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

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@velaw.com January 23, 2009

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

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  1. 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@velaw.com January 23, 2009 University of Texas School of Law

  2. 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 • What’s Next 12-8-2008

  3. Reasons For State Involvement 12-8-2008

  4. 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 12-8-2008

  5. 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 12-8-2008

  6. 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? 12-8-2008

  7. Legal Issues 12-8-2008

  8. Legal Issues I.R.S. 12-8-2008

  9. 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 12-8-2008

  10. 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 12-8-2008

  11. 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 12-8-2008

  12. 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 12-8-2008

  13. 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 Gresham’s 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) 12-8-2008

  14. 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 space—industrial 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 12-8-2008

  15. 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 12-8-2008

  16. Long -Term Stewardship and Liability • Types of Long-Term Risks • Environmental • In Situ • Transnational 12-8-2008

  17. 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 12-8-2008

  18. 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 12-8-2008

  19. Classification • Crossroads • Flexibility CO2 Waste/Pollutant Benefit 12-8-2008

  20. Classification • Crossroads • Beneficial Use • Waste Pollutant 12-8-2008

  21. 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 12-8-2008

  22. 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 12-8-2008

  23. State Activity 12-8-2008

  24. State Activity • Feds vs. States 12-8-2008

  25. 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 12-8-2008

  26. STATE TRENDS – Adopted Legislation/Regulation NA = Not addressed 12-8-2008

  27. STATE TRENDS – Adopted Legislation/Regulation 12-8-2008

  28. STATE TRENDS – Proposed Legislation/Regulation 12-8-2008 NA = Not addressed

  29. STATE TRENDS – Failed or Not Adopted 12-8-2008 NA = Not addressed

  30. 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 12-8-2008

  31. Observations Cont’d • 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 12-8-2008

  32. Predictions • More State legislation - • 2010-2011 when studies are complete • EPA rules finalized • (Possible) GHG limits imposed • Strong O&G States will work to have authority reside in the O&G regulatory agency • We will see state permits issued before EPA rules finalized 12-8-2008

  33. 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 12-8-2008

  34. 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 12-8-2008

  35. Questions? • Contact Darrick W. Eugene Vinson & Elkins LLP General Counsel, Texas Carbon Capture & Storage Association (512)542-8814 deugene@velaw.com 2801 Via Fortuna, Austin, Texas 78746 www.txccsa.org 12-8-2008

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