Correction appended. Updated with comment from Leucadia.

If close listeners heard a longing sigh from the oil industry late last month, it may have come from the plains.

Denbury Resources Inc., an upstart oil producer, had traded its precious Bakken Shale assets to Exxon Mobil Corp. In exchange for the oil-rich lands, Denbury received $1.6 billion in cash and parts of Exxon Mobil's Texas and Wyoming stakes.

As oil assets go, few are as coveted as those in the Bakken Shale, where producers are still asking how many billions of barrels of oil they can unlock with hydraulic fracturing. But Denbury is pursuing its own billions, and while most of the industry focuses on shale, it is building a business model around a much rarer form of oil hunting: enhanced oil recovery.

In a statement after the deal, Denbury President and CEO Phil Rykhoek said, "We can now focus on what Denbury does best, CO2 enhanced oil recovery ('EOR'), which we believe offers one of the most compelling rates of return in the oil and gas industry today."

Denbury, a Texas-based company that produces oil by pumping CO2 underground, thinks it could secure a long-term source of CO2 from a pipeline in the Midwest. Photo courtesy of Denbury Resources Inc.

If Denbury succeeds at what it "does best," it may be blazing a trail in the country's energy and climate strategy.

To keep its EOR business going, Denbury needs large and reliable supplies of carbon dioxide. To boost that supply, it is hoping to build a pipeline linking a Midwest coal plant with its oil fields on the Gulf Coast.

Some experts now see a vastly increased potential for oil production by EOR, and they envision a vast new market for CO2: capturing it at factories, then piping it to distant fields for oil production.

If it works, they say, it would do more than increase U.S. oil production. It would also inspire innovation in carbon-capture technology -- motivated by the same market forces that thirst for oil (EnergyWire, Sept. 24).

Brad Crabtree, policy director at the Great Plains Institute, said the first step could be a large CO2 pipeline linking the industrial heartland to the Gulf Coast.

"Think like a big power line, imagine a big CO2 trunk line that would be like the backbone of the system," he said.

Those oil fields could absorb millions of tons of CO2 for years, maybe decades, he said. The market for CO2 could drive more and more factories in the Midwest -- ethanol plants, coal plants, steel plants -- to contemplate whether carbon capture makes business sense for them.

Where it does, they will use carbon capture and build a pipeline. Crabtree envisioned a gradually expanding network of CO2 pipelines, criss-crossing the Midwest and shipping the gas off to oil fields.

"The thing that's exciting is that there's a whole range of sources of industrial CO2 in the Midwest waiting to be tapped," he said. "That's where ultimately we could see this going."

Wanted: lots of CO2

For the majority of oil companies, having large oil reserves on the books is enough; there are few questions about the wherewithal to get it. But in Denbury's unique business model, CO2 reserves are an essential number, too.

For the moment, the company believes it has enough. Denbury sources all of its CO2 today from Jackson Dome, a naturally occurring reservoir in a volcano near Jackson, Miss. Anytime the company pursues oil in the Gulf Coast area, the pipeline is sure to lead back to Jackson Dome.

According to the company, that pattern can hold for some time. It says 6.7 trillion cubic feet is proven reserves, with another 4.5 tcf considered "possible" or "probable" reserves. Together, these should be enough to supply the bulk of the company's CO2 needs in the Gulf for decades, the company claims.

Even so, Denbury thinks it wise to get CO2 from other sources, said Mike Blincow, the company's director of anthropogenic CO2.

Bountiful as Jackson Dome is, it is finite, and as Denbury mines the "sweet spots" of the dome, the remainder will be less economic. To increase its options -- and to avoid mining CO2 at a cost it would rather avoid -- Denbury hired Blincow about a year and a half ago. He said he was the first employee devoted full-time to securing CO2 from man-made sources.

"The stars are kind of lining up so that we can get access to some of this CO2," he told EnergyWire. "The more we can get in that line now, the more that puts on the life of our Jackson Dome."

Denbury's goal was cheap CO2 -- and a lot of it. Blincow joined the company's campaign, which had started in 2009, to source it from cutting-edge coal plants in the Midwest.

The proposed "gasification" plants were being supported by leaders in states like Illinois, Indiana and Kentucky that wanted to keep coal in their future. These plants were designed to burn coal while separating CO2, a quality that would help them in a world of tightening air regulations.

But in the absence of climate regulation, there was not an economic incentive to stuff the CO2 underground. Denbury courted the gasification plants, and not just in the Midwest. It signed six long-term contracts to off-take CO2 in the event the plants were built.

If just two were built, in Illinois and Indiana, Denbury planned to build a pipeline that would gather the CO2 there, then transport up to 800 million cubic feet per day to its pipeline network in the Gulf. The exact route was undetermined, but that would become clearer once the projects were approved.

Midwesterners have not cooperated. Denbury's pipeline ambition has become embroiled in a larger feud over coal in the region with warring utilities, environmentalists, power-plant developers and politicians.

The heart of the dispute: The gasification plants would substantially raise power rates, whereas cheap natural gas is available on the market right now.

The coal-plant developers have retorted that natural-gas prices are volatile and that once old coal plants are retired, the new, modern coal plants will be a bargain for the long term.

Still, in May, the Chicago Tribune had this headline: "Gasification plants in Illinois dead or on life support."

One plant comes into focus, with challenges

Denbury has since narrowed its focus to one clean-coal plant: Indiana Gasification, a $2.8 billion project whose construction is slated for 2013. The project sponsor is Leucadia Energy LLC, which has attempted to develop four gasification plants in the Midwest and Louisiana.

In the Hoosier State, the plant won't directly generate power; it will convert coal into a form of natural gas and a stream of CO2. It will sell the natural gas to Indiana at a formula-based price that may be above or below the Indiana market price, depending on conditions in the gas and coal markets.

Blincow said Denbury is now proposing a skinnier, and geographically shorter, pipeline starting at the Indiana facility. As for the economics, they are still being worked out.

Leucadia may receive a loan guarantee from the U.S. Department of Energy, changing the cost structure. Alternatively, Denbury and Leucadia could fold the coal plant and CO2 pipeline into a joint venture, arguing that the EOR in the Gulf helps the overall profitability of the project. This, too, could get a DOE loan guarantee, Blincow said.

Another question is what part of the project Indiana ratepayers will pay for. Blincow said at this stage, the companies are considering models where they will cover the whole project, and where they will only cover the gasification plant. If they don't cover the pipeline, Blincow said, Denbury will have to recover its costs by charging transport fees to move the CO2.

But like the other coal megaprojects, Indiana Gasification remains open to various legal and regulatory challenges -- avenues that its opponents are hoping to use.

Nachy Kanfer, deputy director of the Central Region for the Sierra Club's Beyond Coal campaign, said groups are challenging Leucadia's contracts to sell gas to Indiana. If the DOE loan guarantee goes through, there will have to be environmental reviews -- more places for the Sierra Club to get involved.

Kanfer said the Sierra Club is willing to debate the general merits of the strategy -- burning coal, using the CO2 to produce oil.

"The problem in this case is that Indiana ratepayers, far from the oil fields, are being asked to subsidize every last dollar to build the Leucadia plant, for expensive synthetic gas that they don't need and can't afford," he said in an email. "Indiana residents will assume all the risk, with oil companies in the Gulf reaping the benefits."

He said the synthetic gas from Leucadia is projected to cost $6 per million British thermal units. Thanks to hydraulic fracturing, that is roughly double the cost of natural gas on the market today.

Bill Rosenberg, a co-developer on the Indiana Gasification project, said that's the wrong way to look at it.

"The output from the IG plant will help safeguard Indiana consumers from the volatility of the natural gas market—which is far more volatile than coal—and the higher future gas prices forecasted by many energy analysts," Rosenberg said in an e-mail. "The Sierra Club has zero interest in consumers. It just wants to eliminate coal as part of Indiana’s and America’s energy supply.”

The project developers have a contract with the state — which state regulators have approved — that over 30 years, the gasification plant must save consumers at least $100 million. Those savings are based on the idea that natural-gas prices will eventually rise from today's low level, making it less expensive to get the gas by burning coal.

If those savings don't materialize, the State of Indiana will hold a lien on the gasification plant.

Kanfer, of Sierra Club, does indeed have deep reservations about whether coal belongs in the energy future at all.

"This would be a double-down on our reliance on coal when what our country needs is an economywide investment in clean energy," he said.

It is a sentiment that divides environmentalists in the heartland region, perhaps more than anywhere else.

For Kurt Waltzer, coordinator of carbon capture, utilization and sequestration at the Clean Air Task Force, the opportunity here is clear. EOR is a way to revitalize -- and potentially commercialize -- a coal technology that some had left for dead but that could now be added to U.S., Indian and Chinese fleets.

"We believe that CCS is necessary to address climate change. Full stop," Waltzer said. "If we don't do that, we think it's 'game over' for the climate."

Correction: An earlier version of this story misnamed Brad Crabtree of the Great Plains Institute.