State Activity: Providing the Legal and Regulatory Foundation for CCS Success

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State Activity Providing the Legal and
Regulatory Foundation for CCS Success

• Presented to 2009 Oil, Gas, and Energy Law
  Symposium
• Presented by Darrick Eugene, Vinson Elkins LLP
• General Counsel, Texas Carbon Capture and
  Storage Association
• deugene_at_velaw.com
• January 23, 2009
• University of Texas School of Law

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State Activity Providing the Legal and
Regulatory Foundation for CCS Success

• Why States must be engaged
• Legal issues
• State Activity/State Trends
• Opportunities and Challenges
• Whats Next

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Reasons For State Involvement
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Reasons for State Involvement

• Given the ownership issue and proposed
  long-term care-taker role of the states, the
  states are likely to be best positioned to
  provide the necessary cradle to grave
  regulatory oversight of geologic storage of CO2
• Storage of Carbon Dioxide in Geologic Structures
  A Legal and Regulatory guide for States and
  Provinces, IOGCCSeptember 2007

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Reasons for State Involvement

• States are currently principal regulators of EOR
  and natural gas storage
• Industry and states have 30 years experience in
  the injection, transportation and processing of
  CO2
• States are laboratories of innovation
• Major legal issues fall within state jurisdiction

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Implications of EPA Proposed Rule

• For State primacy or primary enforcement
  authority
• Should States develop their own GS rules prior to
  EPA adoption?
• Should states take a wait and see approach or
  proactive approach?
• What happens if state rules are developed prior
  to federal rules?

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Legal Issues
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Legal Issues
I.R.S.
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Legal Issues

• Access and subsurface property rights balancing
  various interests, injected CO2 acquisition of
  property rights
• Long-term stewardship and liability existing
  analogs public perception liability
• Classification of CO2 waste/pollutant vs.
  benefit/industrial product
• Monitoring, measuring and verification balance
  data needs w/ economic considerations

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Access and Subsurface Property Rights

• Key legal property rights questions
• Who owns the pore space?
• Can the rights to sequester CO2 in the pore
  space be transferred to another party?
• Who owns the injected CO2?
• How is liability handled over the CCS lifecycle?
• How can large and legal storage reservoirs be
  created?
• Two approaches
• Compensation schemes for pore space use
• Truncating subsurface ownership

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Access and Subsurface Property Rights

• Analogs studied
• Oil and gas secondary recovery operations
• Natural gas storage
• Hazardous waste injection
• Property rights in U.S. based upon English common
  law
• 5th Amendment guarantees the right to keep
  private property and compensation for property if
  it is taken for public use
• Property rights fundamentally tied to state law
  and variation across jurisdictions is significant
• Severed estates Surface estate conveyed
  separately from mineral estate
• Oil, gas, other petroleum products

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Who Owns the Pore Space?

• Pore Space Ownership
• Traditionally accepted doctrine in U.S. Cujus
  est solum, ejus est usque ad coelum et ad
  inferos
• While not consistent across jurisdictions,
  natural gas storage cases follow historic
  doctrine of property ownership, surface owner
  owns resulting voids once hydrocarbons are
  removed
• Recently passed in WY HB 89
• (a) The ownership of all pore space in all
  strata below the surface lands and waters of this
  state is declared to be vested in the several
  owners of the surface above the strata.
• Hazardous waste injection cases offer insight
• Chance v. BP no subsurface trespass unless
  proven dictum talks of truncating rights to
  subsurface pore space
• Recent Sprankling article in UCLA Law Journal
  proposes new approach

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Transfer and Ownership of Injected CO2

• Storage rights can be transferred
• When thinking about rights also important to
  consider other mineral owners, lessee, future
  party interests,
• Two properties sold with sequestration rights
  retained
• Future-Gen acquired sequestration rights
• Geologic calculations and sequestration
  assumptions important
• Lee Greshams work on models impact on CCS found
  a 10X difference
• Who owns the injected gas?
• Natural gas storage, after some initial discord,
  now clear that injecting party retains ownership
  (and resulting liability)

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Outstanding Questions for Property Rights and CCS

• Unitization or condemnation of subsurface
  property to create large and legal storage
  reservoirs
• Federal (for interstate projects) and state legal
  analogs exist
• Acquisition of property rights reduces liability
• Geologic Sequestration faces unique challenges
• CCS as a public good
• Two Approaches
• Compensation of surface owners
• Implications of different compensation schemes on
  cost
• Might competing GS projects create a market for
  pore spaceindustrial organization key
• Truncation of subsurface rights
• Takings question?
• Other questions
• Mineral rights trump storage rights, possible
  effects on storage integrity?
• Limits to research short time frames, small
  quantities, valuable resource extraction and
  protection
• Different jurisdictions, different solutions
• Litigation is costly and risk of litigation
  influences investment and expenditure

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Long -Term Stewardship and Liability

• Operational Liability
• Environmental, health safety risks associated
  with carbon capture, transport and injection
• Existing analogs
• Causes of action negligence, strict liability,
  trespass product liability
• Risk can be handled under contracts however time
  frame should be standardized

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Long -Term Stewardship and Liability

• Types of Long-Term Risks
• Environmental
• In Situ
• Transnational

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Mechanisms for managing long-term liability

• Goal Create incentives for good site selection,
  responsible site operations, and, secure storage
• Recognizing that
• No private firm can be responsible indefinitely
• Operational data will help to manage risk
• Possibilities for commercial CCS projects
• Assumption data is available to develop and
  manage risk from initial pre-commercial
  deployment
• Private insurance, bonds, pooling mechanisms
• Joint public-private compensation systems coupled
  with tort law
• See Klass A., and E.J. Wilson, 2008, Climate
  Change and Carbon Sequestration Assessing a
  Liability Regime for Long-Term Storage of Carbon
  Dioxide, Emory Law Review, forthcoming Fall 2008

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Long -Term Stewardship and Liability

• Goal create incentives for good site selection,
  responsible site operations, and secure storage
  avoid moral hazard
• Addressing Long-term Stewardship Liability
• Federal, state, industry, company
• Many existing analogs
• Price-Anderson Act Three Tier System
• Low-level radioactive waste
• IOGCC Proposal
• Waste v. Resources is important here
• Natural gas storage - limited liability
• Superfund type liability

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Classification

• Crossroads

• Flexibility

CO2
Waste/Pollutant
Benefit
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Classification

• Crossroads
• Beneficial Use

• Waste Pollutant

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Classification

• Regulatory implications
• Resource management framework
• Waste disposal framework
• Liability implications
• Natural gas model
• Superfund model
• Economic Implications
• UIC Class I Hazardous
• UIC Class II

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Monitoring, Measurement and Verification

• MMV Questions
• Who monitors?
• For how long?
• Related to Liability
• CCS demonstration projects will provide basis for
  regulation
• Guidelines v. Prescription
• Texas example case by case

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State Activity
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State Activity

• Feds vs. States

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State Trends

• Kind of CCS legislation includes study bills,
  registry, incentives, including CCS in clean
  energy portfolio standard
• My focus is legislation establishing the
  legal/regulatory framework for geologic
  sequestration
• State Trends Matrix
• Importance of regulatory oversight
• Acquisition of property rights
• Ownership of the Subsurface Pore space
• Long-term liability (addressed)
• Treatment of enhanced oil recovery using CO2

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State Trends

• Worth examining for some interesting finds
• Discuss Wyoming as the first to pass legislation
• Kansas possibly adopting the earliest rules
• Washington boldly proposes to designate GS as
  Class V (potential conflict with EPA rules)

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STATE TRENDS Adopted Legislation/Regulation
NA Not addressed
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STATE TRENDS Adopted Legislation/Regulation
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STATE TRENDS Proposed Legislation/Regulation
NA Not addressed
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STATE TRENDS Failed or Not Adopted
NA Not addressed
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Observations

• Inspired by IOGCC work
• 2005 CCS A Regulatory Framework for States
• 2007 CO2 Storage A Legal and Regulatory Guide
• States are anxious to enter this arena
• Evidenced by EPA letter to states
• Desire to protect EOR
• Obtain primary enforcement responsibility
  (primacy)
• Influence EPA rulemaking
• No mandates
• Creates permitting, site selection infrastructure
• Provides some regulatory certainty for
  developers/operators
• Facilitates financing

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Observations Contd

• EOR is a driver Nearly all of the states that
  use CO2 flooding have or will consider GS
  legislation
• Where states have chosen to address or to attempt
  to address subsurface ownership, the ownership
  has been vested in surface estate
• No one has fully addressed Long-term liability
• States are split on regulatory oversight

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Predictions

• More State legislation -
• 2010-2011 when studies are complete
• EPA rules finalized
• (Possible) GHG limits imposed
• Strong OG States will work to have authority
  reside in the OG regulatory agency
• We will see state permits issued before EPA rules
  finalized

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Challenges and Opportunities

• Industrial product/Commodity vs. waste/pollutant
• Subsurface Ownership
• Liability Issues Unresolved
• Need for Regulatory Frameworks (State-by-State)
• Public Perception and Acceptance
• CO2 Demand and Market development without
  Required Reductions
• Need for Large-scale commercial demonstration
  projects

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Next Steps

• Educate, Influence Inform
• Mobilize citizens and policymakers
• Unified Voice
• Policy Development and Advocacy Forums
• North American Carbon Capture Storage
  Association
• Texas Carbon Capture Storage Association

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Questions?

• Contact
• Darrick W. Eugene
• Vinson Elkins LLP
• General Counsel, Texas Carbon Capture
• Storage Association
• [phone]
• deugene_at_velaw.com
• 2801 Via Fortuna, Austin, Texas 78746
• www.txccsa.org