CCS hubs: How useful is the analogy with an LNG Liquefaction project?

This article was initially published at Gastech 2023.

The context of this paper is an observation that there are many oil and gas fields around the world and particularly in South East Asia that are reaching the end of production, and in South East Asia a number of the largest gas fields have LNG export facilities associated with them. There have been proposals to use some of these fields as storage facilities for carbon dioxide, and to use some of the facilities originally developed for LNG export facilities as import facilities for carbon dioxide delivered by ship. It will be these proposed CCS facilities that we will focus on in this paper.

For CCS projects that are evolving out of what were originally LNG projects, it is tempting to think of CCS projects in the same way. Superficially, an LNG liquefaction project seems rather similar to a CCS hub, with the main difference being that the flow of gas is reversed: with LNG liquefaction natural gas is produced from geological traps via wells to surface infrastructure, processed and distributed internationally in tankers; with CCS greenhouse gases are collected from combustion or other processes, in some cases transported by tanker, processed and then injected into geological traps via wells. Particularly in a scenario where infrastructure originally constructed to support LNG production and send out is now used for carbon collection and storage, the temptation to think of the two projects in a very similar way is very strong. This paper asks whether the analogy is useful or not.

Let us look firstly at arguably the most important contractual relationship in most oil and gas project: the relationship between the host government and the sponsors of the project. In respect of most gas projects and particularly in respect of LNG projects, the risk: reward is clearly defined. The sponsors take a large risk to explore for gas, then invest in very expensive infrastructure, and then take a share in the revenues that flow from the LNG sales, setting aside some of the revenue to meet the costs of decommissioning.

Contrast this with the shape of the relationship in the case of a CCS project. In the examples we are looking at, much of the infrastructure for a CCS project, namely wells, pipelines, and marine facilities for the berthing of vessels will already be in existence and will likely be transferred to the CCS project for much less than its initial capital cost. The “production” of a CCS project is not, at the moment, a valuable commodity that can be sold into liquid markets like crude oil, or LNG. CCS projects provide a service that only has a value while societies believe it is valuable. The value of the service will be related to the price of carbon, which is, to a large part, a “price” determined by governments around the world as a fine imposed on polluters to emit CO₂. If the cost charged by the service for storing CO₂ is higher than the cost of carbon, users will not pay to store carbon. It is therefore the case that sponsors bear significant political risk that the price of carbon will drop below the project’s break-even price, and a commercial risk (not unlike an LNG project) that the cost of production (or the cost of providing the service) is lower at other projects, and therefore demand for the service is reduced. Sponsors may be able to share this risk with customers by entering into long term service contracts with store or pay terms, in a similar approach to that taken by LNG projects.

Whilst a comparison of the risks associated with CCS and LNG shows them to be quite different, it is clear that the use of techniques developed in the LNG sector, of transferring risk through the use of long term contracts has a role to play when looking at CCS.

One particular risk that distinguishes CCS projects from upstream gas and LNG projects is the potential liabilities associated with a release of CO₂. Once CO₂ is in the geological trap it should remain there in the same way that the hydrocarbons were trapped there. However there are risks associated with the well and possibly with other decommissioned infrastructure. If there is a release of hydrocarbons from upstream exploration or production, the operator potentially has a liability to those adversely affected by the pollution but typically has no liability to the customers of the project, namely the offtakers. Pollution liabilities are generally quite well understood and generally insurable. If there is a release of CO₂, there is a potential liability to affected local communities in the same way as there is with victims of other forms of pollution, but CCS projects have a very different relationship with their customers. The fundamental service that a CCS operator is providing is to store CO₂ in a way that ensures that it is not damaging to the environment and therefore the release of the CO₂ is a failure to perform that obligation. On the face of it, an operator who fails to perform its fundamental obligation should be liable to those that it has contracted with to store CO₂. What would the measure of the damages be? In the absence of a contractual agreement as to what the damages are, under English law, the courts would seek to put the wronged contractual party in the position it would have been in had the contract been properly performed. Assessing how that is done in this scenario is difficult, and so any CO₂ sequestration agreement will need to clearly set out what the agreement of the parties is regarding compensation for fugitive emissions. From an operator’s perspective, the potential liability could be large, particularly if a large amount of CO₂ was released, and so operators would need to limit liability, particularly if they are to attract non-recourse project financing. However looking at the issue from the perspective of the customers, there is a real problem with limiting the liability of operators, as the obligation of the operators to securely store CO₂ is a fundamental building block of the low carbon economy. Goods manufactured with energy generated in a way that does not emit greenhouse gases will become more valuable than goods manufactured using energy generated from fossil fuels, tax and trade regimes are being developed on the basis that energy and goods derived from it are “clean”. If it turns out that the presumption is wrong, because the CO₂ has not been permanently sequestered as everyone had assumed then this is potentially a big issue. Whilst it is unlikely to be redesignate all goods and services that have relied on specific sequestration services, from the perspective of societal acceptance of CCUS as an acceptable approach to mitigating climate change, and to ensure the integrity of the whole system, failures to properly sequester greenhouse gases must lead to very serious consequences for wrongdoers. This tension is an issue that needs to be resolved before the widespread rollout of CCS.

At a more mundane level, providing a service until literally the end of time is not a concept that any legal system deals with well. Lawyers are generally nervous about their clients signing up to open ended commitments. From an operational perspective, technicians will tell you that once the CO₂ is in the field and the well is properly capped there is nothing else to do, but whilst the project is in its operational phase accidents can happen, and as more CO₂ is sequestered, the potential liability for releasing it will increase as time goes on. Just as lawyers are nervous of open ended liabilities, so too are insurers and so it is likely that national legislation will be needed to time bar any claims relating to emissions from historic CCS projects after a certain period of time. There needs to be an international consensus on how long that is to avoid the risk that some countries attract CCS projects just because of the liability protection afforded to project proponents in the latest international race to the bottom.

As we discussed initially, it appears than many of the CCS projects that are being proposed, particularly those in South East Asia, are intended to utilise existing infrastructure developed originally for oil and gas projects. Indeed, the transition from oil and gas production to CCS is likely to be a gradual process as CO₂ is initially used to enhance the production of oil before being permanently sequestered in geological formations. It is hoped that the cost of carbon sequestration will, at least in part, be supported by the enhancement of the hydrocarbon production. If the oil that would not otherwise have been produced is consumed in a way that does not capture the emissions, there is a concern that an activity that is intended to reduce atmospheric concentrations of greenhouse gases actually, for a while at least has a role in increasing greenhouse gas concentrations. However, the relationship with upstream oil and gas is important, and offers a key to how to make these projects more affordable: The upstream oil and gas industry has unmatched knowledge of how gases are retained in geological formations, and how to access those formations in a way that that does not contaminate the surrounding areas. Upstream production, in some cases, can result in the production of significant quantities of geological CO₂, making upstream production an ideal “anchor tenant” for a CCS project. It is also the case that there are many examples of gas fired power production being sited very close to the gas field, making CO₂ from the power plant an obvious candidate for capture and sequestration.

Indeed, if it is accepted that natural gas must be the key energy source in the transition from hydrocarbons to renewables, CCS is the technology that reduces the greenhouse gas emissions of that transaction, and gives a potential second use to the infrastructure that has been built already. The relationship between CCS and upstream production cannot be divorced and offers a great opportunity to fast track CCS to commercial operations. What will be key is to ensure that a CCS project has a net reducing effect on concentrations of atmospheric greenhouse gases over timelines compatible with the fight against climate change and to explain that to society.

In the Asia Pacific region there are a number of countries that are envisaging the CCS industry in their countries developing as a hub, attracting CO₂ captured in other countries, which is then transported internationally, likely by tanker or pipeline, to the country hosting the project. We have seen, for example significant interest from Japanese and Korean companies in projects proposed for Malaysia, Indonesia and Timor Leste. This model, with its parallels with the way that the LNG sector developed in its early days, is appealing. However, there are some issues that need to be resolved, and in some cases the solution will not be purely economic, but partly political as well. The first issue is familiar to the LNG industry, the issue of domestic obligations. Just as LNG projects are often required to dedicate some of the gas production for the use of domestic industry, it seems to make good political sense that CCS projects have strong obligations to store CO₂ originating from the host country before commercial interests based in other countries with potentially the ability to price local emitters out of the facility. Local legislators are likely to face the same conundrum that legislators have considered in respect of open access LNG receiving terminals. Open access to infrastructure encourages competition but legislators have found that generally LNG receiving terminals will not be built unless sponsors can secure users who acquire long term capacity rights at receiving terminals, and we would expect the same debate in respect of CCS facilities.

Engagement with local communities is vital to any new infrastructure project, in any sector. Oil and gas projects, and LNG in particular, have been transformative to host communities, and to host countries. CCS projects will bring benefits to local communities, but these are likely to be by prolonging the life of existing hydrocarbon production, and thus securing jobs in existing hydrocarbon producing, and consuming industries, and of benefit to the wider community by ensuring security of supply of energy in forms that are difficult to replace with renewable energy and providing back up to electricity systems dealing with intermittency issues. Local host communities for CCS will often have already seen significant development as a consequence of hosting oil and gas developments and so CCS will not be as transformative as, say hosting an LNG plant might be. Communities will need to understand that CCS projects are playing a key role in mitigating climate change, and to understand what the risks could be.

One potential barrier to the international reach of CCS hubs, and the development of a global liquid competitive market for CCS is the London Protocol. The 1996 Protocol to the Convention of Marine Pollution by Dumping of Wastes and Other Matter, 1972 prohibited the transboundary transfer of CO₂. An amendment to Article 6 was agreed in 2009 but the amendment will not come into force until it is ratified by two-thirds of the signatories of the Convention. In October 2019 an agreement was reached by the parties to the Convention that allow for the provisional application of the amendment of Article 6 pending full ratification. Under the terms of the 2019 agreement a signatory country that wishes to receive CO₂ from other signatory countries is required to submit an acceptance of the terms of the amendment to the IMO. Currently 3 contracting countries have done so. Signatory countries wishing to export CO₂ to a country that is not a member need to enter into a bilateral arrangement with the receiving country that imposes the same standard for handing waste (including CO₂) as the country would have had if it had been a signatory to the Convention. This poses a potential conundrum for countries such as Malaysia and Indonesia which have not been parties to the Convention. Do they sign agreements with signatory countries (such as Japan, South Korea and China) to impose London Convention standards, which potentially has a significant impact on its marine industry and then limits the “market” to its CCS service to other London Convention countries, which would exclude many of the other countries in South East Asia including Thailand, Malaysia, Indonesia, Brunei, and Singapore. The more material issue for developers of CCS projects is that until governments have decided which approach to take and entered into the appropriate commitments, the developers of a CCS project in a non-signatory country will not know whether they are able to market the project’s services to London Convention countries or not. This delay is a potential project killer that LNG projects have not had to deal with.

The capture and sequestration of CO₂ emissions is recognised as a contribution towards a country’s Nationally Determined Contribution under the Paris Treaty. It should be noted however, that the credits are set against the emissions of the country in which the emissions were captured, not the emissions of the country where the CO₂ is sequestered. Countries that host CCS projects should be very clear that the project will not contribute to that country’s NDC if it is simply used to sequester emission from overseas. This approach should be contrasted with most voluntary schemes where CCS will not be recognised as a valid means of reducing emissions.

So is the analogy useful? There is little doubt that there are a large number of similarities between the development of CCS projects and the development of large scale infrastructure projects, particular oil and gas projects and particularly LNG projects. For CCS projects in regions where there have been LNG projects, there is great potential to reuse infrastructure, particularly in the upstream, and marine loading and unloading facilities, which will significantly reduce cost. Skills and techniques have been developed in connection with the LNG sector which should be used in the development of the CCS sector, from lessons about technology to commercial structuring and contracting. But thinking simply of CCS as an LNG project in reverse misses the key differences: these projects have a very different profile of risk to the developer compared to a typical oil and gas project. There are new and unquantifiable risks that are likely very low probability, but which no-one really understands the full consequences of, when it comes to fugitive emissions of CO₂, and, particularly when considering projects in South East Asia, the impact of the London Protocol throws up an added level of complexity that will need to be addressed at a national level. As ever, sponsors need to work hand in hand with national governments.