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Tertiary Recovery Squeezes Out Every Drop

Posted: Oct 14, 2009 11:34 AM by Eric Fox

Tickers in this Article: APC, SD, OXY, DNR

The exploration and production industry is reaching more and more into areas in North America that are not ideal for development and that might have been passed over in earlier eras. These areas are productive but require slightly more processing, or have one of more problems with the field that require stimulation techniques.

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One problem that some exploration and production companies have is reservoirs that are contaminated with a substance that makes the natural gas unmarketable in its current form. Many fields in North America contain high amounts of carbon dioxide (CO2) that must be removed to make the play viable.

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Sandridge Energy (NYSE:SD) has 600,000 acres under net lease in the West Texas Overthrust belt. Its most promising asset is the Pinion Field, a natural gas field that has a CO2 count as high as 65%.

Sandridge Energy has this field under development and is building the Century project in partnership with Occidental Petroleum (NYSE:OXY) to capture this CO2. Phase I of the project will be completed in June 2010, and Phase II by the second half of 2011. Occidental Petroleum is using the CO2 for its own enhanced oil recovery (EOR) projects, where the CO2 is injected into older wells to stimulate production.

Sandridge Energy has 50,000 acres at the Pinion Field and estimates the field has the potential for 3100 drilling locations.

Making Lemonade
One company that has turned CO2 to its advantage is Denbury Resources (NYSE:DNR). The company owns the largest reserves of CO2 east of the Mississippi. The Jackson Dome is an extinct underground volcano that Denbury Resources bought years ago. Its business model is to purchase mature oil fields and inject the CO2 into older unproductive wells to stimulate production.

Most of these wells couldn't produce enough oil to be productive without the CO2. This recovery method, which is known as tertiary recovery, can lead to an additional 17% recovery of the original oil in place (OGIP) in a field.

Denbury Resources will produce an estimated 24,500 barrels per day in 2009 using this method. The process works at fairly low oil prices as well. Denbury Resources estimates its break-even oil price needed is $37.90 per barrel in the second quarter of 2009.

Other companies with tertiary recovery operations using CO2 include Anadarko Petroleum (NYSE:APC) at the Salt Creek Field in Wyoming. Oil was first discovered here in 1908. Anadarko Petroleum first started injecting CO2 in 2004, and over the last five years has boosted production to 8000 barrels of oil per day.

The Bottom Line
The industry continues to push into fields that were passed over years ago by operators looking for lower hanging fruit, and is using technology to innovate and squeeze every drop of oil and gas that it can. (To learn more, see our Oil And Gas Industry Primer.)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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