Terms Beginning With 'c'

Carbon Dioxide Sequestration

  • October 26, 2020
  • Team Kalkine

What is Carbon Dioxide Sequestration?

Carbon dioxide (CO2) sequestration refers to the process by which CO2 is removed or captured from the atmosphere to lower the effect of global warming. Sequestration is a natural phenomenon occurring on its own. However, the rate of CO2 generation has surged sharply, and the natural sequestration process is unable to cope up with the situation.

Different Ways of Carbon dioxide (CO2) sequestration in an oil and gas field

Theoretically, if carbon dioxide or any other gas is injected in close vicinity of an oil and gas well, the injected gas would expand and push the fluids in one direction. This particular principle is used in one of the many types of Enhanced Oil Recovery (EOR).

The oil and gas wells lack natural pressure to bring the hydrocarbons from the deep reservoirs to the surface. Some may have the required pressure, but due to regular production over the years, the pressure depletes. There comes a point in an oil and gas well when the well starts pumping more water than the hydrocarbon and thus becomes uneconomical.

Most of the oil and gas fields are abandoned because the cost of pumping hydrocarbon becomes uneconomical. The abandoned fields still have 30-40% of hydrocarbon left in their reservoir. Companies around the world are working on developing ways to produce that 30-40% of the oil economically.

Carbon dioxide sequestration is receiving considerable attention since most of the countries are working on cutting their carbon emissions and slow the rate of global warming. The CO2 produced from the industrial processes or the atmosphere could be collected and sent through pipelines or gas tankers to the fields where they can be injected into the depleted reservoirs.

Flow chart for CO2 sequestration in Oil & Gas field (Image Source: © Kalkine Group 2020)

The CO2 sequestration is done in two ways in an oil and gas field:

  • Abandoned natural gas fields could be used to fill in the void with captured carbon dioxide from the industrial processes. The reservoir will have storage and seal already in place to accommodate the gas.
  • CO2 could be used in enhanced oil recovery (EOR) process to extract the residual oil from the reservoir. It involves injecting the gas into the reservoir using one of the drilled wells.

A miscible fluid is formed when injected CO2 mixes with reservoir oil under proper conditions. When miscibility occurs, the forces of capillary pressure which formerly held the oil, disappear. The oil is then free to be carried to the producing well. The concept of miscible displacement of oil by CO2 has been known for many years and has been tried in a few full scale-field projects.

Some of the benefits and drawbacks of CO2 sequestration for producing oil in the purview of the oil and gas industry are discussed further.

Criteria for application of CO2 injection

  • A large gas cap is an unfavorable factor. If the reservoir pressure is considerably lower than the miscibility pressure, a large volume of CO2 is needed to obtain miscibility.
  • A fractured reservoir is considered unfavorable because it provides a conduit from injection to producing well.
  • A good and reliable source of CO2 at a reasonable cost is a prerequisite.
  • Relative thin permeable zones (15-25ft) in the reservoir are technically advantageous because they diminish the tendency of gravity override, but the thicker zones have an oil volume advantage.
  • The depth of the reservoir plays a vital role as the miscibility pressure is around 1200 psi. The required depth to achieve the pressure is equal to or greater than 2,500 ft.
  • Temperature is also an essential factor.
  • The lower limit of oil gravity is in the range of 25-30? API depends whether the oil is aromatic or asphaltic etc.
  • Pure CO2 is preferred for injection, but contamination by methane increases the miscibility pressure. However, 5-10% of methane is tolerable.
  • Hydrogen Sulphide (H2S) lowers the miscibility pressure but causes corrosion and adversely affects the environment.

Benefits of using CO2

  • The most significant advantage of using CO2 compared to other gases is that it can extract heavier components up to C-30. The solubility of CO2 in oil causes it to swell.
  • Swelling of oil by CO2 is to a greater extent than caused by methane.
  • The colorless gas lowers the oil viscosity and increases oil density.
  • It is water-soluble and reduces its density.
  • It achieves miscibility at relatively lower pressures range of 100-300 bar.
  • CO2 decreases the difference between oil and water density and eliminates the chances of gravity segregation.
  • The greenhouse gas decreases the surface tension of oil and water, which leads to more effective displacement.

Disadvantages of using CO2 in EOR operation

  • The main challenge in successful CO2 injection operation is the mobility of the gas. The relatively lower density and viscosity of CO2 compared to that of reservoir fluids can cause gravity tonguing and viscous fingering.
  • The adverse effect of CO2 is more damaging than those with water flooding.
  • A very high volume of CO2 is required to achieve the desired result. For instance, it may require 5-10 million cubic feet of CO2 gas to produce just one barrel of stock tank oil.
  • Supplying CO2 for long distances will require pipelines. Maintenance and installation of such long-distance pipelines are capital extensive.
  • CO2 can form highly corrosive acid upon contact with water known as carbonic acid. Special metal coatings and alloys may be required in pipelines and equipment which are handling the odorless gas.

A government regulatory system to control the and cap the amount of industrial emissions of some harmful chemicals, such as carbon dioxide, into the atmosphere within a country. It is used as a proxy to carbon tax.

Capital Expenditure (CapEx) What is Capital Expenditure? Popularly called as CapEx, it means the expenditure incurred by an entity in maintaining, upgrading or purchasing non-current assets. Capital Expenditure is the amount spent by an entity on fixed assets with the usage of over one year and intangible assets. Private Capital Expenditure is often used as a proxy for non-public investments. A higher level of CapEx may indicate that investment is higher, and the reverse is true. Therefore, CapEx by corporates serves as a proxy for private investments to some extent. In accounting terms, it hits cash flows from investing activities along with movement in value or scale of assets. In the next year, the company will charge Depreciation and Amortisation on the asset, which will hit Income Statement. Investment into intangible assets is also considered capital expenditure as patents, rights, trademarks, Knowhow, technology would provide benefits to the business over the years. Fixed assets investments of businesses include the purchase of machinery, upgrade to machinery, incorporating a new plant. Moreover, CapEx being an expenditure is added to assets of business since it would deliver benefits over the future. Revenue Expenditure vs CapEx Revenue Expenditure of a company includes its operational expenses where the benefits to business from such expenditure would be short-term. It would include marketing expenses, distribution expense, employee costs etc. These expenditures are not capitalized and thus are booked in the profit and loss account. Whereas CapEx by a company would deliver the benefits to the business for more than one year and allow the business to grow sustainably over the future. CapEx is often planned and budgeted for years and includes a higher level of evaluation by the management. The management often segregate the capex as growth or maintenance capex. More on this: Growth Capex Vs Maintenance Capex – Aping the Convention or an evolving distinction? Types of Capital Expenditures Asset purchases: It means when an enterprise buys asset to benefit the business over the long run. A purchase of a new building would enable the business to increase its scale of products, and the new machinery installed in the building would manufacture products or aid in the manufacturing of products until the useful life of the asset. Do Read: Restaurant Brands New Zealand to Purchase KFC Stores Asset improvements: It may include any upgradation to the existing asset base of the company, including a new software or technology, the addition of new part to improve output from existing assets, or maintenance of the assets held by the business.   Intangible assets: Expense incurred by a business in developing or acquiring intangible assets, like patents or trademarks, are also capital expenditure since the expected value from the assets would be realised over the long-term. DO Read: TNG Limited To Trademark Its Titanium Dioxide Pigment As TNG360 Why is CapEx important in investing? Investment is necessary to grow a business, and capital expenditures often set the path for growth in businesses. Management seeks to deliver the best out of its resources, which may require further enhancements to fulfil the vision of the business. CapEx seeks to derive further value for an enterprise through enhancements of existing assets, acquisition of new assets, adoption of new technology etc. It is an important decision that management of business seeks to take continuously and efficiently. CapEx by companies depends on various factors, including business model, products, industry, size, scale. For instance, a large scale mining company like BHP Group Limited (ASX:BHP) requires a much higher level of CapEx compared to an online retailer like Kogan.com Limited (ASX:KGN). But the expectations remain similar: to have a long-term sustainable revenue stream, enhancements to business models, or improvement in the profitability and sustainability of the business. Investors monitor capital decisions of firms very closely to ascertain short-term as well as long-term implications. Since Capital Expenditure often includes large sums of money, it becomes imperative for investors to evaluate CapEx decisions of firms, sources of funds employed in CapEx, or expected liquidity of the business over the near-term. Moreover, investors seek to test the capital budgeting by the management. However, there can be failures as well when the management expectations are not delivered by the past CapEx decisions. When things don’t turn as expected, it is likely that blame would be on management, but they would be appreciated when things turn out better than expected. It is the reason why investors devote a decent time to study the management style of the Board. Management takes the ultimate call for Capital Expenditure plans of a business, and they must evaluate the investment through a sound cost-benefit approach. The source of funds for the Capital Expenditure should also complement the long-term sustainability of the business. Companies fund their Capital Expenditure plans through debt or equity, and management must consider the appropriate source of funds to deliver expected benefits. Click here, to know about Afterpay Limited (ASX:APT) capital raising plans. Capital intensity and rise of Capital light business models Capital intensity of a business depends on the type of business. Large businesses that require heavy assets or regular enhancements would have large Capital Expenditure plans and need for capital, but a software company with a similar scale of revenues may not need huge Capital Expenditure. Capital intensive businesses come with long-term, a higher level of CapEx, and it is crucial for such business to manage CapEx plans. Companies engaged in Mining, construction business, equipment manufacturing, automobiles, energy, transports are considered as capital intensive business. Capital light business models have grown popular over time due to high margins and profitability. Such business models are expected to deliver relatively higher levels of free cash flows to the company over time. In asset-light businesses, the intensity of operational expenses or Revenue Expenditure is higher compared to CapEx. E-commerce companies like Amazon.com, Kogan.com Limited (ASX:KGN), Temple & Webster Group (ASX:TPW) are Capital light businesses. More on Information Technology Companies Capex: Why Capital Raising Is Sometimes Important For IT Stocks?

A carbon credit is a criteria used by countries to cap the carbon dioxide emissions from industrial activities in order to fight climate chnage. It involves issuing of a permit /certificate, which is also tradable, and provides its owner the right to 1 tonne emissions of carbon dioxide or another greenhouse gas.

A Brownfield Investment refers to an investment made in an existing active project or even an inactive project with an existing developed facility or infrastructure. Such investment is made when an organization or a firm wants to expand its capacity using the existing infrastructure, thus entails fewer approvals as against a greenfield investment. The regulation requirements and high cost of starting new businesses make investments in brownfield projects highly lucrative. For brownfield investment purpose, a company can enter into Merger and Acquisition (M&A) or can farm-in to invest in existing facilities or infrastructure. Brownfield investments are the safest way to invest in a new territory and to understand the market sentiments. A company or firm can invest in an existing business to learn and gain experience prior to going for its own greenfield projects. The greenfield projects are capital intensive and always carry a risk of project failure. The brownfield projects, on the other hand, involves lower capital cost and have tested market segment. Benefits of Brownfield Investments Quick access to new market Since the new entrant in the market need not invest a lot of time and money for a new facility or infrastructure, the company could enter and have access to the market really quick. Operations could be started from the existing setup or a little tuning as per the product specifications. The existing firm may have a well-established channel of vendors and suppliers that could eliminate the risk of searching the dependable source of raw materials. The new company could use the existing distributor channel for taking a product to the market with the help of existing supply chain systems. Regulatory Approvals Due to various environmental regulations and many countries trying to meet their respective carbon emission levels targets, getting regulatory approvals can be really a herculean task. Apart from the environmental, there are many bureaucratic approvals required to set up any facility. In a brownfield project, it is a possibility that the existing facility may have already all approvals required for the project. It will save both time and money.  Low Fixed Cost The brownfield projects have required infrastructure which can be put to use immediately, eliminating the need for excessive capital. The facilities may require little modifications or tuning to get started. Payment for regulatory approvals and fee for procurement of specific licenses are also not required. The existing facility may have all approvals and permits. Setting up new market networks and logistics may not be required as the existing facilities may have them all. Staffing and Training It is also a possibility that the project or the facility may have existing well trained and experienced staff for the project. The company need not have to hire fresh staffs and bear training and inductions expenses. Access to high-end technology The M&A or takeover of existing high-end technology firm can help gain access to the technology which may be expensive to develop group up. One such example is the acquisition of Jaguar Land Rover Limited by Tata Motors. The acquisition helped Tata Motors to take over the working facility of the Jaguar Land Rover. Tata Motors gained access to high-end technology of luxury cars along with the well-equipped facility to manufacture those cars. Some of the recent brownfield investments are: Acquisition of Cray by Hewlett-Packard Enterprise in 2019. Cray was a leading innovative technology company working in the field of Artificial Intelligence (AI) and was designed to manage massive data centres and simulation using supercomputing technology. HP acquired Cray for US$ 1.3 billion in order to make inroads into the world of supercomputing. The acquisition could enable HP to perform better in the digital environment. Acquisition by Walt Disney in 2006 of Pixar. Pixar Animation was a computer animation studio that made the first-ever computer-animated feature film- Toy Story in 1995. Walt Disney acquired Pixar in a deal worth US$ 7.4 billion. The acquisition allowed Walt Disney to get more advanced technology for animated movies and at the same time removed competition also. Acquisition of Jaguar Land Rover (JLR) by Tata Motors in 2008. Tata Motors acquired JLR from Ford for a sum of US$ 2.3 billion. Tata Motors got working automobile plants in England along with the ownership of the good brands. Tata Motors also got commitments from the dealers who were eager to work with the JLR brand and were incurring losses at the time of acquisition. Tata Motors was once World’s largest manufacturer of buses and trucks. They had a stronghold in the Indian car market but did not have experience and technology in high-end luxury cars. Brownfield investments have some drawbacks which can be listed as below. The existing facility may require a major facelift, which can increase the investment cost. The machinery and equipment may be obsolete, and replacement would be required. High maintenance of infrastructure and equipment due to usage over the period will increase the operational cost. Risk of change in regulatory requirements and tax policy is always there. The existing facility may have hazardous or contaminated material which may require clean-up cost will be borne by the new investor.

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