Kinder Morgan Plans CO2 Supply Expansion With New Pipeline, Wells

by Trefis Team
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Kinder Morgan Partners
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Kinder Morgan Energy Partners (NYSE:KMP) will expand its carbon dioxide (CO2) supply operations by drilling new wells and building a new pipeline from the company’s St. Johns source field in Apache County, Arizona. The $1 billion investment plan will enable the company to scale up its capacity constrained CO2 business and cater to more enhanced oil recovery (EOR) customers in the Permian basin, while also potentially helping boost its own oil production volumes.

Trefis has a 87.50 price estimate for KMP, which is about 20% ahead of the current market price

Details Of The Expansion

KMP will build and operate a new pipeline called Lobos, which will connect the St. Johns source field with Kinder Morgan Inc.’s larger Cortez Pipeline in Torrance County, New Mexico. The Cortez Pipeline currently carries CO2 from the McElmo Dome to West Texas. The Lobos pipeline will be 213 miles long and is expected to cost about $300 million to build. It is expected to initially transport about 300 million standard cubic feet of CO2 per day. KMP will invest an additional $700 million in building new CO2 wells and field gathering, treatment and compression infrastructure in the St. Johns field in order to boost CO2 production. The company expects the project to come online by Q3 2016, subject to environmental and regulatory approvals. [1]

Carbon Dioxide In The Oil Business

Production from oil wells can be categorized into 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 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 well bore. These two stages typically recover just 20% to 40% of a well’s total reserves. However, using enhanced oil recovery operations, which involve pumping pressurized carbon dioxide, up to 60% of the well’s original reserves can be recovered.

The Permian Basin, where most of KMP’s CO2 customers are located, is the largest EOR market in the United States. The region is one of the oldest oil producing basins in the country and has a large number of mature wells. Demand for CO2 in the Permian has been growing, given relatively high crude oil prices. However, supply has been an issue. While KMP currently produces about 1,300 million cubic feet of CO2 per day, this has been largely inadequate and the company has had to distribute to customers on a pro-rata basis at times.  The St. John’s project, which is KMP’s first greenfield CO2 development, could help the company cater to more customers in the Permian. ((Analysts Day 2014 Presentation, Kinder Morgan, January 2014)) The additional supply could also help KMP ramp-up its own oil production. The company operates some large EOR based projects in the Permian such as the Yates and the SACROC fields (which together produce over 50,000 barrels of oil per day).

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Notes:
  1. Kinder Morgan to Invest Approximately $1 Billion to Expand Vast CO2 Network, Kinder Morgan, March 2014 []
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