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Philip M. Marston, Esq . M ARSTON L AW Paper # 1691

Ninth Annual Conference on Carbon Capture & Sequestration. CO2 Transport (Paper # 1691) Potential Regulatory Frameworks for an Expanded CO2 Pipeline Network: A Look into Galadriel’s Mirror. Philip M. Marston, Esq . M ARSTON L AW Paper # 1691.

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Philip M. Marston, Esq . M ARSTON L AW Paper # 1691

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  1. Ninth Annual Conference on Carbon Capture & Sequestration CO2 Transport (Paper # 1691)Potential Regulatory Frameworks for an Expanded CO2 Pipeline Network: A Look into Galadriel’s Mirror Philip M. Marston, Esq. MARSTONLAW Paper # 1691 May 10 -13, 2010  Hilton Pittsburgh/David L. Lawrence Convention Center  Pittsburgh, Pennsylvania

  2. "What will I see?“ asked Frodo. “Even the wisest cannot tell, for the Mirror shows many things: things that are, things that were, and some things that have not yet come to pass. . . . ." -- the lady Galadriel

  3. Designing successful regulation of a transport system is a four-step process • Review underlying supply and demand characteristics of the commodity being transported • Understand basic operational and business dynamics • Identify public policy objectives to be achieved • Craft a regulatory framework designed to achieve these objectives in light of the underlying business realities Ninth Annual Conference on Carbon Capture & Sequestration

  4. Oil pipelines – the Hepburn Act of 1906 • Oil supply highly fragmented with large numbers of small supply sources • Ida Tarbell’s 1904 “muckraking” stories on exploitation of oil producers • Demand reasonably concentrated initially (limited number of refineries) • Commodity could be readily stored prior to and following transportation • Transportation a “batch” business • Regulation designed largely to protect the independent oil producer Hence, pro-rationing adopted to ensure small producer a share of available capacity Ninth Annual Conference on Carbon Capture & Sequestration

  5. Oil pipelines – the Hepburn Act of 1906 • Oil supply highly fragmented with large numbers of small supply sources • Ida Tarbell’s 1904 “muckraking” stories on exploitation of oil producers • Demand reasonably concentrated initially (limited number of refineries) • Commodity could be readily stored prior to and following transportation • Transportation a “batch” business • Regulation designed largely to protect the independent oil producer Hence, pro-rationing under common carriage rules adopted to ensure small producer a share of available capacity Ninth Annual Conference on Carbon Capture & Sequestration

  6. Natural gas pipeline merchants – the Natural Gas Act of 1938 • Large number of small producers • Extensive gathering lines feed trunklines feeding hundreds of city gate delivery points -- sales only • Continuous process operation • Pipelines were merchants buying in field markets and re-selling to State-regulated local gas utilities • A “many-to-many” network for sales with essentially no access to transportation service • Federal regulation of sales needed to fill “Attleboro gap” – where State regulation constitutionally prohibited • Siting (and eminent domain) added later (1942) based on experience with 1938 Act Ninth Annual Conference on Carbon Capture & Sequestration

  7. Natural gas pipeline as merchants – the Natural Gas Act of 1938 • Purpose of regulation: “protect the consumer interests from exploitation at the hands of private natural gas companies” -- FPC V. Hope Nat Gas Co., 320 U. S. 591, (1944) Ninth Annual Conference on Carbon Capture & Sequestration

  8. By five decades later, natural gas pipelines had formed a national grid. . . . Ninth Annual Conference on Carbon Capture & Sequestration

  9. . . . that allowed for the open access revolution in 1980s with FERC Orders 436/497/636, etc. • Collapse of demand over 10 years led to enormous excess transportation capacity by 1983 • Fell from 22 Tcf in 1973 to 16.8 Tcf by 1983 • Demand in 2006 the same as 1970 -- 35 years before Ninth Annual Conference on Carbon Capture & Sequestration

  10. Characteristics of natural gas pipeline network in 1980s • System linked hundreds of thousands of wells to many thousands of delivery points feeding tens of millions of end users • A “many-to-many” network with thousands of market participants • Non-discriminatory open access rules adopted by FERC beginning in 1985 • Capacity not pro-rated, but first come, first serve” • Hence, not “common carriage”, but non-discriminatory contract carriage • Opening of vast secondary market in capacity • Use of “open seasons”, anchor shippers with dedicated long-term capacity for new construction • Reliance on contract commitments Ninth Annual Conference on Carbon Capture & Sequestration

  11. What does this century of regulatory experience mean for CO2 pipelines? • What is the present network configuration? • Who will be the suppliers of CCS-CO2? • Who will be the customers? • What are the operational requirements of each? • Can any party exert undue market power? • Will to-be-constructed CO2 pipelines to exercise market power? • Or will they rather be subjected to market power by either suppliers or customers? Ninth Annual Conference on Carbon Capture & Sequestration

  12. What are public policy objectives to be achieved? • Are there access or pricing issues present? • Difficulties in expanding capacity to meet market needs? • In the event of disputes, are avenues for relief available? • Contractual protections? • Existing State regulatory protections and powers? • State regulation of rates and access • State eminent domain • State or Federal antitrust laws for access and rates • What about “contractual regulation”? Ninth Annual Conference on Carbon Capture & Sequestration

  13. MAP OF CO2 PIPELINES CO2 pipelines and potential expansion projects ? Denbury Ninth Annual Conference on Carbon Capture & Sequestration Ninth Annual Conference on Carbon Capture & Sequestration

  14. 2010 to 2030: who are potential CCS-CO2 suppliers? • “Low-hanging fruit” • Ammonia manufacture (Gulf South) • Petcoke feedstock (Hydrogen Energy (CA); Gulf South projects) • Coal-to-liquids (Gulf South) • Possible early supply from coal-fired power plants (http://coalgasificationnews.com) • AEP (Mountaineer at New Haven, West Virginia) • FutureGen Consortium (ex AEP and Southern) (Mattoon, Illinois) • Southern Company (Barry Plant, Alabama) • Southern Company (Kemper Co., Miss.) • Summit Texas Clean Energy (near Midland-Odessa, TX) • Illinois • Kentucky (e.g. Cash Creek LLC) • Indiana (Duke Energy’s Edwardsport plant; Indiana Gasification, LLC?) Ninth Annual Conference on Carbon Capture & Sequestration

  15. And from 2030 to 2050? It all depends. . . • Will the early plants be successful at commercial scale? • Will legislation or regulation change over next 20 to 40 years? • Will there be technological innovation? • Will the political consensus on climate change change? • Is “sustainability” sustainable in the face of the personal, national and global debt loads? Ninth Annual Conference on Carbon Capture & Sequestration

  16. Characteristics of CCS-CO2 supply –sources per pipeline • Handful of production sources feeding each major pipeline • 650 MW power plant capturing 4.5 million tons/yr (per IEA BLUE Map Scenario) • Just 5 such plants could fill a 30” pipeline • e.g. 30” pipeline with capacity of ~19 million tons per year (comparable to largest existing US pipeline) • 5 plants @ 4.5 MMT/y = 22.5 MMT/y Like a natural gas pipeline built for the single purpose of receiving the output of just 5 wells for a 20 to 30 year term Ninth Annual Conference on Carbon Capture & Sequestration

  17. Characteristics of CCS-CO2 supply –sources per pipeline • Handful of production sources feeding each major pipeline • 650 MW power plant capturing 4.5 million tons/yr (per IEA BLUE Map Scenario) • Just 5 such plants could fill a 30” pipeline • e.g. 30” pipeline with capacity of ~19 million tons per year (comparable to largest existing US pipeline) • 5 plants @ 4.5 MMT/y = 22.5 MMT/y Like a natural gas pipeline built for the single purpose of receiving the output of just 5 wells for a 20 to 30 year term Ninth Annual Conference on Carbon Capture & Sequestration

  18. Who are the customers for CCS-sourced CO2? • EOR industry currently uses 45-50 MMt/year to produce ~ 250,000 bbl/d of oil • ARI study (2010) projects as much as 3,600,000 bbl/d possible in US by 2030 if not CO2-constrained • potential EOR demand for 600+ MMt of CO2 per year (45 MMt/yr x 14) comparable to the total powerplant-source CO2 supply in the most ambitious CCS deployment study (IEA’s « BLUE Map Scenario showing 77 MMt by 2020 rising to 810 MMt by 2050) Ninth Annual Conference on Carbon Capture & Sequestration

  19. Who are the customers for CCS-sourced CO2? • EOR industry currently uses 45-50 MMt/year to produce ~ 250,000 bbl/d of oil • ARI study (2010) projects as much as 3,600,000 bbl/d possible in US by 2030 if not CO2-constrained • potential EOR demand for 600+ MMt of CO2 per year (45 MMt/yr x 14) comparable to the total powerplant-source CO2 supply in the most ambitious CCS deployment study (IEA’s « BLUE Map Scenario showing 77 MMt by 2020 rising to 810 MMt by 2050) Ninth Annual Conference on Carbon Capture & Sequestration

  20. How long will this all take? • Involves investment of hundreds of billions of dollars • IEA’s Blue Case scenario foresees investment in US by 2030 of ~ $300 billion • By 2050, IEA scenario guestimates $2.5 to $3.0 trillion required worldwide THIS IS A VERY BIG THING. . . . Ninth Annual Conference on Carbon Capture & Sequestration

  21. How long will this all take? • Involves investment of hundreds of billions of dollars • IEA’s Blue Case scenario foresees investment in US by 2030 of ~ $300 billion • By 2050, IEA scenario guestimates $2.5 to $3.0 trillion required worldwide THIS IS A VERY BIG THING. . . . Ninth Annual Conference on Carbon Capture & Sequestration

  22. 7 6 5 4 3 2 1 0 1984 85 86 87 88 89 90 91 92 93 94 A word of perspective: big things take time . . . . Unbundled Transportation Pipeline Sales Pipeline Throughput (1984-1994) (Tcf per quarter) Ninth Annual Conference on Carbon Capture & Sequestration

  23. 7 6 5 4 3 2 1 0 1984 85 86 87 88 89 90 91 92 93 94 . . . and they don’t happen in a regulatory vacuum. Order 234-B Unbundled Order 436 Transportation Pipeline Order 497 Sales Order 636 LDC Unbundling Pipeline Throughput (1984-1994) (Tcf per quarter) Ninth Annual Conference on Carbon Capture & Sequestration

  24. What are some key operational constraints of suppliers and customers? • Powerplant and industrial suppliers need an “output” service • CO2output varies with plant production (of electricity, syngas, methanol, ammonia, etc.) • Require reliable offtake service 24/7 year ‘round • EOR users need a “requirements” service • CO2requirements vary with EOR operations • Require reliable supply for injection in EOR operations 24/7 year ‘round • Unique subsurface rights acquisition/aggregation (i.e. “pore space”) issues Ninth Annual Conference on Carbon Capture & Sequestration

  25. “You say, ‘tomayto’, but I say ‘tomahto”… • CO2 pipeline transmission system and any new regulatory schema must recognize and accommodate these fundamental – and at times contradictory – market requirements • “Few to few network” • handful of major receipt point sources • handful of major delivery points • dedicated, firm capacity to assure availability before the powerplant or industrial CO2 source is built In effect, these will be special purpose or dedicated pipelines each one planned, financed and constructed to serve a few customers Ninth Annual Conference on Carbon Capture & Sequestration

  26. “You say, ‘tomayto’, but I say ‘tomahto”… • CO2 pipeline transmission system and any new regulatory schema must recognize and accommodate these fundamental – and at times contradictory – market requirements • “Few to few network” • handful of major receipt point sources • handful of major delivery points • dedicated, firm capacity to assure availability before the powerplant or industrial CO2 source is built In effect, these will be special purpose or dedicated pipelines each one planned, financed and constructed to serve a few customers Ninth Annual Conference on Carbon Capture & Sequestration

  27. What public policy issues is federal CO2 pipeline regulation expected to address? • Will pipelines be built fast enough to receive all CCS-sourced CO2 supplies? • Will they be able to be built in all the needed locations? • Will pipeline owners be able to deny reasonable access to new CO2 sources or charge unreasonable prices for service? • Is relief available in event of disputes? Ninth Annual Conference on Carbon Capture & Sequestration

  28. Will pipelines be built fast enough to receive all CCS-sourced CO2 supplies? • Pipeline expansions and further planning are already moving forward for CCS-CO2 supply • Pipeline under construction along Gulf Coast • Feasibility planning to bring pipeline to potential Illinois/Indiana/Kentucky supply pool • Multiple agreements already signed – contingent on CO2 supply source being constructed • State laws being adapted as needed to address realistic expansion possibilities • Entirely unclear whether carbon capture will be widely deployed and whether more than a few pipelines will be built or whether a larger network will be required Ninth Annual Conference on Carbon Capture & Sequestration

  29. Will they be able to be built in all the needed locations? • Pipe under construction along Gulf Coast will receive industrial-source CO2 supplies from new plants -- if they are built • Planning review underway for pipe to serve Midwest power plants – if they are built • Potential East Coast projects lack pipeline alternatives because they are too far from potential EOR markets, not because of any regulatory dysfunction • AEP West Virginia pilot project injecting beneath plant in non-EOR formations Ninth Annual Conference on Carbon Capture & Sequestration

  30. What about access and price issues? • Capacity will be reserved and pricing formulas negotiated before a pipeline is constructed • With long term contracts reserving available capacity, access and market power questions simply aren’t relevant • Eventual disputes will be contractual issues to be addressed through consulting contract terms, arbitration proceedings where appropriate, or State courts, where necessary Ninth Annual Conference on Carbon Capture & Sequestration

  31. Is relief available in event of disputes? • Contractual remedies – parties are “married” to each other under long-term agreements • Arbitration? • Court action to enforce contractual protections (protected under applicable State law) • Regulatory action by State regulators under existing CO2 pipeline regulatory schemes • State or Federal antitrust laws if claims of market power abuse Ninth Annual Conference on Carbon Capture & Sequestration

  32. No market power since virtual “life-of facility” contracts must be negotiated – and capacity reserved -- before the pipeline is even built Pipeline is special purpose pipeline dedicated to serve handful of CCS-CO2 sources With no market power, regulation of prices, access and operational terms is simply inapposite “Open access” model with secondary market as used for natural gas would be irrelevant – capacity “booked” before construction Vive la différence! Characteristic Policy principle Ninth Annual Conference on Carbon Capture & Sequestration

  33. Need to dedicate offtake capacity for long-term before carbon capture facilities constructed “Few-to-few”, not “many-to-many” network configuration Flexible reliability required at both ends of pipe even where operational requirements conflict Pro-rationing away capacity for subsequent plants (as for oil pipelines) discourages construction of all facilities – including pipeline Complex open-access system with secondary markets is inapplicable “One-size fits all” tariff regulation tends to devalue CCS-sourced CO2 for EOR operations and favors alternative CO2 sources Vive la différence! Characteristic Policy principle Ninth Annual Conference on Carbon Capture & Sequestration

  34. Where does that leave us? • Anthropogenic CO2 supply sources are proposals only (except natural gas processing and 1980s “synfuels” plant) • Unclear what real-world problem federal economic regulation of pipelines is intended to solve • Proposed new pipelines as dependent on suppliers as vice versa -- unlike oil and natural gas pipelines market power issues for connecting new CO2 capture sources are decades away -- if ever Ninth Annual Conference on Carbon Capture & Sequestration

  35. Where does that leave us? • Anthropogenic CO2 supply sources are proposals only (except natural gas processing and 1980s “synfuels” plant) • Unclear what real-world problem federal economic regulation of pipelines is intended to solve • Proposed new pipelines as dependent on suppliers as vice versa -- unlike oil and natural gas pipelines market power issues for connecting new CO2 capture sources are decades away -- if ever Ninth Annual Conference on Carbon Capture & Sequestration

  36. Pending regulatory and legislative issues • State level initiatives: need to continue action by affected States on storage unit permitting, unitization, right of way rules, etc.) • Federal environmental regulation • Need reasonable final rules from EPA that are technically and economically feasible under UIC program (governing well drilling) and Monitoring, Verification and Reporting (MRV) plans (including opt-in rules for EOR-based CO2 sequestration) • IRS tax rules: greater certainty and clarification in operation of existing investment tax credits for EOR sequestration • Federal legislation formally recognizing CO2-based EOR injections as simultaneously sequestration net injections Ninth Annual Conference on Carbon Capture & Sequestration

  37. Thank you! MARSTON LAW 218 N. Lee Street Alexandria, VA 22314 http://www.marstonlaw.com Ninth Annual Conference on Carbon Capture & Sequestration

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