Carbon Capture Storage Risk Management

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Risk management is one of the few key policy issues aimed at facilitating carbon capture and storage (CCS) at Class VI storage facilities that has not benefited from a substantial policy review over the past of recent years. Stakeholders are interested in developing a policy to effectively manage the safety, performance and liability risks associated with the containment of captured and stored CO2.

In 2019, the National Petroleum Council (NPC) released a report at the request of the Secretary of Energy entitled “Meeting the Dual Challenge: A Roadmap to At-Scale Deployment of Carbon Capture, Use, and Storage in the United States” , containing a wide range of recommendations. Many consider this to be the first current report on CCS policy issues in the United States. No such forum has been convened, but we are aware of the interest of issuers and insurers in exploring risk management solutions.

What are the risks of CCS?

CCS can be designed as having four phases, each with different risks: the site selection phase, during which a storage formation is examined to determine its suitability for long-term CO containment2; the injection phase, during which the installation actively injects CO2 for storage; the maintenance phase of the post-injection site, after the injection has stopped, but during which the site continues to be monitored to ensure CO2 will remain safely confined; and the post-closure phase, which occurs after the facility has met the requirement to demonstrate, in substance, that the sequestered CO2 no longer presents a risk of escape.

These different phases pose different problems in terms of risk management. This blog post will primarily discuss the post-closure or “long-term” phase.

Assuming that the site selection, injection and post-injection site maintenance phases have been managed appropriately – as the UIC Class VI regulatory program was designed to ensure – post-closure risks are expected to be very low. Under 40 CFR § 146.93, “monitoring shall continue until the geological sequestration project no longer poses a hazard to [underground sources of drinking water]and the regulator (either the state or the EPA) has approved a demonstration to that effect. A primary factor in determining whether a threat of endangerment exists is whether the CO2 and the associated underground pressure front remains mobile.

The Class VI regulatory program instituted a default post-injection monitoring period of 50 years. Most anticipate that the injected CO2 and the pressure front will cease to be mobile well before 50 years after the last injection. If this is the case, the “default” period allows the controller to shorten the monitoring period, based on the demonstration described above.

If research can show a probability that CO2 Plumes can be expected to stabilize sooner, EPA should shorten default period to encourage carbon storage projects to go ahead, especially as Investment Act and infrastructure jobs signed into law last November allocated $2.5 billion over the next five years to carbon storage projects. As the NPC study revealed, “long-term liabilities and responsibilities can have a detrimental effect on project development.” (National Petroleum Council Report, Chapter 3, p. 22.) “Long term” includes not only the default 50-year post-injection site maintenance period, but also the post-closure period, the true long term. As noted above, the very definition of being in the post-closure period is that a regulatory agency has determined that the facility no longer poses a threat to underground sources of drinking water, a reasonable approximation of others. risks posed by loss of containment.

In 2008, Hunton formed the CCS Alliance, a coalition focused on risk management for carbon capture and storage. At the time, Congress was about to pass cap and trade legislation to require CO2-emitting plants to reduce their CO2 production over time, with an emissions credit trading program.

The dominant idea of ​​long-term risk management at the time was a trust fund, capitalized with a royalty per tonne on CO2 injected into class VI installations. There has been resistance to the idea of ​​a trust fund, for a number of reasons. First, the fee per ton discussed at the time was $1. Multiplied by billions of tons of CO2 to be stored over time, society would set aside huge sums of money whose use would then be restricted. Risk must be managed in a financially efficient manner. If the regulator’s determination were correct that a site no longer posed risk, a trust fund to cover post-closure liability would be “dead capital”, held to cover non-existent risk.

Second, concerns have been expressed about the poor performance of governments in managing trust funds. Of course, a trust fund is not necessarily a government instrument, but in the context of CCS’s long-term accountability, it was designed as such at the time. Also, with a trust fund for CCS, money would be less available during operation when expected low risks were likely to be highest, but money would continue to accumulate and grow (via interests) after the injection when the risks decrease.

We worked with a group of entities to come up with a different concept: a structure under which early sequestration facilities could enter into a cooperative agreement with the Secretary of Energy, the main benefit of which would be a structure to manage the long-term responsibility. Under the “layered” approach proposed by the group, the site owner/operator would be responsible for “first dollar” liability, up to a defined limit (in millions). Damage beyond the first layer limit would be shared evenly among all parties with cooperative agreements for other sites, up to a defined second limit. In the event (deemed highly unlikely) that damages exceed the first two levels, the federal government would share liability, subject to a defined third limit.

Some advantages of this approach were that liability protection would be an attraction for early sites, and DOE review before entering into an agreement would be added assurance of good site selection. In addition, the proposal included a requirement that the installation had not been refused commercial insurance, yet another assurance of good sites. However, the proposal has a key anachronism: it puts too much money on the table. The risks are most likely lower than assumed by the proposal. However, the concept of risk sharing across layers, for which there are analogues in other risk management contexts, can be useful for CCS.

Ultimately, another concept or structure may need to be offered. Some companies are considering liability of unknown duration for stored CO2 and wants to devise a mechanism that will prevent the associated risks from being kept on the books indefinitely – especially since those risks should be very low.

The key to bringing additional risk management concepts is the discussion between carbon sinks and sinks and risk management experts. Some are happening, but more needs to be done. With CCS poised to take off and Congress providing substantial funding for storage projects over the next few years, such collaboration is timely.

Copyright © 2022, Hunter Andrews Kurth LLP. All rights reserved.National Law Review, Volume XII, Number 40

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