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Transportation of CO2 – an emerging market

10/06/2024

Following the Paris Agreement, Carbon Capture and Storage (CCS) has emerged as a promising tool to substantially reduce carbon emissions. Whilst CCS’s potential is considerable, it is still a developing industry that needs efficient means of transportation.

Captured CO2 can primarily be transported from the emitter to the storage provider by pipelines or ships. Whilst pipelines may prove to be more cost-efficient, at least over time, ships are generally more flexible and quickly scalable.

Cross border transportation of CO2 as “waste”

A first hurdle facing CCS projects where the captured CO2 is to be transported across borders for storage in a foreign subsea reservoir, is the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter 1972 (the London Convention) and its 1996 protocol (the London Protocol). The London Convention and Protocol aims to prevent pollution at sea by dumping of wastes and other matters. One of the principles in the London Protocol, is that the contracting parties shall not allow the “export of wastes or other matter to other countries for dumping or incineration at sea”. An unintended consequence of this is that CO2 intended for storage, and not for commercial use, cannot be transported from one ­contracting state to another. 

Having realised this, some of the signatories to the London Protocol proposed an amendment in 2009, aiming to make it possible to export CO2 intended for disposal when the states involved have entered into an agreement or arrangement, and notified the International Maritime Organization (“IMO”) of the agreement or arrangement. Whilst the amendment has, as of today, not been ratified, the lack of ratification has been temporarily resolved by the adoption in 2019 of a special resolution, which allows for the provisional ­application of the 2009-amendment.

For signatories to the London Protocol, it is therefore now in principle possible to transport CO2 for CCS-purposes. The key conditions in order to make this possible, are that the relevant loading / discharge states have adopted the 2009-amendment, and that they have entered into an agreement or arrangement. Recently, several states have entered into such agreements or ­arrangements. For example, Norway entered into ­arrangements (titled Memoranda of Understandings) with Sweden, Denmark, Belgium and the Netherlands on 15 April 2024. This has effectively removed the red tape that would have prevented these countries from utilising the full potential of the CCS infrastructure that is under development, and marks a welcome development which we expect to be followed up by similar agreements between other countries. 

Structuring of the transportation ­element of CCS

CO2 transportation by ships from the emitter to the storage provider have thus far been arranged by either the storage provider or the emitter. However, neither land based CO2 emitters, nor the emerging storage providers, are typical shipowners.  
In the early projects that we have seen, transportation has been offered as an integral part of the storage provider’s services under a Transportation and Storage Agreement (TSA). The vessels are ordered and built by the storage provider, who aims to time charter the vessels, and thus the actual transportation element, to a third party shipowner. This makes sense in an ­immature industry like CCS where vessels capable of carrying CO2 are few and far between. 
In later projects, we have also seen that large ­emitters are prepared to arrange for the transportation themselves, by entering into long-term time charters for dedicated vessels to be built and operated by a third party shipowner. As the industry matures, we expect to see more of these kinds of arrangements in the future. 

We also expect that CO2 loading terminal operators, which collect CO2 captured by several emitters pending shipment to a storage provider, may add transportation to their terminal services and charter in the required tonnage.

CO2 Time Charter Party 

Whilst the time chartering of CO2 carriers is ­relatively straight forward and similar to charter parties ­commonly used for transportation of other liquified gases, there are some CO2 specific issues that should be addressed, particularly related to boiloff and venting of CO2. 

BIMCO has commenced a project to develop a ­standard time charter partly tailored for seaborne ­carriage of CO2. Their view is that whilst it is possible to use existing charter parties for this purpose, the unique conditions and potential liabilities associated with CO2 carriage and storage warrant the development of a dedicated standard that specifically addresses the needs of shipowners and charterers involved in ­transportation of CO2. 

We are pleased that our partner, Andreas Fjærvoll-Larsen, has been invited to join the BIMCO subcommittee working on this new charter party which is expected to be published in 2025. 

CO2 Transportation and Storage Agreement

A CO2 Transportation and Storage Agreement (TSA), where the transportation is offered by the storage provider and included as part of the storage service fee, is significantly more complex. Firstly, it has ­similarities with regular offtake agreements that we see in the petroleum, energy and renewables industry, but ­operates in reverse compared to those. Secondly, it is a framework agreement for transportation services at sea, or a Contract of Affreightment (CoA). 

The two elements raise different practical and legal challenges, where the transportation element is in our view the most complex – unless the parties are happy to rely on background law. 

The storage provider should be aware that if it also assumes an obligation to transport the CO2, it will be regarded as a “carrier” under maritime law. In the Nordic countries, the national maritime codes will therefore, to some extent, be mandatorily applicable at least if nothing to the contrary is clearly agreed in the TSA. A relatively strict liability regime will ­consequently apply during the transportation, although the carrier is normally able to limit its liability in ­accordance with the applicable law.

Another issue that always arises is the question of flexibility; should the emitter be obliged to pay for the full storage capacity reserved but not ­necessarily used, or should it be allowed  a certain degree of ­flexibility between the capacity reserved and a (lower) basic ­payment obligation? On the one hand, a storage ­provider who has made large up-front investments, naturally wants to secure its cashflow to protect that capex. The emitter, on the other hand, may argue that since it is not in the business of producing CO2 – it is simply a by-product – its obligation to pay for storage capacity should be as limited as possible to reflect the potentially fluctuating demands for its other – and main – products.

A key rationale both economically and ­environmentally for CCS projects is that CO2 is ­actually stored. A further, albeit related issue is ­therefore ­whether the emitter should be obliged to deliver a certain fixed ­volume of CO2, or simply be obliged to pay for the capacity reserved. This issue is particularly important to storage providers that have been granted subsidies based on actual quantities stored, as a “deliver or pay” regime may not provide adequate compensation if parts of the subsidised capacity built is left unused. If the emitter is obliged to deliver a fixed volume of CO2, the question is then to what extent the emitter should also be obliged to try to source in and deliver CO2 from third parties if it fails to deliver the agreed volume itself. 

Other issues the parties should bear in mind are how they regulate loss of CO2 during ­transportation, ­including boiloff thresholds, forced venting and ­valuation of the CO2 cargo; transfer of ownership of the CO2; storage provider’s right to use the vessel to collect CO2 from other emitters and co-mingling of CO2; liability for off-spec CO2 and off-spec CO2 vapour return; possible force majeure relief for emitter; price adjustment based on CPI and/or ETS costs; laytime and demurrage; storage terminal downtime and possible penalty for the storage provider; etc. 

Whilst some of the above issues may have found their common solution in general shipping practice, others have not. And for those issues there are currently little industry practice to rely on for the parties. Hence, it will be interesting to follow this emerging market in its continued development.

Authors
Profile image of Oddbjørn Slinning
Oddbjørn Slinning
Partner
E-mail osl@wr.no
Profile image of Knut Hausken Magnussen
Knut Hausken Magnussen
Specialist Counsel
E-mail khm@wr.no
Profile image of Halvard Saue
Halvard Saue
Managing Associate
E-mail hsa@wr.no

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