This article is an excerpt of a full PIOGA Press newsletter article written and prepared by Braden Christopher and Josh Hannold members of Steptoe & Johnson PLLC – a U.S. law firm with core strengths in energy, labor & employment, litigation, and transactional law. The full article appears in the July 2022 issue of The PIOGA Press.

In May, West Virginia passed House Bill 4491[1] pertaining to carbon dioxide capture and sequestration (CCS), a pertinent element of blue hydrogen energy production.[2] The CCS statute imposes requirements for the operation of injection wells used in an underground CCS storage process. Pennsylvania is following closely behind, as Senator Gene Yaw (R-Lycoming) is planning to introduce similar legislation that would be known as the Pennsylvania Geologic Storage of Carbon Dioxide Act.[3]

The Pennsylvania bill would establish a framework for CCS operations in Pennsylvania, like the West Virginia CCS statute being discussed here has for West Virginia.[4] According to Senator Yaw’s memorandum, the proposed legislation would establish a “legislative intent to facilitate carbon capture in Pennsylvania; designate property rights around storage sites in deep geologic formations; assign state regulatory authority of CCS facilities in Pennsylvania; specify the regulatory and permitting process within the existing federal structure; and create a cash fund sustaining regulatory operations, minimizing impact to taxpayers.”[5] The inclusion of such provisions in the proposed Pennsylvania bill would make it very similar to the West Virginia CCS statute.

Pennsylvania Governor Tom Wolf has been vocal about establishing a hydrogen and carbon storage hub for Pennsylvania.[6] The area’s abundance of natural gas and existing expertise to produce the same has drawn interest from companies like Shell, Equinor and EQT, who have stated that a hydrogen hub project could drive down carbon emissions.[7] Further, the Infrastructure Investment and Jobs Act of 2021 allocates $8 billion for at least four hydrogen hubs across the country.[8] Shell’s cracker plant in Beaver County is expected to be among the first to use a carbon sequestration hub that could be operational by 2027.[9] CCS operations are pivotal to blue hydrogen production, which could be the next logical step in Pennsylvania for low-carbon energy production due to existing natural gas production and its related infrastructure.

In light of Senator Yaw’s proposed legislation, a high-level review of the West Virginia CCS statute may provide insight into the proposed bill in Pennsylvania.

First, the West Virginia CCS statute does not address or provide any eminent domain rights, which could be a significant challenge for any CCS project. Accordingly, CCS projects, in West Virginia, must generally be formed using voluntary contracts with owners of the underlying pore space. Examples of such contracts include deeds, leases and easements. However, if a CCS operator is not able to obtain voluntary agreements with all pore space owners within the project area, the CCS statute does provide an option to move forward without the vested rights from all of the pore space owners. Specifically, the CCS statute provides that if after good faith negotiation and searching, the operator cannot locate or reach an agreement with all necessary pore space owners but has a written agreement with at least 75 percent of the parties with an interest in the pore space of the parcel, or in the case of collective storage, 75 percent of the acreage in the project area, all of the pore space for which voluntary agreements have not been reached will be statutorily included within the proposed storage facility, subject to certain other conditions set out in the CCS statute.[10]

CCS operations cannot be conducted on the surface of any tract of land belonging to a non-consenting owner, except for seismic studies and in cases of emergencies.[11] If an operator is unable to reasonably negotiate with a surface owner for the right to conduct a seismic study on lands owned by the surface owner, the West Virginia Oil and Gas Conservation Commission is permitted to authorize entry on such lands.[12] In that case, the “operator shall notify the owner or owners 15 days prior to entry, pay the surface owner just and reasonable compensation,” and repair damages to the surface and any damage resulting from their entry.[13]

A primary issue in developing carbon storage facilities is determining ownership of the pore space. This issue is complicated when there is a severed mineral estate, as to whether the surface owner or the mineral owner holds the rights to the pore space. Importantly, the CCS statute provides that title to pore space in all strata underlying the surface of lands and waters is vested in the owner of the overlying surface estate.[14] Presumptively, the Pennsylvania bill would also address the issue of pore space ownership, as indicated in Senator Yaw’s aforementioned memorandum. Once the proper parties have been identified, the CCS operator could then move forward with acquiring the necessary rights.

There are at least three primary methods of obtaining the rights of storage in pore space, and each has its own advantages and disadvantages. The first option for acquiring pore space rights through an outright purchase by deed from the surface owner. Generally, a purchase will have fewer restrictions than a lease. However, a CCS operator in West Virginia would need to also purchase the surface estate because the West Virginia CCS statute prohibits any severance of the surface estate from the pore space.[15] Importantly, the CCS statute does not affect transactions that took place before May 30, 2022, but the terms of such transactions must be “clear and unambiguous upon the face of the instruments which severed pore space from title to the surface estate.”[16]

Further, the CCS statute goes on to provide “a rebuttable presumption that for all transactions prior to [May 30, 2022]…, that the pore space remains vested with the surface owner, unless there was a clear and unambiguous reservation, conveyance, and/or severance of the pore space from the surface upon the face of the instruments.”[17] Purchasing the entire surface estate may be more expensive compared to other acquisition methods making it economically less attractive to the CCS operator.

The second acquisition avenue is through a CCS-specific lease of the pore space, like a traditional oil and gas lease, which remains permissible under the CCS statute.[18] Leasing may be easier in Appalachia, where property owners have more familiarity with these types of contracts. Pore space leases may also be less expensive for the operator than the outright purchase of the surface estate. However, leases typically are limited by a term of duration.

The third acquisition method is a subsurface easement. This method may be advantageous because it may be less expensive than a deed or a lease, and the easement could be drafted to have either a temporary or perpetual term. However, the fact that easements are considered non-possessory gives the operator less rights than it would obtain by a deed.

Beyond property rights, a CCS operator must also consider the permanent nature of carbon dioxide sequestration projects and the allocation of liabilities throughout the lifecycle of the project. The most significant difference between the subsurface storage of natural gas and the storage of carbon dioxide is the permanency of carbon dioxide storage. To mitigate the liability risks and costs over the project’s lifetime, the solution embodied in the West Virginia CCS statute, and other similar legal models enacted in other parts of the country and world, is to allocate liability differently at various stages of the lifecycle: site selection, operation, closure and post-closure.[19] Generally, the CCS operator bears all liabilities during site selection, operation, and closure periods. However, the CCS statute permits the operator to seek a completion certificate ten years after the end of injections, whereby responsibility for the CCS project would be transferred to the state.[20]

The CCS statute also requires that the operator pay certain fees allocated to the Carbon Dioxide Storage Facility Trust Fund, primarily “a fee on each ton of carbon dioxide injected for storage.”.[21] This fund is designated for the “anticipated expenses associated with the long-term monitoring and management of closed storage facilities.”[22]

It is also important to understand the liabilities associated with CCS operations. First, an operator should be prepared to address general liabilities that may arise for damages caused by CCS operations. These liabilities can largely be managed by traditional insurance.[23] Second, administrative liability may arise when a CCS operator is subject to state or federal regulations, such as the Safe Drinking Water Act and Clean Air Act. Again, these administrative liabilities can largely be managed through insurance or self-insurance.[24] Third, there is potential for liability from greenhouse gas emissions in the event of a carbon dioxide leak from the CCS project, which could result in, among other things, a loss of emissions credits.[25] Unlike the liabilities associated with general or administrative matters discussed above, there appears to be a current lack of insurance options for addressing greenhouse related liabilities.[26]

As the importance of lower carbon sources of energy continues to grow, carbon capture and sequestration projects combined with blue hydrogen production projects may be an attractive option to promote clean energy in the Appalachian region. Accordingly, the West Virginia CCS statute may provide a potential roadmap for Pennsylvania and other states to consider when it comes to advancing clean energy initiatives.

 

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