IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v101y2017icp123-137.html
   My bibliography  Save this article

Off-shore enhanced oil recovery in the North Sea: The impact of price uncertainty on the investment decisions

Author

Listed:
  • Compernolle, T.
  • Welkenhuysen, K.
  • Huisman, K.
  • Piessens, K.
  • Kort, P.

Abstract

Although CO2 Capture and Storage (CCS) is considered a key solution for CO2 emission mitigation, it is currently not economically feasible. CO2 enhanced oil recovery can play a significant role in stimulating CCS deployment because CO2 is used to extract additional quantities of oil. This study analyzes the investment decision of both a carbon emitting source and an oil company separately by adopting a real options approach. It is shown that when uncertainty is integrated in the economic analysis, CO2 and oil price threshold levels at which investments in CO2 capture and enhanced oil recovery will take place, are higher than when a net present value approach is adopted. We also demonstrate that a tax on CO2 instead of an emission trading system results in a lower investment threshold level for the investment in the CO2 capture unit. Furthermore, we determine a minimum CO2 selling price between the two firms and show that CO2-EOR has the potential to pull CCS into the market by providing an additional revenue on the capture plant. However, when CO2 permit prices are above an identifiable level, the EU ETS does not necessarily result in the adoption of CCS and stimulates oil production.

Suggested Citation

  • Compernolle, T. & Welkenhuysen, K. & Huisman, K. & Piessens, K. & Kort, P., 2017. "Off-shore enhanced oil recovery in the North Sea: The impact of price uncertainty on the investment decisions," Energy Policy, Elsevier, vol. 101(C), pages 123-137.
    • Handle: RePEc:eee:enepol:v:101:y:2017:i:c:p:123-137
    DOI: 10.1016/j.enpol.2016.11.034
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301421516306395
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.enpol.2016.11.034?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Krahé, Max & Heidug, Wolf & Ward, John & Smale, Robin, 2013. "From demonstration to deployment: An economic analysis of support policies for carbon capture and storage," Energy Policy, Elsevier, vol. 60(C), pages 753-763.
    2. Lukas, Elmar & Welling, Andreas, 2014. "Timing and eco(nomic) efficiency of climate-friendly investments in supply chains," European Journal of Operational Research, Elsevier, vol. 233(2), pages 448-457.
    3. repec:dau:papers:123456789/6790 is not listed on IDEAS
    4. Leach, Andrew & Mason, Charles F. & Veld, Klaas van ‘t, 2011. "Co-optimization of enhanced oil recovery and carbon sequestration," Resource and Energy Economics, Elsevier, vol. 33(4), pages 893-912.
    5. Peter Heindl & Peter J. Wood & Frank Jotzo, 2014. "Combining International Cap-and-Trade with National Carbon Taxes," CCEP Working Papers 1418, Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University.
    6. Kemp, Alexander G. & Kasim, Sola, 2013. "The economics of CO2-EOR cluster developments in the UK Central North Sea," Energy Policy, Elsevier, vol. 62(C), pages 1344-1355.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    8. Conrad, Jon M. & Kotani, Koji, 2005. "When to drill? Trigger prices for the Arctic National Wildlife Refuge," Resource and Energy Economics, Elsevier, vol. 27(4), pages 273-286, November.
    9. Julien Chevallier, 2012. "Time-varying correlations in oil, gas and CO 2 prices: an application using BEKK, CCC and DCC-MGARCH models," Applied Economics, Taylor & Francis Journals, vol. 44(32), pages 4257-4274, November.
    10. Esther W. Mezey & Jon M. Conrad, 2010. "Real Options in Resource Economics," Annual Review of Resource Economics, Annual Reviews, vol. 2(1), pages 33-52, October.
    11. Nykvist, Björn, 2013. "Ten times more difficult: Quantifying the carbon capture and storage challenge," Energy Policy, Elsevier, vol. 55(C), pages 683-689.
    12. Somayeh Heydari & Nick Ovenden & Afzal Siddiqui, 2012. "Real options analysis of investment in carbon capture and sequestration technology," Computational Management Science, Springer, vol. 9(1), pages 109-138, February.
    13. Klokk, Ø. & Schreiner, P.F. & Pagès-Bernaus, A. & Tomasgard, A., 2010. "Optimizing a CO2 value chain for the Norwegian Continental Shelf," Energy Policy, Elsevier, vol. 38(11), pages 6604-6614, November.
    14. Nicky J. Welton & Howard H. Z. Thom, 2015. "Value of Information," Medical Decision Making, , vol. 35(5), pages 564-566, July.
    15. Postali, Fernando A.S. & Picchetti, Paulo, 2006. "Geometric Brownian Motion and structural breaks in oil prices: A quantitative analysis," Energy Economics, Elsevier, vol. 28(4), pages 506-522, July.
    16. Reuter, Wolf Heinrich & Fuss, Sabine & Szolgayová, Jana & Obersteiner, Michael, 2012. "Investment in wind power and pumped storage in a real options model," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(4), pages 2242-2248.
    17. Häggquist, Elisabeth & Söderholm, Patrik, 2015. "The economic value of geological information: Synthesis and directions for future research," Resources Policy, Elsevier, vol. 43(C), pages 91-100.
    18. Szolgayová, Jana & Golub, Alexander & Fuss, Sabine, 2014. "Innovation and risk-averse firms: Options on carbon allowances as a hedging tool," Energy Policy, Elsevier, vol. 70(C), pages 227-235.
    19. Wirl, Franz, 2006. "Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty," Resource and Energy Economics, Elsevier, vol. 28(2), pages 105-123, May.
    20. Scott, Vivian, 2013. "What can we expect from Europe's carbon capture and storage demonstrations?," Energy Policy, Elsevier, vol. 54(C), pages 66-71.
    21. Conrad, Jon M. & Kotani, Koji, 2007. "Erratum to "When to drill? Trigger prices for the arctic national wildlife refuge" [Resour. Energy Econ. 27(4) (2005) 273-286]," Resource and Energy Economics, Elsevier, vol. 29(3), pages 244-245, September.
    22. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gwang Goo Lee & Sung-Won Ham, 2023. "Prediction of Carbon Price in EU-ETS Using a Geometric Brownian Motion Model and Its Application to Analyze the Economic Competitiveness of Carbon Capture and Storage," Energies, MDPI, vol. 16(17), pages 1-13, August.
    2. Adkins, Roger & Paxson, Dean, 2019. "Rescaling-contraction with a lower cost technology when revenue declines," European Journal of Operational Research, Elsevier, vol. 277(2), pages 574-586.
    3. Jia-Yue Huang & Yun-Fei Cao & Hui-Ling Zhou & Hong Cao & Bao-Jun Tang & Nan Wang, 2018. "Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach," Energies, MDPI, vol. 11(11), pages 1-22, October.
    4. Pengchun Li & Xueyan Liu & Jiemin Lu & Di Zhou & Susan D. Hovorka & Gang Hu & Xi Liang, 2018. "Potential evaluation of CO2 EOR and storage in oilfields of the Pearl River Mouth Basin, northern South China Sea," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(5), pages 954-977, October.
    5. Tine Compernolle & Kuno J. M. Huisman & Peter M. Kort & Maria Lavrutich & Cláudia Nunes & Jacco J. J. Thijssen, 2021. "Investment Decisions with Two-Factor Uncertainty," JRFM, MDPI, vol. 14(11), pages 1-17, November.
    6. Thomas Aspinall & Adrian Gepp & Geoff Harris & Simone Kelly & Colette Southam & Bruce Vanstone, 2021. "Estimation of a term structure model of carbon prices through state space methods: The European Union emissions trading scheme," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3797-3819, June.
    7. Li, Li & Wang, Shuai & Wu, Jiaqi & Sun, Zhenqing, 2024. "Exploring the efficacy of renewable energy support policies in uncertain environments: A real options analysis," Energy Economics, Elsevier, vol. 132(C).
    8. Dahlen, Niklas & Fehrenkötter, Rieke & Schreiter, Maximilian, 2024. "The new bond on the block — Designing a carbon-linked bond for sustainable investment projects," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 316-325.
    9. Muhammad Ridhuan Tony Lim Abdullah & Saedah Siraj & Zulkipli Ghazali, 2021. "An ISM Approach for Managing Critical Stakeholder Issues Regarding Carbon Capture and Storage (CCS) Deployment in Developing Asian Countries," Sustainability, MDPI, vol. 13(12), pages 1-23, June.
    10. Wu, Xi & Wang, Yudong, 2021. "How does corporate investment react to oil prices changes? Evidence from China," Energy Economics, Elsevier, vol. 97(C).
    11. Loïc Weerdt & Tine Compernolle & Verena Hagspiel & Peter Kort & Carlos Oliveira, 2022. "Stepwise Investment in Circular Plastics Under the Presence of Policy Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(2), pages 413-443, October.
    12. Hanne Lamberts-Van Assche & Tine Compernolle, 2022. "Using Real Options Thinking to Value Investment Flexibility in Carbon Capture and Utilization Projects: A Review," Sustainability, MDPI, vol. 14(4), pages 1-24, February.
    13. Tian Zhao & Zhixin Liu, 2023. "Investment Timing Analysis of Hydrogen-Refueling Stations and the Case of China: Independent or Co-Operative Investment?," Energies, MDPI, vol. 16(13), pages 1-17, June.
    14. Lei Zhu & Xing Yao & Xian Zhang, 2020. "Evaluation of cooperative mitigation: captured carbon dioxide for enhanced oil recovery," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 25(7), pages 1261-1285, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Insley, Margaret, 2017. "Resource extraction with a carbon tax and regime switching prices: Exercising your options," Energy Economics, Elsevier, vol. 67(C), pages 1-16.
    2. Mo, Jian-Lei & Agnolucci, Paolo & Jiang, Mao-Rong & Fan, Ying, 2016. "The impact of Chinese carbon emission trading scheme (ETS) on low carbon energy (LCE) investment," Energy Policy, Elsevier, vol. 89(C), pages 271-283.
    3. Walsh, D.M. & O'Sullivan, K. & Lee, W.T. & Devine, M.T., 2014. "When to invest in carbon capture and storage technology: A mathematical model," Energy Economics, Elsevier, vol. 42(C), pages 219-225.
    4. Zhang, M.M. & Zhou, D.Q. & Zhou, P. & Chen, H.T., 2017. "Optimal design of subsidy to stimulate renewable energy investments: The case of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 71(C), pages 873-883.
    5. Engelen, Peter-Jan & Kool, Clemens & Li, Ye, 2016. "A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure," Resource and Energy Economics, Elsevier, vol. 43(C), pages 33-56.
    6. Margaret Insley, 2013. "On the timing of non-renewable resource extraction with regime switching prices: an optimal stochastic control approach," Working Papers 1302, University of Waterloo, Department of Economics, revised Aug 2013.
    7. Wang, Xingwei & Cai, Yanpeng & Dai, Chao, 2014. "Evaluating China's biomass power production investment based on a policy benefit real options model," Energy, Elsevier, vol. 73(C), pages 751-761.
    8. Yiqing Li & Weiguo Yang & Lixin Tian & Jie Yang, 2018. "An Evaluation of Investment in a PV Power Generation Project in the Gobi Desert Using a Real Options Model," Energies, MDPI, vol. 11(1), pages 1-16, January.
    9. Zhang, M.M. & Zhou, P. & Zhou, D.Q., 2016. "A real options model for renewable energy investment with application to solar photovoltaic power generation in China," Energy Economics, Elsevier, vol. 59(C), pages 213-226.
    10. Ouyang, Yiling & Guo, Jian, 2022. "Carbon capture and storage investment strategy towards the dual carbon goals," Journal of Asian Economics, Elsevier, vol. 82(C).
    11. Strange, Niels & Jacobsen, Jette Bredahl & Thorsen, Bo Jellesmark, 2019. "Afforestation as a real option with joint production of environmental services," Forest Policy and Economics, Elsevier, vol. 104(C), pages 146-156.
    12. Yu, Shiwei & Li, Zhenxi & Wei, Yi-Ming & Liu, Lancui, 2019. "A real option model for geothermal heating investment decision making: Considering carbon trading and resource taxes," Energy, Elsevier, vol. 189(C).
    13. Dahlen, Niklas & Fehrenkötter, Rieke & Schreiter, Maximilian, 2024. "The new bond on the block — Designing a carbon-linked bond for sustainable investment projects," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 316-325.
    14. Andreas Welling, 2017. "Green Finance: Recent developments, characteristics and important actors," FEMM Working Papers 170002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    15. Mo, Jianlei & Schleich, Joachim & Fan, Ying, 2018. "Getting ready for future carbon abatement under uncertainty – Key factors driving investment with policy implications," Energy Economics, Elsevier, vol. 70(C), pages 453-464.
    16. Davis, Rebecca J. & Sims, Charles, 2016. "To Frack or Not to Frack: Option Value Analysis on the U.S. Natural Gas Market," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235642, Agricultural and Applied Economics Association.
    17. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    18. Andreas Welling, 2017. "Optimal Carbon Tax Scheme under Uncertainty in an Oligopolistic Market of Polluters," FEMM Working Papers 170001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    19. Knoope, M.M.J. & Ramírez, A. & Faaij, A.P.C., 2015. "The influence of uncertainty in the development of a CO2 infrastructure network," Applied Energy, Elsevier, vol. 158(C), pages 332-347.
    20. Mo, Jian-Lei & Schleich, Joachim & Zhu, Lei & Fan, Ying, 2015. "Delaying the introduction of emissions trading systems—Implications for power plant investment and operation from a multi-stage decision model," Energy Economics, Elsevier, vol. 52(PB), pages 255-264.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:101:y:2017:i:c:p:123-137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/enpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.