Marrying the sun and upstream oil production to cash in on LCFS credits

All along, the backers of the California Low Carbon Fuel Standard have claimed that the standard, by not being top-down, is going to spur innovation in helping sellers of transportation fuels reach the state’s goals.

And sometimes, they’re proven right. For example, we blogged awhile ago about a plan to turn landfill gas produced somewhere other than in California into two things: natural gas vehicle fuel, and LCFS credits.

It’s hard to imagine how these little things are going to add up enough to help the state’s fuels industry reach its ambitious goal of a 10% cut in the carbon intensity of its transportation fuels. But it does support the suggestion that some companies or individuals will get creative and capitalize on LCFS processes in various ways.

Enter GlassPoint. It sells solar systems to create steam that is used in Enhanced Oil Recovery in California. EOR is a key technology to get California’s heavy crudes out of the ground. GlassPoint vice president-business development John O’Donnell said the state is using EOR for about 60% of its current crude output, “and it will be 90% before it’s done. Thermal EOR revived the state.”

But how solar EOR and the LCFS intersect is a microcosm of figuring out how the LCFS works, and how it creates incentives that enable the risk-taker to get its hands on LCFS credits that can make that risk pay off.

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The carbon intensity of California’s transport fuels in 2014 is required to be 1% less than its 2010 baseline, a goal that will be in place through 2015. But with 10% set as the goal for 2020, there’s clearly a long way to go. (The baseline that is targeted for transportation fuels is approximately 98 grams of CO2 per megajoule).

How solar EOR fits in with the LCFS is pretty easy in one sense. If the sun heats the water to make the steam injected in the ground as part of the EOR process, that’s displacing natural gas. The CI of crude produced with solar EOR is obviously a lot less than that of natural gas.

According to O’Donnell, “In California heavy oil, you may have 11-13 grams associated with the steam.”

O’Donnell reached those numbers using the basic paramaters of a spreadsheet you can find here. The template shows far lower numbers than those used by O’Donnell, but a spokesman for GlassPoint said the amount of steam per barrel of oil produced can be significantly more than what’s in the template, as can the amount of solar EOR used at individual fields (relative to “conventional” EOR fuel sources.) Changing those assumptions in the spreadsheet can bring the gram reduction into double digits.

In practical terms, a widely-used California crude like Midway-Sunset has been given a CI rating of 21.18 grams of CO2 per megajoule. So if O’Donnell’s numbers are used, and Midway-Sunset was produced with a healthy helping of solar EOR, it would kick the CI rating down to about the level of the state’s crude oil CI baseline of 11.36, or even below it. That would turn that local crude from carbon-unattractive to carbon-attractive. But would it be attractive enough to install that solar EOR system? The value of the LCFS credits generated would be a key part of that answer.

GlassPoint doesn’t generate any credits by selling a solar EOR system to a producer, O’Donnell said. But there’s an avoidance of carbon production: “For every 15 million BTUs of gas you don’t burn, you would generate 1 cap-and-trade allowance and one LCFS credit,” O’Donnell said. (The cap-and-trade program is separate from the LCFS regulations.)

As O’Donnell points out, this approach is unique. All the other projects designed to help meet LCFS targets involve substituting something with less carbon intensity for something with a higher CI level: ethanol for gasoline, sugar-based ethanol for corn-based ethanol, natural gas vehicles for gasoline-fueled vehicles.

But solar EOR, O’Donnell says, is the only one that actually reduces the carbon intensity of an input to the refining process.

The LCFS was always a bit unique compared to other clean fuel regulations. Since lead was removed from gasoline in the 1970’s, fuels regulation has generally involved taking something bad out of the mix: benzene was reduced in reformulated gasoline, sulfur levels were cut in diesel, etc.

But the LCFS seeks to change the inputs in order to change the outputs. The crude produced via EOR, where the steam was manufactured using a solar system, doesn’t actually take carbon out of the crude. But it does take carbon out of that crude’s life cycle, thereby reducing its accompanying CI rating.

How that produces a monetary incentive is a bit complicated. Leigh Noda of Stillwater Associates, a California-based energy consultant, spelled out the issues.

Solar EOR is a “innovative crude production method” under LCFS regulations, Noda said in an email. (A Power Point presentation that spells out the basics can be found here, from a recent meeting in which CARB looked at establishing rules for credit generation from things such as solar EOR.)

He noted that the current process actually provides the benefit of processing a lower-CI crude to the refiner that buys that oil, rather than the producer who invested in the solar EOR. So the producer would need to reach a deal with the refiner who buys the solar EOR-produced crude at (presumably) a premium price to assist in its carbon-reduction efforts. And that higher cost should ultimately reflect the investment in the solar EOR system.

“CARB is proposing to amend its provisions so that the producer rather than the refiner would generate the credits, and then they could sell them, rather than the refiner,” Noda wrote. “The rationale is to better incentivize the producer. The current regulation (requires)  a producer to partner with a refiner to generate credits.”

With CARB now publishing the price of LCFS credits monthly, it’s become a relatively transparent market. The price in April was $44/mt of carbon; according to the data, that’s less than any month this year, and less than the full 2013 calendar average of $55.

With a transparent price, and a change in the rules that would allow the producer to generate credits by using solar EOR instead of as a side effect of a transaction with a refiner, determining the cost-effectiveness of this technology should be far easier.

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  1. Geert van de Wouw at September 9, 2014 8:31 am

    Very informative blog. Thanks!
    For your information: Yesterday, SGRF (Oman State General Reserve Fund) and Shell Technology Ventures announced the closure of a $53 mln C financing round in Glasspoint Solar, which SGRF and STV led. Glasspoint Solar allows us to maximize reservoir recovery at affordable steam prices ($5-7 per MMBTU and going down) for Oman, as it frees op gas for higher value uses like petrochemicals, airconditioning, etc. Currently 23 % of Oman’s gas production is being used for EOR, basically for the production of heavy oil. Therefore, Oman has become a leader in deploying advanced EOR technologies and they understood early on the value of using solar steam. We are delighted to be working with them, as we have been for the last 80 years!

    Geert van de Wouw

    Managing Director Shell Technology Ventures

  2. Philip Verelger at May 30, 2014 5:24 pm

    This sounds great.

    However, the CI that is important is the CI for gasoline and the CI for diesel. CARB computes an average CI for all crude refined in California. IT is not clear from the rules whether the CI for gasoline and the CI for diesel is lowered if the CI for crude goes down. However, under the present system there is no incentive for one refiner to pay more because it is the industry average, not the individual refiner’s CI that seems to matter,

    The devil is in the details.


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