Lack of settled state law and regulations
Texas law is generally unsettled over the ownership of pore space and the rights associated therewith. The majority of U.S. jurisdictions have adopted the “American Rule” with regard to pore space ownership rights, attributing the ownership of the pore space to the surface estate. While there is a long line of court decisions in Texas indicating that Texas also follows the American Rule, there is at least one conflicting case in Texas (Mapco, Inc. v. Carter, 808 S.W.2d 262 (Tex. App.), rev’d on other grounds, 817 S.W.2d 686 (Tex. 1991)) that has called into question the adoption of the American Rule in the Lone Star State.
One of the primary concerns with CCUS is the need to use depleted reservoirs, which could create coordination issues between estates. If a reservoir contains residual minerals, the consent of the dominant mineral owner is required before injection can occur. Consent is also required for existing gas storage rights. Further, matters concerning the coordination of estates, including surface use, drill-through rights, subsurface trespass, and easements, remain unaddressed. Assuming that the American Rule is followed, if pore space owned by the surface owner can only be accessed by drilling through minerals owned by the mineral owner, then it is unclear in many jurisdictions whether the mineral owner must at common law provide the surface owner with reasonable use of the mineral estate to access the pore space.
Another important aspect of the unsettled regulation of CCUS is the establishment of a fund to backstop long-term closure obligations for CCUS projects. Many states recognize that closure monitoring obligations for CCUS projects are significantly more expensive and expansive than they are for other types of projects. Some states, including Louisiana, Montana, Wyoming and North Dakota, have implemented a stewardship fund that would be financed through fees assessed on CCUS projects and used to ensure that the necessary monitoring and remediation can be carried out even if the responsible party is no longer able to do so. Texas is among a number of states considering similar frameworks.
Some proposed legislation would also address the issue of liability for stored carbon. This is an important consideration for CCUS developers, who may face liability if stored carbon leaks or causes damage to nearby properties. Solving this issue through credit support provisions or other provisions in contracts with developers is untenable where carbon may be stored indefinitely. In the short-to-medium term, developers may be able to assure coverage of any resulting liabilities, but such coverage cannot realistically continue for hundreds of years. Such legislation would establish a liability framework to protect developers who have followed all applicable regulations and best practices. This would help to ensure that CCUS projects can move forward with confidence, knowing that they, and any potentially impacted third parties, are protected from liability exposure in the long term.
When making future plans for pore space titles, three things should be considered.
- Use of depleted reservoirs. To the extent a reservoir contains residual minerals, the consent of the “dominant” mineral owner is required prior to injection.
- Existing gas storage rights.
- Coordination of estates. This is required when delineating: a) surface use; b) drill-through rights; and c) subsurface trespass and easements.
Pore space leases and other contractual obligations
Pore space leases and contractual obligations resemble oil and gas leases in many ways, but they differ in certain key aspects. Like oil and gas leases, pore space leases:
- Have a primary term with a habendum clause
- Provide acreage bonuses
- Provide pooling and unitization terms
- Address title matters
- Address proportionate reduction
However, pore space leases differ from oil and gas leases in that:
- Most leases calculate landowner royalties upon the volume of carbon injected (irrespective of the operator’s economics), as opposed to the operator’s actual returns; allowing the landowner to share in the upside without bearing any downside price risk.
- Lease terms must provide for post-expiration access so that operators can conduct legally required closure and monitoring operations.
- Parties must contract around uncertain tax treatment and bankruptcy treatment.
Many of the legal agreements used for pore space leasing and operations are similar to traditional oil and gas leases; however, a few agreements actually are unique to pore space leasing:
- Carbon sequestration fee agreement. Under this agreement, a surface owner is paid certain fees for the carbon sequestration and to compensate for any surface use damages. These fees can include a bonus payment, an annual fee paid until the commencement of carbon sequestration, and an injection fee calculated per dollar-per-metric-ton injected, which in some cases is stair-stepped to increase per 10MM metric tons injected.
- Carbon sequestration easement agreement. This agreement provides the pore space lessee with (i) an easement over and under the surface property for the purpose of permanently storing carbon in the pore space beneath the surface property; (ii) the exclusive right to drill, inject and/or sequester carbon; and (iii) the non-exclusive right of way over and under the surface property for the construction, installation, maintenance and operation of pipelines, flowlines, wells, fixtures, machinery and other equipment.
- Surface use agreement. This agreement grants a right to, and exclusive interest in, certain pore spaces beneath the surface of the carbon sequestration easement agreement and a non-exclusive easement across and under portions of the surface of the carbon sequestration easement for the construction and operation of injection and monitoring wells, pipelines, electric lines, substations, meters and roads.
- CO2 transportation and storage lease. In Texas, this agreement is with the state, acting through the Commissioner of the Texas General Land Office, on behalf of the Permanent School Fund of the State of Texas, under Texas Natural Resources Code Chapters 33 and 51 and grants exclusive rights to store carbon in reservoirs and pore spaces in a specified formation, as well as the exclusive right to drill and to construct and maintain pipelines, wells, machinery and other equipment.
- CO2 capture contracts. These agreements include terms for capturing carbon from emission sources such as power plants or industrial facilities, addressing aspects like capture rates, emissions monitoring, and liability for any failures in the capture process.
