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June 11, 2021

Nebraska’s New Subsurface Carbon Storage Legislation and Comparisons to Texas

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NEBRASKA’S NEW SUBSURFACE CARBON STORAGE LEGISLATION AND COMPARISONS TO TEXAS

On May 24, 2021, the State of Nebraska signed into law LB650[1], providing precise guidance on the management of geological subsurface Carbon Dioxide (CO2) storage. While other states, including Texas, have issued legislation on this issue in the past, LB650 represents the latest attempt by a state to regulate subsurface CO2 on a comprehensive basis.

Background

As a by-product of the fermentation process involved in Ethanol production, Ethanol-based CO2 has long been deployed for a number of commercial uses, including carbonation and as a refrigerant in the food industry, as a strengthening agent in concrete and as a tool for secondary recovery in oil production. Some estimates suggest that by 2030 the total global value of CO2-based products could exceed $800 billion. But when excess CO2 is produced, the need arises to properly dispose of the surplus greenhouse gas, rather than simply releasing it into the atmosphere. One of the most promising solutions has been to capture the emitted CO2 at these facilities and store it using a variety of methods, a process that can absorb 85 percent-95 percent of emitted CO2 and help meet 14 percent of global greenhouse gas reduction goals. Technology involving carbon capture, utilization and storage has existed in some fashion since the 1970s, but it wasn’t until the 1990s when storage in subsurface geological saline reservoirs began to be implemented. Since then, subsurface storage has become one of the most recognized methods of storing CO2, providing clear benefits economically over other approaches, and yielding demonstrative help in combating emissions.

However, regulation of this activity by states has come slowly, and most legislation has left many important questions unanswered. Even Texas, which leads the nation in oil and gas production (as well as greenhouse emissions) and has the greatest number of potentially viable subsurface formations, lacks concise rules on the issue. Bill LB650, signed into law by the Nebraska legislature on May 24, 2021 is one of the only statutory promulgations to offer full and complete guidance and may serve as a helpful framework for other states looking to enact comprehensive legislation on the management of geological subsurface CO2 storage.

The bill arrives just in time to take advantage of an uptick in interest towards carbon capture projects. Before the bill’s passage, multiple feasibility studies were being conducted around the state to gauge the viability of storage projects. Following the legislation, several companies have entered into deals regarding CO2 offtake pipelines and carbon capture facilities, perhaps encouraged by the security that Bill LB650 offers.

Bill LB650

Nebraska Bill LB650 enacts a number of rules on key subsurface CO2 storage issues that other states lack, including clarity on ownership, unitization and permitting. Under LB 650, ownership of the “reservoir estate” is deemed to vest in the surface estate owner, unless that reservoir estate has been previously severed by a separate conveyance. So long as the reservoir has not been severed (or explicitly excluded), a conveyance of the surface estate also conveys the reservoir estate, while a conveyance of the mineral estate does not convey the reservoir estate unless explicitly stated. LB650 also clearly resolves two fundamental real property questions that the creation of a reservoir estate could create: (1) proper conveyance and (2) priority of estates. As to the conveyance, any reservoir estate must be properly described to be validly conveyed, as is true with all real property. Regarding priority of estates, the mineral estate is dominant over both the surface estate and the reservoir estate for purposes of development. Further, a reservoir estate does not have default surface rights, so the conveyance document must specify any rights the owner of the reservoir estate may have to use the surface estate.

Unitization, the concept of condensing an entire field or formation into one project and designating an operator to manage on a field-wide basis, was also addressed by Nebraska. For a prospective storage project to be unitized, persons owning at least 60 percent of the physical volume of the reservoir must consent. LB650 stipulates that nonconsenting reservoir owners must be equitably compensated. Once authorization has been obtained from the requisite owners, the operator must obtain a permit for storage from the Nebraska Oil and Gas Conservation Commission (the “Commission”) and the Underground Injection Control program permitting authority. The permitting process requires payment of a fee, a public hearing with notice to all mineral lessees and owners, surface owners and reservoir estate owners within the storage reservoir and within a half mile of the reservoir’s boundaries, and commission findings that, among other things, the storage facility and CO2 are suitable for storage, will not endanger human health or the environment, and is in the public interest. After a permit is granted and the storage operator begins injecting CO2 into the approved reservoir, the operator must pay several fees for each ton of CO2 stored, which covers the Commission’s anticipated expenses for regulating the project during and after completion.

The final important question that LB650 addresses relates to ownership of the stored CO2 during and after the project, which is a meaningful question as liability stems from this ownership. The bill states that the storage operator has title to the injected CO2 (and thus retains liability for any damages caused) until the storage operator applies for, and the Commission issues, a certificate of project completion. After a certificate of project completion is issued, the State of Nebraska receives title, and assumes all responsibilities and liabilities related to the stored CO2.

How Texas Compares

Texas has issued various pieces of legislation on subsurface CO2 storage but still has numerous gaps in its regulation when compared to Nebraska Bill LB650. Texas has yet to create a separate “reservoir estate” and there is no statutory guidance on who owns any such reservoirs. Further, case law on the issue of ownership is conflicted, which often leads storage operators to negotiate with both mineral and surface owners when starting a project in an effort to protect against uncertainty. Texas is the only major oil and gas producing state without laws regarding unitization of subsurface reservoir projects. While there have been various recent attempts to pass legislation on this issue, such proposals have been met with opposition from mineral right owners, farmers and environmentalists.

Permitting for subsurface storage projects likewise remains a convoluted issue in Texas. The State of Texas has not applied to the United States Environmental Protection Agency (the EPA) for control of Class VI well permitting (wells necessary for injection of CO2 into deep formations for storage), making the permitting process much more cumbersome, as operators apply for permits from the Railroad Commission of Texas (the RRC), the Texas Commission on Environmental Quality (the TCEQ) and the EPA. Even once permitting is obtained, jurisdictional authority at the state level is split between the RRC and the TCEQ, with the RRC having authority over storage in formations that are in, above, and below reservoirs that can or have produced oil and gas, while the TCEQ has authority over reservoirs not associated with any possible oil and gas production.

Finally, Texas law differs in a key respect to Nebraska law in the context of stored CO2 ownership and liability: while onshore Texas storage operators similarly hold title to the stored CO2 during a project, they do not relinquish ownership to the State after completion. This can expose storage operators to long-term liability, which may act as a deterrent to starting CO2 storage projects. The lack of clear regulation may increase the likelihood of after-project issues arising.

Footnotes

[1] Adopt the Nebraska Geologic Storage of Carbon Dioxide Act, Neb. Legis. Assemb. 107, Reg. Sess. 2021-2022 (2021).

Authors and Contributors

Omar Samji

Partner

Mergers & Acquisitions

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+1 713 354 4887

Houston

Gabriel Salinas

Counsel

+1 713 354 4846

+1 713 354 4846

Houston

Alix Charles

Associate

Mergers & Acquisitions

+1 713 354 4885

+1 713 354 4885

Houston

Will Johnson

Associate

Project Development and Finance

+1 713 354 4849

+1 713 354 4849

Houston