Posted: 14/12/2022
There is a compelling need for comity in the Carbon Capture Utilisation and Storage (CCUS) space in the ASEAN region and a multilateral treaty is best placed to achieve this. It is not just the ASEAN countries that will benefit from such a multilateral treaty. With economies throughout the Asia Pacific region seeking to decarbonise their economies and CCUS likely to play a pivotal role in the transition, there will be an increase in the number of commercial entities in one state looking to export CO2 cross-border into another state.
The acceleration of the energy transition in ASEAN and the wider Asia Pacific region is clear to see from recent announcements. In September, the Indonesian President signed the Presidential Regulation No. 112 of 2022 on the “Acceleration of Renewable Energy Development for Electricity Generation” and confirmed that a new bill on new and renewable energy is expected to be finalised this year. In Singapore, at the Singapore International Energy Week (SIEW), the Deputy Prime Minister and Ministry of Finance announced Singapore’s commitment to net zero emissions by 2050 (alongside an updated 2030 National Determined Contribution (NDC) target) and Singapore’s hydrogen strategy.
In the short term, we can expect a direct power purchase agreement structure to be approved in Vietnam for renewable energy and further action on the climate agenda from Malaysia’s new government.
The G20 meeting in Bali also delivered a series of MOUs and other agreements reached on renewables and CCUS in the region. These included PERTAMINA and PLN’s MOUs with Japan Bank for International Cooperation (JBIC) and PERTAMINA’s HOA with ExxonMobil extending their original joint study MOU to look at a commercial model for a regional CCS hub.
In Malaysia, PETRONAS is moving ahead with the creation of a CCUS hub and signed a MOU in August with a consortium of six South Korean companies to study the full value chain for CCUS. Both Indonesia and Malaysia have signed MOUs and HOAs with a variety of other parties to explore CCUS.
Meanwhile, Singapore has been actively exploring CCUS as a way to reduce its carbon emissions through an ongoing study with external advisors as well as developing its own hydrogen strategy. Indonesia and Malaysia have, in turn, been exploring CCUS with a number of commercial counterparties but from a sequestration point of view as well as for use in enhanced oil recovery (EOR). In addition to Indonesia and Malaysia, Vietnam, Philippines and Thailand all have potential for geological storage of CO2 within the ASEAN region.
The commercial need for CCUS is clear in Asia Pacific, particularly in economies such as Singapore, Japan and Korea where the countries are net importers of energy and have little or no land suitable for sequestration and also in the large countries such as Indonesia, Malaysia, Thailand and Vietnam where carbon intensive industries dominate.
The obvious answer to the CCUS needs of the Asia Pacific is to look to cross-border projects such as the Northern Lights project in Norway and the Acorn Project in the United Kingdom. These cross-border projects provide for economies of scale, risk sharing, shared capital expenditure and potentially deeper pockets for financing and risk mitigation.
However, they do come with the additional complexity of a cross-border/transboundary legal and regulatory regime. The engagement of the commercial parties in these studies makes it clear that there is a commercial desire from the private sector for these projects.
While the commercial need is clear, the regulatory landscape in ASEAN is uncertain. None of the major potential storage host countries have specific CCUS legislation in place. An ASEAN-level agreement on CCUS legislation would be significantly beneficial to all of ASEAN and to any other third-party countries looking to ASEAN as a storage provider.
Within the wider Asia Pacific region, only Australia has developed CCUS legislation both at a federal level for offshore projects within federal jurisdiction and at a state level for onshore and offshore projects within those states. However, the legislation differs from state to state and some states do not have specific legislation.
Large scale projects such as CCUS are ideal for joint development between domestic commercial parties, state-owned enterprises and foreign investors. Foreign investors bring technology, knowhow and their balance sheets.
To invest, foreign investors need to have clarity on the regulatory environment into which they are investing. Having a CCUS law in each state or indeed an ASEAN CCUS law adopted across all of ASEAN (similar to the approach the ASEAN Competition Action Plan) will provide regulatory certainty and consistency of approach in each ASEAN state. This in turn will help to attract foreign investment and lenders to these projects.
However, although this domestic/ASEAN legislation is critical to deliver CCUS projects, there is an additional level of regulatory uncertainty where CO2 emissions from one country, the emissions country, are delivered to another country, the host country, for storage or sequestration.
There are a series of issues that only arise in a cross-border context that need to be addressed. Any project sponsor of a CCUS project will want regulatory certainty in connection to these issues before committing significant capital. Equally, any lenders to CCUS projects will need to fully understand the regulatory landscape prior to funding the project sponsors. Ultimately, only a government-to-government agreement such as a binding treaty, whether bilateral or multilateral, can provide this certainty. To achieve CCUS in ASEAN it is time for the ASEAN governments to be involved.
The fact that a CCUS treaty is feasible has already been proven by the EU/UK experience as well as in multiple other treaties dealing with cross-border oil and gas. An example of this is the bilateral treaties for oil and gas in the North Sea and elsewhere. Any treaty will need to address the following specific issues.
The transboundary transfer of CO2 for storage in a marine environment is prohibited by the 1996 Protocol to the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter, 1972, known as the London Protocol. There is a proposed amendment to the London Protocol (2009 Amendment) to allow for such transboundary transfer but this amendment has not been ratified and so has not yet come into force.
This amendment has only been ratified by the UK and Norway as well as six EU countries, South Korea and Iran. As such, any transboundary transfer and storage of CO2 in an offshore reservoir or saline aquifer will need to be specifically agreed between the emissions state and the host state.
In the EU/UK context, the EU CCUS Directive (and the relevant UK regulation post-Brexit) and other EU regulations provide elements of a framework for regulating CCUS transboundary transport. As such, from a regulatory point of view, both the Northern Lights and Acorn projects benefit from regulatory certainty for the London Protocol issues and the wider CCUS regulation. Outside of the EU/UK context, a specific bilateral agreement would be required or the 2009 Amendment would need to be ratified and come into force.
Any CCUS cross-border treaty should also examine the impact of the export of CO2 on Nationally Determined Contributions (NDC). Under the Paris Agreement on climate change, each state must define its NDC to reduce greenhouse gases (GHG). The agreement of the parties at COP 26 on the implementation of a global carbon trading scheme (under Article 6 of the Paris Agreement) makes it clear that there can be no double counting of CO2 traded.
Any cross-border arrangement should address the impact of transboundary export of CO2 on the NDC of the emissions state and the host state. For example, if emissions from Singapore are exported to Malaysia for sequestration, then Singapore has reduced its CO2 and Malaysia has increased its CO2 and then reduced it by sequestering that CO2.
From a regulatory and emissions trading point of view, who benefits and how do you avoid double counting? This is not an issue the commercial counterparties can easily resolve without governmental involvement. It needs to be addressed on a government-to- government level. Possibly, the solution is to share the risks and benefits in terms of reductions at a national level rather than an all or nothing approach.
The bankability of any CCUS project and the attraction of utilising CCUS as part of the energy transition is often linked to the ability to access funding by sale of carbon credits either in the voluntary markets or in any regulated markets that may come into existence. How carbon credits can be utilised should also be addressed by a CCUS treaty.
In this simplified example, if emissions from Company A in Singapore are transported to Indonesia for storage by Company B in Indonesia, can Company A financially and commercially benefit from the reduction in CO2 by entering into the voluntary carbon credit market or, indeed, into any locally regulated formal carbon market that is ultimately developed in Singapore? While Company A will have benefited from not having had to pay carbon taxes in Singapore, can it also benefit from the carbon credits created when it has exported the CO2 to Indonesia?
What is the position of the storage company Company B that receives and then sequesters the CO2? If Company B has also reduced its emissions, can they also benefit? Commercially, could there be double counting of the same CO2 molecules by seeking carbon credits in both the host country and the emissions country? The assumption (based on the agreed Article 6 position) is that they cannot. This does need to be regulated to provide certainty and also to ensure that projects are bankable by being able to access these carbon markets.
The above scenario is a simplified version. It is likely that emitting companies in one country will work together to pool CO2 for transportation and ultimate sequestration. It is also likely that any project would have multiple parties including a domestic CO2 transportation network, a cross-border transportation system (either by ship or pipeline) and a host country storage operator. The commercial model would need to be such that each of these project participants are able to benefit from reduced carbon taxes, the sale of carbon credits or the receipt of a payment for storage while, at the same time, have sufficient funds to cover debt service.
An ASEAN-wide regulated carbon credits market may be too much to ask but a clear framework is necessary for how the transboundary movement of CO2 should be accounted for.
Who is liable if CO2 is released and what is the penalty? While the CO2 is in the emissions state, the assumption would be that the liability regime of that country applies. While in transit the question is less clear. If the CO2 is transported by ship - say from Japan to Indonesia - what is the position if the CO2 is released due to an accident at sea in international waters or indeed the territorial waters of a third country?
In a maritime context, at a private level and depending on the terms of the charter/commercial agreements, we could expect to the charterer and/or ship owner to be liable for CO2 emissions. Separately, if the CO2 is transported by pipeline, is the liability regime that of the country in which the release occurs and what if the pipeline ruptures on both sides of the border?
International best practice in the oil and gas industry already exists in the form of the many bilateral agreements that address transboundary infrastructure in places such as the North Sea. A good example of this is the UK-Norway Framework Agreement concerning Cross-Boundary Petroleum Co-operation 2005.
Finally, once the CO2 is sequestered and been in place for a period of time, who is liable for a release of CO2? The emissions state, the original emitter, the storage company or the host state? Or a combination of all of them? Again, past experience in the oil and gas industry as well as the EU CCUS Directive provide guidance on how these issues may be addressed.
Needless to say, to facilitate a cross-border CCUS project, there needs to be a degree of regulatory comity among states to foster confidence and certainty.
The EU CCUS Directive and the UK Carbon Dioxide (Licensing etc) Regulations provide for any storage operator to be responsible for the ongoing monitoring and reporting of any CO2 storage facility. If there is a transboundary/cross-border element to any storage project, then it is for the competent authorities of each state to jointly determine how to proceed. In the case of UK-Norway, the existing Framework Agreement on cross-border petroleum co-operation provides the model for how this joint determination would operate.
In the context of the wider EU regulatory framework and the extensive cross-border treaty structure for the North Sea and other energy-related matters, there is a high degree of regulatory certainty in the EU. The obligations the storage operator will need to comply with must be consistent with the EU CCUS Directive and the UK Carbon Dioxide (Licensing etc.) Regulations (as the case may be).
However, this would require a higher degree of collaboration in ASEAN and other countries where there is less regular cross-border interaction. The recently abandoned Singapore-Malaysia high speed rail project provides a good example of the regulatory complexity that shared cross-border infrastructure can create. Equally, the long-standing success of the West Natuna Gas pipeline from Indonesia to Singapore shows that long term, large scale infrastructure projects do work.
In an ASEAN context, without a CCUS ASEAN regulation, the monitoring and reporting will fall to each local regulator. Without a domestic CCUS law there is regulatory uncertainty. If there were CCUS laws in each of the emissions state and the host state, conflict of laws issues could arise if the monitoring and reporting obligations set different standards. Where the emitter of the CO2 has no legal presence in the host state, the liability will then fall on the host state and the storage operator.
Host states may object to being liable for the waste products of the emissions state and its emitter entities. In an insolvency of the storage entity, there would effectively be no recourse to the emissions state nor to the emitter entity. This would increase the risk for project sponsors, lenders, insurers and host governments.
As with upstream oil and gas projects, CCUS projects need the equivalent of a decommissioning fund. Unlike a decommissioning fund which provides for the ultimate shut down and decommissioning of oil and gas installations, any CCUS project needs to be funded so that the ongoing inspection, monitoring and maintenance of the storage facility can be funded for as long as is needed after the date the storage facility is full and capped off.
How long this period of time will be is dependent on the particular geological formation and the location. The commercial model for any CCUS project needs to include a contribution to this ongoing cost in the storage tariff.
Under the EU CCUS Directive, after an agreed period of time after the storage facility ceases to inject CO2, the storage facility is transferred from the storage operator to the relevant competent authority. The financial contribution from the storage operator to the competent authority is then used to fund the ongoing inspection, monitoring and maintenance of the storage facility.
The situation is more complex outside the EU legal architecture. Without a CCUS law or a clear financial stability structure, a contractual basis would need to be found. While this would work for the commercial parties, how do you then arrange for such a fund to be available to the relevant competent authorities without then becoming part to the commercial discussions?
At this stage, the simplest solution is a bilateral agreement between the emissions state and the host state. As an ultimate failsafe the host state would want certainty of financial support from the emissions state if all the commercial counterparties were insolvent. This can only be achieved by a government-to-government agreement.
As with any large cross-border infrastructure project where CO2 is transported by pipeline, there will be transboundary regulatory issues that need to be resolved about the pipeline route, location of compression stations and the ongoing inspection and monitoring of pipeline facilities. Project sponsors and lenders will look to the emissions and host states for the regulatory certainty needed to commit capital expenditure.
Where there are two completely separate planning and approval processes and, potentially, contradictory standards and regulations on either side of the border, the commercial parties will look for regulatory certainty before making any final investment decision. Again, a government-to-government agreement on cross-border infrastructure that provides some comity would go a long way to provide this certainty.
Given the level of uncertainty, a cross-border treaty is needed to facilitate the establishment of cross-border CCUS projects in the Asia Pacific region. Whether this is CO2 shipped from Japan to Malaysia or pumped by pipeline from Singapore to Indonesia, ASEAN governments are in a unique position to support the development of CCUS in ASEAN and the wider Asia Pacific region.
As a first stage, a simple bilateral arrangement between, say, Singapore and Indonesia or Singapore and Malaysia would kick-start CCUS deployment in the region. However, ultimately, the framework for co-operation should be in the form of an ASEAN-wide treaty or a multilateral global treaty.
It is time to drive CCUS in ASEAN and government-to-government support is needed.
© 2024 Penningtons Manches Cooper LLP.
All rights reserved.
Website design by Frontmedia / Dynamic Pear
Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.
Return to news headlines