Occidental To Try Enhanced Oil Recovery in Permian Basin (OXY, KMP)

Occidental Petroleum (NYSE:OXY) plans to spend $1.1 Billion on a natural gas processing plant and related pipelines. The company expects the enhanced oil recovery (EOR) program to increase it’s Permian Basin production by a "minimum" of 50,000 b/d within five years. The project ups Oxy’s developed reserves in the Permian Basin from 1.2 barrels of oil equivalent (boe) to approximately 1.7 billion boe. A very nice jump indeed.

The new processing plant will produce about 500 million cubic feet of CO2 per day, and a new pipeline will connect the plant to the Denver City, Texas, CO2 hub. That’s important, because it gives Occidental access to additional commercial supplies of CO2 if needed.

Occidental is not the only company pushing EOR in the Permian Basin. Kinder Morgan Energy Partners (NYSE:KMP) has for several years been transporting CO2 to properties it owns or operates in the Permian from its McElmo and Bravo Dome CO2 projects, which straddle the Colorado-New Mexico border. In 2007, Kinder Morgan produced almost 55,000 b/d from its Permian Basin properties, and pumped more than 600 billion cf of CO2 into the region. The company is expanding its CO2 operations, and expects to produce another 200 million cf/d. This is about five times the amount of CO2 that Oxy plans to produce.

However, Occidental’s reserves in the Permian Basin are much larger than Kinder Morgan’s, and the investment that Oxy is making now will reduce its per barrel production costs to levels similar to Kinder Morgan’s — $16.22/boe in 2007. That makes for very handsome profit margins with crude over $130.00 per barrel.

Paul Ausick
July 1, 2008