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CO2 Transport (Paper # 1691) Potential Regulatory Frameworks for an Expanded CO2 Pipeline Network: A Look into Galadriels Mirror Philip M. Marston, Esq.

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Presentation on theme: "CO2 Transport (Paper # 1691) Potential Regulatory Frameworks for an Expanded CO2 Pipeline Network: A Look into Galadriels Mirror Philip M. Marston, Esq."— Presentation transcript:

1 CO2 Transport (Paper # 1691) Potential Regulatory Frameworks for an Expanded CO2 Pipeline Network: A Look into Galadriels Mirror Philip M. Marston, Esq. M ARSTON L AW Paper # 1691 Ninth Annual Conference on Carbon Capture & Sequestration May 10 -13, 2010 Hilton Pittsburgh/David L. Lawrence Convention Center Pittsburgh, Pennsylvania

2 "What will I see? asked Frodo. Even the wisest cannot tell, for the Mirror shows many things: things that are, things that were, and some things that have not yet come to pass....." -- the lady Galadriel

3 Designing successful regulation of a transport system is a four-step process l Review underlying supply and demand characteristics of the commodity being transported l Understand basic operational and business dynamics l Identify public policy objectives to be achieved l Craft a regulatory framework designed to achieve these objectives in light of the underlying business realities Ninth Annual Conference on Carbon Capture & Sequestration

4 Oil pipelines – the Hepburn Act of 1906 l Oil supply highly fragmented with large numbers of small supply sources »Ida Tarbells 1904 muckraking stories on exploitation of oil producers l Demand reasonably concentrated initially (limited number of refineries) l Commodity could be readily stored prior to and following transportation l Transportation a batch business l Regulation designed largely to protect the independent oil producer Hence, pro-rationing adopted to ensure small producer a share of available capacity Ninth Annual Conference on Carbon Capture & Sequestration

5 Oil pipelines – the Hepburn Act of 1906 l Oil supply highly fragmented with large numbers of small supply sources »Ida Tarbells 1904 muckraking stories on exploitation of oil producers l Demand reasonably concentrated initially (limited number of refineries) l Commodity could be readily stored prior to and following transportation l Transportation a batch business l Regulation designed largely to protect the independent oil producer Hence, pro-rationing under common carriage rules adopted to ensure small producer a share of available capacity Ninth Annual Conference on Carbon Capture & Sequestration

6 Natural gas pipeline merchants – the Natural Gas Act of 1938 l Large number of small producers l Extensive gathering lines feed trunklines feeding hundreds of city gate delivery points -- sales only l Continuous process operation l Pipelines were merchants buying in field markets and re- selling to State-regulated local gas utilities »A many-to-many network for sales with essentially no access to transportation service l Federal regulation of sales needed to fill Attleboro gap – where State regulation constitutionally prohibited l Siting (and eminent domain) added later (1942) based on experience with 1938 Act Ninth Annual Conference on Carbon Capture & Sequestration

7 Natural gas pipeline as merchants – the Natural Gas Act of 1938 l Purpose of regulation: protect the consumer interests from exploitation at the hands of private natural gas companies -- FPC V. Hope Nat Gas Co., 320 U. S. 591, (1944) Ninth Annual Conference on Carbon Capture & Sequestration

8 By five decades later, natural gas pipelines had formed a national grid.... Ninth Annual Conference on Carbon Capture & Sequestration

9 ... that allowed for the open access revolution in 1980s with FERC Orders 436/497/636, etc. l Collapse of demand over 10 years led to enormous excess transportation capacity by 1983 »Fell from 22 Tcf in 1973 to 16.8 Tcf by 1983 »Demand in 2006 the same as 1970 -- 35 years before Ninth Annual Conference on Carbon Capture & Sequestration

10 Characteristics of natural gas pipeline network in 1980s l System linked hundreds of thousands of wells to many thousands of delivery points feeding tens of millions of end users »A many-to-many network with thousands of market participants l Non-discriminatory open access rules adopted by FERC beginning in 1985 »Capacity not pro-rated, but first come, first serve »Hence, not common carriage, but non-discriminatory contract carriage »Opening of vast secondary market in capacity »Use of open seasons, anchor shippers with dedicated long-term capacity for new construction »Reliance on contract commitments Ninth Annual Conference on Carbon Capture & Sequestration

11 What does this century of regulatory experience mean for CO 2 pipelines? l What is the present network configuration? l Who will be the suppliers of CCS-CO 2 ? l Who will be the customers? l What are the operational requirements of each? l Can any party exert undue market power? »Will to-be-constructed CO 2 pipelines to exercise market power? »Or will they rather be subjected to market power by either suppliers or customers? Ninth Annual Conference on Carbon Capture & Sequestration

12 What are public policy objectives to be achieved? l Are there access or pricing issues present? l Difficulties in expanding capacity to meet market needs? l In the event of disputes, are avenues for relief available? »Contractual protections? »Existing State regulatory protections and powers? –State regulation of rates and access –State eminent domain »State or Federal antitrust laws for access and rates »What about contractual regulation? Ninth Annual Conference on Carbon Capture & Sequestration

13 MAP OF CO2 PIPELINES Denbury CO2 pipelines and potential expansion projects ? Ninth Annual Conference on Carbon Capture & Sequestration

14 2010 to 2030: who are potential CCS-CO 2 suppliers? l Low-hanging fruit »Ammonia manufacture (Gulf South) »Petcoke feedstock (Hydrogen Energy (CA); Gulf South projects) »Coal-to-liquids (Gulf South) l Possible early supply from coal-fired power plants (http://coalgasificationnews.com) »AEP (Mountaineer at New Haven, West Virginia) »FutureGen Consortium (ex AEP and Southern) (Mattoon, Illinois) »Southern Company (Barry Plant, Alabama) »Southern Company (Kemper Co., Miss.) »Summit Texas Clean Energy (near Midland-Odessa, TX) »Illinois »Kentucky (e.g. Cash Creek LLC) »Indiana (Duke Energys Edwardsport plant; Indiana Gasification, LLC?) Ninth Annual Conference on Carbon Capture & Sequestration

15 And from 2030 to 2050? It all depends... l Will the early plants be successful at commercial scale? l Will legislation or regulation change over next 20 to 40 years? l Will there be technological innovation? l Will the political consensus on climate change change? l Is sustainability sustainable in the face of the personal, national and global debt loads? Ninth Annual Conference on Carbon Capture & Sequestration

16 Characteristics of CCS-CO 2 supply – sources per pipeline l Handful of production sources feeding each major pipeline »650 MW power plant capturing 4.5 million tons/yr (per IEA BLUE Map Scenario) l Just 5 such plants could fill a 30 pipeline »e.g. 30 pipeline with capacity of ~19 million tons per year (comparable to largest existing US pipeline) »5 plants @ 4.5 MMT/y = 22.5 MMT/y Like a natural gas pipeline built for the single purpose of receiving the output of just 5 wells for a 20 to 30 year term Ninth Annual Conference on Carbon Capture & Sequestration

17 Characteristics of CCS-CO 2 supply – sources per pipeline l Handful of production sources feeding each major pipeline »650 MW power plant capturing 4.5 million tons/yr (per IEA BLUE Map Scenario) l Just 5 such plants could fill a 30 pipeline »e.g. 30 pipeline with capacity of ~19 million tons per year (comparable to largest existing US pipeline) »5 plants @ 4.5 MMT/y = 22.5 MMT/y Like a natural gas pipeline built for the single purpose of receiving the output of just 5 wells for a 20 to 30 year term Ninth Annual Conference on Carbon Capture & Sequestration

18 Who are the customers for CCS- sourced CO 2 ? l EOR industry currently uses 45-50 MMt/year to produce ~ 250,000 bbl/d of oil l ARI study (2010) projects as much as 3,600,000 bbl/d possible in US by 2030 if not CO 2 -constrained » potential EOR demand for 600+ MMt of CO 2 per year (45 MMt/yr x 14) comparable to the total powerplant-source CO 2 supply in the most ambitious CCS deployment study (IEAs « BLUE Map Scenario showing 77 MMt by 2020 rising to 810 MMt by 2050) Ninth Annual Conference on Carbon Capture & Sequestration

19 Who are the customers for CCS- sourced CO 2 ? l EOR industry currently uses 45-50 MMt/year to produce ~ 250,000 bbl/d of oil l ARI study (2010) projects as much as 3,600,000 bbl/d possible in US by 2030 if not CO 2 -constrained » potential EOR demand for 600+ MMt of CO 2 per year (45 MMt/yr x 14) comparable to the total powerplant-source CO 2 supply in the most ambitious CCS deployment study (IEAs « BLUE Map Scenario showing 77 MMt by 2020 rising to 810 MMt by 2050) Ninth Annual Conference on Carbon Capture & Sequestration

20 How long will this all take? l Involves investment of hundreds of billions of dollars »IEAs Blue Case scenario foresees investment in US by 2030 of ~ $300 billion »By 2050, IEA scenario guestimates $2.5 to $3.0 trillion required worldwide THIS IS A VERY BIG THING.... Ninth Annual Conference on Carbon Capture & Sequestration

21 How long will this all take? l Involves investment of hundreds of billions of dollars »IEAs Blue Case scenario foresees investment in US by 2030 of ~ $300 billion »By 2050, IEA scenario guestimates $2.5 to $3.0 trillion required worldwide THIS IS A VERY BIG THING.... Ninth Annual Conference on Carbon Capture & Sequestration

22 A word of perspective: big things take time.... Pipeline Sales Unbundled Transportation Pipeline Throughput (1984-1994) (Tcf per quarter) Ninth Annual Conference on Carbon Capture & Sequestration

23 Pipeline Sales Unbundled Transportation Pipeline Throughput (1984-1994) (Tcf per quarter) Order 234-B Order 436 Order 497 Order 636 LDC Unbundling... and they dont happen in a regulatory vacuum. Ninth Annual Conference on Carbon Capture & Sequestration

24 What are some key operational constraints of suppliers and customers? l Powerplant and industrial suppliers need an output service »CO 2 output varies with plant production (of electricity, syngas, methanol, ammonia, etc.) »Require reliable offtake service 24/7 year round l EOR users need a requirements service »CO 2 requirements vary with EOR operations »Require reliable supply for injection in EOR operations 24/7 year round »Unique subsurface rights acquisition/aggregation (i.e. pore space) issues Ninth Annual Conference on Carbon Capture & Sequestration

25 You say, tomayto, but I say tomahto… l CO 2 pipeline transmission system and any new regulatory schema must recognize and accommodate these fundamental – and at times contradictory – market requirements lFew to few network »handful of major receipt point sources »handful of major delivery points »dedicated, firm capacity to assure availability before the powerplant or industrial CO 2 source is built In effect, these will be special purpose or dedicated pipelines each one planned, financed and constructed to serve a few customers Ninth Annual Conference on Carbon Capture & Sequestration

26 You say, tomayto, but I say tomahto… l CO 2 pipeline transmission system and any new regulatory schema must recognize and accommodate these fundamental – and at times contradictory – market requirements lFew to few network »handful of major receipt point sources »handful of major delivery points »dedicated, firm capacity to assure availability before the powerplant or industrial CO 2 source is built In effect, these will be special purpose or dedicated pipelines each one planned, financed and constructed to serve a few customers Ninth Annual Conference on Carbon Capture & Sequestration

27 What public policy issues is federal CO 2 pipeline regulation expected to address? l Will pipelines be built fast enough to receive all CCS-sourced CO 2 supplies? l Will they be able to be built in all the needed locations? l Will pipeline owners be able to deny reasonable access to new CO 2 sources or charge unreasonable prices for service? l Is relief available in event of disputes? Ninth Annual Conference on Carbon Capture & Sequestration

28 Will pipelines be built fast enough to receive all CCS-sourced CO 2 supplies? l Pipeline expansions and further planning are already moving forward for CCS-CO 2 supply »Pipeline under construction along Gulf Coast »Feasibility planning to bring pipeline to potential Illinois/Indiana/Kentucky supply pool »Multiple agreements already signed – contingent on CO 2 supply source being constructed l State laws being adapted as needed to address realistic expansion possibilities l Entirely unclear whether carbon capture will be widely deployed and whether more than a few pipelines will be built or whether a larger network will be required Ninth Annual Conference on Carbon Capture & Sequestration

29 Will they be able to be built in all the needed locations? l Pipe under construction along Gulf Coast will receive industrial-source CO 2 supplies from new plants -- if they are built l Planning review underway for pipe to serve Midwest power plants – if they are built l Potential East Coast projects lack pipeline alternatives because they are too far from potential EOR markets, not because of any regulatory dysfunction »AEP West Virginia pilot project injecting beneath plant in non- EOR formations Ninth Annual Conference on Carbon Capture & Sequestration

30 What about access and price issues? l Capacity will be reserved and pricing formulas negotiated before a pipeline is constructed l With long term contracts reserving available capacity, access and market power questions simply arent relevant l Eventual disputes will be contractual issues to be addressed through consulting contract terms, arbitration proceedings where appropriate, or State courts, where necessary Ninth Annual Conference on Carbon Capture & Sequestration

31 Is relief available in event of disputes? l Contractual remedies – parties are married to each other under long-term agreements »Arbitration? l Court action to enforce contractual protections (protected under applicable State law) l Regulatory action by State regulators under existing CO 2 pipeline regulatory schemes l State or Federal antitrust laws if claims of market power abuse Ninth Annual Conference on Carbon Capture & Sequestration

32 Vive la différence! l No market power since virtual life-of facility contracts must be negotiated – and capacity reserved -- before the pipeline is even built l Pipeline is special purpose pipeline dedicated to serve handful of CCS-CO 2 sources l With no market power, regulation of prices, access and operational terms is simply inapposite l Open access model with secondary market as used for natural gas would be irrelevant – capacity booked before construction Characteristic Policy principle Ninth Annual Conference on Carbon Capture & Sequestration

33 Vive la différence! l Need to dedicate offtake capacity for long-term before carbon capture facilities constructed l Few-to-few, not many- to-many network configuration l Flexible reliability required at both ends of pipe even where operational requirements conflict l Pro-rationing away capacity for subsequent plants (as for oil pipelines) discourages construction of all facilities – including pipeline l Complex open-access system with secondary markets is inapplicable l One-size fits all tariff regulation tends to devalue CCS-sourced CO 2 for EOR operations and favors alternative CO 2 sources Characteristic Policy principle Ninth Annual Conference on Carbon Capture & Sequestration

34 Where does that leave us? l Anthropogenic CO 2 supply sources are proposals only (except natural gas processing and 1980s synfuels plant) l Unclear what real-world problem federal economic regulation of pipelines is intended to solve l Proposed new pipelines as dependent on suppliers as vice versa -- unlike oil and natural gas pipelines market power issues for connecting new CO 2 capture sources are decades away -- if ever Ninth Annual Conference on Carbon Capture & Sequestration

35 Where does that leave us? l Anthropogenic CO 2 supply sources are proposals only (except natural gas processing and 1980s synfuels plant) l Unclear what real-world problem federal economic regulation of pipelines is intended to solve l Proposed new pipelines as dependent on suppliers as vice versa -- unlike oil and natural gas pipelines market power issues for connecting new CO 2 capture sources are decades away -- if ever Ninth Annual Conference on Carbon Capture & Sequestration

36 Pending regulatory and legislative issues l State level initiatives: need to continue action by affected States on storage unit permitting, unitization, right of way rules, etc.) l Federal environmental regulation »Need reasonable final rules from EPA that are technically and economically feasible under UIC program (governing well drilling) and Monitoring, Verification and Reporting (MRV) plans (including opt-in rules for EOR-based CO 2 sequestration) l IRS tax rules: greater certainty and clarification in operation of existing investment tax credits for EOR sequestration l Federal legislation formally recognizing CO 2 -based EOR injections as simultaneously sequestration net injections Ninth Annual Conference on Carbon Capture & Sequestration

37 Thank you! M ARSTON L AW 218 N. Lee Street Alexandria, VA 22314 http://www.marstonlaw.com Ninth Annual Conference on Carbon Capture & Sequestration


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