Marathon, Kinder Morgan form CO2 joint venture

Jan. 2, 2001
Marathon Oil Co. and Kinder Morgan Energy Partners LP, both of Houston, formed a joint venture for enhanced oil recovery using carbon dioxide flood techniques in the Yates field and the Scurry Area Canyon Reef Operators Committee (SACROC) unit in the Permian Basin of West Texas.


Marathon Oil Co. and Kinder Morgan Energy Partners LP, both of Houston, Tuesday said they have formed a joint venture carbon dioxide secondary recovery in Yates field and the Scurry Area Canyon Reef Operators Committee (SACROC) unit in the Permian Basin of West Texas.

Under the deal, Kinder Morgan will buy 15% of Marathon�s working interest in Yates field of southeast Pecos County, one of the largest, most prolific US oil fields.

Marathon is operator. During the first 9 months of 2000, Marathon�s production from Yates was 14,700 b/d, or 11% of the company�s US production.

Kinder Morgan will contribute its resulting 7.5% overall working interest in Yates to the joint venture, while Marathon adds its resulting 42.4% interest in that field.

Marathon also will contribute its 10.84% working interest in SACROC, located in Kelly-Snyder field in Scurry County. Kinder Morgan will contribute 1.91% working interest in SACROC, retaining 71% ownership in that unit, officials said.

The joint venture will be owned 85% by Marathon, part of the USX-Marathon group, and 15% by Kinder. Neither company would disclose financial details of their deal.

However, Richard D. Kinder, chairman and CEO of the limited partnership, said, �The joint venture with Marathon Oil will enable us to diversify our holdings in the Permian Basin and is expected to be immediately accretive to cash available for distribution to our unit holders.�

On the other hand, Marathon will take a pre-tax, non-cash charge of $930 million against its fourth quarter earnings, reflecting the difference between estimated fair value and book value of its contribution to the joint venture, officials said.

Still, said Steve Hinchman, senior vice-president of production at Marathon, �This is an opportunity to combine expertise and build a competitive advantage in the region. It underpins a prime strategic objective of improving our base business, while providing for profitable resource and production growth.�

He said, �Marathon has many years of experience in the characterization and management of carbonate reservoirs, with a strong reputation in field operations. Kinder Morgan brings comprehensive carbon dioxide management expertise, ranging from a substantial resource base and distribution system to the application of CO2 for enhanced oil recovery. In blending these complementary skill sets, we will create a partnership that provides cost efficiencies, operational flexibility and opportunities for future growth.�

Marathon used CO2 as part of its enhanced recovery program in Yates field in the early 1990s, but subsequently switched to nitrogen because of pricing, a company representative Tuesday told OGJ Online.

Officials at Kinder Morgan CO2 Co.�formerly Shell CO2 Co. before it was acquired by the limited partnership last April�expect to help reestablish CO2 flooding in Yates field at some future point. The unit has already contracted to supply Marathon with 30 bcf of CO2. Company officials also declined to provide financial details of that deal.

Since the two fields are more than 100 miles apart, Marathon will handle operations for the joint venture in Yates field while Kinder Morgan will provide the same duty in SACROC. But any new CO2 projects in either field as a result of the joint venture are still 12-18 months away, officials said.

The SACROC production unit was the first CO2 enhanced oil recovery project in the Permian Basin. As operator, Chevron Inc. initiated CO2 injection in 1971-1972. Pennzoil Co. later took over from Chevron before its upstream operations were spun off into PennzEnergy Co. and merged with Devon Energy Corp. of Oklahoma City. Kinder Morgan acquired the SACROC unit from Devon in June.

Additionally, Kinder Morgan CO2 has initiated a $4 million expansion of its SACROC CO2 project.

�The SACROC unit has significant undeveloped CO2 flood reserves. The expansion project is an eastward extension of the very successful centerline CO2 project, which is producing 4,000 b/d,� said Kinder.