Shell and StatoilHydro have scrapped plans to build a green power plant that would capture and store carbon dioxide because the project was found to be uneconomic.

The decision to shelve the gas-fired power project, which was to be built at Tjeldbergodden in Norway, casts further doubt on the financial viability of power schemes that capture and safely store greenhouse gases.

In the UK, BP was forced to scrap plans to build a carbon-capture and storage scheme at Peterhead in Aberdeenshire, citing inadequate assurances of financial support from the British Government.

Shell and Statoil first announced their plans in March 2006, when Shell hailed the Tjeldbergodden scheme as “an important milestone towards our vision for greener fossil fuels”.

Shell said yesterday that the project would require significant public funding.

The Tjeldbergodden project would have captured carbon dioxide emitted from an 860 megawatt gas-fired power station, which would then have been injected into two offshore oil wells: Shell’s Draugen field and later Statoil’s Heidrun field.

The scheme is based on proven technology by which recovery of oil from wells is enhanced by the injection of gases. Oil companies routinely reinject natural gas into wells to boost oil output and the injection of carbon dioxide has been shown to have similar effect.

In July, however, the partners revealed that the potential extra oil recovered by injecting CO2 would be inadequate to justify the huge investment. However, the two companies agreed to conduct a further study to determine whether an investment was justified.

Yesterday, Shell and StatoilHydro threw in the towel, admitting that while the technology worked, it was uneconomic without significant subsidy.

The cost of drilling additional wells into the two oilfields, as well as pipe-lines to the onshore power station, would be significant - while the financial benefit would have amounted to a mere 2 to 5 per cent of extra oil recovered.

Shell said yesterday that the key reason for its decision was “challenging economics for the gas-fired power station, coupled with a tight market situation with rising prices. In addition, significant financial support from the government would be needed for capturing, transporting and storing the CO2 .”

An additional barrier is believed to be the power market in Norway, where Shell and Statoil would be competing with local power suppliers.

Norway relies almost exclusively on cheap hydro-power but shrinkage in water reservoirs is creating demand for rival fuels.

In using Norway’s gas reserves, the Tjeldbergodden power station would need to compete for fuel with export markets in northern Europe.

The abandonment of Tjeldbergodden, following the scrapping of the Peterhead scheme, will send a strong but unwelcome signal to governments that technological solutions to combat climate change are difficult.

The technology is extremely expensive and the first projects will need big grants and subsidies.

It will also raise questions about the extent to which injection of C02 in oil wells can be seen as a universal solution, given that oil reservoirs differ greatly, and the extent to which CO2 injection can generate returns will depend on the nature of each oilfield.

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