Warming up to CCUS – The legal and regulatory considerations for the successful deployment of CCUS projects
Since the launch of Malaysia's National Energy Transition Roadmap (NETR)1 in July 2023, corporations in Malaysia have been eager to roll out plans to attain net zero carbon emissions to underscore their commitment to NETR via six energy transition levers. Of the six, carbon capture, utilisation and storage (CCUS) has been identified as playing a pivotal role in energy transition.
Corporate lawyers Geoff Allen and Hazel Bachi discuss the emerging global legal and regulatory issues for CCUS deployment that may dim the light on its rising star.
The CCUS process involves the capture, use and storage of CO2 typically from facilities that generate power using either fossil fuels or biomass fuels. If not being used on site, the captured CO2 can be squeezed into a liquid state and transported via pipeline, ship, rail or road and injected into deep geological formations to be stored indefinitely, for example, in depleted oil and gas reservoirs or wherever the geology is suitable.
CCUS is lauded for its strategic value as a climate mitigation tool. Big energy player Tenaga Nasional Berhad (TNB) has announced its aspirations to achieve net zero emissions by 2050. Petronas, the national oil and gas company of Malaysia, is developing the Kasawari CO2 Sequestration project offshore in Sarawak, making it one of the largest offshore CCUS projects in the world. More recently, headlines were made when TNB and Petronas signed a memorandum of understanding to explore carbon capture and storage technology for gas-fire power plants.
However, there are legal and regulatory issues across the CCUS value chain that present barriers to the successful deployment of CCUS, especially for jurisdictions where facilities with the right capability are yet to be developed, including Malaysia.
The ownership of CO2 has to be clearly defined as its moves across the CCUS value chain, in particular, where the capture, transport and storage activities are carried out by different entities. This is to identify liability for any potential leakage along the way, and determine the eligibility for policy incentives, such as government grants and operational subsidies to cover any cost differential between generation costs and market price.
In Nebraska, where the regulatory framework for CCUS is more advanced, title to stored CO2 may be transferred to the state, including all rights and responsibilities subject to the operator satisfying certain conditions. In less developed jurisdictions, it is sensible for commercial contracts to clearly set out where liability lies for injected CO2 over time. Appropriate indemnification provisions should be agreed between the owner of the CO2 and the storage operators in respect of any leakage issues. State ownership of CO2 provides comfort to storage operators who may be hesitant of the implications of storing CO2 with open-ended liability.
Long-term storage liability
A comprehensive CCUS regulatory framework should provide mechanisms to address long-term liability issues. The potential environmental and economic impact of future leaks may be significant.
The IEA recommends that long-term liability for CO2 storage vests with the state as private storage operators may have a limited lifespan and to mitigate the risk of operators failing with insufficient financial capability to address potential liability claims. However, this approach may lead to operators acting differently than if they were held accountable with appropriate penalties.
Stringent conditions should be imposed on operators to negate the risk of leaks, which may include rigorous site safety and environmental protection rules. Where the regulatory regime transfers ownership of a site to the state, operators should contribute to the cost of long-term stewardship. Some US states have established 'storage funds' for example, in Kansas, the state authority collects injection fees and penalties for violations that feed into the state fund to pay for inspection and long-term monitoring costs. Meanwhile, in Montana, operators may transfer liability to the state for 30 years post site closure in return for financial contributions to a storage fund account during the injection period. In the UK, the state can rely on the statutory claw-back provision to recover liability costs to the extent that such costs arise due to operator default.
Disputes can arise due to the movement of CO2 between jurisdictions such as where cross-border pollution or environmental harm occurs and actions relating to non-permanence leading to leaks back into the atmosphere.
To avoid lengthy and costly litigation, commercial agreements should contain robust dispute resolution provisions requiring the parties to take mitigation steps, for example, to cooperate and regularly exchange information and data. It is also worth noting that cross-border CCUS activities may be governed by international treaties that have prescribed dispute resolution steps that the parties should adopt. For example, the Kyoto Protocol encourages businesses to negotiate amicably with referral of the dispute to the International Court of Justice or arbitration as a last resort.
In summary, key players in the energy sector should remain vigilant regarding the legal and regulatory considerations for a successful CCUS deployment. As these considerations evolve, they will gain significance for contract, negotiations, the allocation of risk for long-term storage as well as minimising the likelihood of disputes.