Midstream Missing from Carbon Capture Incentives, Analysts Say

The current structure of carbon capture and sequestration (CCS) tax incentives is powerful, but omits the midstream sector, leading to resistance to the pipelines necessary to get CO₂ from capture to sequestration.

That is the conclusion of an analysis published at the end of October by the Payne Institute for Public Policy at the Colorado School of Mines.

Many midstream operators eager to play their part in the booming CCS segment have been frustrated by finding just as much regulatory and local opposition to greenfield and even brownfield CO₂ pipeline projects as they have long endured for hydrocarbon lines. The Payne analysis offers some insight.

Midstream Missing from Incentives

“Federal tax credits have been integral in kick-starting the CCS industry within the United States, but these credits are targeted at the physical project infrastructure to activate private industry. Both the Infrastructure Law which provides $12.1 billion in CCS funding and the Inflation Reduction Act that increased the available Section 45Q tax credit for CCS from $50/ton to $85/ton of CO₂ stored have accelerated private investment and catalyzed deployments.”

The analysis was written by Anna Littlefield, CCUS program manager at the Payne Institute, and Ashleigh Ross, vice president of strategic engagements and policy for Carbon America, a developer of CCS projects.

“We view the pipeline transportation piece as one of the most challenging aspects of CCUS project development.”—Jarrod Gamble, Kirkland & Ellis

“The system is structurally set up for a you-vs-me negotiation,” the authors wrote, “without a market-based value driver that can absorb increasing stakeholder costs. The net result may be an intractable situation, where communities keep expecting higher levels of value sharing, but operators are structurally hamstrung in their ability to respond.

“The outcome is greater contention between operators and their communities and the necessity of eminent domain which only perpetuates the challenges,” the analysis continued. “The current trajectory of stakeholder battles may lead to lower rates of CCS acceptance and deployment, and greater costs to achieve climate change goals.”

Littlefield and Ross “anticipate that enabling an independent value stream for our communities may be far more effective at generating public acceptance than the actions of individual operators. While operators will continue to use best practices in stakeholder engagement, even for those going above and beyond, the positive impact will be limited to that project.”

They concluded that, “the federal government emphasizing the value of these projects and thanking our communities on the front line will likely be more effective at driving the kind of broad-based acceptance and support needed for CCS to take its place.”

Midstream Looms Large in Project Planning

“We view the pipeline transportation piece as one of the most challenging aspects of CCUS project development,” Jarrod Gamble, an associate in the Houston office of law firm Kirkland & Ellis, told Hart Energy.

“We often find that the practical and logistical considerations around transportation tend to have a significant influence on the projects we’ve seen gain the most traction,” he continued. “Stakeholders often attempt to cultivate partnerships and relationships with counterparties in the immediate vicinity of their ongoing operations to mitigate concerns, and in our experience, these projects in general, have sometimes come together for no other reason than the geographical proximity that the parties share with one another.”

Such making a virtue of proximity is just as well, because long-haul pipe has proven to be difficult. “In many instances, pipelines from emission source to injection sites may not necessarily satisfy the requirements to be considered a common carrier,” said Gamble. “Some states, such as North Dakota (See, N.D. Cent. Code §38-22-10), have promulgated additional eminent-domain policies for CCUS project operators in specific circumstances.”

“Since the passage of the Inflation Reduction Act, which improved not only the economics and realization of CCUS and 45Q credits, but also, the facilities eligible to generate 45Q credits, we’ve seen clients become a lot more serious about these projects.”—Kevin Crews, Kirkland & Ellis

One of the more significant challenges associated with CCUS projects has been obtaining a Class VI underground injection control (UIC) permit, which is generally required for projects intending to conduct long-term permanent sequestration.

“There are some limited circumstances in which other avenues may be available, which typically apply to oil and gas operators engaged in EOR operations or waste disposal operations,” said Kevin Crews, founding partner of the Dallas office of Kirkland & Ellis. “However, investors and stakeholders often voice concerns about partnering with oil and gas operators engaged in such activities from an ESG perspective.” Crews focuses on complex transactions including mergers and acquisitions as well as divestitures and private equity, with a particular focus on the energy and infrastructure sector.

“It is our understanding that operators seeking a Class VI permit directly from the EPA may experience significant lead-time as permitting may range anywhere from 12-36 months,” Crews said. “To date, two states, Wyoming and North Dakota, have obtained primacy from the EPA and have been authorized to oversee Class VI permitting directly without additional approval from the EPA. We also expect Louisiana and Texas to receive Class VI primacy in the not-too-distant future, but the exact timeline is uncertain.”

Despite the complications, Kirkland & Ellis has had a lot of activity from clients interested in CCUS.

“Since the passage of the Inflation Reduction Act, which improved not only the economics and realization of CCUS and 45Q credits, but also, the facilities eligible to generate 45Q credits, we’ve seen clients become a lot more serious about these projects,” Crews said. “Before that, we would tend to describe a lot of our engagement as more advisory, whereas we now have several active CCUS projects which are either close to announcing a term sheet or actively negotiating definitive documents.

“We cannot stress this enough,” Crews continued, “but 45Q compliance is essential to the economics of these projects.

“We also encourage our clients to think early and often about the transportation aspect of their projects. We encourage clients interested in these projects to survey potential partners within their operational footprint. We’ve seen a lot of recent momentum in the Eagle Ford and Gulf Coast regions and expect that some of these projects will go from theoretical to operational,” he said.

Crews and Gamble published an overview in October 2021 of the technical and regulatory issues in CCUS midstream development in the Texas Lawbook.