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Focus: Federal Government releases acreage for carbon capture and storage assessment

8 April 2009

In brief: The Federal Government has announced the world-first release of offshore areas for assessment as potential carbon injection and storage sites under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth). Partner Anna Collyer (view CV) reports on this significant development on one of the foundation elements of the Government's emissions reduction strategy.

How does it affect you?

  • Ten greenhouse gas (GHG) storage assessment areas have been released in total, located in offshore areas adjacent to Victoria, Tasmania, South Australia, Western Australia and the Northern Territory.
  • Applications for GHG assessment permits are being sought on a work bid basis. Guidance notes which have been issued for applicants indicate that substantial work and expenditure programs are contemplated over the six year term of the permit. The work program should be aimed at obtaining sufficient information to enable an application to be made for declaration of an identified GHG storage formation. GHG holding leases and injection licences can only be granted over areas containing identified GHG storage formations.
  • All of the GHG assessment areas which have been released overlap with existing or prospective petroleum titles. Under the Act, the Minister is not strictly required to have regard to the petroleum titles in considering applications for the assessment permit. However, approval of key GHG operations must not be given if the Minister determines there is a significant risk of a significant adverse impact on petroleum exploration or recovery operations under pre-existing titles or a current production licence, except with the agreement of the petroleum titleholder. Accordingly, it seems that the position of the relevant petroleum titleholder will be a crucial element to take into consideration in putting forward a successful work program.
  • Regulations and guidelines supporting the legislation have yet to be released. Applications for assessment permits will not be due until at least two months after these regulations and guidelines have been promulgated. One of the key matters to be addressed by the regulations will be guidance on the significant risk of significant adverse impact test.
  • The guidance notes for applicants also draw attention to $100 million of funding to be made available by the Victorian Government under its Energy Technology Innovation Strategy for carbon capture and storage large scale demonstration projects. Applications for funding are due at the end of August 2009.

Background

The Federal Government believes that carbon capture and storage (CCS) will be a key component of the global solution to climate change. The Government regards CCS as a foundation element of its emissions reduction strategy, alongside the Carbon Pollution Reduction Scheme (CPRS), the renewable energy target and energy efficiency measures. The Treasury modelling underpinning the CPRS White Paper is dependent on the wide-scale development and deployment of CCS technologies between 2020 and 2025.

Late last year, the Government announced the formation of a Global Carbon Capture and Storage Institute, to which it would contribute $100 million per year, aimed at facilitating the establishment of 20 CCS demonstration plants globally by 2020. The Government has also developed the National Low Emissions Coal Initiative and formed the National Low Emissions Coal Council and the Carbon Storage Taskforce. Funding of $500 million over the next eight years is to be provided through this initiative.

Critical to providing regulatory certainty for the development of CCS projects, the Government also passed enabling legislation at the end of last year. The Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 amended the Offshore Petroleum Act 2006 by introducing a comprehensive regulatory regime for CCS. The Act, which is renamed the Offshore Petroleum and Greenhouse Gas Storage Act 2006, establishes a system of titles which mirrors the existing petroleum regime, including a greenhouse gas assessment permit, holding lease and injection licence.

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Release of acreage

In a further significant step towards the development of commercial CCS facilities, the Government has now released acreage under the Act for GHG assessment permits. This release precedes publication of further regulations and guidelines required to support the Act, which are understood to be under development. The Government has indicated that these will be finalised in the third quarter of 2009, and bids for assessment permits will not be due until at least two months after the promulgation of these regulatory instruments.

Ten areas have been released in total in the Gippsland Basin (Victoria and Tasmania), the Otway Basin (South Australia), the Torquay Sub-Basin of the Otway Basin (Victoria), the Vlaming Sub-Basin of the Perth Basin (Western Australia) and the Petrel Sub-Basin of the Bonaparte Basin (Northern Territory and Western Australia).

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Assessment permits

A GHG assessment permit allows the permittee to explore for potential GHG storage formations and injection sites. The permittee may inject and store, on an appraisal basis, a GHG substance, or air, petroleum or water, into part of a geological formation within the permit area. A GHG assessment permit is granted for a period of six years and may be extended for a further period of three years.

The purpose of exploration activities under a GHG assessment permit is to identify an eligible GHG storage formation. The permittee may apply to the Minister for the declaration of such a formation as an identified GHG storage formation for the purposes of the Act. A holding lease or injection licence may then be granted over an area which contains an identified GHG storage formation.

An application for declaration of an identified GHG storage formation must set out the fundamental suitability determinants of the formation and an estimate of the spatial extent of the formation. The fundamental suitability determinants are intended to define the capacity of the formation for GHG injection and storage, and become important criteria for any injection licence ultimately granted in respect of that area. They include the type of GHG substance suitable for storage, the amount which could be stored, the points of injection, the period over which injection could occur, the effective sealing feature, attribute or mechanism that enables permanent storage and any required engineering enhancements.

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Work bids

Applications for the assessment permits have been sought on a work bid basis. Accordingly, applications will be assessed on the basis of the work program put forward by the applicant, the applicant's technical qualifications and additional technical and financial resources available to the applicant. The grant of assessment permits will be determined by the Commonwealth Minister, and the Act requires the Minister to have regard to criteria that have been made publicly available.

The Government has provided Guidance notes for applicants which include the information to be provided by applicants and the criteria against which work bids will be assessed.

The Guidance notes state that work programs should be aimed at obtaining sufficient information to enable an application to be made for the declaration of an identified GHG storage formation. It is intended that the work program contained in the bid will become the minimum guaranteed work program if a permit is granted. Work programs should cover exploration wells to be drilled, seismic and other surveying activities, data evaluation and other work for each year of the six-year permit term.

The key criterion for assessment of bids will be the degree to which the work programs advance the GHG assessment status of the permit area. The objective in awarding an assessment permit will be to select the work program most likely to achieve the fullest assessment of the GHG storage potential within the permit area. It is expected that the minimum guaranteed work program would include a significant amount of new seismic surveying and that at least one well would be proposed within the permit term.

Another significant criterion for assessing bids will be the extent to which the work program takes account of existing or potential petroleum operations by petroleum title holders. The interaction between GHG assessment permits and existing petroleum titles is discussed in further detail below.

Further, the Guidance notes indicate that preference will be given to bids from applicants who can demonstrate the availability of a GHG stream for injection. For GHG associated with petroleum, a relevant factor in this assessment will be whether a retention lease or production licence has been granted over the field which is to be the source of the GHG substance. In other cases, regard will be given to whether substantial investment has been committed to feasibility and design processes for the capture of the GHG substance. Other relevant factors include the public interest, including consideration of the best use of the total available storage capacity of the area and the amount of GHG substance proposed to be stored.

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Overlapping tenure

All of the areas which have been offered for assessment permits overlap with existing petroleum titles or areas over which petroleum acreage has also recently been released. Some of the areas are in the vicinity of existing oil and gas fields.

The Minister does not have to consider the impact on overlapping petroleum tenure as part of the award of assessment permits. However, once an assessment permit has been granted, a permittee is unable to undertake any 'key GHG operations' without the approval of the Minister. The Minister must have regard to the impact of the key GHG operations on petroleum tenure when deciding whether to grant approval for the operations to be undertaken. Key GHG operations include making a well, carrying out seismic or other surveys, injection or storage (on an appraisal basis) of a GHG substance, air, petroleum or water into part of a geological formation, monitoring the behaviour of the GHG substance, air petroleum or water, baseline investigations or taking samples of the seabed or subsoil.

The test to be applied by the Minister in determining whether to approve key GHG operations is whether there is a significant risk that those operations will have a significant adverse impact on the petroleum exploration or recovery operations under an existing or future petroleum exploration permit, retention lease or production licence. The Act provides some guidance on the application of this test, however the detail of the test has been left for the regulations. The Act defines an adverse impact exclusively as an increase in capital or operating costs of the petroleum exploration or recovery operations, or a reduction in the quantity of petroleum able to be recovered or the rate or recovery. It is intended that the regulations will set a threshold amount for determining whether a risk or adverse impact is significant, taking into account the probability of certain occurrences and consequences.

Where the Minister determines that there is a significant risk of a significant adverse impact on an existing petroleum title granted before the commencement of the Offshore Petroleum Amendment Greenhouse Gas Storage) Act 2008, or on an existing petroleum production licence, the Minister must not approve those operations unless the petroleum titleholder has agreed in writing to those key GHG operations.

As noted above, all of the assessment permit areas overlap with petroleum titles. Further, there is a clear expectation, evident from the Guidance notes, that work programs submitted with bids will include substantial key GHG operations. Accordingly, it seems that as a practical matter it will be necessary for a prospective applicant to have an understanding of the likely position of the relevant petroleum titleholder in order to formulate a realistic work program.

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Petroleum titleholders

Existing petroleum titleholders may apply for the assessment permits. There may be some advantage to an existing petroleum titleholder in this respect, as the Guidance notes provide that work being undertaken under a petroleum work program can be included in the GHG work program provided that the work is expected to generate significant new knowledge relevant to GHG assessment of the GHG permit area.

The Guidance notes also indicate that regulations are to be made that will enable petroleum titleholders to explore for GHG storage formations in their petroleum title area without obtaining a GHG assessment permit. Further, the Act enables petroleum retention lease or production licence holders to apply directly for a GHG holding lease or injection licence (respectively) for an identified GHG storage formation within their lease or licence area. Accordingly, petroleum titleholders may not need to pursue an assessment permit under the current release in order to later seek a holding lease or injection licence over their existing tenure. However, an injection licence that is granted on this basis will be limited to the injection of GHG substances that are a by-product of the petroleum recovery operations, unless the Minister believes it is in the public interest to grant a broader licence.

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Government funding

In addition to the Commonwealth Government funding noted above, appendix 3 to the Guidance notes draws applicants' attention to funding available from the Victorian Government under its Energy Technology Innovation Strategy (ETIS) for carbon capture and storage large scale demonstration projects.

This appendix notes Victoria's strong commitment to the development of CCS, given its current reliance on low-cost brown coal electricity generation and recognition as one of the world's most favourable locations for large scale CCS. The Victorian Government is seeking to facilitate and support the establishment of a viable multi-user commercial scale foundation CCS network operating in Victoria. Approximately $100 million of further funding is being made available through the ETIS program. A request for proposals was issued in December last year, and proposals are due at the end of August 2009.

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The way forward

Regulations and guidelines supporting the Offshore Petroleum and Greenhouse Gas Storage Act 2006 are expected in the third quarter of 2009, and bids for assessment permits will be due at least two months following the promulgation of these regulatory instruments.

The 'untested' nature of this legislation means stakeholders may initially find the acreage application process a difficult one. It is reasonable to assume there will be quite a few teething problems as the first applicants move through this process.

If you would like some assistance with this or any other carbon trading or climate change matter, please contact one of our advisers.

Published 8 April 2009

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