Consideration is being given to new tax incentives to encourage enhanced oil recovery schemes in the UK North Sea. Elaine Maslin looks at an assessment of EOR economics.
Professor Alex Kemp.
As production declines, the rate of large new discoveries dwindles, enhanced oil recovery (EOR) schemes are becoming an ever attractive option on the UK Continental Shelf (UKCS).
But are they attractive and could tax incentives help make them more so? A recent report by Professor Alex Kemp and Linda Stephen at the University of Aberdeen compared the economics of three types of EOR and suggests that a tax allowance, based on operating costs, would help make these technologies fly in this mature, expensive basin.
While EOR schemes are already in common use onshore, they are less common offshore, due to the higher implementation costs. But, with an average UKCS recovery rate of about 45%, the potential for EOR could be huge.
The University of Aberdeen’s review, under the aegis of the Aberdeen Centre for Research in Energy Economics and Finance, assessed three types of EOR – salinity waterflood, polymer flood and miscible gas injection. The study was conducted ahead of a review of the UKCS tax regime, which could look to introduce tax incentives appropriate for EOR. An announcement on the tax review was due to be made during the UK Chancellor’s budget on 18 March, just before OE went to press.
For each model, it was assumed that the EOR project would be undertaken on existing host or mother fields.
Low salinity waterflood
According to the study, low salinity waterflood involves a substantial initial investment, followed by a modest annual production increase, spread over a very long time period, meaning a long payback period. Operating costs are substantial, the report says, particularly in terms of requirements for manpower and beds offshore.
Key risks of low salinity projects are; the effectiveness of the waterflood technology in enhancing oil production; the commissioning of the low salinity equipment; the additional complexity of managing the reservoir; and the extra problems regarding well integrity. A further risk relates to the extra weight on the platform from the low salinity kit, which reduces the flexibility of other activities on the platform.
The university assessed a project involving potential EOR of 42 MMbbl, with an estimated £338 million development cost (US$13.3/bbl), at 2014 prices. Lifetime operating costs were estimated at around £100 million and operating costs per barrel at just under $4/bbl.
Polymer flood also has a high initial investment cost, including the cost of modifying the FPSO/platform for receipt of polymers, and the costs of building the EOR storage facilities, according to the University of Aberdeen report. Operating costs are also high, because of the need to purchase large amounts of polymer over a long period. In fact, the cost of the polymers may constitute 80%-90% of the total operating costs, the report says. As with low salinity water, the additional production from polymer flood will generally be at modest levels, over a long time, with payback similarly long.
Chemical EOR projects also come with risks, including the extent of degradation of the polymer in the reservoir. There can be degradation of polymer in the chokes, such that the full viscosity is not obtained at the other side of the choke, highlighting the importance of the choice of choke solution, inversion mixer design, and shear resistant polymer solution. There could also be a risk around the long term availability of polymers. Optimally at least 90% availability is needed, the report says.
The university modeled two possible outcomes for a polymer flood project, on a risked and unrisked basis. In the risked case, the potential EOR (including sales gas) was around 17.5 MMboe, depending on the economic cut-off. The development cost was estimated at £116 million, at 2014 prices. The unit development cost was estimated at $10.67/boe and the lifetime operating cost was estimated at £454 million, with $41.9/boe operating cost.
In the unrisked model, the potential EOR was estimated at 38.3 MMboe with an estimated £156 million total development cost ($6.6/boe), and £529 million lifetime operating cost ($22.7/boe).
Miscible gas also has substantial investment costs and large operating costs, largely due to the need to purchase substantial quantities of gas over a long period, says the report. The biggest risks for a miscible gas scheme are the need for long-term gas supplies and gas prices. The effect of such a scheme would likely be modest levels over a long period, the report says.
In the model used, the potential EOR was around 53.3 MMboe, depending on the economic cut-off, including worthwhile volume of natural gas liquids. The total development costs were estimated at £503.5 million. Lifetime operating costs, including purchase of gas, were estimated at £1,492 million, with $15.5/boe development costs and $4/boe operating costs.
Kemp and Stephen modeled how all three of these schemes would fare under different potential tax allowance schemes, including removing entirely the supplementary charge – a tax in addition to corporation tax on profits from oil and gas production.
Even with a US$90/bbl oil price, and 58 pence per therm for gas, used in the modelling, they conclude: “The findings indicate that currently the project investment economics are quite challenging.”
Given the high cost of the input product for polymers and gas, an alternative could be to offer a tax break on the cost of polymers, says the report. “Given the very high costs involved in purchasing polymers and gas for schemes which are promising in the context of the UKCS, there is a case for an uplift [operating cost allowance] relating to these product requirements,” it says. “They are akin to capital expenditures, when a wider view of their purpose is considered. Even a partial allowance for these costs would be reasonably effective.”
The “more radical” approach of removing the supplementary charge from EOR projects was seen to be beneficial, however, operational cost uplift produced a more effective solution, the report concludes.