The US Environmental Protection Agency (“EPA”) made a bit of history in December 2023 when it issued California’s first draft Carbon Capture and Sequestration (“CCS”) Class VI well permit. The permit, issued for a project proposed by California Resources Corporation (“CRC”) in Kern County, is currently in a 90-day public comment period, after which EPA will make its final decision. The project may be permitted as early as June 2024 if everything remains on schedule. EPA’s long-awaited decision helps pave the way for future CCS projects throughout the state.
Class VI Permits
To receive regulatory approval for a CCS project, a project owner must submit applications for myriad federal, state, and local permits. The primary permitting agency is EPA, which regulates a wide variety of injection wells under its express authority to protect underground drinking water sources pursuant to the federal Safe Water Drinking Act.
EPA’s regulatory authority in this realm is not new. In response to expanded interest in CCS projects more than a decade ago, EPA established the “Class VI Program for Carbon Dioxide (CO2) Geologic Sequestration (GS) Wells” in 2011. What is relatively new, however, is the recent surge in Class VI well permit applications resulting from federal tax credits available under Congress’ 2018 modification of the so-called “45Q” tax credit for CCS projects. (More on that topic in a forthcoming blog.)
The Class VI permitting regime is rigorous and detailed—an interlocking set of “cradle to beyond the grave” regulatory requirements which ensure that the CO2 is properly gathered, condensed, transported, injected, and sequestered, i.e., permanently stored in the earth. An applicant must prove to EPA that the proposed injection wells are properly designed and will be drilled pursuant to strict regulatory requirements, and detailed geologic data and analyses establishing that the targeted underground injection reservoir is geologically capable of permanently storing the proposed volume of CO2. The applicant must also have an approved plan to install and operate significant support facilities and equipment to safely construct, operate, maintain, and then plug the injection wells at the end of the injection phase of the project. The applicant must design and implement an EPA-approved long-term monitoring plan, i.e., a network of gas monitoring wells, to ensure that the geologic reservoir into which CO2 has been injected is retaining its structural integrity during the injection phase and will continue to contain the CO2 long after injection ceases. Robust and long-term financial assurances must be put in place, including insurance policies, bonds, etc. (This is a very brief summary. Highly detailed information on the Class VI permitting process and requirements available on EPA’s website.)
Current Status of the Class VI Program
Potential CCS projects in California increasingly are becoming a significant driving force in the local oil and gas industry. The most recent example of this occurred on February 7, 2024, when CRC announced its upcoming $2.1 billion acquisition of Aera Energy, LLC. The combined company will become by far the largest oil and gas producer in the state, and the resulting economies of scale were a significant driver in the deal. But CRC also identified the CCS potential for Aera’s land in the San Joaquin Basin as one of its major motivations.
The growing momentum behind CCS projects has increased the number of Class VI permit applications across the country, and there is growing concern that EPA does not have the staff and resources to manage the backlog. EPA currently is processing 43 applications, 12 of which are in the San Joaquin Basin and Sacramento Delta. (See the Class VI Permit Tracker on EPA’s website, the current version of which is also set out below). According to EPA, since the establishment of the program in 2011, only 3 projects have received draft or final permits, one of which is CRC’s Kern County project.
While EPA’s stated goal is to process properly completed Class VI applications within 24 months, the CRC project appears likely to take more like 36 months. To mitigate the backlog, Congress provided an additional $50 million to EPA through the 2022 Infrastructure Investment and Jobs Act specifically for the Class VI permitting program. Some individual states are also attempting to streamline the application process by obtaining “primacy,” a process by which EPA would conditionally delegate its CCS project permitting authority to a state government.
California already has primacy under the provisions in the Safe Drinking Water Act applicable to the permitting and operations of traditional oil and gas exploration and production wells within the state, and conversations are ongoing in Sacramento about whether California should apply for similar authority for Class VI permit applications.
It is questionable, however, whether California regulators will be any faster or more efficient than EPA in reviewing future Class VI applications. There is also some political opposition in Sacramento based on the perception that CCS projects will prolong the lifespan of CO2-generating industries such as oil and gas production and gasoline refining.
Source: https://www.epa.gov/uic/current-class-vi-projects-under-review-epa
Conclusion
CCS seems to be here to stay. If EPA retains CCS permitting authority in California, permitting of new projects is likely to become somewhat easier and less time-consuming as project owners and other stakeholders become more familiar with that process. So long as Congress does not eliminate or reduce the 45Q tax credits available to CCS project owners, a more expedited permitting process should also attract additional investment capital. The draft permit issued to CRC in December is a step in the right direction and certainly provides increased optimism for project developers, landowners, and investors who are considering CCS projects in California.
This blog is part of a series that explores the economic benefits, development processes, and legal issues arising from CCS projects in California. For more information about CCS, or to learn how we might be able to help you navigate through a CCS project, please reach out to us at 805-557-8081, email us at dossentjuk@oandblawyers.com, or visit our contact page.