A real options approach to production and injection timing under uncertainty for CO₂ sequestration in depleted shale gas reservoirs

Depleted shale gas reservoirs may be candidates for conversion to injection wells for the long-term geologic storage of CO₂, but the decision to transition from production to injection depends on economic and policy factors that may be uncertain. This paper aims to comprehend the uncertainty inherent to the underlying assumptions of CO₂ sequestration and their impact on the injection decision. We view and analyze the production to injection transition decision as a kind of options problem, where the owner of a producing well can choose to exercise the option to stop producing natural gas and start injecting CO₂. Our approach integrates a detailed reservoir model for shale-gas production and CO₂ injection in the Marcellus shale formation with a multi-period decision problem under uncertainty in future prices for CO₂ and produced natural gas. With no uncertainty, the modeling framework is able to identify the optimal timing of the transition to CO₂ injection as a function of natural gas prices and a hypothetical CO₂ price. We find that a CO₂ price of approximately $15 per tonne to be needed in order to incentivize a producer to transition to CO₂ injection earlier. If these prices are uncertain, we find that the option to delay CO₂ injection has value even when CO₂ prices are relatively high and natural gas prices are low, although the option value is highly sensitive to the choice of discount rate and the option value to delay injection is generally very low when CO₂ prices are $20/tonne or higher. Our modeling suggests that commitment in carbon pricing regimes is of equal importance to the choice of the price level.