Legg Mason Investment Counsel - Our Enemy, Our Friend? Capturing Benefits from Carbon Dioxide

Gaining control of the carbon cycle is arguably one of the most important technological challenges of our era.  As every school child learns, nature is already pretty good at it:  people take in oxygen, and breathe out carbon dioxide (CO2); plants take in CO2 and emit oxygen.  Along with other natural processes between the atmosphere and the oceans, we normally have a balanced system. However, we now face a situation where human-induced emissions of CO2 are greater than what the natural system can process. Excess CO2 means an excessive greenhouse effect and then potentially harmful climate change.  As a species, we are adept at turning the carbon present on our planet into usable energy, but the resulting CO2 may not be our friend.

Social Research Reporter

Monthly commentary from our Social Research Analysts                                        April 2012 

Gaining control of the carbon cycle is arguably one of the most important technological challenges of our era.  As every school child learns, nature is already pretty good at it:  people take in oxygen, and breathe out carbon dioxide (CO2); plants take in CO2 and emit oxygen.  Along with other natural processes between the atmosphere and the oceans, we normally have a balanced system. However, we now face a situation where human-induced emissions of CO2 are greater than what the natural system can process.  Excess CO2 means an excessive greenhouse effect and then potentially harmful climate change.  As a species, we are adept at turning the carbon present on our planet into usable energy, but the resulting CO2 may not be our friend.

In 2009, the U.S. emitted 5.4 billion metric tons of CO2 just from energy-related activities.  The bulk, nearly 40 percent of that CO2, comes from electric power generation.  As a fuel source, coal is responsible for approximately 35 percent of CO2 emissions.  Despite commitments and interests in developing other fuel sources, coal will continue to be a primary source for decades.  Balancing the carbon cycle means finding a safe, reliable, and cost-effective way of dealing with those CO2 emissions.

Today, government and industry alike are pursuing approaches to limit the negative effects of coal and other fossil-fuel based power generation on global climate.   One of those approaches is carbon capture and storage or sequestration (CCS).  CCS refers to a number of technologies by which the CO2 generated is collected at the point of generation, transported, and stored securely underground. It seems simple enough – we need to reduce or eliminate the amount of CO2 reaching the atmosphere.  It is not practical to stop burning coal or other fossil fuels at this point, so take the CO2 that is produced and divert it somewhere else.

Actually, a few organizations have already taken some steps to contain the amount of CO2 reaching the atmosphere.  Natural opportunities to sequester CO2 occur in terrestrial ecosystems including farmland and forests.  Programs promoting forestation, deforestation abatements, restoration of degraded lands, and others are already commonly accepted practices across the globe.

Similarly, industry already has experience capturing CO2 at its source.  For decades, chemical and physical processes have been used to separate CO2 from the gas streams of energy-related industrial processes.  The resulting product has been used in food industry applications.  However, these post-combustion capture technologies have not been sufficiently tested at the scale necessary for significant deployment at fossil-fuel based power plants across the country.

In 2011, the U.S. Department of Energy committed to research, development and demonstrations of carbon capture technologies in support of its mission to “support secure, affordable, and environmentally acceptable near-zero emissions fossil energy technologies.”  Through R&D and regional and global collaborations, the DOE believes it can bring both pre-combustion and post-combustion carbon capture technologies to a commercial scale while keeping the potential increase in cost of electricity to a defined minimum.  In particular, the Office of Fossil Energy is supporting technologies that “allow industry to derive commercial benefit from captured CO2.”

One beneficial use of CO2 has been used for some time.  The practice known as Enhanced Oil Recovery (EOR) began in the 1970s in Texas.  When CO2 is injected in an oil reservoir at an appropriate pressure, it mixes with the residual oil, displacing it from rock and reducing its viscosity, thereby making it easier to move that oil to production.  Oil that previously was not considered recoverable becomes available.

Last February, a coalition of industry, government and environmental and labor interests (the National Enhanced Oil Recovery Initiative, or NEORI) released their recommendations to the U.S. Congress for targeted incentives intended to encourage the expansion of CO2-EOR using CO2 from power plants and industrial facilities.  This action could be a win-win-win for the country as it reduces CO2 emissions that reach the atmosphere, lessens the country’s reliance on oil imports, and provides positive economic impacts on the local, state and national level.

NEORI reports approximately six percent of the current U.S. crude oil production comes from CO2-EOR.  “In total, an estimated 26 billion to 61 billion barrels of economically recoverable oil could be produced in the U.S. using currently available CO2-EOR technologies and practices, or potentially more than twice the country’s proved reserves.”

The bulk of the existing CCS projects in the U.S. are located near relatively low-cost natural underground CO2 sources.  However, domestic expansion of CO2-EOR could be achieved by encouraging more carbon capture from industrial and power plant sources, perhaps making as much as 20-45 billion metric tons available.

Of course, the cost-benefit analysis of each project is related to the cost of oil, the capital needed to construct the carbon capture infrastructure, and the market price of CO2.  Encouraging the development of new capture and pipeline projects should increase the supply of CO2, reduce the cost of CO2-EOR, and thereby reduce the amount going to the atmosphere.

Labor will be needed to get new physical infrastructure in place.  Source capture systems, pipelines and retrofits to existing oil fields will need to be built.  These jobs and projects could also bring increased revenue to local and state governments as well as benefits to local economies via multiplier effects.  Further, any concomitant reduction in oil imports would be a positive for the nation’s foreign trade balance.

Throughout the U.S. (as well as other countries), governments, companies, academia and communities are working together to test the viability of large-scale CCS and CO2-EOR.  Globally, approximately $23.5 billion of public funding alone has been committed to demonstration projects related to carbon capture. With many organizations pursuing projects, the combined CO2 capture capacity across the globe has reached 35.4 million tons per year.  That is an increase of 25% over 2012, and roughly equivalent to the entire annual emissions of Norway.  Together these practices have real potential to improve the outlook for global climate change while the world continues to rely on coal and natural gas as fuel sources.  Perhaps our “enemy” will never truly be our friend, but at least we can begin to relate on better terms.

For more information, contact Bill Smith 410-454-3141
Email Bill Smith

"Energy in Brief: What Are Greenhouse Gases and How Much Are Emitted by the United States?" U.S. Energy Information Administration, Mar. 2011. Web. 26 Apr. 2012. <www.eia.gov/environment>.

 "Carbon Sequestration Leadership Forum." Carbon Sequestration Leadership Forum. Web. 5 Apr. 2012. <http://www.cslforum.org>.

United States. Department of Energy. Office of Chief Financial Officer. Department of Energy, FY 2013 Congressional Budget Request. Vol. 3. February 2012. Print. DOE/CF-0073.

Ibid.

United States. Department of Energy. National Energy Technology Laboratory. Carbon Dioxide Enhanced Oil Recovery. March 2012. Print. www.netl.doe.gov

Carbon Dioxide Enhanced Oil Recovery: A Critical Domestic Energy, Economic, and Environmental Opportunity. Rep. National Enhanced Oil Recovery Initiative, February 2012. Print. www.neori.org

"U.S. Plan to Boost CO2-EOR." Carbon Capture Journal (2012). Web. 19 Apr. 2012. <www.carboncapturejournal.com>.

“National Enhanced Oil Recovery Initiative." Web. 19 Apr. 2012. <http://neori.org/>.

The Global Status of CCS: 2011. Rep. Canberra, Australia: Global CCS Institute 2011, 2011. Print.

Global Status of Large-Scale Integrated CCS Projects: December 2011 Update. Rep. Canberra, Australia, 2011. Print. <www.globalccsinstitute.com>.

Additional Resources

"DOE - Fossil Energy: Office of Fossil Energy Home Page." DOE. Web. 3 Apr. 2012. <http://www.fossil.energy.gov>.

"DOE - National Energy Technology Laboratory." DOE. Web. <http://www.netl.doe.gov>.

Legg Mason Investment Counsel  www.lmicglobal.com/sri

The views expressed are subject to change and do not necessarily reflect the views of all Legg Mason Investment Counsel personnel. Any mention of a company or sector should not be construed as investment advice and should not serve as the sole basis for an investment decision.  Any data cited have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.