Carbon Sequestration Property and Regulatory Issues

Jerry R. Fish Thomas R. Wood

Stoel Rives LLP

July 17, 2008Rocky Mountain Mineral Law Institute

Outline of Presentation Scale of CO2 Sequestration Required. How to Acquire Property Rights on that

Scale. State/Federal Programs to Regulate and

Facilitate CO2 Sequestration. Steps Needed to Make GCS Happen

CO2 Emissions(IPCC SP4)

CO2 Emissions Trajectory(IPCC SPM4)

CO2 Effect on Climate(IPCC SPM4)

CO2 Sequestration “Wedge”(Socolow and Pacala, Science 2004)

Goal of leveling off at 500 ppm CO2

Each “wedge” equals 3.7 gigatons of CO2 mitigation per year

Geologic sequestration may yield 1 to 3 wedges

Global distribution of large stationary sources of CO2

SRCCS Figure TS-2a

Global distribution of large stationary sources of CO2

Prospective areas in sedimentary basins where suitable saline formations, oil or gas fields, or coal beds may be found.

SRCCS Figure TS-2b

Sleipner Project – 1Mt/y

Sleipner

Sleipner Injects into Saline Aquifer

Scale is the Challenge: One 1000 MW coal-fired power plant:

5-8 MMt CO2/y (Sleipner 1 MMt/y). CO2 plume at 10y, ~10 km radius: at

50 yrs, ~30 km radius ~ 2,800 sq. km. For Americans – about 1,100 sq. mi. 600 such projects needed – the area of

Alaska or 6 Colorados.

Indianapolis, For Example…Indianapolis Utility: 528 sq. mi. territory 3,400 MW Coal

Power Needs about 4,000

sq. mi. for sequestration

36 mile radius

How to Deal With Property Rights?

Surface rights and mineral rights may be owned separately.

Unclear if pore space owned by surface owner or mineral owner.

No matter who owns pore space, interference with mineral rights is trespass, usually.

Cassinos v. Union Oil Company of California,18 Cal. Rptr. 2d 574 (Ct. App. 1993).

O&G Operator got state permit to inject waste salt water.

Got permission from surface owner. But injected salt water interfered with oil

and gas reserves, unexpectedly. Court awarded $5 million damages to

mineral owner.

Analogy 1: Property Rights – Natural Gas Storage Law

Injection of natural gas into property you don’t control is trespass.

Remedy: Injunction; damages (including punitive damages).

Ownership of injected gas: stays with injector by statute in most states.

Pore space purchased or leased.

Property Rights – Natural Gas Storage Law Analogy

By federal and state law, gas storage companies have eminent domain rights.

Buffer zones are included – because gas escape is trespass.

But property acquired for gas storage covers only a few square miles, not thousands – And there’s the problem.

Analogy 2: Property Rights for EOR Oil and gas leases give rights to inject

CO2 - but only in aid of production. Leases and state laws give right to

“unitize” for secondary recovery. Holdouts cannot complain about water

or gas injections (usually). EOR not designed to sequester CO2.

Analogy 3: Property Rights for Hazardous Waste Injection Wells permitted by EPA or by State. Pore space outside well owner’s

property is generally not purchased. Ohio Supreme Court said if neighbors

have no reasonable and foreseeable use for the pore space, they cannot complain. Chance case.

Chance v. BP Chemicals, Inc., 670 N.E.2d 985 (Ohio 1996). Same Formation as gas storage (sequestration

proposed there too). Neighbors complain that hazardous waste

migration onto their property is trespass. Ohio court says hazardous waste Injection is

NOT trespass unless it interferes with reasonable foreseeable uses - Based on United States v. Causby, 328 U.S. 256 (1946) (intrusion of airplanes into air space over property).

Analogy 4: Property Rights for Fresh Water Storage States Law: water a public resource. Imposes “servitude” on the pore space. Water authorities can inject water for later

withdrawal. No payment for pore space. Board of County Commissioners v. Park

County Sportsmen’s Ranch, LLP, 45 P.3d 693 (Colo. 2002) (Citing Chance).

Which Law Analogy “Works” for CO2 Sequestration? IOGCC & Wyo. suggest using gas storage law. But affected landowners will number in the

thousands. 20,000 in Chance case. Mineral lands off limits except EOR. Negotiation or condemnation imposes high

costs and long acquisition times. Condemnation laws would have to be

amended. Politically sensitive.

Which Law Analogy “Works” for CO2 Sequestration? Water storage law may be better suited to

rapid deployment of CO2 sequestration. No purchase of pore space required. A well permitting program similar to state laws

for water injection may be appropriate. Liability for mineral (or other property) damage

remains (Cassinos).

Conclusions About Property Rights New laws are needed to govern

ownership and use of pore space for sequestration.

CO2 sequestration projects will be large affecting thousands of landowners.

Best to avoid mineral strata. System modeled on Chance rule

avoids delay and transaction cost.

Project Approval Assuming property rights are worked out,

how do you permit?• 2 F Class turbines in an IGCC plant:

• ~5.4 million tons CO2 per year

• 1,650 lb/MW• 85% availability

• Western states imposing 1,100 lb/MW EPS• Roughly 2 million tons/year sequestered just

to sell baseload

Timing gap IGCC plant with sequestration:

• $3-4 billion Financing requires permitting certainty Newness of technology creates risk of

capital Clear permitting track becomes critical

path item

Permitting Approaches State

• Address as EOR• Address through state wastewater permit

Federal• Address as separate UIC type

Common theme: CO2 as waste

Threshold Issue: Is CO2 a Waste? Tough argument: CO2 permitted as

waste for years Seeking to permanently dispose Need legislative interpretation to

consider other than waste EPA position is that whether CO2 is a

waste is irrelevant

Threshold Issue: Is CO2 a Hazardous Waste? Normally no Federal hazardous waste definitions

don’t fit• Not listed hazardous waste• Corrosive hazardous wastes only include

aqueous or liquid

• Gaseous or supercritical CO2 don’t meet definition

Underground Injection Control Closest existing fit for GCS permitting is

UIC program• But…no existing program anticipated GCS

Currently five well classes, but only three with potential GCS relevance:• Class I• Class II• Class V

Underground Injection Control Class I:

• Inject:• Hazardous waste• Non-hazardous industrial waste• Municipal wastewater disposal

• Inject under drinking water aquifers• Permit to retain for 10,000 years• Closure, post-closure and financial

responsibility requirements

Underground Injection Control Class II:

• Oil & gas industry• 144,000 wells operating nationwide

• 33 million tonnes CO2 injected annually

• Primarily Enhanced Oil Recovery (EOR)• Heavy existing use of CO2

• Focus: Drinking water protection• Not focused on permanence of injection• States can seek delegation based on

equivalence determination

Underground Injection Control Class V:

• Catch-all category• Includes experimental wells• Not focused on permanence of injection

State Models States have proceeded in absence of

federal action• Guided by IOGCC

Key actors:• Wyoming• Oklahoma• Kansas• Washington

IOGCC Model Rules (2007) Key concepts:

• CO2 slated for injection not a waste

• Long term liability proposal:• Industry funded trust fund• 10 years post-closure, operator demonstrates

reasonable expectation of well integrity• Financial assurance mechanism terminated and liability

transferred to state

Recognized need for “necessary and sufficient” property rights

Wyoming HB 90 (Effective: July 1, 2008)

• Mandates UIC permit for GCS• Clear distinction from EOR• Tells WDEQ to develop rules

Oklahoma SB 1765 (May 2008)

• Proposal was groundbreaking• Required development of GCS permitting regime• Transferred ownership of wells to state & released

owners from liability 10 years after closure

• Bill passed relatively disappointing• Mandated task force to report to Governor with

GCS permitting recommendations by December 2008

Kansas HB 2419 (2007)

• GCS rules supposed to be developed by July 2008• Draft in progress

• State GCS fund to pay long-term GCS-related monitoring and remedial activities

• Exempts GCS property and any electric generation unit utilizing GCS from all property taxes for 5 years

• Allows for accelerated depreciation of GCS equipment

Washington Biggest sleeper of group ESSB 6001 passed May 3, 2007

• 1,100 lb/MW CO2 standard on all baseload generation

• “Permanent” GCS as means of compliance • Two IGCC projects seeking permits at time

GCS rules as result of emission limit

Washington Developed GCS permitting program

• Rules promulgated June 16, 2008• Primary focus was deep basalt sequestration

Washington UIC based, sort of…… National involvement by environmental groups EPA: Begrudging participation Focus on “permanence”

• Substantially 99% of GHGs remain for at least 1,000 years

Long term operator post-closure liability:• “little or no risk of future environmental impacts and

there is high confidence in the effectiveness of the containment system and related trapping mechanisms “

EPA UIC Rulemaking Proposed rules signed July 15, 2008 New type of UIC well: Class VI

• Class VI for dedicated GCS projects• Class II for projects involving EOR so long as

field producing• Class II operators wanting Class VI would

require repermitting

EPA GCS Proposal Expressly avoids determining injected

CO2 is waste or product Ambiguity on degree of preemption Applicant must demonstrate CO2 is non-

hazardous Key theme: Not regulating permanence

or holding ability of GCS systems—only protecting drinking water

EPA GCS Proposal Secondary containment zones not required

• Floated concept of requiring secondary containment formations

• Must be identified if present Area of Review (AoR)

• Rejects set radius around well• Applicant must model to establish AoR• Reevaluation at least every 10 years• Corrective action “surfing” allowed

EPA GCS Proposal Open issues:

• Minimum depth • Mandate depth (800 m) to maintain supercritical

state?

• Below lowest drinking water aquifer• Is this necessary?• Will this eliminate too many good sites?

• e.g., Powder River Basin

• Could issue “aquifer exemptions”

EPA GCS ProposalPost-injection monitoring period

• 50 year presumptive minimum time frame• Regulatory authority could lengthen or shorten based

on threat of endangerment to potable aquifers• Final report as condition to closure• Mandatory recorded notice on title of sequestration

Financial assurance required through end of post-injection period

Reject IOGCC transfer of liability concept

EPA GCS Proposal Does not address:

• Hazardous v. non-hazardous waste• Hazardous substance

• Important for CERCLA liability

• Permanence• Property rights• Releases to atmosphere

GCS: What Will It Take? Three existing CO2 cap and trade

programs:• EU Emission Trading Scheme (ETS)• Regional Greenhouse Gas Initiative (RGGI)• Alberta Cap & Trade

Developing cap and trade program:• Western Climate Initiative• Midwestern Regional GHG Accord

GCS: What Will It Take? All CO2 cap and trade programs:

• Require massive reductions• Involve offset provisions

• Offsets moderate price and reward good behavior• Offsets traditionally prohibited for capped sectors

Fundamental tension: Do you prohibit first movers for GCS technology from generating offsets• Even Lieberman-Warner allocated bonus emission

allowances to GCS

Bottom Line Requirements Develop legislative fix to property rights

questions Develop clear and intelligent permitting program Develop clear sunset to GCS post-closure

liability upon reasonable showing Allow first mover GCS plants to generate offsets Allow monetary incentives to first mover GCS

from allowance sales• But don’t rely solely on government funding