CO2 injection in federal waters may offer faster results, greater storage capacity

Glenn Legge * Endeavor Management

Global energy transition has generated numerous projects to reduce carbon dioxide (CO₂) emissions and address global warming concerns. The Inflation Reduction Act (IRA), which provides 45Q tax credits for CO₂ subsurface storage, has also spurred a significant increase in CO₂ storage projects on state lands and in state waters, which are governed by the US EPA’s Underground Injection Control (UIC) Class VI regulatory framework. 

This update will address:

• Current delays in EPA approval of CO₂ sequestration projects on state lands and in state waters, which are adversely impacting project progress and finance.
• A different and more effective regulatory framework that is being created for offshore CO₂ sequestration projects in federal waters of the Gulf of Mexico
• The much greater CO₂ storage capacity in saline reservoirs in the Gulf of Mexico.

The vast majority of CO₂ projects on state lands or in state waters are currently languishing due to delays for regulatory approval. The EPA UIC Class VI approval program for onshore CO₂ storage is currently overloaded and behind schedule, frustrating project managers and financial investors who cannot achieve substantial progress or return on investments (ROI) in less than 4-6 years.

Fortunately, an offshore industry/university group is collaborating on repurposing existing oil and gas structures in the federal waters of the Gulf of Mexico for CO₂ injection/storage (as well as “green hydrogen” and wind projects). These subsurface CO₂ injection/storage projects:

• Are not currently governed by current EPA regulations concerning CO₂ injection/storage and monitoring
• Are suitable for federal tax credits
• Can utilize an expansive existing offshore service sector to shorten project timelines 
• Can access far greater subsurface CO₂ storage in depleted oil and gas reservoirs and saline aquifers of the Gulf of Mexico
• May help reduce the current backlog of oil and gas infrastructure that are overdue for decommissioning in the federal waters of the Gulf of Mexico.

Regulatory delays 

All CO₂ injection projects on state land and in state waters are governed by the EPA UIC Class VI regulations, which are focused on protection Underground Sources of Drinking Water (USDWs).

Pursuant to the EPA’s UIC Class VI Permit Tracker, as of August 16, 2024, there were:

• 152 CO₂ Injection Well Applications were under review by the EPA
• 52 Projects Currently Under Review
• 48 Applications are pending while – EPA is waiting for Applicant Responses 
• 34% of the Well Applications were received in the last 12 months
• The EPA has issued four Final Permit Decisions, two of which took six years to complete.

Some states, such as Louisiana, North Dakota, and Wyoming have obtained “primacy” from the EPA, which allows them to review, approve and regulate Class VI CO₂ injection and storage located in their respective state lands and waters. 

On December 19, 2022, the Texas Railroad Commission (RRC) submitted a UIC primacy request which is still under review and may be delayed by a 2020 EPA investigation into the RRC’s oversight of oil, gas and injection wells. To date, the RRC’s UIC primacy request has been opposed by US representatives from Texas and has been criticized by the Texas General Land Office.

These significant delays for regulatory approval of CO₂ injection and storage proposals on state lands and state waters are problematic for developers and commercial finance entities invested in these CO₂ sequestration projects. This adverse impact on CO₂ injection business proposals has become so significant that the bipartisan US House of Representatives House Climate Solutions Caucus sent a letter to the EPA on April 2, 2024, stating, in part, “Permitting delays are actively crippling US efforts to deploy vital clean energy and carbon capture infrastructure alike.”

Faster regulatory approval

Federal jurisdiction over the Gulf of Mexico generally begins three nautical miles from all states, except Texas, Louisiana and Florida, where federal waters begin nine nautical miles from shore.  Based upon current regulations and statutes, CO₂ injection and monitoring projects in federal waters of the US GOM are not subject to UIC Class VI approval and oversight.

From a practical perspective, these EPA regulations are focused on protecting subsurface aquifers containing safe drinking water. Municipalities and industries on the Gulf Coast do not currently, and are unlikely to ever, utilize potable water from subsurface aquifers below the federal waters of the Gulf of Mexico.

On May 23, 2024, the Director of the Federal Bureau of Safety and Environmental Enforcement (BSEE) stated that BSEE, and the Bureau of Ocean Energy Management (BOEM) have been “developing offshore carbon sequestration regulations that are comprehensive and rely on the best science for oversight of carbon sequestration activities on the [Outer Continental Shelf].” In addition, BOEM has issued a draft Commercial Lease of Submerged Lands and Associated Project Easements for Renewable Energy Development on the OCS, that could be adapted for subsurface CO₂ injection/monitoring in federal waters.

Although we cannot estimate the time period for BSEE and BOEM to approve CO₂ injection/monitoring projects in offshore federal waters, it is highly likely that the promulgation of new regulations and the CO₂ sequestration approval will proceed much more quickly than the EPA’s current UIC Class VI regulatory process.

One of the logistical challenges for offshore CO₂ injection/storage is similar to that faced by CO₂ sequestration projects on state lands and state waters – the lack of suitable pipelines that can transport CO₂ in a super critical state from emission sources to injection wells. Fortunately, the Department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) is focusing on that challenge by utilizing new and/or repurposed pipelines. BSEE, with input from the PHMSA, will likely assume authorization to address offshore pipelines for CO₂ transport.

Bigger storage opportunities

In August 2023, the US DOE National Energy Technology Laboratory (NETL) Geologic CO₂ Storage Atlas V established storage capabilities in the Gulf of Mexico to be in the hundreds of billions of tons of CO₂, which is capable of receiving decades of CO₂ emissions. To be more precise, the NETL provided a medium estimate of 8,613 gigatons in the United States and North America Regions. The NETL believes that saline aquifer formations in the Gulf of Mexico may account for more than 90% of the total estimate.

Additionally, the BOEM 2022 GOM Sand Management Working Group Meeting found that saline aquifers offer considerably larger CO₂ storage potential relative to depleted oil and gas reservoirs in the GOM. The 2022 study concluded that “The geology of offshore Gulf of Mexico, among other offshore basins, is conductive to safely and permanently store large amounts of CO₂ in saline aquifers…” The study also emphasized that these large CO₂ storage locations were relatively close to numerous CO₂ emission point sources along the Gulf Coast. 

Some industry studies have considered using depleted oil and gas reservoirs for CO₂ injection/storage; however, some analyses have stated concerns about plugged/abandoned (P&A) oil and gas wells in these reservoirs being exposed to CO₂ injection pressures that may exceed the wells P&A tolerances. A positive aspect of utilizing depleted reservoirs in federal waters is they may have lower pressures that will allow them to receive CO₂ more efficiently and may be located closer to shoreside CO₂ emitters.

Better win-win aspects

In January 2021, the US General Accounting Office (GAO) released a report addressing widespread delays in decommissioning oil and gas structures in the Gulf of Mexico. The report found that, between 2010 through 2022, operators missed the one-year decommissioning deadline more than 50% of the time – many of these structures are still not decommissioned. As of June 2023, over 500 platforms were overdue for decommissioning.

According to the GAO, the US government holds approximately $3.5 billion in surety bonds to cover between $40 billion – $70 billion in decommissioning costs if oil and gas operators fail to meet their decommissioning obligations. Unfortunately, many of these non-producing structures are not adequately securitized through the operator’s investment grade credit rating, surety bonding or proven production reserves, which may end up becoming a government/ taxpayer liability.

Fortunately, there are energy transition and investment opportunities that may solve these industry and regulatory exposures. The University of Houston, various energy sector participants and the NETL are working on the Repurposing of Offshore Infrastructure for Clean Energy (ROICE) Project Collaborative (RPC). ROICE participants have been analyzing various oil and gas structures in the Gulf of Mexico that may be suitable for repurposing for energy transition projects ranging from green hydrogen and wind energy production, to CO₂ injection, storage and monitoring.

It is anticipated that some partial decommissioning (removal of hydrocarbon processing equipment and other non-essential material), as well as some well P&A, will have to be conducted at the start of a ROICE project. From a regulatory and financial perspective, repurposing and reducing the weight of a platform may extend the structure’s operational life for 20-25 years. 

The “better” aspects of utilizing repurposed offshore structures for CO₂ injection/monitoring include:

• Existing operators and predecessors participating in these ROICE projects will, in essence, extend the operational life of the structure for 20-25 years and delay the bulk of their asset retirement obligations (ARO) for that same time period.
• These projects should not be subject to EPA UIC Class VI regulatory approval which would expedite transition to FID and operational completion much more quickly.
• From a commercial investment perspective, investors will be able to receive IRS 45Q (CO₂) and 45V (green hydrogen) tax credits if they participate in the ROICE projects. 
• ROICE participants, including Endeavor Management, provided technology/economic and regulatory/commercial presentations on projected ROICE projects at the 2024 Offshore Technology Conference. These presentations addressed the commercial, regulatory and financial elements involved in repurposing offshore infrastructure in the Gulf of Mexico for energy transition projects.
• Although ROICE’s initial projects are focused on fixed structures in relatively shallow water (less than 500 feet), the concept should be adaptable, from technical, logistical and financial perspective to fixed and floating structures in deeper water that are closer to saline aquifers with much larger CO₂ storage volumes.

Another benefit of CO₂ storage in federal waters of the Gulf of Mexico is less legal/financial exposure in the event of subsurface CO₂ migration. Sequestration projects on state lands and in state waters often involve multiple owners of surface rights and/or subsurface pore space, which can increase legal and financial exposures if CO₂ adversely impacts downhole interests. The Texas Supreme Court has recently recognized subsurface trespass of CO₂ as a cause of action. Fortunately, CO₂ injection/storage projects in federal waters of the Gulf of Mexico will involve one lessor/landowner – the federal government. The only significant “downside” is the location of federal waters which are further from shoreside CO₂ emitters.

As energy transition proceeds in the US Gulf of Mexico, operators, service companies, contractors, investors and insurers will have to analyze and address new regulatory regimes, legal exposures, commercial frameworks and projected costs for offshore CO₂ injection/monitoring, green hydrogen production and wind energy projects. Fortunately, BOEM and BSEE are promptly proceeding in a well-informed manner to promulgate regulations that will assist the energy transition sector to address the anticipated technical, operational, economic and commercial aspects of the energy transition activities in federal waters.