Carbon Dioxide Sequestration Legislation, Subsurface Pore Space and Trespass in Montana

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1 Carbon Dioxide Sequestration Legislation, Subsurface Pore Space and Trespass in Montana The following is expressly for informational purpose s only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of the following information does not create an attorney-client relationship between Burleso n LLP and the u ser. The opinions expressed are the opinions of the individual author and may not reflect the opinions of Burleson LLP or any individual attorney.

2 REGULATION OF CARBON DIOXIDE SEQUESTRATION - Geologic sequestration of carbon dioxide is regulated at the federal level by the United States Environmental Protection Agency, which statutes and regulations preempt state-enacted statutory and administrative provisions - These federal regulations have their bases in the Safe Water Drinking Act s Underground Injection Control Program, creating a new category of wells designated Class VI, and in the Clean Air Act s Greenhouse Gas Reporting Program - Individual states may seek primacy for regulation of geologic sequestration of carbon dioxide - The State of Montana has applied for primacy with respect to the regulation of geologic sequestration of carbon dioxide, although the federal government s grant of the same is not expected until approximately 2015 at the earliest - Accordingly, the first segment of this presentation focuses on legislation adopted by the State of Montana which is slated to become effective upon the grant of primacy for geologic carbon dioxide sequestration from the federal government

3 MONTANA SENATE BILL In 2009, the Montana Legislature adopted the provisions SB 498, which provide the framework for the regulation of geologic sequestration of carbon dioxide upon the granting of primacy by the federal government - SB 498 creates various new statutory provisions, while also amending several existing Montana statutes to comport with and/or consider geologic sequestration of carbon dioxide - SB 498 gives exclusive jurisdiction to the Montana Department of Natural Resources, Board of Oil and Gas ( MBOG ), for the oversight of geologic sequestration of carbon dioxide in Montana, including: - Promulgation of rules to implement and enforce the carbon dioxide geologic sequestration statutes, including the classification of wells - Issuance of carbon dioxide injection well permits containing measures to prevent contamination - Although the MBOG makes the final decision regarding the issuance of a carbon dioxide injection well permit, it must also solicit, document, consider and address comments from the Montana Department of Environmental Quality prior to any permit hearing

4 DEFINITIONS - SB 498 defines carbon dioxide as that which is produced by anthropogenic sources that is of such purity and quality that it will not compromise the safety of a geologic storage reservoir and will not compromise those properties of a geologic storage reservoir that allow the reservoir to effectively enclose and contain a stored gas - SB 498 defines a carbon dioxide injection well as a well which injects carbon dioxide for the underground storage of carbon dioxide in a geologic storage reservoir, but expressly excludes any well which injects carbon dioxide or enhanced oil and gas recovery - SB 498 defines a geologic storage reservoir as a subsurface sedimentary stratum, formation, aquifer, cavity or void, whether naturally or artificially created, including vacant or filled reservoirs, saline formations, and coal seams suitable for or capable of being made suitable for injecting and storing carbon dioxide, but expressly excludes any natural gas storage reservoir

5 DEFINITIONS - SB 498 defines verification and monitoring as encompassing the means for measuring the amount of carbon dioxide stored at a specific geologic storage reservoir, checking the site for leaks or deterioration of storage integrity, and ensuring permanent, non-harmful carbon dioxide storage - Verification and monitoring expressly includes pre-injection secure storage modeling, including potential fugitive emission paths, seismic activity consideration, and in situ geologic formation chemical reactions, along with leak monitor system establishment - The concept further involves tracking of carbon dioxide plume behavior (and impliedly, pressure fronts), which has generally proven to be far in excess of those encountered in other similar oil and gas related underground injection

6 CARBON DIOXIDE INJECTION WELL PERMITTING, DRILLING AND OPERATION - The bulk of carbon dioxide injection well permitting, drilling and operational requirements, to be set forth in future MBOG rules, will follow the MBOG s statutory mandates and authority - However, there will likely be a fair amount of carry-over from existing oil and gas well permitting, drilling and operating regulations, which would be highly similar with respect to practical matters - One area of divergence appears to be statutory notification requirements separate from those applicable to oil and gas operations, consisting of both publication and mailed notice to all owners of surface and mineral interests (and their respective lessees) of record lying within one (1) mile of any geologic storage reservoir boundary - A second area of distinction is found with respect to the abandonment of carbon dioxide injection wells, allowing the MBOG to look to the geologic storage reservoir program account for reclamation funds if the abandoning party cannot be identified or located

7 SPACING, POOLING AND UNITIZATION OF GEOLOGIC STORAGE RESERVOIRS - SB 498 amends existing provisions of Montana s oil and gas conservation statutes to: (i) provide for the creation of temporary and permanent carbon dioxide injection well spacing units; (ii) further define the term pool as including an underground reservoir for the long-term storage of carbon dioxide ; and (iii) provide for the creation of units for long-term carbon dioxide storage upon the application of those persons owning a minimum of 60% unit storage capacity - The practical effect will be the statutory spacing, pooling and unitization of carbon dioxide injection wells and geologic storage reservoirs in a substantially similar manner to that in place for oil and gas operations, inclusive of any mandatory pooling - MBOG unitization orders must find that the geologic storage reservoir unitization is both: (i) necessary for the long-term storage of carbon dioxide; (ii) the value of the economies affected exceeds the costs incident to the operations; and (iii) that the full extent of the geologic storage reservoir has been reasonably defined by drilling, seismic information, or other information acceptable to the MBOG

8 OPERATING AND ADMINISTRATIVE FEES - SB 498 requires the MBOG to set the amounts of certain fees payable for geologic storage reservoir and carbon dioxide injection well operation, to defray enforcement, operating, management and monitoring costs - SB 498 provides for a per-well carbon dioxide injection well operating fee, payable to the State of Montana - SB 498 also provides for an administrative fee, applicable to injected carbon dioxide on a tonnage basis, which must be based on the MBOG s anticipated actual expenses incurred in monitoring and managing - The MBOG is required to deposit the fees collected into Montana s special revenue fund, and in the case of the administrative fee, into a specific account within that fund

9 CERTIFICATE OF COMPLETION, TITLE AND LIABILITY TRANSFER - A minimum of twenty-five (25) years after the termination of carbon dioxide injection, the MBOG may issue a certificate of completion to the geologic storage reservoir operator, which may lead to subsequent transfer of title to and liability for geologic storage reservoirs and injected carbon dioxide - Once carbon dioxide injections end, the operator must undertake monitoring and verification steps to show compliance with SB 498 s provisions, including full compliance with all statutes and regulations; stabilized retention of injected carbon dioxide by the geologic storage reservoir without migration; proper plugging of wells and removal of equipment; mechanical integrity of all remaining equipment during the post-closure period; and continuing sufficiency of the posted bond - Once the post-closure period has ended and the operator has made the required monitoring and verification showings, the MBOG may issue a certificate of completion - After the issuance of the certificate of completion, the operator is required to monitor and verify the geologic storage reservoir and the injected carbon dioxide for a subsequent period of twenty-five (25) years, ensuring full compliance with applicable statutes and regulations, and showing that the geologic storage reservoir will maintain structural integrity

10 CERTIFICATE OF COMPLETION, TITLE AND LIABILITY TRANSFER - During the twenty-five (25) year post-closure period and the twenty-five (25) year period subsequent to the issuance of a certificate of completion, the operator retains all liability for operation and management of carbon dioxide injection wells, geologic storage reservoirs, and injected carbon dioxide - After this period, the operator may transfer title to the geologic storage reservoir and the stored carbon dioxide to the State of Montana, with the final decision for the same falling on the Montana Board of Land Commissioners - If title to the geologic storage reservoir and the stored carbon dioxide is transferred to the State of Montana, all rights and interests therein are included, along with all liability for the same - If title is not transferred (either by choice or due to lack of meeting the statutory requirements), the operator assumes liability for the geologic storage reservoir and the injected carbon dioxide indefinitely, or until the operator is able to meet the statutory requirements for transfer of title to the same - The operator may petition the Board, after each successive twenty-five (25) year period following the issuance of a certificate of completion, for the transfer of title and liability

11 REAL PROPERTY RIGHTS - Montana s oil and gas conservation statutes, including those as amended by SB 498, contain express provisions regarding the effect of the same on real property rights - The rights of property owners within a geologic storage reservoir, not otherwise committed thereto, are not prejudiced - The rights of mineral owners or lessees to drill through or near a geologic storage reservoir, provided the integrity of the reservoir is maintained, are not precluded - Common law dominance of the mineral estate is not changed or altered - Common and statutory law regarding ownership of surface or subsurface rights is not changed or altered - The subject statutes do not apply within the borders of any federally-recognized Indian Tribe, unless such tribe adopts carbon dioxide sequestration laws and enters into a cooperative agreement with the State of Montana - Ownership of any geologic storage reservoir, if not otherwise determinable from deeds and severance documents as analyzed under common or statutory law, is presumed to be vested in the surface owner

12 INTERPLAY BETWEEN CARBON DIOXIDE SEQUESTRATION, SUBSURFACE PORE SPACE AND SUBSURFACE TRESPASS - Subsurface pore space ownership and subsurface trespass issues are often complex, and are dependent upon both the applicable common and statutory law in effect, as well as the specific factual situation presented - Accordingly, this presentation provides a generalized overview, focusing on identifying the applicable subsurface pore space ownership law and subsurface trespass liability law applicable to carbon dioxide sequestration

13 2011 Burleson LLP WHAT IS SUBSURFACE PORE SPACE?

14 OWNERSHIP OF SUBSURFACE PORE SPACE - Although jurisprudence directly on-point is unavailable, Montana is likely to follow the majority rule, vesting subsurface pore space ownership in the owner of the surface estate, unless it was otherwise expressly severed by a conveyancing instrument - Such ownership is consistent with the provisions of SB 498, which creates a statutory presumption of subsurface pore space ownership by the owner of the surface estate - Montana common law also generally supports ownership of the subsurface pore space as part of the surface estate - Federal law is generally in line with the majority subsurface pore space ownership views, although there are certain federal materials to the contrary 2011 Burleson LLP

15 SUBSURFACE TRESPASS - Trespass is a physical intrusion upon the real property of another, including subsurface property and minerals, without the owner s consent - Trespass can occur through an instrumentality, such as wellbore, or via the migration of a liquid or gas - A trespass can be characterized as continuing or permanent in nature; for example, a failure to remove a thing from the property of another is a continuing trespass until it is removed - Conversely, a wellbore is likely a permanent trespass, owing to the practical impossibility of removal - Such continuing and permanent trespasses are subject to heightened damage allowances, attorney fee and cost recovery, and perhaps most importantly, injunctive relief 2011 Burleson LLP

16 PROPERTY OWNERSHIP PRINCIPLES IN RELATION TO SUBSURFACE PORE SPACE - To the extent that subsurface pore space ownership is vested in the owner of the surface estate, subsurface pore space should be treated as a part of the surface estate for analysis purposes - Accordingly, traditional co-tenancy ownership concepts and surface estate rights extend to subsurface pore space for carbon dioxide sequestration purposes - For example, although no jurisprudence directly on-point exists, references in a traditional surface use and access agreement would likely extend to subsurface pore space - Likewise, the dominance of the mineral estate is also statutorily applicable to subsurface pore space, allowing the mineral estate owner the right to use so much of the subsurface pore space as is reasonably necessary to develop the mineral estate, absent loss of structural integrity - Thus, just as the surface of the lands can be the object of trespass, so too can the subsurface pore space - Accordingly, a wellbore or gas migration is capable of penetrating subsurface pore space, causing liability for trespass where the consent of the surface estate owner was not obtained or when the provisions of SB 498 concerning spacing, pooling and unitization have not been utilized 2011 Burleson LLP

17 SUBSURFACE PORE SPACE TRESPASS RISKS: DAMAGES - Because the value of subsurface pore space lies primarily in its ability to be pressurized for the storage or sequestration of gaseous substances, damages for subsurface trespass are likely to focus on destruction of that ability or on contamination of a subsurface reservoir - Despite the technically broad range of damages potentially associated with subsurface pore space trespass, those damages must nonetheless be capable of reasonable, non-speculative determination - The normal method for calculation of damages with respect to trespass would be the difference between the value of the pore space before the trespass and the value of the pore space after the trespass - However, establishing a benchmark would require costly expert witness testimony, and would likely only be availing if the subsurface pore space owner had established a baseline for the pore space storage or sequestration capacity prior to the trespass - Accordingly, the subsurface pore space owner faces substantial difficulty and cost in successfully maintaining a claim for subsurface pore space trespass damages - The greatest potential for cost to the operator from a subsurface pore space trespass action therefore lies not in the dangers of an large adverse judgment, but in other forms of relief available, particularly in the early stages of the litigation 2011 Burleson LLP

18 SUBSURFACE PORE SPACE TRESPASS RISKS: INJUNCTIVE RELIEF - Montana has judicially and/or statutorily approved the award of injunctive relief in trespass actions - Thus, a subsurface pore space owner may seek a preliminary injunction at the start of litigation, asking the court to preserve the status quo, i.e. the absence of a wellbore penetration or gas migration in the subsurface pore space - Although the specific facts of each case will control with respect to the subsurface pore space owner s ability to meet the requirements for issuance of a preliminary injunction, and despite the potentially high injunctive relief bond an operator may seek to have imposed, courts often err on side of caution when determining preliminary injunctions - Accordingly, the greatest economic risk to an operator from a subsurface pore space trespass claim lies not in the ultimate damages awarded, but in the potential for judicially-mandated cessation of operations - Such cessation may involve prohibition on the removal of equipment from the drilling location, potentially including rigs and other essential equipment, which may lead to further disputes between the operator and its services contractors 2011 Burleson LLP

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