The Economic Contribution of CO2 Enhanced Oil Recovery in ...

The Economic Contribution of CO2 Enhanced Oil Recovery in Wyoming 2010-2012 Benjamin R. Cook, PhD *† University of Wyoming Department of Economics & Finance Enhanced Oil Recovery Institute

July 2013

***Preliminary Draft*** Please do not cite without the permission of the author.

*Benjamin R. Cook, PhD, Visiting Assistant Professor, College of Business, Economics & Finance, Dept. 3985, 1000 E. University Ave., Laramie, WY 82071. Office: College of Business #379W. Email: [email protected] †Funding for this study was provided by the Enhanced Oil Recovery Institute (EORI), part of the School of Energy Resources at the University of Wyoming. The author would like thank Professor David “Tex” Taylor from the University of Wyoming Department of Agricultural and Applied Economics for his helpful guidance creating a customized IMPLAN model for Wyoming and providing feedback on this study. Additional feedback and data support were provided by Dr. Glen Murrell, Associate Director (EORI), Nick Jones, Senior Geologist (EORI), Vanessa Onacki, Research Assistant, and Professor Owen R. Phillips, Department of Economics & Finance, University of Wyoming.

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TABLE OF CONTENTS ES Executive Summary .................................................................................. 3 1 2

Introduction ............................................................................................ 10 CO2 Enhanced Oil Recovery in Wyoming ........................................... 12 2.1 Study Area & Industry Mapping ...................................................... 15 2.2 Customizing the IMPLAN Model for Wyoming .............................. 18

3

Revenues, Royalties, Taxes & Expenditures ........................................ 19

4

Capital Expenditures.............................................................................. 28

5

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Economic Contribution .......................................................................... 30 5.1 Incremental Oil & CO2 Supply Costs ............................................... 30 5.2 Royalties, Severance and Ad Valorem Taxes ................................... 32 5.3 Well Drilling, Completion, and Pipeline Expenditures ................... 35 5.4 Total Economic Contribution of CO2-EOR Incremental Oil ......... 35 Conclusion ............................................................................................... 38

APPENDIX A IMPLAN Customization ..................................................... 39 APPENDIX B Incremental Oil Decline Analysis ....................................... 46

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The Economic Contribution of CO2 Enhanced Oil Recovery in Wyoming’s Economy

ES

EXECUTIVE SUMMARY

Introduction Wyoming’s economy and state & local government budgets depend heavily on the state’s mineral wealth, which are then by extension sensitive to price swings in the markets for those minerals. Mineral related payments are roughly 65% of Wyoming State revenues, with severance taxes and royalties alone accounting for 51% of the State budget. An economic contribution analysis of Wyoming’s oil and gas (O&G) industry commissioned by the Wyoming Heritage Foundation found that for 2007 oil and gas activities accounted for 32% of economic output, and 20% of employment. Further, a recent and similar study commissioned by the American Petroleum Institute (API) found that for 2009 (during the recession) the oil and gas industry’s operational impact on Wyoming’s economy as share of the state was effectively higher than for any other state. The booming supply of natural gas coming from shale plays combined with mineral price declines following the 2008 financial crisis have dealt a significant blow to public funds. Peaking in 2008, Wyoming mineral royalties and severance tax collections are projected to be 16-23% below their 2008 peak in the coming years. In addition to diversifying Wyoming’s economy so that it is less exposed to mineral price risk, pursuing other value-added activities for minerals and energy within the state (such as gas and/or coal to liquids) and encouraging the development of existing resources are of fundamental importance. The strength of oil prices relative to other minerals highlights the importance of enhanced oil recovery within the state. While oil prices themselves face renewed

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pressure from economic troubles in Europe and slow recovery at home, improved oil recovery has the potential to delivery hundreds of millions of barrels of additional production from Wyoming oil fields. In 2004 the Wyoming State Legislature passed legislation establishing the Wyoming Enhanced and Improved Oil Recovery Commission, along with the Enhanced Oil Recovery Institute (EORI) at the University of Wyoming – EORI’s primary mission being to work with oil operators to maximize the potential of Wyoming’s oil resources through enhanced recovery technologies. Utilizing a similar approach to the economic impact assessments already mentioned, the objective of the present study is to investigate the economic contributions attributable to CO2 enhanced oil recovery in Wyoming. CO2-EOR operations include the combined impact of incremental oil production, CO2 purchased for injection, and the associated royalties, severance and ad valorem taxes. Collectively, the WY oil units with active CO2 floods from 2010-2012 produced 23.35 million barrels of oil, 14% of Wyoming crude production during that time, of which 20.43 million or 12.2% of production is attributable to the CO2 injection. Through the end of 2012 the combined total incremental oil1 produced using CO2 in Wyoming approached 95.22 million barrels. Regional Economic Model A regional input-output (IO) economic model, IMPLAN, is customized to more accurately reflect Wyoming’s oil and gas industry and then used to assess the employment, labor earnings, and other factors due to CO2-EOR. The IMPLAN modeling system estimates the ripple effect of economic activity referred to as direct, indirect and induced impacts.

1

Incremental oil is the additional oil production recovered through injecting CO 2 net of the expected production level without CO2 flooding.

4







Direct impacts in terms of employment, earnings, output and value-added related to oil extraction, CO2 recycling, drilling and support services, wholesale equipment merchants and construction services. Indirect impacts as measured by the employment, earnings, output and value-added resulting from payments to supply chain industries (production function or intermediate goods) to the oil extraction and capital expense industries. Induced impacts as measured by the employment, earnings, output and value-added coming from the expenditure of incomes earned from direct and indirect employment, and for the purposes of this study, also includes the expenditure of mineral payments to governments and royalty owners.

Economic Impacts According to the U.S. Energy Information Administration (EIA) domestic crude oil prices averaged $74.71 in 2010, $95.73 in 2011, and $94.52 in 2012. However, Wyoming oil typically sells at a discount, averaging $68.10, $83.45 and $80.70 during the same time period. 2 The WOGCC reports the average monthly WY Sweet and WY Sour oil price differentials versus the WTI price. 3 The monthly oil price was estimated based on the WTI price and WY discount for each type of oil, and then used to calculate incremental oil revenues for each unit. Although data is available on the average daily volume of CO2 purchases by Wyoming projects, the contract pricing terms have not been disclosed. In order to assess the economic contribution of these activities, the operational cost of

2

U.S. Energy Information Administration (EIA), Annual “Domestic Crude Oil First Purchase Prices by Area” http://www.eia.gov/dnav/pet/pet_pri_dfp1_k_a.htm accessed April 2012. 3

Moving into 2013 this “discount” has become less prounced for “WY Sweet” ($6.65 for Jan/Feb), but has grown even larger for “WY Sour” ($34.32 for Jan/Feb). WOGCC Monthly Statistics were obtained from Jim S. Robinson, Principle Economist for the WY Economic Analysis Division. The latest Wyoming Oil Discount can be found in the monthly “Wyoming Insight” publication, http://eadiv.state.wy.us/creg/WyInsight.pdf.

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supplying this CO2 is estimated as the accounting year sales value for carbon dioxide reported by the Federal Office of Natural Resources Revenues (ONRR).4 These ONRR sales values work out to about $0.88/Mcf in 2010, $1.03/Mcf in 2011, and $1.13/Mcf in 2012. From 2010-2012 the CO2-EOR projects in Wyoming generated around $1.56 billion in additional oil revenues along with substantial mineral payments in the form of royalties, severance, and ad valorem (property) taxes. Using estimates of the various tax and royalty rates this amounts to $179.65 million in government royalties, $97.98 million in private royalties, $77.05 million in severance tax, and $93.72 million in ad valorem (property) taxes to counties. Of this $448.41 million of mineral payments, approximately $288.58 million (64.4%) was assumed spent within Wyoming, and an additional $30.82 million was saved in the Permanent Wyoming Mineral Trust Fund (PWMTF). Of the balance, $56.5 million went to the Federal Government, and $72.51 million in private royalties was not spent in Wyoming. The oil revenues, CO2 purchases and mineral payments are summarized in Table ES-1 below and modeled within the IMPLAN system to estimate the combined economic contribution to Wyoming from 2010-2012. As summarized in Table ES-2 the five CO2 fields in Wyoming are estimated to account for an average of 1,914 jobs annually, paying a total of $326.52 million in labor income from 2010-2012 and adding $1.65 billion to WY Gross State Product (GSP, or value added) during that time period. While only an average of 156 of those jobs occur directly in the oil and gas extraction sector from the oil production and CO2 plant, there were 484 from the extraction supply chain and induced business, and then another 640 from mineral royalties and taxes. This means that for every direct job created from CO2-EOR production an additional 6 jobs are also supported throughout the economy. 4

ONRR statistical data is available online at http://www.onrr.gov/

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Ignoring the capital investments and thinking in terms of incremental oil production and CO2 purchase rates, 188 jobs are supported for every 1 million barrels of incremental production, or 6.7 jobs per MMcfd of purchased CO2. With around 188 jobs supported for every 1 million barrels of incremental production from CO2-EOR projects it is clear that EOR technologies can contribute thousands of Wyoming jobs annually in the coming decades from the enhanced development of WY resources. Figure ES - 1

2,500

Economic Contribution of WY CO2-EOR

2,250

Induced (Tax/Roy)

Annual Jobs Supported

2,000 1,750

Induced (Industry)

1,500 1,250

Indirect

1,000 Direct Oil

750 500

Capital Investment

250 0 2010

2011

2012

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Table ES - 1 Incremental Oil Fiscal Profile & In-State Spending Assumptions Fiscal Item

2010

2011

2012

3 Year Total

Yearly Average

Est. Incremental Oil

6,674,879

7,007,232

6,748,391

20,430,501

6,810,167

Est. Oil Price

$67.01

$83.52

$83.45

$233.97

$77.99

Incremental Revenue

$447,259,427

$585,221,305

$529,378,557

$1,561,859,290

$520,619,763

Estimated CO2 Purchases

196.44 MMcfd

201.05 MMcfd

178.33 MMcfd

575.82 MMcfd

191.94 MMcfd

CO2 Delivery Cost

$0.88/Mcf

$1.03/Mcf

$1.13/Mcf

$1.01/Mcf

$1.01/Mcf

CO2 Supply Cost

$63,097,720

$75,583,370

$73,550,895

$212,231,985

$70,743,995

Royalties to Fed Gov’t

$16,544,231

$21,345,982

$18,605,096

$56,495,308

$18,831,769

Royalties to WY

$33,470,770

$46,509,585

$43,172,298

$123,152,652

$41,050,884

Private Royalties to HHs

$29,724,635

$36,123,204

$32,136,032

$97,983,870

$32,661,290

Severances to WY

$22,051,188

$28,874,552

$26,127,908

$77,053,648

$25,684,549

Ad Valorem to Counties

$26,866,345

$35,090,949

$31,764,218

$93,721,513

$31,240,504

Total Mineral Payments

$128,657,167

$167,944,272

$151,805,552

$448,406,991

$149,468,997

State/Local Education

$31,930,572

$42,710,753

$39,047,549

$113,688,874

$37,896,291

State/Local General

$34,523,363

$46,556,918

$42,684,702

$123,764,983

$41,254,994

State/Local Investment

$7,113,892

$9,657,595

$8,881,010

$25,652,497

$8,550,832

Private HHs 75-100k

$7,728,405

$9,392,033

$8,355,368

$25,475,806

$8,491,935

In-State Mineral Payments

$81,296,232

$108,317,298

$98,968,629

$288,582,160

$96,194,053

Share Spent In-State

63.19%

64.50%

65.19%

64.36%

64.36%

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Table ES-2

Total WY Economic Contribution of CO2-EOR

Type of Impact

2010

2011

2012

3 Year Total

Yearly Average

Direct Employment

144.5

174.4

148.3

467.2

155.7

Labor Income

$17.17

$20.72

$17.62

$55.51

$18.50

Value Added

$377.43

$455.47

$387.34

$1,220.24

$406.75

Indirect Employment

291.1

351.2

298.7

941.0

313.7

Labor Income

$16.85

$20.33

$17.29

$54.47

$18.16

Value Added

$31.83

$38.41

$32.67

$102.91

$34.30

Induced (Industry Activity) Employment

157.6

190.2

161.7

509.5

169.8

Labor Income

$5.26

$6.35

$5.40

$17.01

$5.67

Value Added

$10.53

$12.70

$10.80

$34.04

$11.35

1,796.6

598.9

Induced (Government Expenditures) Employment

649.7

395.7

751.1

Labor Income

$30.52

$18.57

$35.23

$84.32

$28.11

Value Added

$41.28

$25.15

$47.78

$114.21

$38.07

124.3

41.4

Induced (Private Royalties) Employment

51.4

18.9

54.0

Labor Income

$1.71

$0.63

$1.79

$4.13

$1.38

Value Added

$3.44

$7.91

$3.67

$15.01

$5.00

Capital Investments Employment

473.9

635.2

793.1

1,902.3

634.1

Labor Income

$29.10

$36.35

$45.62

$111.08

$37.03

Value Added

$44.95

$50.76

$64.33

$160.04

$53.35

Total Impact/Contribution Employment

1,768.2

1,765.7

2,207.0

5,740.9

1,913.6

Labor Income

$100.61

$102.95

$122.95

$326.52

$108.84

Value Added

$509.46

$590.40

$546.59

$1,646.45

$548.82

2.89

1.93

2.67

2.46

2.46

Employment/$MM of Capital

3.04

3.24

3.12

3.14

3.14

Employment (Total/Direct)

2.86

2.18

2.34

2.42

2.42

Labor Income (Total/Direct)

2.17

1.80

1.94

1.96

1.96

Value Added (Total/Direct)

1.21

1.17

1.21

1.19

1.19

Multipliers Employment/$MM of Oil

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1

INTRODUCTION

The vast mineral resources in the State of Wyoming play a significant in state’s economy and are a pivotal source of revenue for the state and municipal governments. The State of Wyoming is the largest producer of both coal and soda ash (trona) in the United States, the 4th largest source of natural gas, and consistently ranks as the 8th largest domestic producer of crude oil. Mineral related payments are roughly 65%6 of Wyoming State revenues, with severance taxes and royalties alone accounting for 51%7 of the State budget. An in-depth economic contribution analysis of Wyoming’s oil and gas (O&G) industry by Booz-Allen-Hamilton was commissioned by the Wyoming Heritage Foundation (WHF 2008). This study indicated that for 2007 (pre-recession) the total contribution of oil and gas activities (both direct and downstream) accounted for “32 percent of the state’s total economic output or gross revenues, 20 percent of employment, 25 percent of total earnings, and 43 percent of Gross State Product.” A more recent and similar study by PriceWaterhouseCoopers (PwC) (2011) was commissioned by the American Petroleum Institute (API) to investigate the economic contribution of the oil and gas industry to the U.S. economy as a whole. Although not as detailed as the above model, their analysis found that for 2009 (during the recession) the oil and gas industry’s operational impact on Wyoming’s economy as share of the state was effectively higher than for any other state.

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As reported by Brian Jeffries, Executive Director of the WY Pipeline Authority (WPA) May 15th, 2012. Data Source: WY Dept. of Revenue, Fiscal Year 2010 Data. Presentation slides available at http://www.wyopipeline.com/information/presentations/2012/Wyoming%20Pipeline%20Corridor %20Initiative%20copy.pdf 7

Based on the Wyoming Consensus Revenue Estimating Group (CREG) “January 2012 CREG Forecast for FY2012-FY2016” available at http://eadiv.state.wy.us/creg/GreenCREG_Jan12.pdf

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The results were more conservative than the WHF report, but this analysis still found that O&G accounted for 15.8% of Wyoming’s total employment, 19.9% of labor income, and 24.3% of Gross State Product. Despite being the 8th largest domestic source of oil – Wyoming’s annual crude production has fallen 61% from a peak of 136 million barrels annually (mmb/yr) in 1978 to just over 54.5 mmb/yr in 2011 (WOGCC). This fall in production, lower oil prices from the mid-1980s through the 1990s and the increasing importance of natural gas led to declining severance tax revenues from crude oil; crude oil's share of total severance tax revenue fell from around 40% in the early nineties to only 15% by 1999. After two decades of production declines, high oil prices have led to increased oil production activity including investments in so-called tertiary methods such as CO2 Enhanced Oil Recovery (CO2-EOR). Aggregate oil production has been rising since 2006 and is projected to continue increasing over the coming years. Peaking in 2008, Wyoming mineral royalties and severance tax collections are projected to be 16-23% below their 2008 peak in the coming years driven primarily by lower natural gas prices (see Figure 1). Higher oil prices relative to natural gas, and the potential for increased oil production through advanced methods such as CO2-EOR mean that crude oil has an increasingly important role in Wyoming’s economy. In 2004 the Wyoming State Legislature passed legislation establishing the Wyoming Enhanced and Improved Oil Recovery Commission, along with the Enhanced Oil Recovery Institute (EORI) at the University of Wyoming – EORI’s primary mission being to work with oil operators to maximize the potential of Wyoming’s oil resources through enhanced recovery technologies.

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Figure 1

Wyoming Royalties & Severances Collections

Sources: WY CREG (Oct. 2012) DOE-EIA Mineral Prices

$16

Federal Mineral Royalties & Coal Bonus

$14

$1,200 Down 16-23% from 2008

Severance Taxes $1,000 $800

$12

WY Crude Prices (Mcfe)

Oil/Gas Price ($/Mcfe)

Royalty and Severance Revenues ($MM)

$1,400

Wyoming Mineral Royalties & Severance Taxes Contribution of Oil and Gas

$10

WY Gas Prices (Mcf)

$8 $600 NG Severance $400

$6

$4

$200

$2

Oil Severance $0

$0

Utilizing a similar approach to the economic impact assessments already mentioned, the objective of the present study is to investigate the economic contributions attributable to CO2 enhanced oil recovery in Wyoming. CO2-EOR operations include the combined impact of incremental oil production, 8 CO2 purchased for injection, and the associated royalties, severance and ad valorem taxes. A regional input-output (IO) economic model, IMPLAN, is customized to more accurately reflect Wyoming’s oil and gas industry and then used to assess the employment, earnings, and Gross State Product (value-added) associated with the revenues and expenditures of CO2-EOR extraction operations.9

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CO2 ENHANCED OIL RECOVERY IN WYOMING

8

Incremental oil is the additional oil production recovered through injecting CO2 net of the expected production level without CO2 flooding. 9

IMPLAN is an input-output modeling system utilized by both public and private entities to assess economic impacts and contributions of various economic activities. IMPLAN is produced by MIG, Inc.

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Wyoming’s primary experience with CO2 flooding goes back to the 1980s when Amoco began employing the technique on oil units (primary the Tensleep formation) within the Lost Soldier and Wertz fields. Both projects utilized CO2 shipped via pipeline from ExxonMobil’s Shute Creek Gas Plant in southwestern Wyoming. Three additional projects have since come online utilizing the CO2 from the Shute Creek facility; Anadarko began CO2 flooding in both the Salt Creek field and the Monell Unit of the Patrick Draw field in 2003, and Devon Energy Corp initiated CO2 flooding at the Beaver Creek Madison unit in 2008.10 More recently, significant investments have been made by Denbury Resources Inc. to build their 20-inch 232-mile long “Greencore Pipeline” transporting CO2 from Lost Cabin in central Wyoming up through the Powder River Basin to the Bell Creek field in Montana. Along with several other investments and contracts to secure CO2 sources within Wyoming, Denbury has also entered an agreement with Elk Petroleum Inc. to jointly develop the Grieve Field which began injecting CO2 in early 2013. Collectively, the WY oil units with active CO2 floods produced roughly 23.35 million barrels of oil from 2010-2012 representing 14% of Wyoming crude production during that time, and of which 20.43 million or 12.2% of production is attributable to the CO2 injection. Through the end of 2012 the combined total incremental oil 11 produced using CO2 in Wyoming approached 95.22 million barrels.

10

Although not included in this study one additional project in northwestern Colorado receives CO2 from Shute Creek facility – the Rangely Weber Sand Unit operated by ChevronTexaco which began CO2 flooding in 1986. 11

Incremental oil is the additional oil production recovered through injecting CO 2 net of the expected production level without CO2 flooding.

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Regional Economic Model Following the WHF and PwC studies this analysis makes use of the IMPLAN® input-output (IO) economic modeling system, but utilized the most recent Software Version 3.0 and the associated Wyoming database for year 2010 (released October 2011). The IMPLAN model is widely used by both public and private entities to study the composition and connections within domestic economies, and the economic impacts resulting from changes in industry and policy. Such input-output systems rely on the construction of matrices (tables) relating purchases in one industry to expenditures and output values across all other industries or entities. For example, in order for Denbury to build their “Greencore Pipeline” through Wyoming they must purchase steel pipe, probably from an outof-state manufacturer, and also hire local labor and contractors, lease various types of equipment and utilize other in-state and out-of-state suppliers. Those suppliers then have their own associated expenses and wages and so on throughout the economy. This chain of economic activity results in both direct and indirect effects through the primary industry and the associated supply chain (inter-industry linkages) with expenditures outside of the studied economy constituting leakages. Further still, the income and benefits of employees within the economy, how those households spend their earnings, as well as the expenditure of tax revenues by government lead to yet a third layer of effects called induced effects (or impacts). The IMPLAN modeling system allows for the construction and customization of multipliers that describe this ripple effect of economic activity as direct, indirect and induced impacts. As applied to understanding the influence of CO 2-EOR extraction activities, capital expenditures, and mineral payments these impacts can be described as follows:

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





2.1

Direct impacts in terms of the employment, earnings, output and valueadded related immediately to the oil extraction operators and CO2 providers.12 Indirect impacts as measured by the employment, earnings, output and value-added resulting from payments to supply chain industries for the oil operators and CO2 providers. Induced impacts as measured by the employment, earnings, output and value-added coming from the expenditure of incomes earned from direct and indirect employment, and the expenditure of mineral payments made to governments and private royalty owners.13 STUDY AREA & INDUSTRY MAPPING

The 2010 IMPLAN database for Wyoming includes county-level data for each of Wyoming’s 23 counties consisting of spending patterns (or production functions) for 440 industries plus various levels of government and household types. These 23 counties can then be modeled individually, or combined to create sub-state regions or an aggregate statewide model. Because substantial royalty and severance payments accrue to the state government and CO2 activity occurs and is expected to develop all around Wyoming, the IMPLAN study area is modeled at the state level (a composite of all 23 counties).

12

While the results of this study can be broken down by operator and all CO2 is supplied by one company – it is not necessarily the case that the “direct” employment means employment at those companies. In principle that is the general idea, but the model itself merely calculates the proportion of employment in the “oil and gas extraction” sector supported by a given value of oil/gas production. 13

Including mineral payments as part of the induced impacts is a slightly different approach than is typically used in similar studies. Other studies will report such impacts separately, as opposed to part of the induced effects, and then add them to the total. It seems more natural to think of these expenditures as an induced effect – either way they are added to the total. The primary difference that may be noticed is the size of the multipliers as typically calculated (total impact divided by direct impact).

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In order to study the contribution of existing 14 CO2-EOR operations estimates must be made for the associated oil production revenues, charges for the injected CO2, the expenditure of mineral payments by governments and private royalty owners, and any capital expenditures such as well drilling & completion, and CO2 pipelines and plants.15 The modeling of CO2 purchases is a bit nuanced. The purchase of CO2 for injection into the oil reservoir constitutes a substantial and ongoing operational expense. For projects purchasing CO2 from a third party, and depending on the source of the CO2, the operator may pay a $0.50-$1.00/Mcf delivery charge plus 1.3-2.6% of the current oil price16 In the case of vertically integrated operators who own their CO2 resource the internal cost (what they charge themselves as an accounting basis) is perhaps closer to the delivery charge. Denbury Resources Inc. is a relative newcomer to Wyoming, but has extensive experience with EOR and has moved quickly to secure CO2 and construct a pipeline through the Powder River Basin. Primarily functioning as a vertically integrated operator rather than purchasing CO2 from a third-party, Denbury’s reported CO2 expenses serve as a good proxy for the internal operational cost of supplying CO2. For 2012 Denbury reported an average quarterly CO2 charge of

14

There are many other oil units across Wyoming with the potential to economically employ CO2EOR technology. Assessing the economic contribution of these projects can be done using a CO2EOR Economic Scoping Model such as CO2ScopeTM. 15

Expenditures on electricity are ignored as it is assumed that once the electrical lines are built to the oil field the incremental employment effects (above and beyond standard operations) are insignificant. 16

van ‘t Veld, K. and Phillips, O.R. (2009). Pegging Input Prices to Output Prices in Long-Term Contracts: CO2 Purchase Agreements in Enhanced Oil Recovery. Department of Economics & Finance, Enhanced Oil Recovery Institute, University of Wyoming, Laramie, WY. DOE (2006). National Strategic Unconventional Resource Model: A Decision Support System. U.S. Department of Energy, Office of Petroleum Reserves, Office of the naval Petroleum and Oil Shale Reserves (DOE/NPOSR), Washington, DC.

16

$5.18 per barrel of oil equivalent (boe) utilization rates of 10-13 Mcfs/bbl.19

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or $0.40-0.52/Mcf for Denbury’s

Depending on the source of purchased CO2 it could be studied in several different ways: out-state purchases treated as 100% leakage (money flowing out of the state with no multiplier effect), industrial sources modeled as industrial gas manufacturing, conventional gas byproducts modeled as gas extraction, or simply regarded as the pipeline delivery of a commodity. Current and planned CO2 sources within Wyoming are the commingled byproduct of helium and/or natural gas extraction. The CO2 is separated from these primary products regardless, but additional facilities are required to purify and compress the CO2 for pipeline delivery. Once the separation, compression, and pipeline are in place it is unclear how to disentangle the employment from the primary gas products from the CO2 sales (i.e. the marginal increase in employment attributable to those CO2 operations). Given the nature of current Wyoming CO2 supply coming from the Shute Creek helium facility, and absent more detailed knowledge about the incremental impact on operations, the economic impact of CO2 expenditures will be modeled through the oil and gas extraction sector which includes processing and compression – the same sector as used for the incremental oil production. The various CO2-EOR related activities considered in this study are mapped to IMPLAN sectors as outlined in Table 1. Oil and CO2 production are assumed to be 100% from in-state locations, and the local demand (or purchase) percentages (LPP) for government and private household spending is determined within IMPLAN.

18

BOE prices are from the Denbury Resources Inc. Corporate Presentation, May 2013. http://www.denbury.com/files/2013-05%20IR%20Presentation%20%20New%20Template_v001_j17fx6.pdf 19

Denbury’s 2011 Corporate Responsibility Report, http://www.denbury.com/files/doc_downloads/DenburyCRR_Final_050313.pdf

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2.2

CUSTOMIZING THE IMPLAN MODEL FOR WYOMING

The off-the-shelf IMPLAN database is constructed from a variety of published and essentially public data sources which are reconciled to create a consistent set of multipliers – consistent in the sense that the sub-regions (county/zip code) add up to and equal higher levels of aggregation (state/national). IMPLAN sources include Bureau of Economic Analysis (BEA) Regional Economic Accounts (REA) and National Income and Product Accounts (NIPA), the Census Bureau's County Business Patterns (CBP), and the Bureau of Labor Statistics' Census of Employment and Wages (CEW). The IMPLAN database for most sectors is left untouched, but is then customized further for certain oil and gas industries in order to match Wyoming’s industrial experience as close as possible. Additional industry data was collected and used to modify the output, employment and value-added components for the following three oil and gas industry sectors: 

Oil and gas extraction (sector 20)



Drilling oil and gas wells (sector 28)



Support activities for oil and gas operations (sector 29)

A detailed description of the customization methodology and resulting industry study area parameters is provided in Appendix A and Table A-3.

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Table 1

CO2-EOR Activity Mapping to IMPLAN

Fiscal Item

IMPLAN Sector Title

IMPLAN Sector

Local Purchase or Production

Incremental Oil Production & Injectable CO2 Production

Oil and gas extraction

20

100%

State/Local Government Education State/Local Government NonEducation

Spending Pattern Spending Pattern

State/Local Government Investment

Spending Pattern

Households 75-100k

Spending Pattern

Mineral Royalties, Severance and Ad Valorem Taxes

Private Royalties to InState Households New Well Drilling & Well Completions

CO2 Pipelines

3

Multiple, Based on Separate Authority for Expenditures (AFE) Examples for Drilling and Completions Based on Oil & Gas Journal pipeline costs categories of materials, labor, miscellaneous, and ROW & damages.

Varies across consumption within the spending pattern

28, 29, 36, 319, 335, 351, 365, 369

45% (WHF 2008)

28, 29, 36, 319, 335, 351, 365, 369

45% (WHF 2008)

REVENUES, ROYALTIES, TAXES & EXPENDITURES

The five oil fields with active CO2 floods in Wyoming are located in four counties, have different CO2 purchase levels and produce oil from a mix of federal, state and private mineral leases. Further, ad valorem (property) taxes are charged net of royalties and have different mill levies in each county. Although there are some exceptions made with respect to state severance taxes, for this study it is assumed to be a constant 6% across the CO2 projects.

19

Incremental Oil & Revenues Only the portion of each oil units’ production arising from CO2 injection, the incremental oil, is included in the analysis. For each field-reservoir combination (FRC) the monthly production history was obtained from the Wyoming Oil & Gas Conservation Commission (WOGCC), and used to estimate a pre-CO2 production decline path. The incremental oil was then determined by subtracting the predicted pre-CO2 production from the total FRC production from 2010-2012. The production decline analysis is illustrated graphically for each FRC in Appendix B. According to the U.S. Energy Information Administration (EIA) domestic crude oil prices averaged $74.71 in 2010, $95.73 in 2011, and $94.52 in 2012. However, Wyoming oil typically sells at a discount to this price likely due to quality and transportation constraints – selling for $68.10, $83.45 and $80.70 during the same time period. 21 The WOGCC reports the average monthly WY Sweet and WY Sour oil price differentials versus the WTI price. 22 The Beaver Creek, Patrick Draw and Salt Creek units are all considered “Sweet” oil based on their higher oil gravity and relatively lower sulfur content, whereas the Lost Soldier and Wertz units are considered “Sour”. The monthly oil price is estimated for each type of oil, and then used to calculate incremental oil revenues for each unit based on the monthly production in excess of their pre-CO2 production path. The incremental production and revenue estimates are summarized in Table 2.

21

U.S. Energy Information Administration (EIA), Annual “Domestic Crude Oil First Purchase Prices by Area” http://www.eia.gov/dnav/pet/pet_pri_dfp1_k_a.htm accessed April 2012. 22

Moving into 2013 this “discount” has become less prounced for “WY Sweet” ($6.65 for Jan/Feb), but has grown even larger for “WY Sour” ($34.32 for Jan/Feb). WOGCC Monthly Statistics were obtained from Jim S. Robinson, Principle Economist for the WY Economic Analysis Division. The latest Wyoming Oil Discount can be found in the monthly “Wyoming Insight” publication, http://eadiv.state.wy.us/creg/WyInsight.pdf.

20

Table 2

Incremental Oil Production & Revenue Estimates by FRC

Field-Reservoir Combination

Incremental Oil

Est. Incr. Revenues

2010

2011

2012

2010

2011

2012

Beaver Creek – Madison Patrick Draw - Monell Unit Salt Creek - Wall Creek Salt Creek - Wall Creek 2 Lost Soldier Tensleep Lost Soldier - Darwin/Madison Lost Soldier - Flathead/Cambrian Wertz - Tensleep Wertz - Darwin/Madison

922,213 1,156,921 8,415 2,753,684 534,054 534,033 307,277 186,805 271,476

1,270,471 1,251,992 44,697 2,547,246 575,308 430,953 273,678 356,756 256,132

1,437,506 1,442,126 88,179 2,007,159 505,270 418,735 224,828 363,190 261,398

$63,325,734 $79,028,185 $638,019 $188,453,153 $33,532,667 $33,635,157 $19,498,575 $11,828,640 $17,319,298

$109,261,442 $108,027,901 $3,808,279 $220,263,072 $43,723,535 $32,681,865 $20,720,806 $27,307,297 $19,427,108

$117,608,852 $117,527,240 $7,213,339 $163,845,853 $35,198,780 $29,026,195 $15,501,158 $25,344,291 $18,112,851

Wyoming CO2-EOR Totals

6,674,879

7,007,232

6,748,391

$447,259,427

$585,221,305

$529,378,557

21

CO2 Purchases As discussed earlier the CO2 pricing is typically pegged to the oil price with oil operators entering into a combination of short-term and long-term contracts to ensure a reliable supply meeting their injection requirements.24 The market price of Denver City (new contract) injectable CO2 as a share of the oil price has varied from just below 2% to as high as 4% in the last decade. With the most recent year publicly reported, 2010, being closer to 2% of the WTI price of $79.48 per barrel that year.25 Although data is available on the average daily volume of CO2 purchases by Wyoming projects, the contract pricing terms have not been disclosed. In order to assess the economic contribution of these activities, the operational cost of supplying this CO2 is estimated as the accounting year sales value for carbon dioxide reported by the Federal Office of Natural Resources Revenues (ONRR).26 These ONRR sales values work out to about $0.88/Mcf in 2010, $1.03/Mcf in 2011, and $1.13/Mcf in 2012. The daily CO2 purchase rates and estimated annualized operational CO2 supply expenditures are reported in Table 3.

24

van ‘t Veld Klaas T. & Phillips, Owen R., “Pegging Input Prices in Long-Term Contracts: CO2 Purchase Agreements in Enhanced Oil Recovery.” July 2009. http://www.uwyo.edu/owenphillips/papers/CO2pegging071509.pdf 25

Presentation by Steve Wehner, Sr. VP Chaparral Energy, 17 th Annual CO2 Flooding Conference in Midland, TX, December 6th, 2011. http://co2conference.net/pdf/1.1Moore_CMWorkshop_Summary2011-CO2FloodingConf.pdf 26

ONRR statistical data is available online at http://www.onrr.gov/

22

Table 3

Estimated CO2 Purchases by Field28

CO2 Unit

Avg. Daily CO2 Volume (MMcfd)

Est. Annual CO2 Purchase Cost ($)

2010

2011

2012

2010

2011

2012

Beaver Creek Patrick Draw Salt Creek Lost Soldier/Wertz

30.5 22.3 117.4 26.3

32.5 37.6 103.4 27.5

25.3 28.8 94.4 29.8

$9,786,130 $7,171,688 $37,704,596 $8,435,305

$12,220,396 $14,125,055 $38,880,975 $10,356,945

$10,415,083 $11,895,367 $38,940,498 $12,299,947

Wyoming Totals

196.5

201

168.3

$63,097,720

$75,583,370

$73,550,895

28

Data on the average daily purchase rate was obtained from Glen Murrell, PhD, Associate Director, Enhanced Oil Recovery Institute based on monthly CO2 sales data for Shute Creek. The combined average daily purchase rate for fields with multiple units is allocated proportionately between the individual FRCs based on their level of incremental oil production.

23

Lease Distribution, Royalty Rates, and Ad Valorem Taxes The location and cumulative oil for each well were used to estimate the distribution of production between federal, state and private lands.30 Royalties on federal mineral leases are 12.5% of the production value with a 52/48 split between federal and state. All federal land is also assumed to have private royalty override charge of 5.25% to bring the total up to 17.75% in-line with a study of federal lease rates in Montana.31 The current royalty rate on state leases is capped at 16.67% but can be higher on private lands. In June of 2011 Laramie County leased land to Anadarko for oil development at a royalty rate of 18.75% which is in-line with the private royalty estimates used in the WHF report;32 lacking the actual private royalty information this study will assume the same. Counties collect ad valorem taxes on mineral properties with mill levies on 100% of the assessed value (value of production in the previous year). The majority of EOR activity was located in three counties – Fremont (7.2% rate), Natrona (6.8% rate) and Sweetwater (6.6% rate) – with a portion of the Wertz field in Carbon County (6.4% rate). For simplicity it is assumed that Wertz is charged the twocounty average of 6.5%.33 The royalty/tax rates and the mineral lease distribution by field-reservoir combination are summarized in Table 4. 30

Mineral lease shares estimated by Nick Jones, Senior Geologist, Enhanced Oil Recovery Institute, and Vanessa Onacki, Undergraduate Research Assistant, using EORI/WOGCC well locations, BLM land ownership and production data from the WOGCC and IHS/PI Dwights Rocky Mountain Region. 31

A 2005 royalty rate review conducted by the Montana Department of Natural Resources and Conservation is available online here: https://dnrc.mt.gov/Trust/MMB/RoyaltyRateReview/PDFs/RoyaltyReport.pdf 32

The WHF study assumed $863,412,137 in private mineral royalties on $13,661,277,948 of revenue in 2007. With about 33.64% of WY’s cumulative oil produced on private land this equates to a private royalty rate of 18.79%. 33

Wyoming State Board of Equalization, “2011 Wyoming Abstract & Mill Levy Report”. http://taxappeals.state.wy.us/2011%20Abstract%20and%20Mill%20Levy%20Report.xls

24

Table 4

Royalty/Tax Rates & Mineral Lease Distribution by FRC

Field-Reservoir Combination Beaver Creek – Madison Lost Soldier - Darwin/Madison Lost Soldier - Flathead Lost Soldier - Tensleep Patrick Draw – Monell Salt Creek – Wall Creek/WC2 Wertz - Darwin/Madison Wertz - Tensleep

Ad Valorem Rate 7.24% 6.61% 6.61% 6.61% 6.61% 6.79% 6.52% 6.52%

Federal Share 21.00% 22.00% 12.50% 37.00% 54.30% 77.70% 100.00% 100.00%

State Share 79.00% 0.00% 0.00% 0.00% 1.90% 9.50% 0.00% 0.00%

Private Share 0.00% 78.00% 87.50% 63.00% 43.80% 12.80% 0.00% 0.00%

State/County Budgets & Private Households Having determined the breakdown of severance, ad valorem and royalty payments for each FRC, for the purposes of economic contribution the key question is how and on what are those mineral payments spent within the Wyoming economy. The primary institutional spending patterns included in IMPLAN involve state/local expenditures on education, non-education, and capital investment (infrastructure) related activities. Using information from the Wyoming Economic Analysis Division 39 it was determined that around 36% of royalties were allocated to education, 51% to general spending, and the remaining 13% going to capital investments. For severance taxes, around 40% is saved in the Permanent Wyoming Mineral Trust Fund with 56% allocated to general spending accounts (non-education spending), and 4% to capital investments. Although there are differences across

39

Wyoming Consensus Revenue Estimating Group (CREG), January 2012 CREG Forecast for FY2012-FY2016, http://eadiv.state.wy.us/creg/GreenCREG_Jan12.pdf

25

counties, on average 74% of all Ad Valorem collections go to education related activities, 19% to general spending and roughly 7% to capital investment.40 Tracking the royalties paid to private households and determining how those royalties are spent is particularly challenging. In the WHF study it was assumed that only 26% of private royalties remained in Wyoming, and followed the IMPLAN spending pattern for households earning $75,000 to $100,000. The same approach is utilized here for assessing private royalty payments linked to CO2-EOR. The incremental oil fiscal profile and the associated in-state spending of mineral payments by category are summarized for 2010-2012 in Table 5.

40

At the county level it is a bit unclear how much of divisional budgets goes to capital investment/infrastructure and what is purely operational. This study assumes that school construction amounts and all special district levies well allocated to capital investments. Wyoming State Board of Equalization, “2011 Wyoming Abstract & Mill Levy Report”. http://taxappeals.state.wy.us/2011%20Abstract%20and%20Mill%20Levy%20Report.xls

26

Table 5

Incremental Oil Fiscal Profile & In-State Spending Assumptions

Fiscal Item Est. Incremental Oil

2010 6,674,879

2011 7,007,232

2012 6,748,391

3 Year Total 20,430,501

Yearly Average 6,810,167

Est. Oil Price

$67.01

$83.52

$83.45

$233.97

$77.99

Incremental Revenue

$447,259,427

$585,221,305

$529,378,557

$1,561,859,290

$520,619,763

Estimated CO2 Purchases

196.44 MMcfd

201.05 MMcfd

178.33 MMcfd

575.82 MMcfd

191.94 MMcfd

CO2 Delivery Cost

$0.88/Mcf

$1.03/Mcf

$1.13/Mcf

$1.01/Mcf

$1.01/Mcf

CO2 Supply Cost

$63,097,720

$75,583,370

$73,550,895

$212,231,985

$70,743,995

Royalties to Fed Gov’t

$16,544,231

$21,345,982

$18,605,096

$56,495,308

$18,831,769

Royalties to WY

$33,470,770

$46,509,585

$43,172,298

$123,152,652

$41,050,884

Private Royalties to HHs

$29,724,635

$36,123,204

$32,136,032

$97,983,870

$32,661,290

Severances to WY

$22,051,188

$28,874,552

$26,127,908

$77,053,648

$25,684,549

Ad Valorem to Counties

$26,866,345

$35,090,949

$31,764,218

$93,721,513

$31,240,504

Total Mineral Payments

$128,657,167

$167,944,272

$151,805,552

$448,406,991

$149,468,997

State/Local Education

$31,930,572

$42,710,753

$39,047,549

$113,688,874

$37,896,291

State/Local General

$34,523,363

$46,556,918

$42,684,702

$123,764,983

$41,254,994

State/Local Investment

$7,113,892

$9,657,595

$8,881,010

$25,652,497

$8,550,832

Private HHs 75-100k

$7,728,405

$9,392,033

$8,355,368

$25,475,806

$8,491,935

In-State Mineral Payments

$81,296,232

$108,317,298

$98,968,629

$288,582,160

$96,194,053

Share Spent In-State

63.19%

64.50%

65.19%

64.36%

64.36%

27

4

CAPITAL EXPENDITURES

The contribution of capital expenditures related to CO2-EOR is based on the estimated cost of new well drilling, well completions and the construction of the Greencore Pipeline by Denbury. As of this writing, these costs are merely preliminary estimates pending survey results from the actual operating companies. The economic impact of these capital expenditures are evaluated using customized spending patterns which are based on example Authority for Expenditure (AFE) reports for well drilling and completion. The pipeline construction spending pattern is likewise modeled after the expenditure category shares reported by the Oil & Gas Journal’s annual pipeline economics report. Well Drilling & Completion Well data for each of the oil field-reservoirs actively engaged in CO2 or under development for CO2 was downloaded from the WOGCC. The well spud date (start of drilling), completion date, and well status were used to determine the number and type of new wells drilled and completed for each year from 20102012. In those cases where a well was drilled, but listed as inactive, it was assumed that the well was not fully completed with the associated surface equipment. Additionally, if the spud date and completion date spanned multiple years, the well incidence/cost was divided across those years. The costs for drilling and completion are estimated using the parameters from the CO2ScopeTM model, and adjusted for inflation using the I.H.S. Upstream Capital Cost Index. The drilling costs per foot are an increasing function of depth, and the completion costs involve both the down-hole work and surface equipment. The Greencore Pipeline Denbury’s Greencore Pipeline is a 231-mile 20-inch CO2 pipeline runs from Lost Cabin in central Wyoming and proceeds northeast through the Powder River Basin before terminating just north of the border in Montana. Available cost

28

estimates when the project was proposed placed the cost at $275-$325 million, but the actual completed cost may be higher than that. The pipeline was constructed in two stages, the first half in 2011 and the last half in 2012. For simplicity at the time of this writing, it is assumed that the total expenditure was $300 million with $135 million (45%) occurring in 2011 and the remaining $165 million (55%) in 2012. As mentioned in section 2 only 45% of capital expenditures are assumed to remain in-state for the economic impact calculation. The count of well drilling and completions, their associated cost estimates, and the assumed costs of the Greencore Pipeline are all reported below in Table 9.

Table 6

Estimated CO2-EOR Well Drilling & Completions Item/Year

2010

2011

2012

Well Counts & Avg. Depth Wells Drilled

122.8

61.1

93.7

Producer Completions

61.3

37.3

33.7

Injector Completions

58

21

46.5

Average Depth

4,042

2,493

2,569

Per Well Drilling & Completion Costs Complete a Producing Well

$518,992

$571,139

$597,100

Complete an Injector Well

$235,202

$258,835

$270,600

Plus Addition Per Foot Charge

$35

$38

$40

Avg. Drilling Cost per Foot

$188.78

$188.31

$198.75

Total Drilling & Completion Costs Well Drilling

$93,725,151

$28,673,834

$47,817,123

Producer Completions

$40,522,751

$25,093,784

$24,091,738

Injector Completions

$21,854,570

$7,213,238

$16,999,276

Denbury’s Greencore Pipeline Pipeline Construction

--

$135,000,000

$165,000,000

Total Capital Expenditures

$156,102,472

$195,980,855

$253,908,136

In-State Expenditures (45%)

$70,246,113

$88,191,385

$114,258,661

29

5

ECONOMIC CONTRIBUTION

The contribution of CO2-EOR extraction to the Wyoming economy from 20102012 is assessed using the customized IMPLAN model and fiscal parameters outlined in the preceding sections. The estimated value of capital expenditures, incremental oil production, the operational supply cost of purchased CO2, the associated royalty, severance and ad valorem payments are reported in unadjusted dollars for the year of expenditure. However, the IMPLAN model has a base year of 2010, thus IMPLAN initially deflates all figures to 2010, and then reflates the results back to 2012 dollars; thus, all economic impacts are reported in 2012 dollars. 5.1

INCREMENTAL OIL & CO2 SUPPLY COSTS

Over the three years from 2010-2012 the total value of incremental oil due to CO2 injection was estimated at $529.4 million, on CO2 purchases of $73.6 million. Both the oil revenues and the CO2 purchases were processed through the customized oil and gas extraction sector 20 in IMPLAN. The economic contributions of these activities are summarized by year in Table 9. The incremental extraction and supplied CO2, ignoring the associated royalties and taxes, added an average of $452.4 million to WY State Gross Product (value added), supporting an average of 639 jobs annually. In total, the CO2-EOR production process itself added roughly $1.36 billion to WY State Gross Product from 2010-2012, with every direct job in the oil and gas industry supporting an additional 3 jobs in downstream and induced economic activity.

30

Table 7

Contribution of Incremental Production & CO2 Supply Costs

Type of Impact

2010

2011

2012

3 Year Total

Yearly Average

Direct Employment

144.5

174.4

148.3

467.2

155.7

Labor Income

$17,170,577

$20,721,256

$17,621,456

$55,513,289

$18,504,430

Value Added

$377,426,499

$455,473,990

$387,337,290

$1,220,237,779

$406,745,926

291.1

351.2

298.7

941.0

313.7

Labor Income

$16,848,037

$20,332,019

$17,290,447

$54,470,503

$18,156,834

Value Added

$31,829,251

$38,411,177

$32,665,051

$102,905,480

$34,301,827

Indirect Employment


157.6

190.2

161.7

509.5

169.8

Labor Income

$5,261,354

$6,349,343

$5,399,512

$17,010,209

$5,670,070

Value Added

$10,527,715

$12,704,726

$10,804,161

$34,036,602

$11,345,534


593.2

715.8

608.7

1917.7

639.2

Labor Income

$39,279,968

$47,402,617

$40,311,415

$126,994,001

$42,331,334

Value Added

$419,783,465

$506,589,893

$430,806,503

$1,357,179,861

$452,393,287

Multipliers Employment

4.10

4.10

4.10

4.10

4.10

Labor Income

2.29

2.29

2.29

2.29

2.29

Value Added

1.11

1.11

1.11

1.11

1.11

31

5.2

ROYALTIES, SEVERANCE AND AD VALOREM TAXES

The incremental oil production from CO2-EOR generated an estimated $448.41 million in mineral payments ($179.65 million in government royalties, $97.98 million in private royalties, $77.05 million in severance tax, and $93.72 million in ad valorem/property taxes to counties). Approximately 64.4% of those payments, or $288.58 million were spent within Wyoming with an additional $30.82 million saved in the Permanent Wyoming Mineral Trust Fund (PWMTF). Of the balance, $56.5 million went to the Federal Government, and $72.51 million in private royalties went outside of Wyoming. The economic contribution of in-state mineral payments was evaluated using IMPLAN’s representative spending patterns for state/local government expenditures on education and non-education activities, as well for households with annual income in the $75,000 to $100,000 range. Of the $288.58 million left in Wyoming, it was assumed that $113.54 million was spent on education activities, $123.72 million on non-education government activities, $25.65 million on capital investments, and $25.48 million by private households. The entire impact of these mineral payment expenditures are treated as a component of “induced” effects in this study and are added to those already reported.42 The induced contributions of these activities are summarized by year in Table 10. The $448.41 million of in-state mineral payments essentially doubles the jobs supported by the industry production alone, averaging 640 jobs annually. The mineral payments from 2010-2012 add $88.44 million in labor income, and represent $129.22 million of WY Gross State Product (value added).

42

As noted earlier (footnote 5) many other economic impact studies simply label government expenditures as separate impacts – the only real difference in this study is that we label them as “induced” impacts. Treating the total contribution of mineral payment expenditures as part of induced seems more consistent with the “spirit” of what is meant by an induced impact.

32

Table 8

Economic Contribution of In-State Mineral Payments

Type of Impact

2010

2011

2012

3 Year Total

Yearly Average

Induced (Government Expenditures) Employment 649.7

395.7

751.1

1796.6

598.9

Labor Income

$30,516,319

$18,567,025

$35,232,999

$84,316,342

$28,105,447

Value Added

$41,275,833

$25,152,568

$47,777,961

$114,206,362

$38,068,787

51.4

18.9

54.0

124.3

41.4

Labor Income

$1,710,362

$628,601

$1,787,017

$4,125,979

$1,375,326

Value Added

$3,442,133

$7,905,501

$3,665,671

$15,013,305

$5,004,435


Total Royalty, Severance, Ad Valorem Employment 701.1

414.7

805.1

1920.9

640.3

Labor Income

$32,226,680

$19,195,625

$37,020,016

$88,442,321

$29,480,774

Value Added

$44,717,966

$33,058,069

$51,443,632

$129,219,667

$43,073,222

33

Table 9

Contribution of CO2-EOR Capital Expenditures

Type of Impact

2010

2011

2012

3 Year Total

Yearly Average

Direct Employment

286.0

393.1

490.2

1169.3

389.8

Labor Income

$22,146,619

$27,327,433

$34,331,221

$83,805,273

$27,935,091

Value Added

$32,198,713

$34,412,920

$43,861,019

$110,472,652

$36,824,217

Indirect Employment

71.3

96.4

120.1

287.7

95.9

Labor Income

$3,062,658

$4,165,141

$5,189,008

$12,416,807

$4,138,936

Value Added

$4,956,658

$6,609,594

$8,243,643

$19,809,895

$6,603,298


116.6

145.7

182.9

445.3

148.4

Labor Income

$3,891,266

$4,861,653

$6,100,872

$14,853,791

$4,951,264

Value Added

$7,795,422

$9,738,800

$12,221,243

$29,755,465

$9,918,488


473.9

635.2

793.1

1902.3

634.1

Labor Income

$29,100,543

$36,354,227

$45,621,101

$111,075,871

$37,025,290

Value Added

$44,950,793

$50,761,314

$64,325,905

$160,038,012

$53,346,004

Multipliers Employment

1.66

1.62

1.62

1.63

1.63

Labor Income

1.31

1.33

1.33

1.33

1.33

Value Added

1.40

1.48

1.47

1.45

1.45

34

5.3

WELL DRILLING, COMPLETION, AND PIPELINE EXPENDITURES

From 2010-2012 an estimated $605.99 million was spent on CO2 capital investments in oil wells and pipelines, of which nearly $272.7 million is assumed to have been spent within the Wyoming economy over that time period. The economic contribution of these investments were evaluated using customized spending patterns for well drilling, well completion and pipeline construction utilizing various sectors within IMPLAN. While the associated equipment purchases likely resulted in some sales/use taxes for the State, they are not modeled in the study. Referring to Table 9 , this level of capital expenditures would support an average of 634 jobs per year, adding an average of $53.35 million yearly to the WY State Gross Product. 5.4

TOTAL ECONOMIC CONTRIBUTION OF CO2-EOR INCREMENTAL OIL

The combined total economic contribution of capital investments, incremental oil production, CO2 supply costs, and royalties, severance and ad valorem payments are summarized in Table 10. Altogether, oil production and associated activities for the five CO2 fields in Wyoming are estimated to account for an average of 1,914 jobs annually, paying a total of $326.52 million in labor income from 20102012 and adding $1.65 billion to WY Gross State Product (GSP, or value added) during that same time frame. While only an average of 156 of those jobs occur directly in the oil and gas extraction sector from the oil production and CO2 plant, there were 484 from the extraction supply chain and induced business, and then another 640 from mineral royalties and taxes. This means that for every direct job created from CO2-EOR production and additional 6 jobs are also supported throughout the economy. The substantial mineral payments to state and local governments are primarily spent in Wyoming on education and public services, which of course support additional induced employment.

35

Ignoring the capital investments and thinking in terms of incremental production and CO2 purchase rates, 188 jobs are supported for every 1 million barrels of incremental oil production, or 6.7 jobs per MMcfd of purchased CO2. Thought of another way, every $1 million in additional oil production supports 2.46 jobs, and every $1 million in additional capital spending supports 3.14 jobs. Seasonally adjusted nonfarm employment for WY averaged 286,600 from 2010201243 meaning that CO2-EOR accounted for roughly 0.67% of total Wyoming employment.

Figure 2

2,500

Economic Contribution of WY CO2-EOR

2,250

Induced (Tax/Roy)

Annual Jobs Supported

2,000 1,750

Induced (Industry)

1,500 1,250

Indirect

1,000 Direct Oil

750 500

Capital Investment

250 0 2010

43

2011

2012

http://www.bls.gov/sae/#tables

36

Table 10

Total Contribution of CO2-EOR Activities ($MM, 2012 dollars)

Type of Impact

2010

2011

2012

3 Year Total

Yearly Average

Direct Employment

144.5

174.4

148.3

467.2

155.7

Labor Income

$17.17

$20.72

$17.62

$55.51

$18.50

Value Added

$377.43

$455.47

$387.34

$1,220.24

$406.75

291.1

351.2

298.7

941.0

313.7

Labor Income

$16.85

$20.33

$17.29

$54.47

$18.16

Value Added

$31.83

$38.41

$32.67

$102.91

$34.30

Indirect Employment


157.6

190.2

161.7

509.5

169.8

Labor Income

$5.26

$6.35

$5.40

$17.01

$5.67

Value Added

$10.53

$12.70

$10.80

$34.04

$11.35

1,796.6

598.9

Induced (Government Expenditures) Employment

649.7

395.7

751.1

Labor Income

$30.52

$18.57

$35.23

$84.32

$28.11

Value Added

$41.28

$25.15

$47.78

$114.21

$38.07

124.3

41.4


51.4

18.9

54.0

Labor Income

$1.71

$0.63

$1.79

$4.13

$1.38

Value Added

$3.44

$7.91

$3.67

$15.01

$5.00

Capital Investments Employment

473.9

635.2

793.1

1,902.3

634.1

Labor Income

$29.10

$36.35

$45.62

$111.08

$37.03

Value Added

$44.95

$50.76

$64.33

$160.04

$53.35


1,768.2

1,765.7

2,207.0

5,740.9

1,913.6

Labor Income

$100.61

$102.95

$122.95

$326.52

$108.84

Value Added

$509.46

$590.40

$546.59

$1,646.45

$548.82

2.89

1.93

2.67

2.46

2.46

Employment/$MM of Capital

3.04

3.24

3.12

3.14

3.14

Employment (Total/Direct)

2.86

2.18

2.34

2.42

2.42

Labor Income (Total/Direct)

2.17

1.80

1.94

1.96

1.96

Value Added (Total/Direct)

1.21

1.17

1.21

1.19

1.19

Multipliers Employment/$MM of Oil

37

6

CONCLUSION

Wyoming’s economy and state & local government budgets depend heavily on the state’s mineral wealth, which are then by extension sensitive to price swings in the markets for those minerals. The booming supply of natural gas coming from shale plays combined with near across the board mineral price declines following the 2008 financial crisis have dealt a significant blow to public funds. In addition to diversifying Wyoming’s economy so that is less exposed to mineral price risk, pursuing other value-added activities for mineral and energy within the state (such as gas and/or coal to liquids) and encouraging the development of existing resources are both of fundamental importance. The strength of oil prices relative to other minerals highlights the importance of Wyoming’s support for and deployment of enhanced oil recovery technologies within the state. While oil prices themselves face renewed pressure from economic troubles in Europe and the slow recovery at home, improved oil recovery has the potential to delivery hundreds of millions of barrels of additional production from Wyoming oil fields. In this study for 2010-2012 it is estimated that every 1 million barrels of incremental oil produced with CO2 supported about 188 jobs within Wyoming. Although this number is sensitive to the lease ownership and pricing of the produced oil, it is clear that EOR technologies can contribute thousands of Wyoming jobs annually in coming decades.

38

APPENDIX A

IMPLAN Customization

This study primarily relies on IMPLAN’s county-level Wyoming database for year 2010, but is customized further for certain oil and gas industries in order to more closely match Wyoming’s economy in those sectors. Industry data was collected and used to modify the output, employment and value-added components for the following three oil and gas industry sectors: 

Oil and gas extraction (sector 20)



Drilling oil and gas wells (sector 28)



Support activities for oil and gas operations (sector 29)

In order to maintain consistency with the 2010 IMPLAN database, all values for customization were either collected for 2010, or adjusted to 2010 using the corresponding GDP deflator from IMPLAN. A detailed explanation of the methodology used and the resulting model parameters is provided in the following sections (refer to the final Table A-3 for final sector parameters). . A.1

Oil and Gas Extraction (Sector 20)

Output (Value of Production): The total industry output for the extraction sector was based on the 2010 production of oil (58,303,404 barrels) and gas (2,523,493,504 Mcfs) as reported by the Wyoming Oil and Gas Conservation Commission (WOGCC).51 The average annual 2010 prices for Wyoming crude oil ($68.10/barrel)52 and wellhead gas ($4.30/Mcf)53 provided by the U.S. Energy Information Administration (EIA).

51

Wyoming Oil and Gas Conservation Commission (WOGCC). Online Stats Book - County Production Report, 2010 County Report (as of 04/18/12), http://wogcc.state.wy.us/online_stats_bk/main_menu.cfm (accessed April 18th 2012). 52

Average annual 2010 domestic first purchase price of crude oil for Wyoming (EIA.gov). January 1983-present: Form EIA-182, "Domestic Crude Oil First Purchase Report", http://www.eia.gov/dnav/pet/pet_pri_dfp1_k_a.htm (accessed April 16th 2012).

39

Employment & Labor Income: 2010 average employment (4,197 employees) and total wages ($399,494,000) for the extraction sector were obtained from the Bureau of Labor Statistics (BLS) Quarterly Census of Employment and Wages (QCEW) 54 under the North American Industry Classification System (NAICS) code 211. Total wages were then adjusted to account for benefits using the ratio of total compensation to wages (1.199) for “oil and gas extraction” reported by the Bureau of Economic Analysis (BEA) Survey of Current Business.55 Cost of Production: The non-labor cost of production for oil and gas was estimated using the 2009 values for the Rocky Mountain region in the EIA’s “Oil and Gas Lease Equipment and Operating Costs” report. The EIA reports the estimated annual lift/operating costs for oil, natural gas and coal bed methane for a variety of well depths and production levels which were then adjusted from 2009 to 2010 using the IMPLAN GDP deflator (0.989). Wyoming oil and gas production, well counts, and well depths were extracted from the I.H.S. P/I Dwights PLUS Rocky Mountain Production Data 56 and shares of total production were allocated to the corresponding depths and production rates from the EIA data. The transportation charge for both crude oil ($1.31/barrel) and natural gas ($0.49/Mcf) was estimated as the average operating revenue per unit for Wyoming pipelines found in the PennEnergy Research US Pipeline Economics

53

Average annual 2010 wellhead price for Wyoming (EIA.gov). Form EIA-895A, "Annual Quantity and Value of Natural Gas Report”, http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_SWY_a.htm (accessed April 16th 2012). 54

http://www.bls.gov/cew/ (accessed April 18th 2012).

55

Bureau of Economic Analysis Series SA06N and SA07N for Wyoming. LineCode 201 "Oil and gas extraction" (2010 Compensation = 485,179) / (2010 W&S = 404,769) = 1.19865651767. http://www.bea.gov/iTable/iTable.cfm?ReqID=70&step=1 (accessed April 18th 2012). 56

IHS (IHS). 2011. PI/Dwights Plus Rocky Mountain Production Data, Volume 21, Issue 11, Released: November 30, 2011.

40

Study 2011.57 A gas processing charge of ($0.49/Mcf) was imputed by assuming a 15-percent 10-year return on plant capital and additions for those same Wyoming gas pipeline operators, and finally an additional ($0.30/Mcf) was included for gathering gas from the wellhead to the major pipeline.58 The lift/operating costs from EIA report were allocated to Wyoming’s production according to the proportions found in the I.H.S. data and then added to the transportation, processing and gathering fees. On average the cost of production for 2010 was determined to be roughly $1.49 per Mcf equivalent (Mcfe).59 These costs are summarized in Tables A-1 and A-2. Table A-1

Non-Labor Basic Production Costs Per Unit

Production Cost Lift Cost

Oil: Primary (per barrel) $0.42-$1.28

Oil: Secondary (per barrel) $1.64-$3.94

Natural Gas (per Mcf) $0.19-$1.13

Coalbed (per Mcf) $0.36

Gathering

--

--

$0.30

$0.30

Transport

$1.31

$1.31

$0.49

$0.49

Processing

--

--

$0.49

$0.49

Totals

$1.72-$2.58

$2.95-$5.25

$1.47-$2.41

$1.64

57

The Oil & Gas Journal's Pipeline Economics Report and FERC filings are the source for this survey. Data is current to 2010. http://ogjresearch.stores.yahoo.net/us-pipeline-economicsstudy.html 58

Such gathering charges are frequently mentioned in articles about the break-even price of natural gas. See for example the article, “What is the breakeven price for natural gas producers?” by Keith Schaefer, ResourceInvestor.com, April 30, 2009. http://www.resourceinvestor.com/2009/04/30/what-is-the-breakeven-price-for-natural-gas-produc 59

Even after adjusted for inflation, this production cost is slightly higher than the $1.15 (2007=$1.10) per Mcfe used by Booz-Allen-Hamilton in the WHF (2008) study.

41

Table A-2

Total Non-Labor Production Costs by Product Product

Volume

Avg. Cost per Unit

Non-Labor Costs

Crude Oil (barrels)

58,303,404

$3.75/barrel

$218,916,875

Nat. Gas/Coalbed (Mcf)

2,523,493,504

$1.61/Mcf

$4,073,814,109

Totals (Mcfe)

2,873,313,928

$1.49/Mcfe

$4,292,730,983

Total Value Added and Value Added Components: Total value added for the extraction sector was calculated as the difference the total value of production ($14,821,483,880) and the non-labor production costs from Table A-2. After deducting total employee compensation ($478,993,306) from total value added, the remaining amount was divided between Other Property Type Income and Indirect Business Tax according the existing IMPLAN ratios for sector 20. A.2

Drilling Oil and Gas Wells (Sector 28)

Employment & Labor Income: Average employment for 2010 (2,376 employees) and total wages ($191,365,000) for the drilling sector were obtained from the Bureau of Labor Statistics (BLS) Quarterly Census of Employment and Wages (QCEW) 60 under the North American Industry Classification System (NAICS) code 213111. The level of employment was then adjusted (2,561) to account for self-employment using the ratio (1.078) of total employment in “support activities for mining” from the Bureau of Economic Analysis (BEA) Survey of Current Business, and BLS employment in the same sector (NAICS code 213).61 Finally, the total wages paid to the adjusted employee count were modified to account for benefits using the ratio of total compensation to total wages (1.145) for “support activities for mining” in the BEA Survey of Current Business.62

60

http://www.bls.gov/cew/ (accessed April 18th 2012)

61

Total employment from BEA series SA25N LineCode 203 “Support activities for mining” divided by BLS employment in the same sector NAICS 213 (2010 BEA Employment =12,137) / (2010 BLS Employment = 11,262) = 1.07769490321. 62

Bureau of Economic Analysis Series SA06N and SA07N for Wyoming. LineCode 203 "Support activities for mining” (2010 Compensation = 890,999) / (2010 W&S = 778,037) = 1.1451884679. http://www.bea.gov/iTable/iTable.cfm?ReqID=70&step=1 (accessed April 18th 2012).

42

Output (Value of Production): The value of production was determined by first calculating the output per worker for the drilling sector ($228,763) reported in the 2007 Economic Census63 and inflating to 2010 ($239,041 per worker) using the IMPLAN GDP deflator (0.957). The total value of output in the drilling sector was then estimated as the product of this output per worker and the adjusted employee count ($612,187,396). Total Value Added and Value Added Components: The total value added for drilling was calculated using the ratio of value added to output for the existing IMPLAN sector 28. Likewise, the individual components of value added were subsequently allocated according to their corresponding ratios from the in-built IMPLAN drilling sector. A.3

Support Activities for Oil and Gas Operations (Sector 29)

The support sector was customized using the same basin methodology as described for the drilling sector. Employment & Labor Income: Average employment for 2010 (8,433 employees) and total wages ($569,094,000) for oil and gas support operations were obtained from the Bureau of Labor Statistics (BLS) Quarterly Census of Employment and Wages (QCEW) under the North American Industry Classification System (NAICS) code 213112. The level of employment was then adjusted (9,091) to account for self-employment using the ratio (1.078) of total employment in “support activities for mining” from the Bureau of Economic Analysis (BEA) Survey of Current Business, and BLS employment in the same sector (NAICS code 213). Finally, the total wages paid to the adjusted employee count were modified to account for benefits using the ratio of total compensation to total wages (1.145) for “support activities for mining” in the BEA Survey of Current Business.

63

http://www.census.gov/econ/census07 (accessed April 18th 2012).

43

Output (Value of Production): The value of production was determined by first calculating the output per worker for oil and gas support operations ($172,120) reported in the 2007 Economic Census and inflating to 2010 ($179,854 per worker) using the IMPLAN GDP deflator (0.957). The total value of output in the support sector was then estimated as the product of this output per worker and the adjusted employee count ($1,635,012,138). Total Value Added and Value Added Components: The total value added for oil and gas support operations was calculated using the ratio of value added to output for the existing IMPLAN sector 29. Likewise, the individual components of value added were subsequently allocated according to their corresponding ratios from the in-built IMPLAN drilling sector.

44

Table A-3

Customized Sectors for Wyoming versus IMPLAN Database Study Area Data Employment

Output (Value of Production) Employee Compensation

Customized Extraction (20) 4,197

Customized Drilling (28) 2,561

Customized Support (29) 9,091

IMPLAN Extraction (20) 9,957

IMPLAN Drilling (28) 2,672

IMPLAN Support (29) 9,683

$14,821,483,880

$612,187,396

$1,635,012,138

$2,509,661,696

$1,122,572,544

$1,907,591,424

$478,993,306

$206,348,956

$613,654,289

$483,882,720

$217,921,824

$648,745,088

$0

$29,854,777

$88,784,127

$521,046,016

$31,529,154

$97,826,832

Other Property Type Income

$6,587,422,618

$225,549,296

$3,900,353

$542,430,080

$592,214,976

$4,550,596

Indirect Business Tax

$3,462,336,985

$6,381,536

$27,495,314

$285,100,224

$16,755,722

$32,079,162

Total Value Added

$10,528,752,896

$468,134,565

$733,834,082

$1,832,459,040

$858,421,676

$783,201,678

$478,993,306

$236,203,733

$702,438,415

$1,004,928,736

$249,450,978

$746,571,920

$420,187

$196,998

Proprietor Income

Total Labor Earnings Cost of Production w/o Labor Output/Worker

$4,292,730,983 $3,531,447

$677,202,656 $239,041

$179,854

45

$252,062

APPENDIX B

Incremental Oil Decline Analysis

Figure B - 1 Beaver Creek – Madison Beaver Creek - Madison (Fremont County) Monthly Oil & Pre-CO2 Decline Path 160

3,000 Monthly Oil Production Pre-CO2 Decline Path

2,500

CO2/Gas Inj (Since '91) 120 2,000

Incremental Oil 2010 = 922,213 2011 = 1,270,471 2012 = 1,437,506

100

80

1,500

60

Begin CO2 Flooding 2008

40

1,000

500

CO2/Nat. Gas Injection (MMcf)

Oil Production (1,000 Bbls)

140

20

0

0

Month-Year

Figure B - 2 Lost Solider – Darwin/Madison Lost Soldier - Darwin/Madison (Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 140

1,400

Monthly Oil Production Pre-CO2 Decline Path


CO2/Gas Inj (Since '91)

100

1,200

1,000

80

800

60

600

40

400

Incremental Oil 2010 = 534,033 2011 = 430,953 2012 = 418,735

20

0

200

0

Month-Year

46

CO2/Gas Injection (MMcf)


120

Figure B - 3 Lost Solider – Flathead/Cambrian Lost Soldier - Flathead/Cambrian (Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 60

700

Monthly Oil Production

Pre-CO2 Decline Path


600


500 40


400

30 300 20 200

Incremental Oil 2010 = 307,277 2011 = 273,678 2012 = 224,828

10

0


50

100

0

Month-Year

Figure B - 4 Lost Solider – Tensleep Lost Soldier - Tensleep (Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 350

6,000

Monthly Oil Production Pre-CO2 Decline Path CO2/Gas Inj (Since '91)

5,000

250

Incremental Oil 2010 534,054 2011 = 575,308 2012 = 505,270

200

4,000

3,000

150 2,000 100

Begin CO2 Flooding 1989 1,000

50

0

0

Month-Year

47



300

Figure B - 5 Patrick Draw – Monell Unit Patrick Draw - Monell Unit (Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 140

3,500

Monthly Oil Production 3,000

Pre-CO2 Decline Path Incremental Oil 2010 = 1,156,921 2011 = 1,251,992 2012 = 1,442,126

CO2/Gas Inj (Since '91) 100

2,500

80

2,000

60

1,500


40

20

1,000

CO2/Nat. Gas Injection (Mmcf)

Oil Production (1,000 Bbls

120

500

0

0

Month-Year

Figure B - 6 Salt Creek – Wall Creek Salt Creek - Wall Creek (Natrona County) Monthly Oil & Pre-CO2 Decline Path 90

2,500

Monthly Oil Production 80



2,000

60

Incremental Oil 2010 = 8,415 2011 = 44,697 2012 = 88,179

50

1,500

40 1,000 30 20

10

500


0

0

Month-Year

48


CO2/Gas Inj (Since '91) 70

Figure B - 7 Salt Creek – Wall Creek 2 Salt Creek - Wall Creek 2 (Natrona County) Monthly Oil & Pre-CO2 Decline Path 450

16,000




350 300

14,000

Incremental Oil 2010 = 2,753,684 2011 = 2,547,246 2012 = 2,007,159

12,000

10,000

250 8,000


200

6,000 150 4,000

100



2,000

50 0

0

Month-Year

Figure B - 8 Wertz – Darwin/Madison Wertz - Darwin/Madison (Carbon/Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 70

1,400



1,200


50

1,000

40

800

30


600

20

400

Incremental Oil 2010 = 271,476 2011 = 256,132 2012 = 261,398

10

0

200

0

Month-Year

49



Figure B - 9 Wertz – Tensleep Wertz - Tensleep (Carbon/Sweetwater County) Monthly Oil & Pre-CO2 Decline Path 400

3,000

Monthly Oil Production Pre-CO2 Decline Path

350


2,500

300 2,000 250


Incremental Oil 2010 = 186,805 2011 = 356,756 2012 = 363,190

200

1,500

150 1,000 100 500 50

0

0

Month-Year

50

