Carbon Capture: Killing Two Birds with One Stone

In May, the biggest carbon capture project in the US went on line in Port Arthur, Texas, capturing carbon dioxide from industrial operations and using that carbon for enhanced oil recovery (EOR) and securely storing it underground. It is unprecedented and the technology is breakthrough. The $431 million project was boosted by a $284 million investment by the US Department of Energy. This is the carbon capture litmus test, and the stakes are high.

The first of the facilities two plants has been capturing carbon since December 2012, while the second plant began capturing carbon in March this year.  Now both plants are operating at full capacity, and diverting for EOR. Full capacity operations mean that the facility will capture more than 90% of the carbon dioxide from the product stream of two methane steam reformers in the area-that's one million metric tons of carbon dioxide annually. Those one million metric tons are then diverted for sequestration and EOR. The end picture here: This diverted carbon dioxide will lead to an estimated annual increase in oil production of between 1.6 and 3.1 million barrels from the West Hastings oil field, just south of Houston.

Not only, then, is carbon capture an environmental breakthrough-it's also a fossil fuels breakthrough as it show the potential to extract harder-to-access hydrocarbons or tap deeper into wells that have already been tapped out.

How It Works …

The Port Arthur Air Products hydrogen facility captures carbon (about 50 million cubic feet/day), compresses it and sends it through a pipeline for use in EOR.

The fundamentals of the EOR process include a flood of carbon from the pipeline, which is then injected into an aging reservoir that has stopped producing. The carbon dioxide increases the pressure in the reservoir and pushes the oil out at nearby well bores. And it does this all without releasing greenhouse gases into the atmosphere because the CO2 remains trapped under the ground, much like the oil was. 

The Stocks to Watch in the Carbon Gamble

Plano-based Denbury Resources (DNR) is the big name in the Port Arthur carbon capture project because it will benefit most from the carbon diverted for enhanced oil recovering operations across the Gulf Coast. Specifically, the CO2 is shipping via Denbury's Green Pipeline-Texas to its West Hastings oilfield.

Denbury stands to gain a lot from this is that CO2 EOR is already a proven and lucrative process in Texas, and specifically where Denbury has a nice set of assets that are about to get a production boost.

What does the market think of Denbury? It's been kind. It also recently made a sweet sale and asset exchange deal with ExxonMobil Corp. (XOM) in 2012, and is still riding high on that one.

To wit: Denbury sold 196,000 acres in the Bakken Shale to Exxon for $1.3 million and operating interests in older oil fields in Texas where it can put EOR to work.

Also in on the deal are Pennsylvania-based Air Products and Chemicals Inc. (APD), which owns the carbon capture facility, and San Antonio-based Valero Energy Corp. (VLO), whose refinery site houses the facility.

Air Products uses its steam methane reformers located within Valero's Port Arthur plant to produce hydrogen that helps the refiner make cleaner-burning transportation fuels. The technology belongs to Air Products, and it's definitely taking credit in the market for bringing the first carbon capture facility of this massive scale on line. Air Products also owns the world's largest hydrogen plant and pipeline supply network, which stretches 600 miles and produces more than 1.2 billion cubic feet of hydrogen daily to refineries and petrochemical plants. The Port Arthur project is just another feather in its cap-but a huge one.

Where to Look for More Carbon Capture Opportunities

Hands down, Texas is the CO2 EOR leader. The state gets up to 20% of its daily oil production from carbon-assisted EOR, which is largely used in the west. 

There is also a carbon capture facility in Geismar, Louisiana (again, Denbury benefits from this flow of CO2 for EOR) that can handle about 20 million cubic feet per day. It's certainly not on the scale of the Port Arthur project, but it's also been successful.

Further afield, we have a new carbon capture facility coming on line in 2015 in Mississippi.

The bottom line: Where there is carbon capture and a constant flow of CO2 for EOR, the companies at the receiving end of this pipeline will see production increase. Keep your eye on those companies. Investors with a sophisticated long-term strategy will see carbon capture as a winning gamble, all the way around.

Right now, it's all about EOR in terms of stock-watching, but in less than a decade, carbon capture technology will become cost-competitive and a great investment itself.