Contracts and risk management in carbon capture, utilization, and storage projects

Abstract

The process of capturing carbon dioxide (CO2) from one or more industrial or energy sources, then transporting the CO2 via pipelines, and storing it permanently in underground formations or delivering it for different uses involves interconnected aspects and sectors. Thus, a typical carbon capture, use, and storage (CCUS) project requires committed engagement from operators in various industries, public and private financiers and stakeholders. The projects are developed around contractual arrangements, such as offtake agreements, in the backdrop of complexities and risks arising from the segmented nature of the value chain. These agreements are designed to consolidate the various aspects, secure firm commitments and the necessary upfront capital investment. Some of the potential risks that could impact the development of viable projects include the pricing or value of captured CO2, loss of revenue stream due to shutdown of emission sources or carbon leakage and recapture, law and policy changes relating to fiscal incentives, ownership, and transfer of environmental attributes and long-term liability for stored CO2, managing cost and project milestones, etc. This article identifies and reviews the broad categories of contractual and regulatory measures for mitigating CCUS project risks from a transactional law perspective. It discusses the context for viable carbon capture offtake and transportation arrangements vis-à-vis the measures being developed to mitigate risks and common issues encountered from early planning to operational stages, especially in the USA and Europe. It is noted that offtake and transportation arrangements play a key role in ensuring bankable CCUS projects and define the terms and conditions upon which parties engage in the interdependent aspects of capturing, delivering, or sequestering CO2 permanently.