Decarbonizing the energy economy and avoiding the worst effects of climate change is the order of the day in the Biden administration and state capitols nationwide. Most recently, the U.S. Environmental Protection Agency released a proposed rule aimed at further reducing carbon emissions from coal and natural gas-fired power plants. The proposed rule looks to carbon capture and utilization and storage (“CCUS”) or carbon capture and storage (“CCS”) as primary decarbonization tools. This reliance on CCS coincides with a significant increase in the value of 45Q tax credits for CCS enshrined in the Inflation Reduction Act last year.
Despite the growing interest in CCS, Colorado’s legislature did not take the opportunity to facilitate CCS in its recent legislative session, which concluded earlier this month with minimal action on the recent CCS legislative framework proposed by the Colorado Oil and Gas Conservation Commission (“COGCC”). Like similar plans put forward by Colorado’s neighbors to the north and east, the Proposal addressed a number of issues generating uncertainty in the CCS industry and potentially inhibiting intrastate CCS development. The issues range from the ownership of the underground space where carbon may be stored — known as pore space — to responsibility for long-term liability for any stored carbon. The legislature, however, declined resolve concerns over pore space ownership or establish a process akin to the pooling and unitization framework used by the oil and gas industry to encourage CCS.
Why Pore Space Ownership and Pooling Matter
A central issue generating unease around the expansion of CCS across the country is the legal ownership of pore space. To properly store carbon, a CCS operator must place it in deep underground geologic formations, which will prevent the carbon’s subsequent escape. An associated challenge is that to store the many tons of carbon obtained through the capture process, CCS entities typically require a large area within which they may store carbon. This presents both a practical and legal hurdle to CCS development. There are often numerous pore space owners within a proposed injection area, but not all those owners will be equally comfortable allowing CCS.
The question of which party owns the pore space is undecided in Colorado and many other jurisdictions around the country. Is the pore space owned by the surface owner or the party owning the minerals beneath the surface, such as oil and gas? The answer is unclear and varies by state, due in part to the recent growth in CCS as a viable decarbonization option, which has delayed a coherent approach to the issue by courts. While a CCS operator might be able to infer how a court may rule on the issue from decisions addressing ownership rights in the context of saltwater disposal wells and underground natural gas storage, the lack of clarity nonetheless creates considerable risk.
The failure to obtain storage rights from all pore space owners within a project area could halt a storage project or expose the project to a variety of legal claims. For example, the unauthorized storage of carbon in the pore space — whether intentional or not — opens the CCS entity to claims of trespass and nuisance. Indeed, the CCS entity could face an injunction requiring the cessation of storage activities and the removal of the unauthorized carbon. And for the CCS entity found to have leased land from the incorrect pore space owner — surface versus mineral owner, or vice versa — the potential damages could be considerable.
Existing State Approaches
A handful states have sought to resolve those challenges through the legislative process. Rather than wait for courts to hash out the ownership details and the scale of potential liabilities, Wyoming, North Dakota, Montana, Louisiana, and Nebraska, for example, have addressed these problems head on.
Although the legislative approaches differ somewhat between the jurisdictions, the states have generally determined the pore space ownership issue in favor the surface owner. Wyoming, North Dakota, and Nebraska set this trend, which tracks with the approach taken by a majority of courts addressing the issue, albeit in different contexts. Further, these states provide clarity regarding the transferability of pore space rights and the requirements for accomplishing such a transfer. Montana is an interesting exception. There, the legislature merely created a rebuttable presumption that the surface owner owns the pore space.
To counter the potential for a recalcitrant surface owner to stymie a CCS operation, several states have adopted tools from the oil and gas playbook: pooling and unitization. Pooling and unitization generally refer to a process by which a CCS entity can forcibly aggregate all of the owners — in the oil and gas context, mineral owners — in a particular area to allow for development to proceed. Typically, to proceed with either option, the project proponent needs to have obtained the authorization from a specified percentage of the owners within the project area. Through this process, the project proponent may proceed with development despite the objection of individual pore space owners.
Wyoming, North Dakota, Montana, Nebraska, Kentucky, and West Virginia have all repurposed the pooling and unitization concept for CCS development. The landowner authorization thresholds for taking advantage of the pooling process range from 51% to 80%. Each of these states also require compensation for the nonconsenting pore space owners. Further, these jurisdictions generally impose a requirement that the CCS entity engage in good faith negotiations with all surface owners prior to pursuing pooling.
Colorado’s Missed Opportunity
Colorado, however, stopped short of providing certainty to the CCS industry. Senate Bill 23-016 (“SB-16”), signed into law by Governor Jared Polis earlier this month, avoids addressing the issues of pore space ownership, pooling, and several other issues identified in the COGCC Proposal. Instead, SB-16 limits its focus to authorizing the COGCC to seek primacy over the permitting of Class VI injection wells, which are used for CCS and administered by the EPA under the Safe Drinking Water Act. While no doubt an important step since obtaining primacy is a time-consuming process — only Wyoming and North Dakota have secured primacy — it is a half measure in the State’s fight to decarbonize its energy sources.
Colorado’s significant decarbonation objectives in 2030, 2035, and beyond are laudable, but meeting them will require carbon reductions wherever possible. The COGCC proposal and the actions of Colorado’s regional neighbors provide a useful starting point for removing uncertainty from a CCS industry that seems poised to increase its role in the nation’s decarbonization efforts.