Kinder Morgan CO2's Fox: SACROC a 'home run' for company

May 12, 2003
Kinder Morgan CO2 Co. LP purchased its interest in the Scurry Area Canyon Reef Operators Committee (SACROC) unit in 2000 and to date has more than doubled the unit's oil production.

Guntis Moritis
Production Editor

Kinder Morgan CO2 Co. LP purchased its interest in the Scurry Area Canyon Reef Operators Committee (SACROC) unit in 2000 and to date has more than doubled the unit's oil production.

Regarding enhanced oil recovery with CO2 injection in SACROC, Charles E. Fox, vice-president of operations and technology for Kinder Morgan CO2, said, "It's a niche business where the returns are more certain than in some other parts of the [exploration and production] industry, but they are not as spectacular.

"So it's a lower-risk, moderate-reward business that fits well into [parent Kinder Morgan Energy Partners LP's] portfolio. When compared to KMP's other pipeline and terminal assets, EOR provides higher risk, higher reward opportunities, but still reflects Kinder Morgan's overall conservative risk-reward profile."

Fox said that KMP's unique financial structure, which exempts it from paying corporate income taxes, makes the company a very efficient owner of assets. As a result, the company does not need "to hit home runs" to be successful: "We are happy to hit a bunch of singles and doubles, although at SACROC, we knocked the ball over the fence."

Kinder Morgan CO2 currently owns about 85% of the SACROC unit.

Kinder Morgan

Charles E. Fox, Vice-President, Operations & Technology, Kinder Morgan CO2 Co. LP
"It's a niche business where the returns are more certain than in some of the other parts of the E&P industry but they are not as spectacular. So it's a lower risk, moderate reward business that fits well into Kinder Morgan's portfolio."
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Kinder Morgan was formed in February 1997, when Richard D. Kinder, William V. Morgan, and a group of other investors acquired the general partner of Enron Liquids Pipeline LP.

Fox said the enterprise value of the company at that time was about $300 million, and it has grown to a $19 billion value currently. "It's a remarkable business story," he added.

The Kinder Morgan group of companies includes three separate, publicly traded entities: KMP, Kinder Morgan Inc. (which owns the general partner of KMP), and Kinder Morgan Management LLC.

KMP is a master limited partnership that has four business units: products pipelines, natural gas pipelines, terminals, and CO2. It owns and operates more than 25,000 miles of petroleum products and natural gas pipelines and more than 70 terminals that handle coal, bulk materials, and liquid storage.

The partnership, through Kinder Morgan CO2, also is the main supplier and transporter of CO2 for enhancing oil recovery. Kinder Morgan CO2 sells more than 400 MMcfd of CO2 to various oil field customers.

Fox said that the tax treatment by the US government that basically limits KMP to transportation and production of natural resources provides the company with a strong competitive advantage. Unlike traditional C-corporations, master limited partnerships do not pay corporate income taxes because they are required to pay out all available cash as distributions to unitholders. Furthermore, at the individual level, the unitholder receives a depreciation deduction that results in the deferral of a large portion of taxes.

The basic aim of the partnership is to generate stable returns for its unitholders, Fox said.

SACROC

SACROC was the first CO2 enhanced oil recovery project in the Permian basin, with CO2 injection initiated in 1971. Chevron Corp. initially operated the unit. Pennzoil Co. later took over the operation from Chevron before its upstream operations were spun off into PennzEnergy Co. and merged with Devon Energy Corp.

Kinder Morgan CO2 bought Devon's interest in SACROC in June 2000.

The unit at one time produced more than 200,000 bo/d, but production had declined to about 8,500 bo/d at the time of Kinder Morgan CO2's purchase.

During the 1950s, because of the way production allowables were administered, the operator produced the field as a waterflood with injection wells placed down the centerline of the field.

Because this required fewer water injection wells, it allowed the owners to have maximum financial returns but not maximum oil recovery, according to Fox. This also placed a lot of water in the center of the field.

The owners kept CO2 out of this highly water-swept area until the mid 1990s, when Pennzoil began to develop the centerline area with CO2.

Fox said Pennzoil realized good results, and Kinder Morgan CO2 has continued to expand CO2 injection in the centerline. He explained that the purpose of injecting CO2 is to reduce the residual oil saturation to well below that of the residual saturations in a waterflood, and therefore, waterflood-swept areas are ideal targets for CO2 flooding.

One reason for Kinder Morgan CO2's interest in purchasing the unit was that SACROC was its largest purchaser of CO2, so that it knew much about the field and was confident that the centerline area could be expanded to provide a good return on the investment, Fox said.

Kinder Morgan CO2 pitched the purchase of SACROC to Rich Kinder and Bill Morgan on Apr. 4, 2000, Fox said, which was the day that KMP closed on the purchase of the 80% of Shell CO2 Co. Ltd. that it didn't already own. About 35 people from Shell, including one engineer, came to Kinder Morgan.

KMP redevelopment strategy

Kinder Morgan CO2 began operating SACROC on June 28, 2000, and Fox said, "We set a stake in the ground that we would start [re]development of SACROC within 2 months. But we missed it by a couple of weeks because we ran into trouble in hiring people."

He added that his firm eventually was able to hire an excellent staff, and oil production started turning around in January 2002. Currently it is more than 18,000 bo/d.

So far Kinder Morgan CO2 has committed almost $400 million to develop SACROC, much of it in infrastructure enhancements related to gas processing that will make future development more profitable. Fox said most of this money will be spent by yearend.

Currently, Kinder Morgan CO2 has three rigs drilling new wells in SACROC. Fox estimated that a drilling rig is on site 2 weeks and a workover rig then completes a well in another 2 weeks.

The field had about 400 active wells and more than 1,100 shut-in wells when Kinder Morgan CO2 bought it, according to Fox. It currently has 14 workover rigs working on reactivating some of the shut-in wells.

Fox said SACROC now has about 500 active wells, including both injection and producing wells, and will have 600 by the yearend.

In redeveloping the field, Fox said, "We are trying to take the arrangement of wells that we had in the past and do the best we can with them. We would like to have all five-spots, but it would cost too much to convert the existing nine spots to five spots."

Five-spot patterns have one injector for each producer, while the nine spots have one injector for three producers. Because the wells are on 20-acre spacing, a five-spot pattern covers 40 acres, while a nine spot covers 80 acres.

Fox said that Kinder Morgan CO2 believes it can develop any portion of the field that has 10 ft or more of hydrocarbon pay.

One potential area is the reef platform in the north part of the field that has an 800-ft thickness (70 ft of hydrocarbon pay) compared with the 250 ft in the centerline area. Fox said this area will require a lot of CO2; so that "we really have to think out how we are going to effectively sweep out 800 ft of vertical pay.

"When you don't have good injection control, you have some zones where CO2 goes through fast, and you leave oil behind in the others. But it is a great challenge to have since there are not that many places in the world that have 800 ft of pay."

Another part of the redevelopment involves gas processing. As Fox puts it, "Gas processing is always the tail that wags the dog in a CO2 flood." He said that the decision on how large to build a gas plant is based on the optimum production level.

He said that right now the commitment is to have a production level at SACROC of a little more than 28,000 bo/d, but estimates indicate that additional drilling and more infrastructure could raise the production to 30,000-50,000 bo/d.

"But right now we don't know what the optimum level of gas facilities is," Fox said. "We think the gas processing infrastructure development will mostly be completed by end of 2004, and development of the field itself will last 20 years, although production will peak in about 2010-15."

CO2 supply

Kinder Morgan CO2 owns interests in the two largest CO2-source fields in the US: the McElmo Dome in southwestern Colorado and Bravo Dome in New Mexico. These source fields, along with Sheep Mountain in Colorado, have provided an average 1.2 bcfd of CO2 to the Permian basin during the past 15 years, according to Fox.

Kinder Morgan CO2 operates and has a 45% working interest in the McElmo Dome unit. Its interest in Bravo Dme is 11%.

Kinder Morgan CO2 operates the 1 bcfd capacity, 502 mile, 30-in. Cortez pipeline that carries CO2 from McElmo Dome to the Denver City hub in West Texas. Denver City also is the hub for CO2 pipelines from Bravo Dome and Sheep Mountain.

At Denver City, CO2 can enter Kinder Morgan CO2's 100% owned, 16-26 in., 600-MMscfd capacity Central Basin pipeline to McCamey, Tex.

Kinder Morgan CO2's 91% owned, 140 mile, 16-in. Canyon Reef Carriers (CRC) pipeline connects the Central Basin pipeline to SACROC.

Since 2000, Kinder Morgan CO2 has added three pumps to the CRC pipeline and raised its capacity to 270 MMscfd. But Fox said this capacity is still insufficient for the planned SACROC expansion and three CO2 floods operated by others in the Horseshoe atoll area.

To be sure of an adequate CO2 supply, he said Kinder Morgan CO2 is building the 16 in., 113 mile, 250-MMscfd capacity Centerline pipeline from Denver City to SACROC. He expects it to be completed in May.

Kinder Morgan CO2 also has deliverability expansion plans for McElmo Dome. It is permitting its first horizontal well in the field to reduce environmental impact, along with two vertical wells.

Fox explains that because McElmo Dome is below the Canyons of the Ancients National Monument, the area requires a rigorous permitting process that involves obtaining an archeological survey to ensure that development activity will not impact archeological sites.

He said that if there may be such an impact, Kinder Morgan CO2 will reroute flowlines and change well locations.

He added that unlike typical natural gas fields, McElmo Dome can produce about 1 bcfd from only about 46 wells; so that its impact on the environment is much less than a natural gas field that would require many more wells to deliver that much gas.

Career highlights

Charles E. Fox is vice-president of operations and technology for Kinder Morgan CO2 Co. LP. He manages the operations of the McElmo Dome CO2 source field, Kinder Morgan's CO2 pipelines, and the SACROC oil field unit and its related gas plants.

Employment

Before his present assignment, Fox worked for several Shell Oil Co. units in drilling, reservoir engineering, and CO2 marketing and management.

Education

Fox holds a BS in mechanical engineering from Rice University and an MS in petroleum engineering from Stanford University. He is the coauthor of the SPE monograph, Practical Aspects of CO2 Flooding.