Carbon Capture and Sequestration Legal Considerations

1
Carbon Capture and SequestrationLegal
Considerations

• Kevin M. McGuireJackson Kelly PLLCLexington,
  Kentucky

Presented at the 33rd Governors Conference on
the Environment September 30 October
1 Lexington Convention Center
2
INTRODUCTION

• Who controls the rights to surface use for CCS
  projects?
• Who owns the geologic storage space that will be
  used by CCS projects?
• Who will be liable for problems that may occur
  during CCS operations?
• Who will be liable for problems occurring after
  the injection phase of a CCS project?

3
Legal Considerations Ownership Issues for
Surface Use

• Rights-of-way for CO2 pipelines
• Current statutory eminent domain authority does
  not appear to extend to CO2 pipelines. 15 U.S.C.
  717f(h)(2009) KRS 278.502.
• Use of rights-of-way for existing pipelines and
  electricity transmission lines would depend on
  the language of the existing easement.

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Legal Considerations Ownership Issues for
Surface Use

• Right of access to the surface for injection
  operations and beyond.
• May require voluntary agreement with surface
  owner.
• Absent voluntary agreement, law is unclear.
• Mineral owner has implied right of reasonable use
  of the surface. See, Horseshoe Coal Co. v.
  Fields,  268 S.W. 1078, 1080 (Ky. 1925)
• Rule applied in an oil and gas contextin Texaco,
  Inc. v. Melton, 463 S.W.2d 301 (Ky. 1970).
• No cases applying rule to CO2 injection.

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Legal Considerations Ownership Issues for
Geologic Storage

• Non-Federal Lands
• Prior to severance, fee simple owner could
  authorize use of subsurface estate for CO2
  storage.
• Post severance, Kentucky mineral estate owners
  appear to own the right to authorize natural gas
  storage in depleted geologic formations, but it
  is unclear whether this would apply to CO2
  storage.
• See, e.g. Cen. Ky. Natural Gas Co. v. Smallwood,
  252 S.W.2d 866 (Ky. 1952), overruled by Tex. Am.
  Energy Corp. v. Citizens Fidelity Bank Trust
  Co., 736 S.W.2d 25 (Ky. 1987)(holding that the
  mineral owner held the rights, but overruling on
  another point of law, whether the stored gas was
  personal or real property) (Stephenson, J.,
  dissenting) (noting that the current decision has
  no effect on the cases it purported to overrule).
• There are no cases applying rule to CO2 storage.

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Legal Considerations Ownership Issues for
Geologic Storage

• Federal Lands
• Federal courts look to federal law to determine
  the extent of the federal governments ownership
  interest.
• Most federal cases involve interpretation of the
  Stock-Raising Homestead Act of 1916 (SRHA). 43
  U.S.C. 299 (2009).
• Land grants are construed favorably to the
  Government, that nothing passes except what is
  conveyed in clear language, and that if there are
  doubts they are resolved for the Government, not
  against it. Watt v. Western Nuclear, Inc., 462
  U.S. 36, 59 (1983).
• The question is not what Congress intended to
  reserve, but rather what Congress intended to
  give away in its grant to the landholder in the
  SRHA. Rosette Inc. v. U.S., 277 F.3d 1222,
  1229 (10th Cir. 2002).
• These cases interpret SRHA to retain the
  subsurface estate.
• Outside of SRHA, the federal government is
  treated like any other owner of real property.

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Legal Considerations Ownership Issues for
Geologic Storage

• State statutory solutions
• Wyoming
• Ownership of all pore space is vested in the
  surface estate. Mineral conveyance does not
  convey the pore space unless the agreement
  explicitly conveys the pore space. Wyo. Stat.
  Ann. 34-1-152.
• West Virginia
• Legislature created a working group to study
  issues regarding ownership and other rights and
  interest in "pore space." Working group to issue
  preliminary report by July 1, 2010, final report
  by July 1, 2011. W. Va. Code, 22-11A-6.

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Legal Considerations Ownership Issues for
Geologic Storage

• State statutory solutions
• Kentucky HB 537 (2009 Regular Session)
• Introduced, but not passed
• Would have created carbon management legal issues
  study group to provide recommendations to the
  legislature by 10/31/09 on pore space ownership.
• Interstate Oil Gas Compact Commission (IOGCC)
  Model General Rules and Regulations
• Would empower any CO2 storage operator, with
  approval from the state regulatory agency, to
  acquire all necessary and useful surface and
  subsurface rights by eminent domain. Task Force
  on Carbon Capture Geologic Storage, IOGCC,
  Storage of Carbon Dioxide in Geologic
  Structures A Legal and Regulatory Guide for
  States and Provinces, September 25, 2007, at
  33-34

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Legal ConsiderationsLiability

• Leakage through or along injection wells or
  abandoned wells
• Undetected faults or those created by injecting
  CO2 at excessive pressure
• Corrosion of cap rocks and cement plugs used to
  seal injection wells
• Diffusion into shallower geologic formations

10
Legal ConsiderationsLiability

• Liability exposure for a CCS project is likely to
  fall into one of three broad categories tort,
  contract, or regulatory.
• Tort liability
• A tort claim may arise when an activity conducted
  by the injection operation results in an injury
  to a third party.
• Trespass liability for a CCS operation may arise
  where a CO2 leak results in damage to private
  property, such as private subsurface water or
  mineral rights.

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Legal ConsiderationsLiability

• Contractual liability could arise if leakage were
  sufficient to undermine the value of carbon
  credits associated with an injection operation.
• If the entity that captures the CO2 is different
  from the one that does the sequestration,
  liability could arise if a CCS project breaches
  its obligation to carbon producers that have
  relied on the project to maintain and store the
  carbon they have consigned to the project.

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Legal ConsiderationsLiability

• Regulatory liability may arise when an activity
  conducted by the injection operation results in
  an injury to a third party.
• CO2 may be determined to be a hazardous substance
  under Comprehensive Environmental Response,
  Compensation and Liability Act (CERCLA) 42 U.S.C.
  9601-9675
• CERCLA imposes joint and several liability for
  contamination caused by hazardous waste.
• This liability would apply not only to the
  current owner of a facility but also the owner at
  the time of the disposal, the generators of any
  hazardous substances located on the site, and, in
  certain instances, transporters of waste to the
  site.
• CO2 may be determined to be a hazardous waste
  under Resource Conservation and Recovery Act
  (RCRA) 42 U.S.C. 6924
• RCRA would impose corrective action requirements
  on a CO2 storage facility operator for releases.

13
Legal ConsiderationsLong-Term Stewardship

• Possible alternative strategies to manage the
  financial liability associated with long-term
  stewardship
• Traditional bonding and insurance approaches.
• A wholly private-sector solution.
• States assume responsibility for sites within
  their borders.
• Federal responsibility for all sites.
• A hybrid private-public solution.
• IOGCC Model Program

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Legal ConsiderationsLong-Term Stewardship

• Traditional bonding and insurance approaches.
• Under current UIC regulations, the operator is
  required to provide a plan for plugging and
  abandonment, estimate the cost of plugging and
  abandonment, and ensure funds are available for
  plugging and abandonment at the time of
  permitting.
• Both bonding (e.g., surety bonds, letters of
  credit, etc.) and insurance mechanisms (including
  both self and third-party insurance) are
  available to the operator.

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Legal ConsiderationsLong-Term Stewardship

• A wholly private-sector solution.
• In a wholly private-sector solution each project
  (or operator) would have to bear full
  responsibility for the anticipated cost of any
  future problems.
• Private sector entities, however, often have
  relatively short time-horizons and lifetimes in
  comparison to the period over which injected CO2
  must remain sequestered
• Government would have to intervene if serious
  problems were to arise at a sequestration site
  after the injecting parties cease to exist

16
Legal ConsiderationsLong-Term Stewardship

• States assume responsibility for sites within
  their borders.
• Several U.S. States are already moving in the
  direction of developing legal frameworks in which
  the state would assume responsibility for
  long-term stewardship once a project is closed
  out.
• Kansas established a trust fund to cover long
  term stewardship costs, to be financed by fees on
  CO2 sequestration operations. HB 2419, enacted
  May 2007
• Draft rules specify that after Kansas state
  regulators grant a site post closure status, any
  future costs will be assumed by the state using
  the trust fund.
• Ohio (HB 487 (2008)) and Michigan (SB 707 (2007))
  have introduced, but not yet passed, similar
  legislation.

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Legal ConsiderationsLong-Term Stewardship

• Federal responsibility for all sites.
• Would avoid the variability, limited resources
  and economic redundancies of state-financed
  oversight, the complications of interstate CO2
  plumes, and create a consistent basis for
  emissions trading.
• If the low risk associated with sequestration can
  be spread across all projects in the nation, the
  costs for any single project could be
  significantly lower than if the risk is shared
  only by a small number of projects at the state
  level.
• A federally administered program would also
  create a level regulatory playing field for
  injectors.

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Legal ConsiderationsLong-Term Stewardship

• A hybrid private-public solution.
• A private firm is given responsibility for all
  aspects of long-term stewardship, either on a
  state-by-state basis or for the nation as a
  whole.
• The state or federal government could establish
  operational guidelines, and establish regulatory
  oversight to assure that the private firm is
  protecting public health and the environment
  while also being fiscally sound.
• Government could require the firm to purchase
  insurance against the costs of remedial
  activities, but provide some cap on their
  financial responsibility, above which the
  government would assume responsibility.

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Legal ConsiderationsLong-Term Stewardship

• IOGCC Model Program. IOGCC Task Force, supra, at
  11.
• Two-stages of liability.
• After well is plugged, operator of the storage
  site would be liable for a defined period of
  time.
• Would be required to obtain well and operation
  bonds to assure performance.
• After defined period of time, operator is
  released from any future liability. Liability
  would transfer to the state.
• States costs would be paid by industry funded
  and state administered trust fund.
• Funds would come from injection fees paid by
  storage site operators.

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CONCLUSION

• Significant legal questions remain to be
  answered.
• Partial answers are suggested by examining
  analogous contexts, such as natural gas storage.
• Key elements of potential Kentucky legislation
• Insurance / Trust Fund / Long-Term Stewardship
• Financial incentives
• Eminent Domain
• Ownership Issues likely to be determined by
  Courts