Carbon storage down under

By Claire Smith.

Key Points:
The Federal Government has taken the first step in the right direction but still has some significant hurdles to overcome if it is to establish a fair, transparent and robust legal framework that can be adopted as a model for CCS legislation in other States and international jurisdictions.

The future for coal-based electricity generation, both domestic and exported depends, according to Professor Garnaut, on carbon capture storage (CCS) becoming commercially effective[1]. Early CCS investors in Australia will be looking to the Federal and State Governments for financial incentives but also legal certainty. This article examines the Federal Government's progress in the development of a legislative framework for offshore CCS and highlights some of the key challenges ahead.

What is CCS and why is it so important?

Essentially, CCS consists of three distinct phases:

1. "capture" of carbon dioxide (CO2) that would otherwise be emitted to the atmosphere from large point sources such as coal or gas fired power stations;
2. "compression and transport" of CO2 to suitable storage sites (eg. by pipeline) and,
3. "storage" of CO2 via injection into deep geological formations such as depleted oil or gas fields, saline aquifers or unminable coal seams where it will be trapped for thousands or possibly millions of years.

The concept of injection and storage of CO2 is not a new phenomenon. Oil and gas companies have been using similar technologies for many years to purify natural gas and enhance oil recovery. The oldest commercial scale CCS project is Sleipner in the North Sea which has been operated by Norway's StatOil since 1996. The project strips approximately 1 million tonnes of CO2 from natural gas a year and injects it into a saline aquifer. Currently the world's largest CCS project is located in a depleted oil reservoir in Canada. CO2 for this project is captured at a coal gasification plant in North Dakota which produces methane from coal.

The real attractiveness of CCS lies in its compatibility with the existing coal, oil and gas industries. In other words, if economically viable, CCS will allow the survival of the fossil fuel industry in a future carbon constrained world. The Intergovernmental Panel on Climate Change estimates that the economic potential of CCS could be between 10 and 55 percent of the total carbon mitigation effort until year 2100 (Section 8.3.3 of IPCC report[2]).

Progress with the Offshore Bill

The draft Offshore Petroleum Amendment (Greenhouse Gas Storage) Bill is designed to facilitate the location of suitable offshore CO2 storage sites and permit transport, injection and storage operations. Some key developments in the passage of this Bill are briefly summarised below and explained in more detail in the following sections.

• 16 May 2008 - Release of exposure draft of Bill by Department of Resources, Energy and Tourism (DRET )
• 16 June 2008 - Bill is tabled in Parliament and is referred to the House of Representatives Standing Committee on Primary Industries and Resources for inquiry.
• 15-18 July 2008 - Standing Committee holds a public inquiry and receives oral submissions from a range of government, industry and environment stakeholders.
• 15 August 2008 - Standing Committee releases its report, "Down Under: Greenhouse Gas Storage" which sets out 19 recommendations to the Government informed by the written and oral submissions it has received.

What does the Bill cover?

The Bill, if enacted, will bring the injection and storage of CO2 in offshore sub-seabed storage areas within the scope of the existing petroleum legislation (ie. the Offshore Petroleum Act 2006 (Cth)) and will establish a range of new offshore titles granting:

• rights to investigate and lease suitable areas of the seabed in Commonwealth offshore waters (between the three nautical mile limit and the outer limit of the Australian continental shelf); and
• new licences authorising the transportation, injection and storage of "greenhouse gas substances".

For practical purposes, when the amendments commence "greenhouse gas substance" will mean CO2 together with any substance incidentally derived from the capture, injection or storage process and any permitted chemical detection agent used to trace it. The definition could be extended in the future by regulation to cover other greenhouse gases (GHG ).

The Bill, as currently drafted, provides a high level of protection to incumbent petroleum operators. Pre-existing titleholders have a right of veto under the Bill for any CCS-related activities that the relevant Minister determines might have a significant impact on their petroleum activities.

How could a prospective storage operator be regulated under the new regime?

Figure 1 sets out the steps that a prospective storage operator will need to go through from the initial bid application and exploration phase to injection and storage operations and eventually site closure and surrender of any licence/lease (based on an analysis of the Bill as currently drafted).

Bid application and exploration phase

The bid application and assessment process will be run by DRET. It is anticipated that the assessment process will take between six to 12 months. The successful applicant will be granted a GHG Assessment Permit. This gives the permittee the right to explore for a suitable storage formation using any method currently used to explore for petroleum and inject and store CO2, air, petroleum or water on an appraisal basis. Importantly, there is no statutory requirement that a substance injected on an appraisal basis be permanently stored as the purpose is to "appraise the suitability" of the storage formation. All key GHG operations require the approval of the responsible Minister.

GHG Assessment Permits will remain in force for six years. There is a provision to allow an extension if an application has been lodged but the permits cannot be renewed. When a permittee identifies and "proves up" a storage formation it must obtain a declaration from the responsible Minister that it is an "identified GHG storage formation" in order to obtain a GHG holding lease or injection licence. It is possible to have multiple declared GHG storage formations provided that each is wholly situated within the titleholder's area. Unlike a petroleum declaration, the GHG declaration retains significance over the whole life of the project as the licence conditions in any injection licence will be derived from matters specified in the declaration. The relevant Minister has the power to revoke the declaration if it becomes apparent at a later stage that the storage formation is not suitable for permanent storage of CO2.

A GHG assessment permittee can proceed directly to an application for an injection licence if it can demonstrate that there will be a source of CO2 available to commence injection within five years of the grant of the injection licence. If a source has not been secured, the permittee can obtain a GHG holding lease instead. This will enable the lessee to retain tenure over the block(s) to which the identified storage formation extends while the lessee secures its commercial CO2 supply.

If a licence holder does not commence injection and storage operations within the licensed area for a continuous period of five years, the Minister may cancel the injection licence. An injection licence-holder can choose to revert to a holding lease which has a five year duration plus a renewal (of a further five years). The Minister must be satisfied that the lessee will be in a position to inject and store within 15 years prior to granting the holding lease.

A special GHG holding licence, which will remain in force indefinitely, can be granted in limited circumstances eg. where a GHG assessment permittee has been refused an injection licence on the grounds that the CO2 operation would have a significant adverse impact on existing petroleum operations. The special holding lease allows the lessee to retain tenure over the block until such time as the petroleum operations have ceased.

Operational phase

A GHG injection licence is the "operating licence" authorising injection and storage of CO2 into one or more identified storage formations that are wholly situated within the licence area. The injection licence will remain in force until the injection operations cease, the site closing work program is completed and the licence is surrendered.

An applicant for an injection licence must submit a draft site plan for approval by the Minister. Any activity carried out under the licence must be in accordance with the site plan which must be periodically updated to reflect any changes in the risk profile. The Minister must also be satisfied of the applicant's technical and financial resources before granting the licence (as the operational phase could be 20 to 30 years).

The injection licence will be subject to conditions derived from the specifications in the declaration which can be varied as the project progresses and any other conditions the Minister thinks is appropriate. An important statutory condition is a requirement to provide security or to top up existing security at any time required by the Minister.

The Bill confers a range of powers on the responsible Minister for dealing with "serious situations" where injection and storage operations do not go as planned (eg. if there is a leakage of CO2 or an anomaly in CO2 behaviour) including suspending or ceasing injection and/or undertaking mitigation.

Closure phase

At the end of the project, the licensee must apply for a site-closing certificate and submit a report setting out an assessment of expected CO2 migration pathways and suggestions for post-closing monitoring, measurement and verification (MMV). This triggers the commencement of the site-closing period, during which the licensee will be required to carry out a decommissioning works program.

In addition to reinstatement works, the works program will include extensive MMV of the behaviour of injected CO2 to assure the responsible Minister that the CO2 is behaving in accordance with the site plan projections. The licensee will be required to provide security for the payment of the post-closure costs notified to it by the Minister prior to obtaining a site-closing certificate. Once the site-closing certificate is issued, the licensee can surrender the title and leave the site. The Commonwealth has indicated that all securities, except any that have been forfeited and the post-closure security, will be returned at this stage.

Who bears the liability?

At the same time the Bill was released, the Australian Government Solicitor (AGS) released a legal issues paper dealing with the question of who will bear liability for injected CO2. The AGS' position is that:

• prior to closure statutory liabilities should lie with the licensee and common law liabilities should lie where they fall (ie. the current petroleum legislation does not exclude or limit common law liability); and
• post closure (ie. upon the issue of a site-closing certificate) the licensee will have no further statutory liabilities. However, common law liability will continue to lie where it falls. There are no proposals to immunise project participants against long-term common law liabilities. Regulators of GHG titles and activities will, however, be immunised.

According to the AGS, in the longer term, the risk will pass to the Commonwealth, if, and when, the project participant ceases to exist or where damages for some other reason are irrecoverable. This will be as a consequence of the passage of time rather than any assumption of liability on the part of the Commonwealth. The AGS paper concludes by saying that:

"GHG industry participants will therefore need to make their own arrangements to deal with potential common law liability, as an ordinary cost of doing business".

Standing Committee's recommendations on the draft Bill

The Standing Committee was appointed at the request of the Government to ascertain whether the Bill complied with a range of objectives and published its aptly named report "Down Under: Greenhouse Gas Storage" on 15 August 2008. The following table summarises the Standing Committee's terms of reference and its response.

Terms of Reference	Standing Committee Response
1. Does the Bill establish legal certainty for access and property rights for the injection and long-term storage of GHG in offshore Commonwealth waters?	Yes, although how the access and property rights provided for under the Bill will actually operate will depend a great deal on the regulations and guidelines (yet to be issued) and practice over time.
2. Does the Bill provide a regulatory regime which will enable management of GHG injection and storage activities in a manner which responds to community and industry concerns?	Yes - however, both industry and the community have concerns about how this legislation will operate and these concerns will only be assuaged if both CCS and the legislation fulfil their potential.
3. Does the Bill provide a predictable and transparent system to manage the interaction between GHG injection and storage operators with pre-existing and co-existing rights, including petroleum and fishing operators, should these come into conflict?	Yes but Committee makes a number of recommendations (see below) to defuse potential conflict and increase co-operation between those sectors.
4. Does the Bill promote certainty for investment in injection and storage activities?	To the extent the Bill provides a legislative framework within which industry may operate, it provides some degree of certainty for investment in injection and storage activities, although the Committee highlights a number of industry concerns in this area. Recommendations to increase levels of investment certainty are therefore made.
5. Does the Bill establish a legislative framework that provides a model that could be adopted on a national basis?	The Bill is unlikely to be adopted as a model for a national legislative framework in its entirety, although elements of the Bill may be suited to consistent application nationally. This is a start to a new industry. The Bill does what it is designed to do - namely, provide an enabling framework for GHG storage in Commonwealth offshore waters - and should be enacted on that basis.

The following are among the Standing Committee's key recommendations:

• no acreage should be automatically excluded from consideration for selection on the grounds of pre-existing petroleum activities;
• process for identifying and short-listing acreage for release should be transparent and systematic;
• proponents who can demonstrate a readily available CO2 stream for imminent injection should receive preferential consideration by the Government in its assessment of bids for acreage allocation;
• a GHG Assessment Permit holder should be given the right to renew its permit up to a maximum of three years;
• the responsible Commonwealth Minister should be granted the power to direct: (a) petroleum and GHG storage operators to negotiate in good faith where titles potentially or actually overlap and (b) agreement where this is otherwise unobtainable;
• incumbent petroleum operators should be offered a one-off opportunity to incorporate a GHG assessment permit over their exploration or production licence, with the condition that they must demonstrate utilisation of this permit within five years or surrender it;
• further financial incentives are needed for the earliest movers in this new industry to promote uptake and investment in technology;
• consideration should be given to making monitoring data publicly available;
• long-term liability should be formally transferred from the GHG operator to the Government (through a mechanism set out in the legislation) upon the operator meeting prescribed site closure criteria; and
• regulations and guidelines attendant upon the legislation (eg. criteria for achieving a site closing certificate) should be released for stakeholder and public comment as a matter of urgency.

It is clear from the above recommendations that the Standing Committee has listened closely to the oral submissions it received over four days of public inquiry in July and is keen to come up with solutions to break the perceived deadlock between the commercial interests of incumbent petroleum companies and new entrants eg. the Gippsland Basin.

The Report also sends a clear signal to CCS investors that they are likely to benefit from preferential treatment (both in terms of financial incentives and permit allocations) if the Government adopts the Committee's recommendations. However, where competing commercial interests are at stake, parties will need to be prepared to negotiate in good faith or risk the Government stepping in.

Giving incumbent petroleum operators a one-off opportunity to obtain a GHG assessment permit which must be used within five years could also be problematic. What happens where operators hold production licences that may be viable for several decades into the future?

The Standing Committee acknowledges that there are many valid arguments as to why the Government should take over long-term liability including:

• providing investment surety within the CCS industry by establishing clear timeframes on potential liability;
• promoting and facilitating initial uptake of CCS technology where obtaining insurance may be problematic given the immaturity of the industry; and
• ensuring that potentially extreme long-term liabilities associated with GHG storage are formally transferred to an appropriate long-term entity such as the Government rather than through de facto inheritance by the passage of time.

Although the Standing Committee is in favour of including a mechanism in the Bill to allow formal transfer of long-term liability from the GHG operator to the Government on the grounds that such a transfer would act as an incentive for proper management of GHG storage, it does not endorse indemnifying proponents from common law liability. Consequently, it appears that the storage operators may still be required to bear some long-term common law liability risks while they remain in existence.

Key challenges ahead

The Standing Committee Report highlights that the Government still has a number of significant issues to grapple with if it is to achieve a transparent, fair and robust legislative framework that gives certainty to project investors and also manages the potential conflicts between CO2 emitters and CO2 storers; existing petroleum activities and GHG activities; and third party access rights. Key challenges will include:

• promoting legal certainty and transparency - wide discretionary powers are granted to the responsible Minister in respect of the grant of GHG titles, imposition of licence conditions, making of directions to the licensee, and site closure. Although such discretion arguably provides greater flexibility which may be useful, particularly in relation to the early projects, it does not necessarily promote legal certainty and transparency. It will be important for the Commonwealth to provide clear guidance and regulations setting out the criteria for its decision-making, particularly, in relation to acreage allocation, bid assessments and site closure requirements;
• third party access to GHG storage formations and transport infrastructure - this will be an important issue for project participants. At present the Bill makes provision for regulations to establish a regime for third party access but does not give any detail as to what those rights will be and when they will take effect;
• resolution of commercial conflicts and competition issues at various stages of the Project (eg. bidding process; third party access etc.) - the Government's position on these issues will be key in promoting legal and investment certainty for project participants. The Standing Committee has recommended giving the Commonwealth the power to direct parties to negotiate in good faith where there are potential or actual overlapping GHG storage and petroleum titles and direct an outcome if there is a deadlock. Although such an approach promotes commercial solutions it may not give sufficient certainty to investors. The Government will also need to consider how to approach various competition issues that may arise;
• financial security - security is another area that needs further clarification. The Bill provides for stringent financial security requirements at exploration, production, closure and post-closure phases. However, it is unclear as to exactly what form that security will take, how much it will cost and how it will be funded. Should a fund be set up to cover closure and post-closure costs that is provided by the operator from its income stream during the operational phase? The Standing Committee acknowledges the current difficulties associated with estimating long-term post-closure MMV costs and that an industry fund could be a potential future option (but does not support one at this stage);
• national consistency in CCS legislation - while some aspects of the Bill could be implemented at a State level e.g. through national guiding principles, there will be a range of additional issues that State Governments will need to address such as land tenure and compliance with existing environmental, OHS and planning legislation in each State; and
• allocation of liability - who bears liability and what liability will be transferred post-closure? How will potential future statutory liabilities be addressed e.g. those that might arise under a Carbon Pollution Reduction Scheme if CCS is included and a CO2 escape occurred?

The Government will also need to carefully consider the use and direction of subsidies and funding incentives to encourage early uptake of CCS, in particular, for the "capture" component. In the UK, the Government is using a competition to direct funding for demonstration of the full chain of CCS technologies (ie. capture, transport and storage) on a commercial scale. The Government has pre-selected "post-combustion capture on a coal-fired power plant" for the demonstration project, the rationale being that such technology, if commercially viable, could be retrofitted to existing plants in Asia. Will the Government do something similar here in Australia to encourage rapid uptake?

Final thoughts

Professor Garnaut concludes that Australia's role as the world's largest exporter of coal, and as a coal supplier and close economic partner to major Asian developing countries, would make it the natural leader to drive commercial introduction of CCS on a domestic and international scale[3]. The Federal Government has taken the first step in the right direction but still has some significant hurdles to overcome if it is to establish a fair, transparent and robust legal framework that can be adopted as a model for CCS legislation in other States and international jurisdictions.

 

[1] Garnaut Climate Change Review, Draft Report dated June 2008 and released on 4 July 2008

 

[2] [IPCC, 2005] IPCC special report on Carbon Dioxide Capture and Storage. Prepared by working group III of the IPCC. Metz, B., O.Davidson, H. C. de Coninck, M. Loos, and L.A. Meyer (eds.). Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, 442 pp

 

[3] Garnaut Climate Change Review, Draft Report dated June 2008 and released on 4 July 2008

For further information, please contact Claire Smith.