Carbon Dioxide for Sale

The Case: In 1988, the Basin Electric Power Cooperative of Bismarck, ND, bought a troubled chemical plant that converted coal into synthetic natural gas. The gamble paid off, and the story of Basin’s success is altering the business of power and the politics of pollution.

Dakota Gasification Company

FY 2005 revenues: $234.5 million
Employees: 700
CO2 stored underground: Six million tons

On september 14, 2000, the Dakota Gasification Company moved beyond survival. The company’s one-of-a-kind chemical plant in Beulah, ND–an industrial beast that converts 18,000 tons of lignite coal into 170 million cubic feet of synthetic natural gas per day (enough to heat 2,500 homes for a year)–had been written off 15 years earlier as a government-financed boondoggle, a misbegotten product of crisis-driven U.S. energy policies. But the determined subsidiary of a rural utility defied its critics. That September day, the company took a dirty by-product–carbon dioxide–and made it a financial asset by turning on a new CO2 pipeline. Not only would the move secure the plant’s viability, but it would also help clean up the environmental reputation of coal power.

Dakota Gasification operates a 300-kilometer pipeline full of carbon dioxide. This river of pollution heads north from Beulah to the aging oil fields of southeastern Saskatchewan. There the CO2 plunges a kilometer and a half below the earth’s surface into thick, stubborn oil deposits. The CO2 cuts the oil’s viscosity by a factor of four and eases its flow to the surface. Beulah’s CO2 is expected to help extract 130 million extra barrels of oil from the Saskatchewan oil fields, for which Dakota is well compensated. Once in the ground, the carbon dioxide takes the petroleum’s place, becoming trapped beneath an impermeable stack of limestone, sandstone, and shale. The process safely buries more CO2 in a year than a hundred thousand cars release in their operational lifetime.

Policymakers are increasingly looking to Dakota’s technology as the potential key to clean domestic power in the future. The Bush administration has advanced coal gasification and underground storage of greenhouse gases as a long-term solution to a long-term problem. The U.S. Department of Energy is championing a 10-year R&D program, dubbed FutureGen, that is aimed at perfecting a task that Dakota is currently accomplishing with technology that dates from the 1970s. “FutureGen is promoting technology that hasn’t even been demonstrated at small pilot plants,” says Dale Simbeck, vice president of technology for SFA Pacific, an energy consultancy based in Mountain View, CA. “But here’s a large-scale operation that’s technically successful and that’s doing all these things that are being talked about.”

Al Lukes, Dakota’s chief operating officer, says he’s used to the surprised reactions of international visitors who come to see what’s happening in the northern plains: “People look at us and say, ‘My God, you can do that?’”

As Dakota’s story spreads, policymakers face an increasingly stark choice. The International Energy Agency projects that enough coal plants to produce 1,400 gigawatts of electricity will have been installed between 2003 and 2030. These plants will generate about 118 billion tons of carbon dioxide over their operating lifetimes. That’s more than all carbon emissions from coal over the past 250 years combined. Even some pragmatic environmentalists agree that gasification technology may be the biggest single lever available for limiting greenhouse gases over the near term. “The coal is going to be mined. The only question is how it’s going to be burned,” says Antonia Herzog, a senior scientist with the Natural Resources Defense Council, an environmental advocacy group based in Washington, DC. “If new coal plants are going to be built, they should be gasification plants.”

Dakota by Default
Dakota Gasification was conceived during the energy shortages of the 1970s. While OPEC squeezed oil supplies, price controls in the United States choked production of natural gas. Natural-gas-pipeline firms, alarmed by tight supplies, began exploring alternative sources; by 1978, a consortium of gas pipeline companies, Great Plains Gasification Associates, had coalesced to build the world’s first synthetic natural-gas plant. Construction commenced in 1981 after President Reagan agreed to backstop the technologically ambitious project with federal loan guarantees, and in 1984 it was complete. Barely a year later, the gas pipeline companies bailed out, defaulting on $1.5 billion in loans.

The problem wasn’t Great Plains’ technology. Its process, adapted from the chemistry that enabled Nazi Germany to produce synthetic motor fuels, worked as designed: Coal and steam reacted together at 1,000 °C to yield a gaseous mixture of hydrogen, carbon monoxide, and CO2 (plus contaminants such as sulfur, mercury, and xenon gas). Pure CO2 and contaminant streams were bled off, and the remaining carbon monoxide and hydrogen–a mixture known as synthesis gas or “syngas”–was fed to a catalyst to form hydrocarbons. The Nazis’ catalysts turned out fuel for tanks, planes, and submarines; Great Plains’ catalyst turned out high-quality methane.

Lukes, a chemical engineer who returned to his native North Dakota to work for Great Plains, says what upended the company was directional drilling and the deregulation of natural gas, which took place over several years, beginning in 1978. Deregulation unleashed a frenzied search for new gas deposits, and directional drilling multiplied each well’s output. Great Plains expected to fetch $9 to $10 per thousand cubic feet for its synthetic gas, but by the mid-1980s, a gas glut had driven prices as low as $1 per thousand cubic feet. “No way could we make gas for that price,” says Lukes.

The plant was earning revenue, but at its owners’ expense: thanks to pricing formulas written into their 25-year gas purchase agreement, the pipelines paid Great Plains upward of 50 percent more than the market price for natural gas.

The Department of Energy took possession of Great Plains when the pipeline companies walked away. Under pressure to protect 822 jobs in economically depressed North Dakota and to recoup some of the government’s losses, the agency allowed the plant to keep operating. But it immediately began looking for a buyer. In 1988 it found the Basin Electric Power Cooperative of Bismarck, the local utility that powered the plant. Basin Electric stood to lose $37 million a year–about 8 percent of its annual revenues–if the plant closed. That $37 million “was a big number for Basin back then,” says Lukes. Basin acquired the plant for $85 million in cash (and a promise to share future profits with the Department of Energy) and created a subsidiary, Dakota Gasification, to run it.

It was a risky move for Basin. In the years after the purchase, political support for alternative energy wavered. Gas prices slid. And the gas pipelines litigated their gas purchase agreements, forcing a settlement that would strip Dakota’s protective price premium by the late 1990s.

One Company’s Trash
Dakota survived by becoming a recycler: the by-products of its waste streams bring in more than $150,000 a day. And its most lucrative by-product–the one that finally secured its future–is carbon dioxide.

Scrubbing oil out with CO2 isn’t as lucrative as striking a major new field. “The big-name oil companies don’t go after these. These are like bunts, and they’re looking for home runs,” says SFA Pacific’s Simbeck. But the bunts are worth making for the second-tier oil companies that now dominate U.S. and Canadian oil production. Put the CO2 in the ground, and you’re likely to get more oil–that is, if you have CO2. Most carbon dioxide used in oil fields comes from natural deposits of either CO2 on its own or CO2 entrained with natural gas. Oil-field operators north of Beulah had neither.

By the mid-1990s, Dakota looked like a survivor, and Calgary, Alberta-based PanCanadian Petroleum, the operator of one of Canada’s largest oil fields, was ready to negotiate. Production at PanCanadian’s field in Weyburn, Saskatchewan, peaked in the 1960s, but company geologists believed that CO2 would rev it back up. Under a 1997 deal, Dakota built gas compressors and a pipeline to deliver the CO2 to Weyburn, and PanCanadian agreed to pay Dakota for financing costs on the equipment, plus pay a demand charge. In February, Dakota signed up a second Saskatchewan oil producer, Apache Canada, which will begin taking CO2 next year.

Judy Fairburn, a vice president of operations for EnCana (PanCanadian’s new name after merging with Calgary-based Alberta Energy), says that buying Dakota’s CO2 increased production costs at Weyburn, and that PanCanadian predicated its investment on receiving $16 to $18 a barrel. That was a good bet: oil now fetches about $50 a barrel, and Weyburn is delivering 26,000 barrels per day–its highest level since the 1970s. “This oil field is definitely into its second wind,” says Fairburn.

With natural gas selling at $7 per thousand cubic feet, Dakota is looking good, too. Asked if Dakota might be out-earning its oil-field customers, Fairburn nervously laughs. “I’ll have to calculate that,” she says. “They’re certainly well positioned.”

They are–and not just because of what they are helping to take out of the ground. As the oil rises in the Great Plains, Dakota Gasification’s industrial CO2 is pooling underground, creating an environmental benefit that could be worth millions of dollars more in years ahead, if the United States ever decides to adopt a cap-and-trade emissions policy. A $34 million research study sponsored by the International Energy Agency has been tracking the CO2 underground. Its final report, released last fall, confirmed what everyone expected: the same strata that sealed in Weyburn’s oil for 50 million years should hold its CO2 for thousands of years, if not longer.

Gasification is again in the spotlight, and not just because of its ability to store away greenhouse gases. Today’s record-high natural-gas prices show no signs of slipping, despite record levels of gas exploration in North America. And the technology is improving. Dozens of gasification plants have been built since 1984–most of which turn coal-derived syngas into ammonia fertilizers–and their cutting-edge power equipment costs less to build and operate than Dakota’s. Major suppliers of the equipment, like General Electric, are taking orders for more. Dakota was not only lucky in its decades-long struggle to prove the viability of coal gasification, it was also right.