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CCS legal and policy – July / Aug 2010
Feature Articles, July 14 2010 (Carbon Capture Journal)
- There is a storm brewing in UK waters at the moment which has the potential to profoundly affect the development of the regulations governing the UK’s CCS infrastructure, says Calum Hughes, principal consultant in CCS regulation and policy at Yellow Wood Energy.
The regulatory regime that currently governs access to offshore oil and gas transportation and processing infrastructure in UK waters has remained more or less unchanged for 35 years. Under this regime, parties seeking access to existing infrastructure, who consider the terms upon which they are being offered such access to be unreasonable, may refer their case to the Secretary of State for a determination of fair terms.
Similar referral options exist under different statutes for onshore and offshore pipelines and, as well as regulating access to existing infrastructure, allow third parties to require that new pipelines and associated equipment are specified and constructed in order that the capacity required by the third party is available provided that they are willing to pay the incremental cost of such capacity provision.
This regulatory model has been criticised by some as one which fails to yield infrastructure design which is economically optimal, but, while this may be true, advocates of the current model have cited in its defence that the Government determination option has never been called upon and, therefore, all parties must be content with the price and quantity of infrastructure access it engenders. Recently though, a rebuttal of this argument has been aired publicly: the apparent harmony may be due to the reticence of smaller, independent oil companies to risk raising the ire of their larger neighbours by exposing them to the potential embarrassment of a public censure, or worse, for abusing their dominant position.
Whatever the case in fact, the status quo is about to be tested; Endeavour International, being apparently unhappy at the amounts it is being charged by Nexen Petroleum for the use of the Scott Platform, has referred its case to DECC.
The offshore industry has a Code of Practice intended to lay down acceptable procedures and approaches for those entering into access negotiations and DECC has issued guidelines as to how it will carry out its determinations. However, neither of these are mandatory and, as the details of the tariff agreements in the subject case are not publicly available, one can only opine on what line will be taken by the Department in its determination and the tenor of the precedent it will set. Whatever this proves to be, the referral seems to have brought to the fore a deficiency in the current oil and gas infrastructure access regulatory regime with regard to its role in providing developers of more marginal oil and gas fields with access to processing and transportation infrastructure at sufficiently commercially attractive rates.
This deficiency has apparently been recognised by the new coalition Government and the next Energy Bill, announced in May’s Queen’s Speech, will include provisions to: “ensure that North Sea infrastructure is available to all companies to ease the exploitation of smaller and more difficult oil and gas fields”.
The relevance of all this to CCS is that DECC proposes to use the current oil and gas regulatory model as the basis for the regime that will be applied to CCS infrastructure in the UK. The obvious question raised by the recent events described above is whether a regulatory regime which is proving unsatisfactory for an industry where project economics are being squeezed is a sound basis for one where project economics are marginal from the outset.
Open access for new industry entrants to existing infrastructure is one key area for CCS and it is, accordingly, mandated in the European CCS Directive. The Directive must be transposed into Member State national law by June 2011 and DECC has stated that one of the reasons it finds the oil and gas model appealing for application to CCS is that it addresses the issue of mandated open access.
A satisfactory CCS regulatory framework must, however, also deliver adequate infrastructure capacity, and do so in an economically efficient manner. It has been recognised that the oil and gas regulatory model as it stands is not ideal in this regard and that it is likely to be even less suitable when applied to an industry in which there are even fewer drivers for the infrastructure developer to build in spare capacity and future revenue uncertainties are even greater.
DECC’s proposed method of addressing this deficiency is to build in an ‘open-season’ period in the early stages of the infrastructure planning application procedure. During this period, the infrastructure developer is required to make details of its proposals publicly available and to allow adequate time, for those who may wish to have additional capacity or functionality incorporated into its designs, to enter into negotiations to have this done. It is hard to envisage, though, how an open-season alone might achieve DECC’s aims. Consider, for example, an individual organisation, that currently predicts it will require, in order to remain competitive, a relatively modest amount of CO2 transportation capacity at some time in the next 15 years, but knows that the accuracy of these predictions are subject to the resolution of a number of policy decisions which are highly uncertain and have the potential to materially affect at which point its participation in CCS might be economically justifiable. Will this organisation decide to invest capital in the provision of that capacity now?
Whether further adjustments will be made to the oil and gas model, over and above those which have already been publicly mooted, as it is moulded into the final CCS regulations, is expected to become clearer over the next year or so. But, the nature of the CCS industry is materially different from that of oil and gas and, unless there are further changes made, in light of the recent experiences in the oil and gas industry, I doubt whether the first CCS regulatory model will stand the test of time as well as its oil and gas cousin. Well-advised project developers will consider the potential for changes to the regulatory regime when evaluating projects and add contingencies for this regulatory risk, a factor which will impact negatively on the likelihood of their projects achieving sanction.
