While the 45Q tax credit has been available since 2008, the 2022 Inflation Reduction Act (IRA) significantly changed the value and structure of the credit. For sequestration and enhanced oil or gas recovery projects, the credit value is considerably larger than before. Not only is the credit value higher but, during the first 5 years of sequestration, the project operator can claim the full credit income (“direct pay”) from the IRS tax-free, irrespective of its tax liability for a given year. For the remaining 7 years of credit availability, a project operator also has the flexibility to sell those future credits to another interested party, potentially creating an additional revenue stream. These changes have generated increased momentum to initiate Carbon Capture, Utilization, and Storage (CCUS) projects. Before the IRA, only a handful of Class VI well projects were in development. Now, as of April 2024, there are over 40 projects in some stage of EPA review nationwide.
However, an unintended consequence of the increased momentum is that permitting a Class VI CCUS project has now become a protracted multi-year endeavor. Permitting agencies are stretched thin, and project developers are competing for the limited capital, material, and time available for projects. Supply chains for crucial materials like corrosion-resistant downhole components and compression equipment face long lead times due to limited availability. The timeframe can also be further impacted by the project's scale and management efficiency. These delays and permitting challenges have a domino effect on CCUS project economics, impacting not just developers, but also their suppliers and eventual customers. While a project might be booked now, it's a long-term investment with benefits that won’t likely materialize until several years into the future.
So, how can CCUS project developers accelerate deployment?
Class II Injection Wells for Oil and Gas Companies
The best starting point is to choose the appropriate permitting pathway. If the project developer operates within the oil and gas space and is planning on sequestering produced CO2, there are advantages to pursuing a Class II permit for sequestration (or EOR) instead of a Class VI permit. As such, it shouldn’t come as a surprise that most of the monitoring, reporting, and verification (MRV) plans that have been submitted to the EPA for sequestration projects are for Class II permits.
Advantages of State Primacy for Class VI Wells
In addition to choosing the appropriate permitting pathway, another way to accelerate a project is to develop it in a state that has Class II or Class VI primacy. For Class VI wells, currently only North Dakota, Wyoming, and Louisiana have primacy. Geologically these states are also well-suited for CCUS projects with abundant subsurface storage for captured carbon dioxide. Furthermore, given their prior history with oil and gas production, these states tend to have the existing workforce and regulatory infrastructure to support CCUS projects.
State-level primacy can offer several advantages. First, state regulatory staff tend to be knowledgeable in their state’s specific Class VI regulations and past permitting decisions. Second, states with primacy can engage with their legislatures to tailor regulations and address concerns unique to their state’s needs. Additionally, these states can also potentially adjust local project requirements within the Class VI framework.
By choosing a state with Class VI primacy, projects can benefit from not only a faster, more streamlined permitting process but also potentially reduced development costs. States with primacy also tend to be well-informed about the specific challenges and/or concerns that may surface during the feasibility and permitting process. This combination of factors typically increases the certainty of project success and shortens the overall timeline to operation.
As states have become aware of the economic advantages of CCUS, momentum for Class VI primacy has increased. Many states are now reviewing the process for gaining primacy, including some who have submitted applications to the EPA, such as West Virginia, Texas, and Arizona. However, as North Dakota, Wyoming and Louisiana can attest, gaining primacy is a long and complex process.
The Importance of Upfront Planning and Financial Assurance for CCUS Projects
While state primacy offers significant advantages, it can't replace the critical role of thorough and efficient project planning from the outset. Issues not addressed in the initial planning stages inevitably resurface later, causing delays and cost overruns. Project developers should understand the cost implications and timelines associated with Class II or Class VI permitting. This understanding should be factored into the initial project development stages, which typically involve a feasibility study and often a stratigraphic test well.
Inadequate upfront planning extends beyond project delays and cost overruns. It can also impact financial assurance, a critical part of the permitting process which typically involves insurance or bonding mechanisms. Financial assurance involves multiple stakeholders - project operators, regulating agencies, and insurance/ bonding firms. Each of these parties share a mutual interest in the project safely and successfully sequestering the CO2. Firms must either pay the costs to mitigate risks upfront or pay a premium on the financial assurance to insure against those risks. Done well, the cost of upfront mitigation (testing, monitoring, and corrective action) can be appropriately balanced against the probability that something adverse may occur.
The cost of financial assurance is a significant factor in CCUS project economics and one that is often misunderstood or overlooked. By gaining a clear understanding of these costs upfront, companies can develop a more comprehensive economic picture and strike the balance between upfront risk mitigation and financial assurance costs.
Fast-Track Your CCUS Project
Leverage Trihydro's proven experience in evaluation, financial modeling, permitting, and construction to expedite your CCUS project. We'll guide you through the entire process, helping you avoid the costly delays and challenges associated with incomplete planning.