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Carbon Capture and Sequestration: Evolving Legal Challenges

Mitigating Climate Change Legal Risks and Managing Long-Term Liabilities

presents

Today's panel features:Dennis Arfmann, Partner, Hogan & Hartson, Boulder, Colo.

David M. Flannery, Member, Jackson Kelly, Charleston, W. Va.

Tuesday, November 24, 2009

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1

CARBON CAPTURE AND SEQUESTRATION: EVOLVING LEGAL

CHALLENGES

Mitigating Climate Change Legal Risks and Managing Long-Term Liabilities

Dennis Arfmann, Hogan & HartsonDavid Flannery, Jackson Kelly

Tuesday, November 24, 2009

2

What Is CCS?

A two-step process.

Step One: The capture of CO2 from exhaust gases from power plants or industrial facilities:- post-combustion capture; - pre-combustion capture; - oxy-fuel combustion.

Step Two: The injection of CO2 into geologic formations for long-term storage.

3

Why is CCS Important?

• Much climate change discussion is focused on fossil fuels• However, many energy sources will be affected• CCS will play a key role in the nation’s energy future• EPRI has assessed the potential for new technologies for

power generation through 2030.

See:http://my.epri.com/portal/server.pt?space=CommunityPage&cached=true&parentname=ObjMgr&parentid=2&control=SetCommunity&CommunityID=404&RaiseDocID=000000000001019563&RaiseDocType=Abstract_id

Prism / MERGE Analyses 2009 Update

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Prism / MERGE Analyses 2009 Update

EIA 2009

3854 TWH

Prism 2030

4888 TWH

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EXTENSIVE US EXPERIENCE WITH CO2 TRANSPORT & ENHANCED OIL RECOVERY

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Oil production in Postle, OK after CO2 injection

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MIT conclusions about CCS

• Scientifically feasible to store CO2 in saline aquifers• An insurance system is needed to cover liability • A regulatory framework must include criteria for site

selection

The Future of Coal, Options For A Carbon-Constrained World, Massachusetts Institute of Technology, 2007, p. ix, http://web.mit.edu/coal/

8

G8 conclusions about CCS• Establish legal and regulatory framework by 2010• Define property rights and allocate storage capacity • Government assumption of long term liability • Permitting system to address closure and post closure • CO2 should not be classified as a waste • Insurance industry should be encouraged to develop CCS

products

G8–IEA-CSLF: 3rd Workshop, Near Term Opportunities For CCS; 11/27/07

http://www.cslforum.org/publications/documents/g8_rec_calgary07.pdf

9

10

States Needed to Complete CGS Regulatory Framework

site licensing/ amalgamation of storage rights

long term “Care Taker”phase

well Injection and closure operations

AREA OF EPA OVERLAP

11

What the Guidance Document provides to states & provinces

• Background on why states and provinces are the most logical “cradle to grave” regulators.

• Useful background on climate change and the importance of geologic storage.

• Model statute and regulations

• Legal analysis of ownership issues

12

IOGCC Property Rights Analysis

• Right to use pore space should be considered a private property right

• Storage rights should be required as part of initial licensing• Regulatory program should contain clear rules about

ownership of pore space rights and how the right to store CO2 will be secured

• Eminent domain powers and unitization are contemplated to gain control of storage reservoir

• Ownership of pore space is a function of state lawhttp://iogcc.myshopify.com/collections/frontpage/products/co2-storage-a-legal-and-regulatory-guide-for-states-2008

13

IOGCC Property Rights Analysis

• Unsettled subsurface ownership law - surface owners own pore space - mineral owners have rights that may be affected - no rights are needed to conduct UIC operations

• Regulatory program development is important given uncertainties in law of ownership

14

IOGCC Model Statute

Section 1. Legislative declaration; jurisdiction. • GS benefits citizens• CO2 valuable commodity / allow withdrawal

Section 2. Definitions • Carbon dioxide – Anthropogenically sourced carbon

dioxide of sufficient purity and quality as to not compromise the safety and efficiency of the reservoir to effectively contain the carbon dioxide

15

IOGCC Model Statute

Section 3. Agency approval. • Mandatory findings:

- reservoir is suitable and feasible - good faith efforts to obtain property rights - no contamination of other formations - no danger to human health and environment

Section 5. Eminent domain etc. • Agency approval empowers use of eminent domain (except to take

other CCS facilities) • Existing eminent domain power preserved • Alternative mechanisms encouraged

16

IOGCC Model StatuteSection 6. Trust Fund

- fund to be used solely for long-term monitoring/ remediation

- fee attached to material injected - administered by state

Section 7. Liability Release - certificate of completion 10 years after injection - upon demonstrating mechanical integrity, ownership

would transfer to State - upon transfer, generators released from regulatory

liability and bonds released - continued monitoring / remediation would be

responsibility of trust fund

17

IOGCC Model Statute

Section 9. Cooperative Agreements • Cooperative agreements authorized for projects that extend

beyond state authority

Section 10. EOR• EOR operations are exempt

• Conversion of EOR to CCS is authorized

18

IOGCC Model Rules

Section 1. Applicability Section 2. Definitions Section 3. General Requirements Section 4. Permit• Property rights are necessary to construct / operate • Permit application must include:

- site maps - technical evaluation - emergency response plan - leak detection - well casing program- performance bond - closure plan

19

Model RulesSection 5. Amalgamation of Rights

Section 6. CSP Wells

Section 7. CSP Operational Standards

Section 8. Reporting Requirements

Section 9. CSP Closure

20

IOGCC Model ProgramOpen issues:

• tort liability transfer • property ownership• property acquisition • pipelines

21

CCSRegCCS Reg participants: - Carnegie Mellon - University of Minnesota - Van Ness Feldman - Vermont Law School

Policy Briefs:• Learning and Adaptation in Regulation of Geologic Sequestration (August

28, 2009)• Comprehensive Regulation of Geologic Sequestration (July 20, 2009) • Regulating Carbon Dioxide Pipelines for the Purpose of Transporting

Carbon Dioxide to Geologic Sequestration Sites (July 13, 2009)• Governing Access to and Use of Pore Space for Deep Geologic

Sequestration (July 13, 2009) • Compensation, Liability and Long-Term Stewardship for CCS (July 13,

2009)http://www.ccsreg.org/policy_briefs.html

22

CCSReg Policy Brief: Comprehensive Regulation

• Congress should enact GS legislation - declare CCS in the public interest- address access to pore space - amend Safe Drinking Water Act to address all GS

issues - coordination between UIC and GHG inventory - set up revolving fund to cover long-term

stewardship - create public entity to accept responsibility for closed

GS sites

23

CCSReg Policy Brief: Pore Space

• Permit GS under UIC• Permit should grant right to use pore space• Property owners must demonstrate during comment period

material impairment of non-GS uses to be compensated • No preemption of state mineral rights laws • Limit trespass liability where operators conducted pursuant

to valid UIC permit.

24

CCSReg Policy Brief: Liability

• Operating projects should be subject to otherwise applicable law

• Federal program should oversee post closure – Funded by revolving fund based on risk assessment – Transfer project (and liability) to federal program once

injection is complete and standards are met– Remediation/compensation in post closure should be

responsibility of federal program – Emergency funds could be used for other projects not

yet closed

25

CCSReg Policy Brief: Pipelines

• Allow CO2 pipelines to “opt-in” FERC jurisdiction • FERC approval would allow use of eminent domain and

open access operation • Retain current state siting and economic regulation for

existing CO2 pipelines and new CO2 pipelines that do not “opt-in” to FERC

• Streamline permitting on federal lands • Utilize existing pipeline safety framework

26

CCSReg Policy Brief: Adaptation

• Regulatory requirements should be flexible performance standards should be reviewed after 5 years of operation of 5-10 GS facilities

• Adapt standards to each site

• Evaluate regulatory program every 10 years

27

MGA Infrastructure Accord

• Site at least one new CO2 pipeline (2012)

• Site at least one CO2 capture project (2012-2015)

• Incorporate CCS into new coal based energy facilities (2020)

28

MGA CCS Utility• A geologic storage utility (GSU), should be established in

each state • All liability will be held by the GSU • GSU will purchase all surface and subsurface property

rights “necessary” to develop and operate storage and pipeline

• Option 1: Declare pore space below 2500 (except hydrocarbon) for public use and pay to the surface owner a fee no greater than $xx per acre

• Option 2: Unitization once 51% of property rights are obtained

• Authorize condemnation of surface and subsurface

29

USEPA UIC Program• March 1, 2007 Guidance: CCS experimental wells will be

handled as Class V UIC wells pending development of final program (http://www.epa.gov/safewater/uic/pdfs/guide_uic_carbonsequestration_final-03-07.pdf

• July 25, 2008 Proposed Rules: CCS wells to be permitted as Class VI; comment period closed December 24, 2008 (See 73 Fed. Reg. 43492 (July 25, 2008)

• UIC rules are limited to Safe Drinking Water Act; more limited than IOGCC model program

30

Proposed UIC Rules

Goals• Protect underground sources of drinking water • No requirement to capture/sequester CO2

Safe Drinking Water Act does not provide authority to address:

• Capture and transport of CO2• Property rights • Liability transfer• Accounting for GHG reductions

31

Proposed UIC RulesNew category of injection well (Class VI)• More protective than others • Tailor existing UIC program to injecting large volumes of CO2

Climate mitigation technology: • Storage potential: 3,000 gigatons CO2• Emissions from 1000 coal-fired power plants • Significant role in reducing CO2

Target formations: • Deep saline: 88.6% • Depleted oil and gas: 4%• Unmineable coal seams: 1.5%• Other

32

Proposed UIC Rules

Program components: • Geologic characterization • Identification of wells penetrating injection zone • Injection well construction • Well operation • Mechanical integrity testing • Monitoring plume and pressure • Well plugging • Financial responsibility

33

Wyoming Ownership of Pore Space

• 2008 HB 89 Severance created by contract as instrument transferring pore space must describe rights as to use of surface otherwise no use granted

• Pore Space part of surface estate• All instruments of transfer of surface include pore space

unless specific exception• Specific exception must be explicitly described or void• Mineral estate is dominant• Protection granted for existing contracts

34

Wyoming Permitting of CCS Activities

• 2008 HB 90 Permitting Process• WDEQ proposed Class VI permit requirements• Public Comment Hearing December 11, 2009• WDEQ Carbon Sequestration Working Group

– Report September 2009– Financial assurances—bonding and insurance– Cost estimates—operation, site closure & remediation,

post-closure, monitoring & verification– GS Special Revenue Account—for MMV fees– Draft Statute (2010)

35

Wyoming Dominance of Mineral Estate

Ownership

• 2009 HB 56 Prohibits CS in areas with recoverable hydrocarbons.

• 2009 HB 57 Mineral estate dominant over pore space; Reaffirms that surface owners have the primary right to underground pore space where CO2 stored.

• 2009 HB 58 Assigns liability for CS projects to the injecting companies rather than the state or pore space owners

36

Wyoming Unitization of CS Projects

• 2009 HB 80 Mandatory requirements for unitization of CS projects

• Profit-sharing interests for landowners to sell or sublease the subsurface for CO2 storage: 80%/20%

• Requires compliance with state CS regulations

37

North Dakota Incentives for CCS• SB 2221 Creates incentives for coal conversion

facilities that capture CO2• Provides a credit against privilege taxes on coal

conversion facilities for CCS projects• Removal of CO2 emissions from coal conversion

facilities– Measured by specific regulatory scheme– Depends on whether facility is electrical generating plant or coal

gasification facility– Standards established for daily and annual measurement and recording

of captured CO2

38

North Dakota Industrial Commission Authority for CS

• SB 2095 & 2139 NDIC authority over CS • Liability for injected substances rests with the

operator for ten year post-closure until certificate of completion issued

• Liability then transfers to state of North Dakota• Surface owner owns pore space, non-severable• Mineral estate is dominant under ND law• NDIC may “amalgamate” property interests• NDIC to establish permitting process and fees

39

Louisiana CS Storage

• HB 1117 Authorizes injection, storage and withdrawal of CO2 in and from underground reservoirs and salt domes

• Authorizes the State to lease state land for the injection and storage of carbon dioxide

• Allows State to enter into operating agreements whereby State receives a share of revenues from the surface or underground storage of CO2

40

LouisianaRegulatory Program

• HB 661 Establishes Louisiana Geologic Sequestration of Carbon Dioxide Act– Grants Dept. of Natural Resources jurisdiction and authority

to regulate permits for geologic storage and subsequent withdrawal of CO2 and related pipelines and facilities

– Addresses liability of owners and operators of CO2 storage facilities

– Creates Carbon Dioxide Geologic Storage Trust Fund funded by fees, penalties to provide funds for long-term testing, monitoring and remediation

– Authorizes site-specific trust accounts for long-term maintenance and restoration of storage facilities when ownership transfers

41

West Virginia

• HB2860 passed April 9, 2009• Findings:

- alternative and renewable electricity is insufficient - public interest exists for advancing CCS- CCS and pipelines are integral to power plant

operations• Permitting:

- UIC permit required- enhanced mineral recovery exemption - transition authorized for existing CCS facilities

• Cooperative agreements

42

West Virginia CCS StatuteCarbon Dioxide Sequestration Working Group

- study issues: • scientific, technical, legal and regulatory • ownership of subsurface • long range strategy • conduct studies • receive funds • preliminary report 7/1/10• final report 7/1/11

- encourage development - assess feasibility - clarify property ownership - identify sites - assess costs / benefits - identify research - long term strategy

43

Other States• In 2009 17 states proposed CCS legislation. • Pending in Utah, Kansas, California, Illinois,

Minnesota, Nebraska, New York, Pennsylvania and Tennessee

• Enacted in Oklahoma, Louisiana, Montana, South Dakota, North Dakota and Wyoming

• Most enacted legislation includes– regulation of carbon capture and sequestration– permitting carbon capture– ownership of carbon that is captured

44

Federal Developments

The American Clean Energy and Security Act (Waxman-Markey HR 2454)

Clean Energy Jobs and American Power Act (Kerry-Boxer S 1733)

DOE Carbon Capture and Sequestration Program Act Amendments Act of 2009 (Bingaman S 1013)

Carbon Storage Stewardship Trust Fund Act of 2009 (Casey-Enzi S 1502)

45

American Clean Energy and Security Act (Waxman-Markey)

• Dual phase emissions allowances to coal, petroleum and coke-fired power plants

• Mandatory CS strategy report for EPA and other federal agencies

• EPA must promulgate regulations within 2 years for permitting of CS sites

• Creates Carbon Storage Research Corporation • Coal performance standards for coal-fired power

plants permitted between Jan 2009 and 2020

46

Clean Energy Jobs and American Power Act (Kerry-Boxer)

• Mirrors and clarifies Waxman-Markey• Direct EPA to promulgate regulations to certify

and permit CCS sites• Establishes performance standards for new coal-

fired power plants• Authorize utilities to hold referendum to fund

research and development of new CCS or conversion technology

• Establishes per-ton incentive program, financed by allowances, for commercialization of CCS

47

DOE CCS Program Amendments Act of 2009

• Amends Energy Policy Act of 2005--Secretary of Energy demonstration program for commercial application of integrated systems capture, injection, monitoring, long-term geological storage of CO2 from industrial sources.

• Authorizes Secretary enter into cooperative agreements providing financial and technical assistance for up to 10 demonstration projects.

• Requirements for demonstration projects--site safety, environmental protection, remediation, site closure.

• Secretary to provide grants for training of state employees involved in permitting and management of carbon capture, transportation, and storage projects.

48

Carbon Storage Stewardship Trust Fund Act

• Establishes revolving fund in Treasury of deposits collected by DOE from CO2 storage sites for any civil claims during post-closure stewardship phase

• DOE collect risk-based fee per-ton of injected CO2• Establishes program for site closure certification--CO2

facility closed wells, completed injection, monitoring • Transfers responsibility of long-term stewardship of closed

cites to Federal government• Standards for measurement, monitoring, verification and

remediation during post-closure stewardship• Private liability assurance during active project period and

establishes limit on liability for damages during post-closure stewardship

49

International CCS Projects

• Carbon capture and storage (CCS) projects are proliferating worldwide, on a pace to meet an international goal of 20 demonstrations by 2010, according to the National Energy Technology Laboratory (NETL)

• The NETL CCS database shows 192 active and proposed projects -- 38 CO2 capture, 46 storage, and 108 capture and storage projects. Eight projects are already capturing and storing CO2, including two in the United States

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NETL CCS Database

51

International Developments-U.K.• U.K. CCS policies for new power plants

– No new coal without CCS. A programme of up to four commercial-scale CCS demonstrations, funded by a new CCS incentive, and a requirement for any new coal power station to demonstrate the full CCS chain (capture, transport and storage) at commercial scale.

– A long term transition to clean coal. Our ambition is to see CCS ready for wider deployment from 2020 and for any new coal plant constructed from then to be fully CCS from day one. We expect demonstration plant will retrofit CCS to their full capacity by 2025, with the CCS incentive able to provide financial support. A rolling review process, which is planned to report by 2018, will consider the appropriate regulatory and financial framework to further drive the move to clean coal. In the event that CCS is not on track to become technically or economically viable, an appropriate regulatory approach for managing emissions from coal power stations will be needed.

– Alongside this we have also published a Strategic Environmental Assessment post adoption statement, consultation on draft supplementary guidance for Section 36 Applications: New Coal Power Stations, an updated Impact Assessment and a study by Redpoint analysing regulatory and financial incentives to develop clean coal.

52

International Developments-Canada & Alberta

• Canadian and Alberta governments team up on CCS projects– Carbon Capture and Storage Funding Act, Bill 14 – TransAlta Corp to capture and store carbon at coal-fired

plant near Edmonton, Alberta aiming to cut plant’s GGH emissions 1 million metric tons annually

– Helping Royal Dutch Shell PLC build commercial-scale CCS for Alberta’s oil sands

53

International Developments—Australia & Queensland

• 2009 Queensland GHG Storage Act• CO2 reservoir is a state resource.• If overlap with a mineral lease, negotiate.• First, apply for a GHG permit.• Then, a GHG injection and storage lease.• Then, a GHG survey and data gathering.• ZeroGen is funded and owned by Queensland.• Other funders include Australian Coal Association

and Mitsubishi.