteria, California-based company saw an opportunity to apply their heavy oil expertise in the U.S. in a niche few other companies were pursuing.

Targeting oil fields with 12- to 22-degree API gravity, in 2007 they acquired Pleito Creek Field in Kern County, California, in the San Joaquin Basin under the name Legacy Energy, backed by private investors. The field held 40 million barrels of oil in place with a 15-degree API, but only 2 million barrels had been recovered. It was producing 30 barrels a day.

"We saw this as an ideal candidate to apply our heavy oil expertise," says Clancy Cottman, NiMin chairman and CEO.

Legacy later reverse-merged into NiMin Capital Corp., a shell company listed on the Toronto Stock Exchange. NiMin's listing on the NYSE Amex is pending.

At Pleito, the NiMin team applied their unique knowledge of gravel-packed natural completions in horizontal wells gained from their experience in Venezuela to drill four new wells. By heavy oil standards, the wells were successful even without EOR, producing 150 barrels per day. But as is typical with heavy oil, the wells declined rapidly. Even with an anticipated 14% to 15% recovery rate, Cottman sought a way to enhance recovery further.

In the 1950s, when the field was first discovered, Humble Oil (later Exxon Corp.) had great success—for a while—with in situ fireflooding to reduce the viscosity of the oil. However, the process created coke, and over three to four air-injection cycles destroyed the wellbores. Knowing the oil was there for the taking, NiMin engineers began brainstorming.

NiMin Capital Corp. viewed Pleito Creek Field in the San Joaquin Basin as an ideal candidate for its heavy oil expertise, says Clancy Cottman, chairman and chief executive.

A traditional waterflood would not work because the oil is too heavy. At 4,000 feet, the reservoir was too deep for conventional steam flooding, as the steam turns to water before reaching the oil. And CO2 injection was out, because California has no natural CO2 supply sources.

Instead, the company refined the fireflooding concept into a process it dubbed combined miscible drive (CMD). The CMD process involves injecting 100% oxygen and water as foam into the top of the reservoir, which creates steam and CO2 through wet combustion when it comes in contact with the oil. The steam and CO2 together reduce the viscosity of the oil, making it more mobile, which then flows down dip to the waiting horizontal wells.

Sven Hagen, NiMin president, says, "The combination of having carbon dioxide in the reservoir, with steam generation and heat, is the primary component to getting the oil to move. It's a unique process of using pure oxygen and the way we've designed the well configuration with the injector."

The process has been awarded a patent.

NiMin began injecting foamed oxygen in June 2009. Initial response showed six months later when declines reversed to inclines, with some wells pushing above their initial production rates. Today, production stands at 250 barrels a day, well above the normal decline, says Cottman.

Even at this pilot stage, the project cash flows and is economic, he says. But he emphasizes the importance of getting production up and past a critical-mass level.

"We would like to see a few hundred barrels of additional response before proceeding to full-scale development," says Cottman. "That would be more meaningful."

The company is pumping 500,000 cubic feet of oxygen per day, trucked in from Los Angeles at $8 per Mcf. On-site production of oxygen is planned for 2012. "That will cut our oxygen costs in half and allow us to ramp up oxygen injection."

The company plans to double injection to 1 MMcf by year-end, and add another 500,000 cubic feet by first-quarter 2012. Capital costs this year will be minimal, as facilities and injection equipment are in place. Two vertical wells are scheduled this year that will be completed with hydraulic fracturing to compare recovery rates with the unfractured horizontal wells. A total of 17 wells are planned to reach full development.

NiMin estimates additional recovery from CMD of between 20% and 50% of the oil in place.

Cottman has identified 165 U.S. oilfields he believes are candidates for the technology, and he's willing to trade technology for working interests in them.

"We're looking for joint ventures where we can use our CMD technology as an entreé into older fields that we believe are underdeveloped. In California alone, several billion barrels of oil remain below 2,000 feet that we know are there, and we want to use CMD to recover those deeper barrels."

NiMin's heavy-oil recovery pilot project in Kern County, California, creates in situ steam and CO2 by injecting 100% foamed oxygen into the reservoir.

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