June 2011 Vol. 238 No. 6

Features

Whats Ahead For Transporters And Marketers of CO-2?

Kinder Morgan’s R. Tim Bradley, president of carbon dioxide (CO-2), discusses the impact the company’s new 91-mile, 10-inch CO-2 distribution pipeline and complementary facilities will have on future enhanced oil recovery operations in the region and the company’s future plans.

Kinder Morgan is one of the nation’s largest pipeline transportation and energy storage companies with more than 37,000 miles of pipelines and 180 terminals. The company transports, stores and handles energy products like natural gas, refined petroleum products, crude oil, ethanol, coal and carbon dioxide (CO-2). These products are essential for generating electricity, heating homes, powering cars and much more.

Almost all of the assets are owned by Kinder Morgan Energy Partners, the largest publicly traded pipeline master limited partnership with an enterprise value over $33 billion. The company’s philosophy is that most of its businesses are operated like a giant toll road, receiving a fee for services and providing connectivity for its customers. The company is investing billions of dollars to build new and expand existing infrastructure to help meet future energy demands in growing markets across North America.

Kinder Morgan is also the leading transporter and marketer of CO-2 in North America, delivering approximately 1.3 Bcf/d through about 1,300 miles of pipelines. The company ranks as the second-largest oil producer in Texas, producing over 55,000 bpd at the SACROC Unit and the Yates Field in the Permian Basin. In addition to CO-2 pipelines and oil producing fields, this business segment owns significant interests in and operates CO-2 source fields, natural gas and gasoline processing plants, and a crude oil pipeline.

According to the company, CO-2 flooding is a proven technology that is used to boost production in mature oil fields. Kinder Morgan transports CO-2 via pipeline from southwestern Colorado to West Texas where it is injected into oil-producing fields. The Permian Basin produces approximately 20% of the total oil production in the United States (excluding Alaska).

Shortly after completing construction of the company’s CO2 Eastern Shelf Pipeline and the Katz oil field project in the eastern Permian Basin of Texas, P&GJ visited with R. Tim Bradley, president of CO-2, of Kinder Morgan, to discuss the impact the new 91-mile, 10-inch CO-2 distribution pipeline and complementary facilities will have on future enhanced oil recovery operations in the region and the company’s future plans.

P&GJ: What makes the recently completed CO-2 Eastern Shelf Pipeline and Katz project unique and what would you like people to know about it?
Bradley: Every cross country pipeline project is unique. The location, terrain and excavation conditions can vary significantly; even when confined to a region similar to West Texas. Each variation presents different safety challenges and impacts construction costs. Excavation crews encountered solid rock, unstable sands, expansive clays and some unique river crossings. The 91-mile project also extended through multiple active and inactive oil fields. More than 300 pipeline crossings were required and our crews did an excellent job safely performing the required excavations. Crews also had to be aware of wildlife hazards indigenous to the region including African killer bees, rattlesnake colonies and an over-population of wild boar in some counties.

P&GJ: This project holds promise to unlock a significant amount of oil reserves in the coming years. What can you tell us about that?
Bradley: In addition to the 25MM target tertiary barrels within the immediate EOR project at Katz, the anchor on the project, the pipeline is designed to carry additional CO-2 capacity to the several tertiary candidate fields within easy reach of the new pipeline. Future expansions of Kinder Morgan’s CO-2 supply system may involve additional pumps and/or lengthening of the Katz Pipeline.

P&GJ: When you meet with customers what do they say are their greatest needs from your company?
Bradley: Each customer has their own unique needs, but the most common among them is reliable supply (on time delivery to a specified point, within an agreed specification and at the proper pressure.) EOR projects are complex and involve substantial investments; they need reliable suppliers.

P&GJ: What area, or areas, do you perceive as needing enhanced oil recovery operations in the near-term? What about long-term?
Bradley: Without a doubt, the most successful and active EOR area has been the Permian Basin. Home of the oldest flood (SACROC), the number of candidate fields is remarkable. Higher oil prices, coupled with economic CO-2 supply, should extend EOR project activity in the region for quite some time to come. Outside the Permian, there are a great number of EOR opportunities, but economic CO2 supply limits them presently to the Texas, Oklahoma, Louisiana, Mississippi Gulf Coast and Wyoming. There are very significant target fields in California and Montana.

P&GJ: What is your company’s business strategy, particularly as it relates to future CO-2 projects?
Bradley: Kinder Morgan is continuously working to increase the supply of CO-2 to its customers and to its own EOR activities. Whether we are drilling more wells in our source fields, adding compression and the related supply facilities, or building new distribution infrastructure, we recognize that this business is a long-term investment for all parties; reliable and economic supply is essential.

P&GJ: Can you overview some of the technical and environmental challenges that had to be addressed?
Bradley: As it regards to the Eastern Shelf Pipeline – every project is unique and multiple new items must be addressed. Procuring pipe which met Kinder Morgan’s metallurgical requirements was an issue. Ultimately, a pipe mill in Japan was chosen as the supplier for our project. The Eastern Shelf Pipeline also crossed channels and tributaries to the Brazos River. Great care was taken to ensure we were good stewards of the environment and we thoughtfully considered the geology unique to the Brazos River system. In many instances, we encountered a surface river and an underlying sub-surface river which complicated our directional drilling efforts.

P&GJ: What would you like people to know about the CO-2 segment of Kinder Morgan?
Bradley: Tertiary recovery is a major source of future oil supply, not just in the U.S., but potentially many places in the world. The growth potential is significant, limited only by the economic supply of CO2 and the talent to employ it. Kinder Morgan CO-2 is a focused and vertically integrated EOR company – one of very few firms with the scale, skills and track record needed to successfully execute these projects.

P&GJ: What drove Kinder Morgan’s decision to get involved in the transport and marketing of CO2?
Bradley: In April 2000, Kinder Morgan had the opportunity to acquire the remaining 80% of Shell CO-2 Company it did not already own. The principle asset was their operated interest in the McElmo Dome, Cortez Pipeline, Bravo Dome (non-operated), and the Central Basin Pipeline in the Permian Basin. With significant CO-2 reserves, system expansion capacity, and the experience needed to demonstrate to our customers the technology and operating practices to conduct a successful CO2 flood, Kinder Morgan brought a renewed focus on the business.

Later, with the acquisition of two significant oil fields, (SACROC and Yates), Kinder Morgan was able to rapidly ramp up its core supply and transport business. Since then, several measures have been taken to expand its production of CO2 by 68%, including development of the Doe Canyon resource, Goodman Point expansion at the McElmo Dome, construction of the Centerline Pipeline, and increasing pumping capacity on the Cortez Pipeline to its present rate of 1.2 Bcf/d.

P&GJ: What is your outlook for the CO-2 pipeline construction industry over the next few years?
Bradley: The overall outlook for the CO-2 pipeline construction industry is positive; however, activities slightly above today’s levels will create a shortage of experienced/skilled workers. The energy industry’s most experienced workers will be entering retirement soon. Low oil prices and consolidation in the 1990s required oilfield and pipeline construction companies to make significant staff cuts. Many workers opted to choose other occupations and never returned to the industry. This created a 20-year experience gap which presents serious challenges during higher oil prices and peak activity periods.

P&GJ: As the leading transporter and marketer of CO-2 in North America, how did that came about and what were some of the challenges involved in attaining this position?
Bradley: The greatest challenge has been the long lead time and scale of tertiary recovery projects. They require large investments and confidence in the long-term value of oil. Kinder Morgan has used extensive hedging to significantly reduce its commodity exposure. Many of our customers have slowed or accelerated their projects, depending on their commodity outlook. Managing a reliable system that is responsive to the changing economic environment has been a challenge that we believe we have successfully navigated. Steadily rising distributable cash flow is no accident at Kinder Morgan CO2. At the moment, satisfying the growing demand for CO-2 in a very bullish oil market is our immediate challenge.

P&GJ: What are some important lessons you have learned that you could share with our readers?
Bradley: Kinder Morgan has improved its acquired existing floods through the use of innovative approaches to tertiary EOR – this has been a key to beating expectations. Readdressing SACROC has been a carefully crafted technical effort that has had a remarkable outcome over many years. Shifting Yates from a nitrogen flood to a CO-2 gravity-based flood has been a resounding success. Few companies have the in-house expertise to pursue CO-2 EOR operations; the ones that do will be very busy indeed.

P&GJ: Has the economic downturn had any impact on the CO-2 segment of Kinder Morgan?
Bradley: Not really; initially, financial turmoil negatively affected the price of oil and slowed the pace of customers’ tertiary development and/or delayed new project startups, but since then, the price of oil has been on a steady rise. Low electric power costs, benefiting from low natural gas prices, have been a significant positive contributor for our business; CO-2 Compression, which is a key element in our Source and EOR field operations, is a power-intensive business.