Could Texas, whose governor dismisses global warming and opposes climate legislation, deliver the world’s first carbon-neutral coal-fired power plant? That looks increasingly likely thanks to a $1.75 billion project in West Texas that received a signed agreement last week for a $350 million grant from the U.S. Department of Energy.

The project, being developed by Bainbridge Island, WA-based Summit Power Group, combines carbon capture with domestic oil production, giving the plant something that few carbon capture and storage projects enjoy: demand for its greenhouse gas emissions. Summit plans to build a 400-megawatt power plant at its site in Penwell, TX, capture 90 percent of the emissions, and sell the nearly three million tons per year of carbon dioxide to oil fields across the Southwest. Oil and gas operators increasingly inject high-pressure carbon dioxide into their aging oil wells to reduce the oil’s viscosity and thus accelerate production, a process known as enhanced oil recovery (EOR). “If we build this there won’t be any more dirty coal plants built,” says Laura Miller, the former Dallas mayor who leads the project for Summit.

Over half of U.S. oil fields are amenable to enhanced oil recovery, according to a 2008 report by the DOE’s National Environmental Technology Laboratory. Globally, the International Energy Agency predicts that aging oil and gas reservoirs could hold 920 gigatons of carbon dioxide–enough to take a century of emissions from 3,000 plants like Summit’s.

The Summit plant is an integrated gasification combined cycle (IGCC) design that converts its fuel into a clean-burning mix of hydrogen and carbon monoxide called syngas. Of the 30 IGCC plants proposed in the United States since 2000, only one–Duke Energy’s Edwardsport, IN, plant–has broken ground.

The troubled FutureGen project, a public-private partnership to prove the integration of coal gasification, carbon capture, and sequestration technologies, was killed by the Bush Administration only to be resurrected by President Obama’s energy secretary, Steven Chu, last spring. The DOE and FutureGen’s industrial backers have been haggling since last spring to trim the $2.4 billion price tag for the Mattoon, IL, project, of which more than $1 billion could be federal money.

Summit (conceived in 2005 as Texas’s entry in the bidding for FutureGen) could beat the pack because its products are more diverse. While most IGCC plants burn all of their syngas to generate power, Summit will send some to a chemical plant to produce urea for fertilizers. And, most importantly, whereas FutureGen proposes to store captured carbon in a saline aquifer at added cost, Summit’s sale of carbon dioxide for oil recovery will help cover its capital and operating costs.

Selling carbon dioxide to oil and gas operators should boost the Penwell plant’s revenues by about 50 percent. Miller says those sales will cover one-third of the revenues Summit will need to service the $550 million in equity investment and roughly $1 billion in loans it is now seeking in order to break ground by the end of 2010.

The economics look sound, judging from a 2009 study by Harvard’s Belfer Center for Science and International Affairs. The study found that using enhanced oil recovery revenues could cover the entire price premium for carbon capture on coal-fired power, assuming oil fetches about $75 a barrel. Oil was selling above $74 on Friday.

Research also shows that oil-field operators can keep the carbon dioxide from escaping to the atmosphere. Carbon dioxide that returns to the surface when the oil is produced is readily separated from the oil and reinjected underground. A decade of monitoring has found no net losses of postindustrial carbon dioxide injected into oil fields near Weyburn, Saskatchewan.

The University of Texas is confirming those findings at the world’s oldest and largest EOR operation: an oil field about a two-hour drive northeast of Penwell. Since 1972, a succession of owners have injected over 150 million tons of carbon dioxide into the oil-soaked fossilized reef, which lies 6,000 to 7,000 feet below Snyder, TX. The field is pierced by over 2,000 wells, but, according to Susan Hovorka, a senior geologist with the university’s Gulf Coast Carbon Center in Austin, TX, three years of searching has yet to reveal a trace of leakage.

Hovorka points, for example, to aquifers that begin just 300 feet above the carbon dioxide, which is injected at 2,200 pounds per square inch. The water shows neither the elevated acidity or pressure that a leak should induce. “The wells are sealing better than we’d anticipated. It’s cheering,” says Hovorka.

Whether such sequestration represents a net carbon reduction remains, however, a matter of interpretation, since the oil produced will eventually be burned as fuel. A life cycle assessment from Carnegie Mellon University last fall estimated that, when fuel combustion is factored in, such enhanced oil operations release 3.7 to 4.7 tons of CO₂ for every ton of CO₂ sequestered. EOR operations would have to use three times as much CO₂ per barrel of oil produced to completely offset their tailpipe emissions.

Hovorka expects just that to happen if and when carbon pricing becomes a reality. She says that under current conditions, EOR operators maximize the oil-to-CO₂ ratio to minimize costs, but can adjust operations to flip the ratio if carbon pricing means there’s value in offsetting emissions. “The carbon balance of EOR is market driven, not implicit in the technology,” says Hovorka.

Miller says it is unfair to pin the downstream emissions on Summit, since the resulting oil is likely to displace other, less desirable oil production. “It’s not realistic [to think] that we’re not going to pull oil out of the ground. I’d rather go into existing wells rather than offshore and into environmentally sensitive places to dig for oil,” she says.