Standard agreements for purchase and sale of bulk captured CO2 in CCS chains
Project leaderIOM Law advokatfirma AS
Background and project purpose ?
The technology to deploy CCS at a large scale is available, although there is still be room for improvement, cost reductions and new technology development in the years to come. Nevertheless, there are still hurdles and a lack of framework for commercialization, both nationally and internationally, in the form of, for example, uncertainty related to regulations, business models and policy instruments. Efforts are being made to remove barriers and close the gaps. One of the initiatives is the standardization efforts that take place under ISO (International Organization for Standardization) for CCS and CO2-EOR, under ISO TC 265. CLIMIT supports this work through several projects. Among these projects is 618185, which is also led by IOM Law.
The purpose of standard development is also to ensure a more predictable and sustainable division of responsibility across the value chain. For this to happen, private actors must adopt the standards, either because the law requires it or recommends it, or on their own initiative. Several of the ISO standards are already in use in Norwegian and international frameworks. For example, the guidelines to the Norwegian CO2 Safety Regulations refer to ISO standards 27913 (for pipeline transport) and 27914 (for geological storage of CO2). In the United States, the standard 27916 (CO2-EOR) is referred to by the IRS as an eligible method to quantify and verify CO2 volumes stored as part of enhanced oil recovery pursuant to the tax regime 45Q.
The background for the project related to standard agreements was partly that IOM Law has seen a possibility to facilitate for a wider use of the standards negotiated in ISO TC 265, beyond what is done through permits and regulations. Furthermore, CCS is an immature industry in a commercial context. In the oil and gas industry, for example, there are a number of standard agreements that contribute to predictability and good framework conditions for industry players. Although CCS projects will depend on a different framework for commercialization than oil and gas, increased use of standards can hopefully contribute to more sustainable projects, as well as to a greater variety of companies involved.
What was the project objective ?
The project aimed to study the following issues:
1. Research the need for Norwegian or international standard agreements for the purchase and sale of CO2 in storage, both for industrial CCS and for CO2-EOR. We focused on the benefits such agreements will have, and whether it increases the possibility of commercializing CCS as a climate measure.
2. Map and analyze which principles such an agreement should be based on, and hence which risks and responsibilities must be regulated, both from a Norwegian and international perspective
3. Investigate potential “umbrella” or industry organizations that can develop such a standard, such as Standards Norway, ISO, API, LOGIC, the Federation of Norwegian Industries, Offshore Norway, etc.
4. Identify potential stakeholders who may benefit and interest in contributing to the development of potential standard agreements, nationally and internationally.
What has the project done in terms of activities?
Throughout the project, a number of activities were carried out. The main activities can be summarized with the following points:
1. Conversations with stakeholders from the industry in both Norway and abroad (including the USA, France, the Netherlands and Sweden) to map the industry’s needs and benefits from standard agreements for the purchase and sale of CO2 to commercialize CCS value chains.
a) Some of the talks were initiated by the applicant and other conversations by industry representatives. The latter is an indication that some players in the CCS industry have identified a need for some form of standardized agreement themselves. Overall, the feedback provided a basis for establishing that standard agreements for the purchase and sale of CO2 can be one of several tools that can contribute to cost reductions and commercialization of CCS.
b) The focus of the project has been on agreements for the purchase and sale of CO2, or what are collectively referred to as “offtake agreements” in this project. Offtake agreements are long-term contracts that can contribute to project financing and ensure stable volumes of CO2 for a storage facility.
c) However, there have been statements and feedback from industry representatives that there are other forms of contracts that would also be a good fit in the CCS context, such as so-called “contract for difference.” This is a form of contract that has already been adopted by, for example, the UK authorities to support low-carbon solutions in, for example, renewable energy. The reason why the project did not research these contracts in further detail is that this is primarily seen as a policy instrument, and that from a commercial perspective it would be desirable to move away from such support schemes. Furthermore, the project considered such a contract model, when used between two private parties, potentially more complicated for CCS than, for example, for electric power. Electric power is consumed, and the price that may be evened out is the market price. For CCS, pricing the CO2 includes consideration regarding the current allowance price, but the operator also assumes the risk of leaks far in the future at a potentially much higher allowance price, which also will be part of the consideration.
2. Review of a selection of available standard agreements for the purchase and sale of natural resources and CO2 for use in pressure support extraction of oil. However, there were not many available examples of such agreements with direct relevance to CCS, so regulations, articles, presentations and other available information on the topic were also examined. Parallels have also been drawn to fabrication contracts for the Norwegian petroleum industry. Despite the fact that the latter is not about the purchase and sale of products directly, but the construction and sale of installations, it is a good example of a negotiated Norwegian standard contract with a pre-agreed allocation of risk and responsibility, under existing trade associations.
a) The review resulted in the identification of a number of common themes and issues that are regulated in such standard agreements, and which can be included in an agreement on the purchase and sale of CO2, or the purchase of storage services for the owner of CO2 emissions. Depending on whether the storage operator buys CO2 for storage (for example, for enhanced oil recovery) or sells storage services, the content of the clauses may change, but in all cases there is a need to regulate things such as price, time period, risk, CO2 stream composition and a number of other factors. Whether the infrastructure should be “open source”, and thus handle CO2 volumes from a range of sources, or a “one sink-one source” value chain, provisions on third-party connections and consequences thereof will be relevant.
3. Identification of stakeholders and trade associations by searching the internet and through conversations with actors.
a) Which organization is suitable as an umbrella organization for a standardized agreement will depend on several factors, including whether the agreement is to be developed nationally or internationally.
b) Some stakeholders in the industry also indicated that it is not necessarily the case that the existing organizations are the best place to develop standard agreements for CCS, but that one could consider setting up a separate initiative.
c) ISO will not necessarily be a natural platform to look to for the development of a standard agreement for CCS, but there are a number of ISO standards available for technical and operational aspects in a CCS value chain. These standards may be natural appendices to the agreements, to describe e.g. technical specifications.
4. Mapping of stakeholders who may benefit from standardized agreements took place primarily through conversations, but also by following presentations at conferences and newsletters circulated in a CCS context.
a) Statements from various stakeholders that collectively cover the entire value chain from capture to storage indicate that there is a potentially broad need and desire for such agreements, without implying that the project can conclude that there is a strong consensus that standardized agreements are needed; there has been a huge increase in the number of stakeholders involved in the CCS industry over the previous two to three years. Thus, the conversations and surveys represent a relatively small sample of stakeholders overall.
What has the project achieved ? Did the project achieve its objective ?
The conclusion after the project is that standard offtake agreements can be useful for commercialization of the CCUS industry, as one of several tools for cost reduction, predictability and transparency. They can also help ensure that more actors have the opportunity to contribute to and participate in full-scale value chains for CCS using standard agreements, by, for example, having parts of the risk allocation decided in advance. One can see examples of such approach to allocation of risk and responsibility in e.g. the Norwegian fabrication contract for offshore installations. This can also contribute to better and more efficient utilization of infrastructure, in the form of predictable frameworks for, for example, third-party access. Depending on who pays for the CO2 (storage operator or emission source), an alternative may be to sort some of the topics into different versions or attachments to the agreement. Thus, one can have a main part of the contract that regulates what includes “all” offtake agreements, such as duration, confidentiality, force majeure, etc.. It could then be an appendix for a situation where the emission owner pays the storage operator to handle CO2 volumes, as well as another attachment for those situations where the storage operator pays for CO2 volumes. For many practical purposes, the former will contain more detailed provisions on the handling of CO2 after receipt and injection, so that emission owners can, for example, meet documentation requirements under e.g. the emissions trading scheme. Here, ISO standards for CCS can contribute, both to quantification and verification, as well as documentation of environmentally safe storage. The use of these standards in combination with standardized offtake agreements can also contribute to increased cost reductions, streamlining and commercialization of the value chain.
The project has also mapped the content of potential standard agreements, regardless of who pays for the CO2. A number of common themes were identified, which must necessarily be regulated regardless of who is the buyer and seller. Furthermore, the ISO standards may be used in both versions of the agreement, to meet technical specifications for, for example, CO2 stream, monitoring and reporting. Observations in the project show that there may be increasing interest in standardized solutions in the future, and that demand has already arisen among a number of players, both at home and abroad.
The project’s goals were thus achieved.
Future plans ?
IOM Law has no specific plans to apply for funding for a second phase of this project, but is already working on a project in the US where the knowledge gained from this project will useful. We also see that several actors in Norway and Europe have shown interest in the work and the topic, and IOM Law is therefore looking at opportunities to use the expertise in the area in the future for clients.
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