RESIDUAL OIL ZONE EXTRACTION COULD BE NEW FRONTIER FOR CO2 EOR OPERATIONS, EXPERT SAYS

Tamar Hallerman
GHG Monitor
06/01/12

Oil producers are beginning to significantly ramp up extraction projects using CO2 enhanced oil recovery operations to target water-saturated oil deposits previously considered uneconomic, according to one EOR expert. The deposits, known as residual oil zones (ROZs), have the potential to generate as much oil in Texas’ Permian Basin “as all of our production to date,” Steve Melzer, owner of Melzer Consulting who has done much of the pioneering research on EOR and ROZs in west Texas, said in an interview with GHG Monitor this week. “It’s that big.” ROZs are oil-bearing transition zones that exist between typical oil deposits and waterfloods that naturally occur in the lower portions of some reservoirs. In those transition zones, oil mixes with water in varying concentrations. While the zones were initially considered uneconomical to tap in the past, field tests conducted by several oil companies over the last 20 years combined with the current high price of oil have caused many in the industry to reconsider, particularly in the Permian Basin. The region, which also stretches into southeastern New Mexico, is particularly rich in ROZs and already has the world’s most extensive CO2 pipeline infrastructure in place for EOR operations, lending itself to what could become a booming new industry for ROZs. “The industry is ramping up now and we’re rapidly evolving,” Melzer said. “We’ve gone from two projects in 2005 to 11 projects now in the West Permian Basin, and we’re only just now touching the surface.”

Industry Quietly Explores ROZs

Major companies like Shell and Hess Corp. began quietly exploring the idea of oil extraction from ROZs in the 1980s and early 1990s in Texas’ West Permian Basin. In the 1980s, Hess drilled below the traditional oil extraction zone in its Seminole oil field and found oil saturations of 30 to 40 percent in the ROZ, according to Melzer. From there, Hess and Shell began separate, under-the-radar pilot projects in the early 1990s to see if oil could be commercially extracted from the deposits. “This technology is not all that old,” Melzer said. “It’s a technology where the engineering really underwent a 10-year observation from 1996 to 2006. That’s about time the oil price kicked up, and at that stage it basically became accepted technology.” Hess in particular has continued to be a leader in the field, operating the majority of the 11 projects currently in place in the Permian Basin. Calls to Hess for more information were not returned.

Meanwhile, the Department of Energy’s Office of Fossil Energy has largely stayed out of ROZ exploration and pilot projects, according to Melzer, maintaining the hands-off role it traditionally has adhered to with the oil and gas industry. Most of the extraction technology used for ROZs is largely the same used for EOR operations in traditional oil wells, which utilizes captured CO2 from natural or anthropogenic sources that is then pumped underground and recycled for several decades. That process allows potential ROZ developers to take advantage of any EOR infrastructure that may already be in place in certain regions of the country, Melzer said, including large CO2 point sources and pipelines. However, that also means that the same problems the conventional EOR industry faces—particularly the shortage of affordable sources of CO2—also automatically affect ROZ developers, Melzer said.

The ROZ oil extraction process is also expensive, requiring steep levels of initial capital expenditures, and operations could take years before developers see any profits. In particular, as long as natural gas remains cheap many developers will likely see little incentive to tap into ROZs. “This doesn’t stack up real well with unconventional shale in terms of rates of return because it’s really capital intensive in terms of upfront [investment] and the rates of return are lower,” Melzer said. But he added that the payoff could be huge in the long-term, particularly if oil prices continue to increase. “With shale, you get your money quicker but then it’s gone in 10 years,” he said. “ROZs are the sort of things that are going to be around for 30, 40, 50, 60 years. From a national perspective, I think that’s something we should emphasize because it’s something that could have a lasting value.”

Melzer estimated that in addition to the Permian Basin, which produces more than 11,000 barrels of oil per day from ROZs, significant potential for more development likely exists in the Gulf Coast and under North Dakota’s Bakken play and northwest Wyoming’s Bighorn Basin. Melzer said there is also evidence of ROZs in places like the North Sea, the Baltics and the Arabian Gulf. “This all has ducktailed together to be a wonderful new opportunity. It’s not just a one off thing in the Permian Basin,” Melzer said. “It’s now a question of where we can find ROZs in a lot of other places and how big [the zones] are.”

Investors Weigh Potential Risk

While Melzer described the state of ROZ extraction science as “well past the immature stage,” research is still ongoing, and the oil industry has yet to determine standards as basic as the percentage of oil saturation needed for operations to be commercial. As R&D work continues, potential investors for ROZ extraction projects must weigh significant amounts of financial risk as they move forward. Michael Moore, vice president at Blue Strategies LLC in Houston and executive director of the North American Carbon Capture and Storage Association, is an asset holder in an ROZ project being developed in the West Permian Basin in Texas. In an interview with GHG Monitor, Moore said his organization’s investment in the project is due to a combination of factors. “It’s a function of the confidence of our technical capabilities, experience level and knowledge of the geographic area we’re doing the work in that would drive an investor like us to invest in a project like this,” he said. “There are a lot of moving pieces, but here in west Texas we’re very comfortable with this stuff.”