Carbon Sequestration Property and Regulatory Issues

1. Carbon Sequestration Property and Regulatory Issues Jerry R. Fish Thomas R. Wood Stoel Rives LLP July 17, 2008 Rocky Mountain Mineral Law Institute

2. 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

3. CO2 Emissions(IPCC SP4)

4. CO2 Emissions Trajectory(IPCC SPM4)

5. CO2 Effect on Climate(IPCC SPM4)

6. 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

9. Sleipner Project – 1Mt/y

10. Sleipner

11. Sleipner Injects into Saline Aquifer

12. 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.

13. 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

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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).

21. 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).

22. 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.

23. 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).

24. 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.

25. 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

26. 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

27. Permitting Approaches • State • Address as EOR • Address through state wastewater permit • Federal • Address as separate UIC type • Common theme: CO2 as waste

28. 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

29. 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

30. 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

31. 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

32. 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

33. Underground Injection Control • Class V: • Catch-all category • Includes experimental wells • Not focused on permanence of injection

34. State Models • States have proceeded in absence of federal action • Guided by IOGCC • Key actors: • Wyoming • Oklahoma • Kansas • Washington

35. 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

36. Wyoming • HB 90 (Effective: July 1, 2008) • Mandates UIC permit for GCS • Clear distinction from EOR • Tells WDEQ to develop rules

37. 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

38. 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

39. 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

40. Washington • Developed GCS permitting program • Rules promulgated June 16, 2008 • Primary focus was deep basalt sequestration

41. 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 “

42. 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

43. 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

44. 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

45. 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”

46. EPA GCS Proposal Post-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

47. EPA GCS Proposal • Does not address: • Hazardous v. non-hazardous waste • Hazardous substance • Important for CERCLA liability • Permanence • Property rights • Releases to atmosphere

48. 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

49. 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

50. 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