American Oil and Gas Reporter - June 2014 - 134

CO2 EOR

Power Plant NSPS Likely To Backfire
Editor's Note: The following is adapted from a white paper prepared by Denbury Resources Inc. on how the U.S. Environmental Protection Agency's New
Source Performance Standard for carbon
dioxide emitted by coal-fired power plants
likely would affect the use of CO2 subject
to the regulations in enhanced oil recovery operations.
PLANO, TX.-The U.S. Environmental Protection Agency's proposed New
Source Performance Standard for coalfired power generation relies on carbon
capture and sequestration as the "best system of emissions reduction" that has
been "adequately demonstrated."
Such a finding is required by the relevant statute for EPA to adopt the emissions
standard. However, EPA's cost assessment
for CCS is based in material part on the expectation that "new fossil fuel-fired electric generating units that install CCS generally will make the captured CO2 available for use in enhanced oil recovery operations," and the agency's belief that "using EOR lowers costs for producing domestic oil."
Under the proposed rule, an emitter
may use EOR-based storage to meet the
performance standard only where the offsite injector reports the CO2 storage to EPA
under Subpart RR of the greenhouse gas
reporting rules. This results in an emitter
trying to enforce an EPA rule on an EOR
operator who, at present, is subject only
to Subpart UU of the GHG reporting rules.
Under Subpart RR, an operator would
have to submit and receive final approval
of a "monitoring, reporting and verification (MRV)" plan from the EPA, following any appeals under Part 78 and subsequent judicial review. This means that approval of an MRV plan is likely to be delayed and then finally determined through
litigation. Thus, the proposed NSPS rule
would impose federal regulations on oil
and gas drilling and subsurface operations
utilizing rules applied to emissions from
electric generating units.
Conflicting Objectives
Contrary to EPA's expectations, the proposed NSPS rule is likely to foreclose,
rather than encourage, the use of anthropogenic CO2 in EOR operations. That is
because complying with Subpart RR will
transform EOR from a resource recovery
operation into a waste disposal operation.
Subpart RR compliance will create regulatory uncertainty and risk that will re-

sult in EOR operators refusing to purchase
CO2 that is subject to those rules. Further,
operators likely will prohibit CO2 suppliers from commingling "Subpart RR CO2"
with other CO2 supplies being transported for EOR operations. Indeed, the EOR
off-take agreements underlying the projects on which EPA relied to show that CCS
had been "adequately demonstrated"
would not have been entered into if Subpart RR compliance had been required.
In sum, requiring EOR operators to
comply with Subpart RR in order for the
emitter to meet the NSPS requirements
will foreclose the development of CO2capture projects that otherwise would include EOR off-take agreements.
State Conservation Laws
The touchstones of state oil and gas law
(including a number of state constitutional mandates) are conserving natural resources, preventing waste, and protecting
the correlative rights of all affected mineral interest owners. Complying with
Subpart RR will conflict with these mandates.
Generally speaking, "waste" means operating wells in a way that reduces the total ultimate recovery of the resource.
These legal principles are fundamental to
countless commercial oil and gas industry agreements-mineral leases, unit or
pooling agreements, and operating and
royalty agreements, to name a few. Operators must develop resources prudently and
diligently under mineral leases, and avoid
damaging the reservoirs or otherwise reducing the total ultimate recovery of the
resource.
For example, in Texas, a state appellate
court has ruled that conserving and developing all natural resources is a "public right
and duty," and preserving the state's natural resources "is an issue of constitutional dimension."
In contrast, the EPA's rules and policies
governing CO2 storage for emissions reduction are premised on a "waste disposal" model, which is why EPA based the
Class VI geologic sequestration rules on
the rules for Class I waste disposal wells.
Under the NSPS framework, CO2 injectate is viewed as a waste to be stored permanently, rather than as a commodity to
be used to maximize recovery of hydrocarbon resources.
The whole thrust of EPA's reliance on
CCS as an emissions reduction technology will be focused on reducing emissions.
Waste disposal considerations will perme-

134 THE AMERICAN OIL & GAS REPORTER

ate the entire closed-loop CO2 recycling
system and transportation network, and
will preclude timely access to the remaining oil at the end of an EOR operation.
Interfering with, delaying implementation of, and therefore reducing the total
ultimate recovery of remaining oil from an
EOR operation will constitute the "waste"
of resources that is contrary to, and expressly prohibited by, state conservation
laws (including constitutional law), as well
as upset countless commercial agreements. While no one knows what an
EPA-approved MRV plan ultimately may
require, an operator is not going to risk accepting a plan that is counter to his duty
as a prudent operator to increase the recovery of remaining resources.
Regulatory conditions that are onerous,
restrictive, expensive, or technologically
challenging will constitute substantial
barriers for a prudent operator who must
continually manage and change his injection operations in order to maximize recovery of the remaining mineral resources.
Such regulatory restrictions will generate
mineral property "takings" claims that thus
far are fairly rare, but could dominate the
landscape under the proposed NSPS structure.
MRV Plans
Subpart RR is not merely a reporting
rule, but is a vehicle for litigation-based,
substantive regulation under the undefined
MRV plans. Subpart RR is not merely a
reporting rule. It requires the operator to
obtain EPA approval of a monitoring, reporting and verification plan. Absent an approved MRV plan, the operator will not be
allowed to inject CO2. And if a plan is approved, it must be maintained under the
rule for a duration determined by the EPA,
and not the EOR operator.
Once a plan is administered, only the
EPA can determine its closure. This, in itself, is an unacceptable scenario for mineral interest owners who must wind down
their activities when the purpose of an
EOR operation has come to an end.
Moreover, there are no standards governing what may constitute an incomplete
or otherwise unacceptable plan, nor any
timeline for approval, creating a completely open-ended and undefined regulatory
framework. Nevertheless, failure to monitor or report data according to the MRV
plan ultimately approved is subject to EPA
enforcement action under the Clean Air
Act, for which penalties can be substantial.

American Oil and Gas Reporter - June 2014

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