Association for Public Policy Analysis & Management

Since the early 1970s, carbon dioxide (CO2) has been increasingly injected into depleted oil fields in the United States as a tertiary production technique in order to enhance oil recovery (EOR). The first industrial-scale EOR project began in 1972, and by 2014 there were 125 active EOR projects in the United Sates. As a result of the energy crisis in the late 1970s, tax incentives were implemented to encourage domestic oil production; between 1990 and 2004 oil producers were able to claim a 15% credit for qualified expenses that were incurred by their domestic EOR production projects. One stream of literature on CO2-EOR uses an engineering perspective to examine the feasibility, risks, and the physical processes that occur “down the hole” in the oil reservoir. Another stream of literature focuses on the broad economic benefits and environmental implications of CO2-EOR as an industrial-scale activity. In this work, we look “across the holes” and conduct an empirical investigation of the effect that the 15% federal tax credit had on the implementation and expansion of EOR in Texas. In 1990 there were 45 active EOR projects in the United States that produced 2,124 bbl/d on average, and this activity increased to 67 projects with an average production of 3,039 bbl/d in 2004. Did the federal tax credit incentivize oil operators to increase EOR activities, and thus implement a more expensive production technique even when oil prices were low? Using panel data of EOR production that was compiled from biannual surveys in the Oil and Gas Journal since 1974, we conducted for the first time a robust quasi-experimental analysis of the impact of the tax credit on EOR production in Texas.  The main hypothesis is that project-level EOR production increased due to the tax credit, holding other factors constant—including the oil price the physical characteristics of projects. Using a dynamic panel model to estimate EOR production with and without the federal tax credit, we find that EOR production was higher when the tax credit was available. This study offers important policy-relevant lessons for stimulating the diffusion of a technology that has been implemented, but not widely, and buffering against fluctuations in which the market price for the commodity that is produced by this technology.