Global carbon capture and storage regulations: A driver or barrier to CCS project development?

It’s fair to say that globally, legislation is catching up to aspiration to deploy CCS technology more widely. CCS regulation broadly falls into a spectrum between two conceptually very different models in terms of implementing substantive legislation designed to directly support the deployment of CCS.

Under certain European models, the government takes on the role of ‘disaggregator’ in order to mitigate cross-chain liability that the private sector currently finds difficult to address. These regimes typically mandate ‘open access’ networks and directly regulate the economic and technical terms upon which the network must be provided to third parties. By contrast, in jurisdictions where planned CO2 legislation aims to ‘incentivize’ CCS via tax credits (rather than regulate via direct legislation), the implementation of such projects and their attendant risk allocation (including cross-chain liabilities and infrastructure sharing terms) becomes the responsibility of private-sector participants to develop. Consequently, the regulatory ‘ecosystem’ in more ‘regulated’ regimes will provide more details around pricing, access terms and the management of risk allocation across the entire value chain. In ‘incentivized’ regimes, as access to third party infrastructure begins to accelerate, this will be replaced by an ecosystem of private arrangements which will regulate relations and allocate risk between market participants in an analogue to the development of the US liquefaction industry.

Most jurisdictions contemplating passing CCS legislation fall somewhere between these two camps, with many countries providing direct subsidy support to specific demonstrator projects, without (yet) passing legislation that would facilitate national deployment. This subsidy support can be enacted through secondary legislation or can be incorporated directly into the terms of an exploration or development license or concession. This allows governments to ‘road test’ their preferred approach without becoming committed (and therefore potentially liable) to third parties under direct legislation or via bilateral investment treaty (BIT) obligations. We have summarized below several different approaches that are currently under consideration by different governments globally. 

Arturo Sferruzza
Partner, Milan

Giulio Mariano
Associate, Milan

At the EU level, the main regulatory development for CCS was the adoption of the CCS Directive in 2009. The directive establishes a legal framework for the safe and environmentally sound geological storage of CO2, including requirements for site selection, operation, closure and post-closure of CO2 storage sites. The directive also includes provisions on monitoring, reporting, and verification of CO2 storage activities, as well as the allocation of liability in case of accidents.

In addition to the CCS Directive, the EU has also established funding mechanisms to support the development of CCS technology, such as the European Commission's NER 300 program. This program provides funding for CCS and other innovative low-carbon energy technologies.

In Italy, the regulatory framework for CCS is based on the EU CCS Directive and the country's national legislation. Italy has established a regulatory regime for the geological storage of CO2 that includes requirements for site selection, operation, monitoring and closure. The regulatory regime is enforced by the Italian Ministry for Enterprises and Made in Italy and the Ministry for Ecological Transition, which is responsible for granting permits for CO2 storage and ensuring compliance with the regulatory requirements.

In March 2023 the European Commission issued a proposal for a Net-Zero Industry Act (NZIA), which provides a promising framework for an options-based strategy to achieve industrial decarbonization in Europe.

The main measures that NZIA provides are:

• An EU CO2 storage target: Article 17 of the NZIA sets a target for storage in the EU of 50 million tonnes of CO2 in annual injection capacity by 2030;
• European coordination on carbon storage: the NZIA proposal requires Member States to publish “areas where CO2 storage sites can be permitted on their territory” (Article 18);
• Clear responsibility of the oil and gas sector: Article 18 of the NZIA calls on Member States to “establish an obligation for licensees of oil and gas production sites located on their territory to make publicly available all geological data relating to production sites that have been decommissioned or whose decommissioning has been notified to the competent authority.” Article 19 outlines that entities holding an oil or gas production license in the EU will be subject to an individual contribution to the Union-wide CO2 storage target. This is to be allocated on a pro-rata basis of “each entity’s share in the EU crude oil and natural gas production from 1 January 2020 to 31 December 2023.”;
• Accelerating CO2 storage site development: various measures are put forward in the NZIA proposal to unplug the storage bottleneck, none more important than the eligibility of CO2 storage facilities for obtaining Net-Zero Strategic Project (NZSP) status. With this, CO2 storage projects will be able to obtain their storage permit within 18 months of application (Article 13), provided they are located in the EU and aim to be operational by 2030 (Article 10). 

The UK government’s approach to CCS regulates the network and users separately. Each network is considered a regulated monopoly (akin to an electricity or water transportation network), such that the network codes mandate open access, but also carefully controls user tariffs. The capex associated with the development of the network is recouped over a number of years, with a fixed percentage recoverable, together with an agreed economic rate of return, determined by the regulator based upon the ‘asset beta.’ Higher asset beta indicates significant construction risk, which attracts a higher rate of return. Networks in steady state operation (and requiring less maintenance) attract lower rates of return, with the goal being to incentivize investment over time to ensure optimal availability/reliability.

Users of the network are (currently) selected through competitive tender, and are awarded subsidy arrangements entered into directly with the government, designed to ‘shield’ the relevant project (either a power project, through a ‘Dispatchable Power Agreement’ (DPA), or an industrial user that wishes to decarbonize its operations through the award of an ‘Industrial Capture Contract’ (ICC)) from the increased costs of operating with both capture equipment and the incremental costs of transportation and storage into the CCS network. The DPA and ICC contracts are also the mechanisms by which the government shields users from cross-chain liability. For the most part, unavailability of the transport and storage (T&S) network will not result in reduction of subsidy payments to emitters. Similarly, the government insulates the T&S network from any shortfall in revenue associated with limited user numbers (the economic return is effectively ‘fixed’). Whilst these key cross-chain liabilities are largely mitigated, the government has created a separate regime for underperformance for the respective network or emitter, which can result in reduced payments. This ‘value for money’ protection is designed to incentivize private sector performance in maximizing utilization of these networks.’

In recent years, China has made significant progress on CCUS development. In August 2022, the first integrated 1 Mtpa Carbon Capture, Utilization and Storage (CCUS) project, "Qilu Petrochemical - Shengli Oilfield CCUS Project," officially came into operation; Baogang Steel Group plans to build an integrated 2 Mtpa scale CCUS demonstration project for the steel industry, and the first phase of the 500,000-ton demonstration project has already started construction; and CNOOC, Guangdong Development and Reform Commission, Shell China, and ExxonMobil China signed an MoU to jointly study a large-scale CCUS hub in Daya Bay. The development of CCUS in China still faces challenges such as the lack of market mechanism or sufficient policy incentives.

CCUS Policies

Since the introduction of China’s “1+N” policy system for emission peaking and carbon neutrality, more CCUS-related policies have been released. By May 2023, China had issued about 80 CCUS-related policies at the national level, including plans, standards, roadmaps, and technology catalogues accumulatively. CCUS has been included for the first time in China’s national Five-Year Plan (2021-2025).

Most of the policies focus on the R&D and demonstration of CCUS, while policies related to technical standards, investment and financing are also increasing, such as the Climate Investment and Financing Pilot Work Plan, the Green Bond Endorsed Projects Catalogue (2021 Edition), China’s National Standardization Development Outline, and the Implementation Plan for Science and Technology Support for Carbon Dioxide Peaking and Carbon Neutrality (2022-2030).

CCUS is also being covered in sectorial policies. Initially CCUS was only mentioned in the power and oil and gas industries. More recently, CCUS was added to hard-to-abate sectoral policy guidelines, including The Guidelines on the Transformation and Upgrading of Energy Intensive Industries and Key Areas for Energy Conservation and Carbon Reduction (2022 Edition) and the Carbon Peaking Implementation Plan for the Industrial Sector.

Local governments are also increasingly providing support. By May 2023, 30 provincial governments had issued policies relevant to CCUS R&D and promotion programs.

In general, the current policies issued for CCUS are at the guidance stage aimed at setting out initial incentives. There is currently no specific legislation to regulate in detail the access, construction, operation, regulation, and termination of CCUS.

Demonstration Projects

By November 2022, there were around 100 CCUS demonstration projects in various stages of development. Nearly half of the projects are in operation, with CO2 capture capacity of more than 4 Mt per year and CO2 injection capacity of more than 2 Mt per year, an increase of about 33 percent and 65 percent, respectively, compared with 2021.

The regulatory framework for CCS in the United States is in development. At the federal level, the US Environmental Protection Agency (“EPA”) maintains authority over underground injection of carbon (unless the EPA has granted primary enforcement authority to a particular state). In addition, carbon capture projects may require a number of different federal regulatory approvals depending on the particular project, but there does not yet appear to be a centralized system for any required or preferred approvals. 

The states also maintain regulatory authority over carbon capture facilities. However, not all states have promulgated carbon capture and storage facility laws or have consistent governing case law, and the laws that have been passed and the existing case law vary in content from state to state. While there are efforts underway to clarify the carbon capture regulatory landscape, the lack of direction of the current regulatory environment can complicate development of CCS facilities. This evolving framework may be slowing development in some respects, but it also has meant that parties are keen to be made aware of what regulation there is (and isn’t) and how the risks of the less developed framework can or should be allocated and addressed from a contractual perspective as the pace of the demand for carbon capture facility development begins to exceed the pace of regulation.

Ben Bradstreet
Partner, Perth

Troy McKelvie
Partner, Perth

CCS legislation and regulation in Australia is progressing, although the state of legislative and regulatory development and the approach to CCS regulation varies somewhat between States and Territories. The current Federal Labor Government is generally supportive of CCS as a means of addressing climate change, when combined with other climate change mitigation and GHG reduction measures, although both the Federal Resources Minister and the Federal Energy and Climate Change Minister have made recent statements that the approach of the Federal Government will focus on reducing regulatory barriers to CCS projects, rather than providing extensive funding for CCS projects or backing individual CCS projects.

At the Federal level, CCS laws currently apply to offshore areas, where offshore CCS is regulated by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth), which establishes a system for the grant of greenhouse gas (GHG) assessment permits, GHG injection licences and a system for the declaration of offshore areas as being eligible for GHG storage. The primary regulator for offshore CCS at the Federal level is the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA). Depending on the nature of the CCS project and its impacts, offshore CCS projects may also require additional Federal environmental approvals and other statutory approvals.

The regulatory and legislative landscape at the State and Territory level varies between jurisdictions. Some States have already enacted specific CCS legislation and regulatory regimes while other States and territories are still developing industry-specific CCS laws and policies. Key CCS laws at the State and Territory level are summarized below:

• Victoria and Queensland have CCS-specific legislation in place, namely the Greenhouse Gas Geological Sequestration Act 2008 (Vic) and Greenhouse Gas Storage Act 2009 (Qld) respectively;
• WA has CCS legislation in place, namely the Barrow Island Act 2003 (WA), although this legislation is specific to Chevron’s CCS project on Barrow Island in WA. CCS for Chevron’s Gorgon Gas Project was imposed under the conditions of approval for the Gas Project;
• In March 2023, the WA Department of Mines, Industry Regulation and Safety released a consultation draft of the Draft Petroleum Legislation Amendment Bill (Draft Bill). This Drat Bill proposes amendments to the the Petroleum and Geothermal Energy Resources Act 1967 (WA), the Petroleum Pipelines Act 1969 (WA) and the Petroleum (Submerged Lands) Act 1982 (WA), and seeks to introduce a greenhouse gas legislative regime similar to the Commonwealth’s Offshore Petroleum and Greenhouse Gas Storage Act 2006. The Draft Bill includes provisions for property rights for greenhouse gas storage formations, acreage release for greenhouse gas exploration titles, retention leases and injection licences, injection, site closure and long-term liability requirements for GHG storage. Public submissions on the Draft Bill closed in late April 2023 and the WA Government is currently considering submissions received during exhibition of the Draft Bill; and
• NSW, SA, Tasmania, the ACT and the Northern Territory do not currently have specific CCS legislation in force. This does not necessarily mean the CCS projects cannot proceed in these jurisdictions, although the regulatory approach and approvals required for such projects are not set out in CCS specific legislation. The Northern Territory is collaborating with the CSIRO, industry and engineering companies with a view to fast-tracking CCS development in suitable precincts in the Northern Territory, including the potential for a CCUS hub in the Darwin Middle Arm Sustainable Development Precinct.

While some States and Territories lack CCS specific legislation, the need for proper regulation of CCS, and the role that CCS may play in reducing GHG emissions from projects, as well as the potential for a ‘blue hydrogen’ production industry in Australia, which received considerable policy support from the previous Federal government, suggests that CCS specific laws in Australia will continue to be developed and there is general State and Federal acceptance that CCS may have a role to play in the response to climate change. We expect law and policy will continue to develop in this space over the coming years.

Chris Wright
Counsel, Singapore

Su Xin Lim
Paralegal, Singapore

For now, Malaysia does not have any laws that govern CCS. However, acknowledging the critical importance of CCS in delivering significant emission cuts in fossil fuel-based emissions, the Malaysian government, led by the Ministry of Energy and Natural Resources has partnered with the Global CCS Institute to develop and implement the Malaysian CCS Capacity Development Program. As CCS still a new technology, Malaysia is hoping to gain as much as possible knowledge and capacity building in this area. Currently, the CCS projects in Malaysia will be regulated using the existing national legislation. For instance: the Environmental Quality Act 1974; the Street, Drainage and Building Act 1971; the Petroleum Development Act 1974; the Petroleum Regulations 1974; the Environmental Quality (Control of Solid Waste Transfer Stations and Landfill) Regulations 2009; and the Occupational Safety and Health Act 1994. The Malaysian government has also stated that they will always support any initiative that can reduce carbon emissions to become a carbon-neutral nation as early as 2050. The Budget 2023 (passed on 9 March 2023 at the policy stage) also proposes new tax incentives to encourage green investments for companies undertaking carbon capture and storage to recognize CCS activities as a new source of economic growth and in achieving net-zero greenhouse gas emission.

 There are some existing/planned projects in the CCS space in Malaysia. The first ever CCS project in Malaysia is the Kasawari CCS project which is located off the coast of Sarawak, and aims to capture and process O2 from a sour gas field development, which will subsequently be injected into a depleted gas field. A total of 76 million tonnes of CO2 from the Kasawari CCS project will be reinjected into the M1 field via pipeline, which is approximately 138 km away from the platform. Kasawari CCS (Kasawari phase 2) is targeting first injection in the fourth quarter of 2025. Once completed, the Kasawari CCS project will be the largest offshore CCS project in the world by volume of carbon dioxide (CO2) captured, with the ability to capture up to 3.3 million tonnes per annum of CO2.  The second CCS Project in Malaysia is another offshore CCS project where the operator will be Thailand’s PTT Exploration and Production Public Co. Ltd. (PTTEP), which will capture CO2 from the Lang Lebah field at offshore in Sarawak, and then transport to the Golok field. This project is expected to start commercial production in 2026 while the final investment decision (FID) is anticipated in 2023. On 5 December 2022, Petronas and JX Nippon Oil & Gas Exploration Corporation (JX Nippon) entered into a Heads of Agreement to jointly build the first CCS project in Malaysia. More recently Petronas and ExxonMobil signed two Project Development Agreements to jointly pursue CCS activation projects in Malaysia.  State-owned Petroleum Sarawak Bhd (Petros) has also received their first license for carbon storage to begin its strategic role as resource manager for CCS in Sarawak. The additional gas unlocked by CCS can ensure long-term energy and gas supply security for Sarawak, complementing the energy transition for Sarawak and Malaysia.

Likewise, Malaysia’s state-owned oil and gas company Petronas has signed and forged strategic partnerships through memoranda of understandings related to CCS with Japan’s JOGMEC and JX Nippon Oil and Gas Exploration, Japan Petroleum Exploration Co., Limited, ExxonMobil, POSCO International Corporation and POSCO Engineering & Construction, Mitsui O.S.K. Lines, Ltd., Mitsui & Co., Ltd., DNV, GS Energy Corporation, Lotte Chemical Co., Samsung Engineering Co. LTD, Samsung Heavy Industries, SK Earthon Co. Ltd, SK Energy Co. Ltd, Tenaga Nasional Berhad (TNB), Storegga Limited,  Japan's Ministry of Economy Trade & Industry (METI) and Japan Bank for International Corporation (JBIC), Storegga, Vopa and a memorandum of cooperation with Japan Organization for Metals and Energy Security (JOGMEC) to cooperate in energy transition initiatives towards achieving respective energy transition and decarbonization targets. On 12 October 2022, Shell New Ventures Malaysia Sdn. Bhd. (Shell Malaysia) and PETRONAS signed a Cooperation Agreement to jointly explore the development of Carbon Sequestration Hubs in Malaysia, which  is an important milestone in maturing carbon capture and storage (CCS) as a commercially scalable decarbonization solution for industries in Malaysia and beyond. Singapore and Malaysia also signed three agreements covering areas that include digital economy and green economy cooperation where they will also exchange information on low-carbon solutions, including on technical and regulatory issues, and explore joint studies and demonstration projects, particularly in hydrogen and CCS.

Chris Wright
Counsel, Singapore

Andrea Lim
Associate, Singapore

Teerin Vanikieti
Counsel, Bangkok

Patcharapol Sudsakorn
Trainee, Bangkok

Thailand is currently in the process of developing a regulatory framework for CCS. Currently, there is no specific law or organization that has the authority to regulate CCS in Thailand. The Petroleum Act, supervised by the Minister of Energy, is the most relevant law in this context. However, a more comprehensive regulatory framework must be established to support CCS.

 The governmental organization directly responsible for the development of CCS is the Office of Natural Resources and Environmental Policy and Planning Department, operating under the Ministry of Natural Resources and Environment (ONEP). ONEP has obligations to draft policies and master plans regarding environmental issues, including climate change and greenhouse gas management. In the context of establishing a regulatory framework for CCS, ONEP collaborates with the Department of Mineral Fuels, under the Ministry of Energy (DMF), to assess the practical possibility of CCS and consider regulatory revisions.

Moreover, there are many organizations involving the development of CCS in Thailand. On March 16, 2022, the Climate Change Subcommittee on Driving GHG Reduction through the Application of CCS Technologies (CCS Subcommittee) was officially established to consider and provide recommendations on practical issues including legal measures. The CCS Subcommittee consists of individuals holding positions in various organizations, including Minister of Energy, the Director-General of the Department of Mineral Resources, the Director-General of DMF and the Secretary-General of ONEP. Based on this position, the CCS Subcommittee can enhance the collaboration among relevant organizations.

On October 19, 2022, the CCS Subcommittee approved the CCS Master Plan, developed by ONEP and DMF, which includes the Technical Framework, Regulatory Framework, Commercial and Incentive, and Stakeholder Engagement.

According to the CCS Master Plan, there will be a preliminary study and evaluation of underground geological rock formations in many areas of Thailand to verify their ability to store carbon dioxide.

On March 14, 2023, the Cabinet tasked DMF, with analyzing relevant regulations and issuing the necessary laws for CCS activities to ensure regulatory consistency and prevent legal contradictions.

On August 22, 2023, the Department of Mineral Fuels launched a public hearing on the draft amendment to the Petroleum Act B.E. 2514 (A.D. 1971) (as amended) (Petroleum Law Amendment). The objective of Petroleum Law Amendment is to regulate the operation of CCS directly. One of the key components of this law is the definition of carbon business which includes the exploration for a carbon storage area and injecting carbon into such area. Additionally, the Petroleum Law Amendment establishes the licensing requirements. The implementation of Petroleum Law Amendment would provide a clear regulatory framework to conduct CCS business in Thailand. However, the enforcement timeline of this law remains uncertain. 

Kresna Panggabean
Partner and
Head of Office,
Jakarta, TNB &
Partners in association
with Norton Rose
Fulbright Australia

Salman Sembiring
Associate,
Jakarta TNB &
Partners in
association with Norton Rose
Fulbright Australia

Indonesia is one of the first countries in the Asia-Pacific region to introduce regulations on CCS, being one of the first countries to ‘test’ the CCS legal framework. In March 2023, Indonesia’s Ministry of Energy and Mineral Resources (MEMR) issued Regulation No. 2 of 2023 – MEMR Regulation 2/2023 (Regulation) which came into force on 3 March 2023.  This Regulation aims to support upstream oil and gas activities and helps decarbonize the extraction industry in Indonesia, on top of being a step towards Indonesia’s its net-zero emissions target by 2060. 

In summary, the Regulation focuses on the relevant process surrounding CCS. It sets out ways that carbon can be captured (including capturing emitted carbon from burning activities), how carbon is to be utilized (including that captured carbon is used to increase oil and gas outputs), how carbon is to be stored in accordance with various technologies (carbon is to be stored in specific target zones), and how carbon is to be transported to these zones (including pipelines and ships). Even before the processes can begin, interested parties must seek approval from MEMR, which will then evaluate whether the proposed CCS activities take into account the technical, economical, operational, environment and safety considerations.

As to the monetization of CCS activities, for those activities in connection with upstream oil and gas activities, they can be monetized by the contractor by carbon trading in accordance with the applicable laws and/or through reimbursement of operational costs. For carbon emissions not from upstream oil and gas activities, they can be monetized through storage services and revenue earned from the injection of carbon into the zones. Following the Regulation, Indonesia is also looking at introducing a “cap and trade” and a “cap and tax” mechanism, along with tax incentives.

While a gamechanger in the CCS space, the Regulation still has gaps. For example, key issues such as quality specifications, leakage risks and commingled carbon are not addressed in specific detail by the Regulation. Regardless, Indonesia holds the first-mover advantage and it is likely that neighboring countries such as Malaysia and Thailand are watching the developments closely.