The key elements of CO2 storage agreements

As the world increasingly focuses on reducing carbon emissions to tackle climate change, CCS has emerged as a key technology. CCS offers the potential to significantly reduce CO2 emissions from industrial sources by capturing the CO2 and storing it underground, thus preventing carbon dioxide from entering the atmosphere. Wikborg Rein has assisted in the drafting and negotiation of several CO2 storage agreements for both Norwegian and international CCS projects, and in this article we will take a closer look at the key elements of CO2 storage agreements. 

Varying contract setups

In simple terms, a CO2 storage agreement is entered into between a supplier of CO2 and a storage provider, to set out the terms and conditions for long-term CO2 storage in a subsoil or subsea deposit. These agreements are referred to in many ways: CO2 storage agreements, CO2 offtake agreements or CO2 transport and storage agreements are just a selection. In this newsletter, we will use the term "CO2 storage agreement", and we will not go into specific issues arising in relation to the transport of CO2.

A key difference between CO2 storage agreements and storage agreements in other industries is that the CO2 supplier will never ask to get its CO2 back. For the storage provider, the storage obligation is therefore unlimited in time, whilst the obligation to receive new CO2 will be limited to the duration of the agreement. The further details and the overall contract setup depends on the business model of the involved parties. In our experience, there are three primary business models for CCS projects, each requiring a specific contractual regime:

1. The emitter is responsible for capture and transportation of CO2, and the storage provider is responsible for storage:
   • In this model, a Contract of Affreightment will need to be entered into between the emitter and the transporter
   • A storage agreement will need to be entered into between the emitter and the storage provider
2. The emitter is responsible for CO2 capture, whilst the storage provider is responsible for transport and storage:
   • A transportation and storage agreement, which may be the same contract or separate agreements, must be entered into between the emitter and the storage provider
   • A Contract of Affreightment must be entered into between the storage provider and the transporter
3. The emitter delivers CO2 to an aggregator, who then assumes responsibility for CO2 handling:
   • Various potential models can be applied within this business model, and the contract type(s) will depend on the specific aggregation model employed

In this article, we will focus on certain elements which are in our experience typically important for all three models. 

Key contract terms

Despite the variations in business models, contract setups, and individual differences from project to projects, CO2 storage agreements typically share certain characteristics. CO2 storage agreements are usually long-term contracts, and the key contract terms include volume commitments, compensation regime, shortfall, and off-spec CO2 regulations. We will discuss some of these elements below.

Volume commitments

Volume commitments refer to the capacity the emitter is entitled to use in the storage reservoir, with a corresponding obligation for the storage provider to make such capacity available. Typically, CO2 storage agreements will set out annual contract quantities as well as potentially shorter interval volume restrictions to ensure steady CO2 deliveries. The annual contract quantity can either be constant or be adjusted to reflect the emitter's storage needs over an extended period. 

Compensation regime

A key question is to which extent the emitter is obligated to pay for the storage capacity reserved, and not just the storage capacity used. Since CO2 is a by-product, the emitters can have difficulties to predict the storage capacity they will need. Consequently, the emitter has a need for flexibility, particularly given the long-term nature of these agreements. On the other hand, the storage provider needs predictability and a steady cash flow, as it requires large investments to build the CO2 storage facilities. This clash of interests demands creative solutions to balance the emitter's need for flexibility and the storage provider's need for predictability. 

At the current stage of the CCS industry development, the "supply-or-pay" compensation regime is by far the most widespread. A supply-or-pay principle is a mechanism by which the emitter has an option on whether or not to supply CO2 to the storage provider, on the condition that the emitter must still make payment to the storage provider regardless of whether the capacity is utilised. The supply-or-pay mechanism can either be a fixed percentage or the entire annual contract quantity.

Other elements to consider in the regulation of the compensation regime are the unit fee structure, price adjustments, and which exemptions (if any) should be made from the supply or pay principle. 

Off-spec CO2

The storage agreement should define the quality requirements of the CO2 stream. Any product not meeting these requirements will be deemed off-spec.  

From the storage provider's perspective, storage of off-spec CO2 could lead to non-compliance with permits, resulting in legal and regulatory repercussions. Additionally, off-spec CO2 may be harmful to the storage provider's installations. Due to these constraints, the storage provider would want to safeguard against an obligation to receive off-spec CO2. A particular feature of CO2 storage agreements is moreover that the off-spec discussion could be relevant in another axis as well, namely for CO2 vapour return between the sink and the transport vessel.

The storage agreement should specify the storage provider's right to reject off-spec CO2, including procedures therefore, and should regulate the several specific issues arising in connection with CO2 off-spec vapour return.

Conclusion

The negotiation of CO2 storage agreements are complex and time consuming, due to the greenfield nature of CCS projects and because of uncertainty on how the market and regulatory framework will develop. In addition to the topics addressed above, CO2 storage agreements include other important elements such as EU ETS risk, force majeure, delays and liability and indemnities, which all take time to negotiate and conclude on. CCS players should be mindful of the time and resources that will go into negotiating a balanced CO2 storage agreement.

Wikborg Rein has a market-leading CCS team, and extensive experience in all legal matters related to the industry, including CO2 storage agreements. Our lawyers have a unique understanding of the entire CO2 value chain, and have experience from advising major industrial companies with CO2 capture and storage projects. Feel free to contact us if you want assistance on your CCS project.