“Fiscal Mechanisms to Promote CO2 for EOR in the North Sea: Understanding the CO2 Value Chain”

1. “Fiscal Mechanisms to Promote CO2 for EOR in the North Sea: Understandingthe CO2 Value Chain” Presentation by Carl-W. Hustad, CEO CO2 - Norway AS, Kongsberg________________________ “Session J1 - Policy: CCS Opportunities / National Actions II” Seventh International Conference on GHG Control Technologies08:30 – 10:10 September 08, 2004

2. Overview of theCO2 Value Chain • Pure sources of CO2 (eg. refineries, hydrocrackers, ethanol, etc.) • CO2-capture from power plants and industrial complexes • CO2-gathering, handling, terminals and interim storage • CO2-transportation (ships and / or pipelines) • CO2-hubs, terminals and offshore export facilities • CO2 for enhanced oil recovery (EOR) and large-scale sequestration • CO2-credit generation, certification and trading • CO2 risk-assesment, mitigation of corporate exposure, evaluation of opportunities + business development.

3. Main Driversalong the CO2 Value Chain • There are 3 main incentives for companies to invest and develop projects along this value chain. These are; • 1. Possible use of CO2 for EOR (and also enhanced gas recovery). • 2. Pending constraints on future carbon emissions. • 3. Corporate due diligence (ie. exposure to future risk and public image). • HOWEVER • To date no company may attribute a value on the ‘physical’ CO2 substantially beyond $10/t. Whilst the cost of moving CO2 along the complete value chain is usually greater than $30 /tCO2.

4. Thoughts aroundthe CO2 Value Chain (1) Why is the CO2 value chain important? It shifts the focus of CO2 and GHG emissions away from CO2 being a regulatory problem, over to creating a commercial resource / commodity. Who are the Stakeholders? Any person, company or societal body that may have a vested interest in the value chain functioning as efficiently as possible. How can the CO2 value chain best evolve? There are many ways by which it can evolve, and there are a few specific ways by which it can be impeded and evolve inefficiently. Initially, the role of government would appear to be to ensure that the market has incentives to choose the most efficient path.

5. Thoughts aroundthe CO2 Value Chain (2) • Can this value chain contribute to the wealth of society and nations? • The chain can be the bridge by which we move from our current fossil energy infrastructure through to a sustainable 'hydricity' (ie. with hydrogen and electricity as the energy carriers) based supply of energy. • It can therefore extend the transition period by several decades to permit development and commercial implementation of renewable energy sources. • Within a decade this value chain could be a major creator of new wealth within the OECD countries, and ... • ... It will provide viable policy alternatives for governments to develop new industrial activity, ensure energy security and help combat climate-change.

6. CO2-EORDevelopment (1984-2004)

7. The CO2-EOREconomic Model (CEM) • Assumed pipeline infrastructure supplying approx. 680 mtCO2 over 20 year period to six UK and five Norwegian fields. • Used “Best Available” techno-economic data to evaluate overall project economics and total tax revenue for host governments. • The CEM permits changes in all significant economic parameters. • Project and sub-projects can be evaluated in terms of NPV and IRR. • Total project economics can be related to a “Break-Even” oil price. • Model permits analysis of different fiscal mechanisms that can be evaluated in order to manage project risk exposure on behalf of all project stakeholders.

8. Base Case CEMassumptions for Norway / UK • Oil Price ($/bbl) $20 • Special/PR Tax Rate % 50% / 50% • Corporate Tax Rate % 28% / 40% • Effective Tax Rate % 78% / 70% • Depreciation Term (years) 6 yr / 1 yr • Operating Cost ($/bbl) $4.50 / $5.50 • Decommissioning Costs • Large Fields $450 million • Small Fields $150 million

9. Base Case CEMassumptions for Norway / UK • Field Capital Costs ($/incr bbl) $2.25 • Financed Debt (where applicable) 40% • Incremental Operating Cost ($/bbl) $2.00 • Incremental Pump Costs ($/t CO2) $0.10 • Incremental Production bbls/t CO2 3.2 • Recovery Factor (% of OOIP) 6% • CO2 Delivered Price ($/tonne) $35 • CO2 Support Price ($/tonne) $23 • CO2 Purchased Price ($/tonne) $12

10. Draugen Ninian Claymore Brae Forties Sleipner Fulmar Billingham EsbjergCO2-hub Brunsbüttel Pernis Antwerp Snøhvit CENS Project • Potential delivery of CO2 for EOR through infrastructure at cost of < $35 /tCO2. • Screening of the most mature EOR fields indicates poten-tial of > 30 mtCO2/yr for +20 year period. • A combination of pipelines and ship transportation enhances flexibility and economics for initial EOR projects. • † Designated fields were “potential” CO2-floods. Potential CO2 for EOR fields CO2-sources Tampen GullfaksArea Brent Mongstad Brage Grane KårstøCO2-hub Herøya Ekofisk Dan/Gorm

11. With CO2-Purchase Price at $35 /tCO2 the basic (unsupported) EOR project requires averaged oil price in range $27,80 - $29,20 /bbl to achieve 10% IRR “After-Tax” within present taxation systems in NO / UK sectors. The North Sea CO2-EOR Project (Norway/UK) Main observation is that with oil valued below $18 /bbl then the EOR-project alone can only afford to pay $10 - $12 /tCO2 given current economic framework. However this excludes a considerable upside that would accrue to the government if it also participated in the project. In Norway the favourable effect of reducing depreciation from 6 to 3 years is shown by the dashed line.

12. In NO-sector with 3-year depreciation and market oil price $21,00 /bbl, the oil field operator can afford to pay $20,50 /tCO2. The remaining $14,50 /tCO2 is supported by NO-Govt that has zero discounted NPV on the EOR project. In UK-sector with market oil price $21,95 /bbl, the oil field operator can afford to pay $19,50 /tCO2. The remaining $15,50 /tCO2 is supported by UK-Govt that has zero discounted NPV on the EOR project. The North Sea CO2-EOR Project (Norway/UK) CO2-Purchase Price v’s “Break-Even” Oil Price The dashed lines correlate ability to purchase CO2 at higher price (left axis) with increasing oil price. The solid lines is how government income (inverted on right axis) becomes +’ve as oil price increases and support level decreases. Main observation is that when government is included and actively supports the CO2-price then the Project can “survive” with oil price down to $20 /bbl. (NB! There is still no added value to government due to sequestration of CO2).

13. The North Sea CO2-EOR Project (Norway/UK) Change in Govt. Tax Income with respect to the Base Case For each significant case considered the respective government tax income will change. Bars show %-change with respect to the Base Case. Main observation is that in both sectors oil price rise has the most direct impact on government income, while also the Norwegian government is most exposed to reduction in the offshore tax regime.

14. Comparisons for aReservoir Production Profiles

15. Summary of theKey Issues for CO2-EOR For the oilfield operator it is; (i) Perception of the market price of crude oil. (ii) Risk exposure. (iii) Security of CO2 supply. Key issues for the CO2-supplier are; (iv) Cost for capturing and gathering the CO2. (v) Future legislation constraining CO2-emissions. (vi) Cost of alternative options for CO2-avoidance.

16. CO2 - From theProblem to a Solution? OPPORTUNITIES CHALLENGES Action! Action!! Action? “Energy Security”, EOR, Hydrogen, Renewables, “Zero-Emission”. Climate-Change, “Energy Supply”, Costs, Incentives, Dialogue. CO2 SOCIETY SOLUTIONS Awareness, Respect, Communication, Education, Acceptance. Sustainable, Technology RD&D, Profitable Projects.