How KMP’s CO2 Supply And Transportation Business Could Drive Growth

by Trefis Team
-16.32%
Downside
98.27
Market
82.23
Trefis
KMP
Kinder Morgan Partners
Rate   |   votes   |   Share

Kinder Morgan Energy Partner’s (NYSE:KMP) CO2 business division produces oil and gas, and produces, transports and markets carbon dioxide, which is used in enhanced oil recovery (EOR) operations. While the oil production business has been growing on the back of higher production and better price realizations, the CO2 supply business has remained sluggish due to capacity constraints. Although the supply and transportation business accounts for just about 27% of the CO2 business division’s distributable cash flow, ((Analysts Day 2014 Presentation, Kinder Morgan, January 2014)) we think that it presents a significant growth opportunity for the company.

See our full analysis for Kinder Morgan Energy Partners

What is CO2 Based Enhanced Oil Recovery?

The development and production from oil and gas wells has different stages. In the primary stage, production rates are among the highest, as oil moves to the well bore using the pressure in the reservoir and can be brought to the surface using artificial lift techniques such as pumps. In the secondary stages, the oilfield’s life is extended by injecting water or gas in order to displace oil and drive it towards the wellbore. The first two phases can only access about 20% to 40% of the wells original reserves. However, using enhanced oil recovery (EOR) operations, which involve pumping pressurized carbon dioxide, up to 60% of the well’s original reserves can be recovered. Although the process is expensive, rising oil prices are beginning to justify the costs.

KMP’s CO2 Supply Business And Expansion Plans

KMP sources its CO2 from naturally-occurring reservoirs such as the Doe Canyon and McElmo Dome in Colorado, and supplies to EOR operations in the Permian basin in Texas. The basin contains several legacy oil fields that saw their production peak in the 1970′s and have fallen significantly since. About half the country’s EOR projects are located in the region. [1] The demand for CO2 in the basin has been growing, given the relatively high crude oil prices. KMP currently produces about 1,300 million cubic feet (MMcf) of CO2 per day. However, this has been largely inadequate given current demand. and the company has had to distribute to customers on a pro-rata basis at times.

The company has been on an expansion spree of late, seeking to improve capacity by around 700 MMcf by 2017. New source expansion projects include the St. Johns field, Yellow Jacket Boosters and Cow Canyon. While most of the sources are naturally occurring, the company also has some recapture projects under development. For instance, the company will derive Co2 from Amine gas treating plants. KMP has also been improving the capacity of its Cortez Pipeline from around 1.3 billion cubic feet per day to nearly 2.0 billion cubic feet per day.  Additionally, KMP is also evaluating new fields in other parts of the country in order to expand its customer base and diversify its revenue stream.

Growth Opportunities: Higher Oil Production And ROZ

Besides improving supplies to its EOR customers, KMP’s CO2 expansion plans will also allow the company to ramp up its oil production and position itself for opportunities in the residual oil zones of the Permian Basin.  KMP itself is a big consumer of CO2, given that it operates some sizeable oilfields that use carbon dioxide flooding, such as the Yates and the SACROC fields (which together produce over 50,000 barrels of oil per day). [2] A higher CO2 production should allow the company to improve the output of its projects, further aiding revenues and margins for the division.

The residual oil zones of the Permian Basin are areas of immobile oil that are found below the region of oil and water contact in a reservoir. [3] These resources are located in several producing fields in the Permian and could hold as much as 10 billion barrels of oil. [4] Since enhanced oil recovery techniques are required to produce from these reservoirs, it could result in higher demand for CO2 as operators begin to tap into these resources. Since KMP is one of the largest CO2 suppliers in the Permian Basin, with many of its source fields located around the area, it would be in a good position to cater to the demand.

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)

Notes:
  1. The Future of CO2, Permian Basin Oil And Gas Journal []
  2. KMP Form 10-Q []
  3. DOE sees vast energy resource in residual oil zones, Oil and Gas Journal []
  4. Society of Petroleum Engineers []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!