Kinder Morgan Energy Partners
) CO2 division has been one of the company's strongest performing
segments. Although the division is the second largest in terms of
revenue behind the natural gas pipelines business, it is by far the
most profitable with EBITDA margins of around 67% last
year. The division accounts for about
30% of the firm's Trefis price estimate
The CO2 division primarily produces, markets and transports
carbon dioxide (CO2) that is used to improve the production from
mature oil wells. Besides this, it also operates oil fields and a
gas pipeline in West Texas (oil production accounted for less than
half the division's 2011 revenues). In this article, we will
explore the division's activities and some of the opportunities and
risks that the business could face going forward.
What Is CO2 flooding and why Is It Important?
Oil wells typically have the highest production rates in the
primary phase of their lives. Production gradually declines with
time due to a decrease in reservoir pressure, making it difficult
for the oil to flow towards the well head. To solve this problem,
enhanced oil recovery (EOR) operations are used by inducing
pressure inside the wells by pumping carbon dioxide, enabling more
oil to flow out through the well head. The process is quite
expensive, however, higher oil prices are beginning to
justify the high cost.
Production enhancement is critical
to optimally harness the world's crude
oil resources. According to oil field services major
Halliburton, about 70% of the world's oil wells are in their mature
stages, and a 1% increase in oil recovery factor in these wells
could produce enough oil to feed the world's oil needs for 2
Where Does Kinder Morgan Stand In This Space?
The firm's CO2 business primarily caters to oil fields in the
Permian basin. Kinder Morgan is a leading carbon dioxide supplier
in the region with daily production of about 1.3 billion cubic
feet. It owns or has interests in a total of about 8 billion cubic
feet of carbon dioxide reserves located in New Mexico and Colorado
and also operates the pipeline infrastructure required to transport
its production. The firm also has strong experience in the field of
EOR, having operated one of the oldest EOR projects in the region,
the SACROC oil field.
What Are The Opportunities?
The Permian basin contains several legacy oil fields
that saw their production peak in the 197o's and have
fallen significantly since. This has caused an increase in demand
for production enhancement. About half the country's EOR projects
are located in the region. ((
, Permian Basin Petroleum Association Magazine))
However, the oil production from the basin's EOR fields has been
flat over the past five years due to a shortage of CO2.
((ref:1)) Mature wells in the basin use up to 1.8 bcf of
new CO2 every day which is not adequate. In order to feed the
shortfall and growing demand, the firm has announced several
investments towards expanding its CO2 operations, including the
expansion of production at its Doe Canyon unit in
Another opportunity for Kinder Morgan's CO2 business
is in residual oil zone (ROZ). A bulk of the basin's remaining oil
reserves lie in ROZs which lie under the primary oil zones,
which can sometimes go deeper than 15,000 feet. The
implementation of CO2 based recovery for oil production has
been successful in the Permian region and could further
boost the demand for Kinder Morgan's CO2.
Potential Risks To The Business
Unlike Kinder Morgan's pipelines business where prices are
decided by volumes transported, the CO2 division is exposed to oil
prices. Many of the firm's contracts for CO2 are tied to the prices
of crude oil with a floor price, and a decline in oil prices could
impact the business. Another risk is that the business operations
are not geographically diversified since they cater primarily to
wells located in the Permian basin. Any adverse conditions like
inclement weather or a change in regulations influencing production
in the region could impact Kinder Morgan's CO2 business.
We have a price estimate of about $90 for Kinder Morgan, which
is about 10% ahead of the current market price.
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