A “Pore” Explanation: What are Pore Spaces, How To Lease Them, and What To Do With Them?

27 April 2022 Legal News: Energy Publication
Author(s): John P. Melko

A common theme in current energy and climate literature and discussion is carbon capture, use, and sequestration (“CCUS”). Carbon dioxide (CO2) is a greenhouse gas (“GHG”), and while plants love it, its unique physical and chemical properties make outsize contributions to warming the atmosphere and ultimately, the oceans and land masses. The observed negative effects of GHG’s generally, and CO2 specifically outweigh any positive effects. Current projections demonstrate that creation of man-made CO2 will continue for decades.  Accordingly, the emphasis is on steps to curb, capture and store CO2.

Pore space leases are about the capture and storage of CO2. Technologically, the industry has learned how to separate carbon gases from manufacturing processes, including oil & gas production. Burning those gases obviously makes the problem worse, so they must “go” somewhere. One of those places is storage in deep geologic formations where the harmful gases can be locked up either permanently or until pulled out of storage for use making fertilizer, hydrogen, or other useful substances.

That’s where pore space comes in. Pores are microscopic spaces between particles of rock or sand. Pores are actually where oil and natural gas occur. Once those minerals are produced, the pores remain empty. Played out oilfields are an excellent bank of safe, empty pore space. It is safe because those geologic formations trapped oil, natural gas, and ancient salt water in formation for untold millennia until they were coaxed out of ground by man. Injecting (i.e., pumping) CO2 into those formations then sealing the well bore effectively locks it up in sealed tombs.

But pore space is present in all formations, irrespective of whether there had ever been oil or natural gas there, so long as other geological features are present. So, by way of example only, salt domes, salt deposits, brine deposits, and other mineral formations may also be good depositories of GHGs.

Moreover, pore space is already in regular use. In fields where oil wells produce, small quantities of natural gas frequently reinject as much of that gas back into formation as possible. Doing so increases the pressure in the formation, driving oil which has been displaced by the gas to the surface. Some of the gas never finds its way back out. Historically, unwanted gas produced alongside the oil in quantities too small to economically transport was flared, i.e., burned. Since flaring is now in disfavor, gas which cannot be reinjected will have to be transported elsewhere for either industrial use or storage. Natural gas is a carbon rich gas. But CO2 produced in manufacturing and released into the air can also be captured and transported for storage.

Similarly, there is always basic sediment and water (BS&W) produced with oil. As mentioned above, most oil leases allow for reinjection of BS&W. The reinjection also increases reservoir pressure, trapping the reinjected water in the formation. BS&W is rarely, if ever, worth the expense of processing for another use, so lessors do not look at it or its reinjection as revenue, and therefore it is not a royalty producing commodity. An interesting side note is that other uses might one day make that BS&W valuable, but that’s a topic for another article.

The Pore Lease

So if there is so much pore space, why is leasing it such a mystery?  There are a number of reasons, including ownership of that space. Oil & gas leases normally contain provisions allowing the lessee to reinject produced gas and water. These lessors are the mineral owners. Depending upon the lease they granted to a lessee, the “minerals” that lessees may produce are frequently limited to oil & gas. Other than the standard reinjection provisions, those leases may not include the right to use the subsurface for any other purpose, or to mine or produce any minerals besides oil & natural gas.

That means that the owner of the surface rights usually still owns the storage rights in the pores space to be used for CCUS, and significantly, expects to be paid for the additional use of its property. Parties looking to store GHGs, despite the beneficial effect on the environment, are doing it on a business basis.  That is, they must realize enough revenue whether through tax credits, or straight out CCUS lease payments, to pay for the endeavor. These costs are significant and include royalty or other “use” agreements with stakeholders.

We do not write on a blank slate here, as there are dozens of natural gas storage fields and water disposal wells in the US. The leases for these include many of the same issues as a pore space lease.

Where there is still an active mineral lease in the same ground as the pore space lease, or if the geologic formation to be used for storage crosses lease ownership lines, then the stored GHG may migrate into other owners’ property. This migration will trespass into those neighboring properties, negatively impacting the owners and lessees of those properties.

What that means is that the lessee of the CCUS lease must ensure that its lessor actually has title, and that all other parties whose property interests might be impacted: (i) consent, (ii) can be compelled to participate in a CCUS lease through regulatory forced pooling; or (iii) have had their rights condemned through some sort of eminent domain litigation process. This title hodgepodge exists because it is increasingly rare to find an owner of suitable property with fee simple title. More often, the mineral estate has been severed from the surface estate.

This explains why several CCUS leases have been executed with state or federal government for lands where the state or fed controls 100% of title, i.e., the governmental agency has fee simple, unless it has already entered into a mineral or mining lease. If so, the same property rights problems exist, but to a smaller extent since the lessor/grantor is the sovereign.

Assume that a company has successfully analyzed title and reservoir use issues, entered into agreements for satisfactory leases and use agreements with all affected stake holders.  What comes next?

The Permitting Process

Concomitant with the leasing journey, the CCUS operator must also apply for and receive permits from the relevant state and federal government agencies to permit the injection of CO2. This complicated multi-step process entails proving that the geology is proper for the reinjection process, operations will be conducted safely, and a monitoring system will be established to sniff out any CO2 escaping from formation is future decades. After all, it is of no use to inject CO2 into a formation which will not trap the gas permanently. The relatively small number of CCUS leases that have been granted appear to have taken years of lease negotiation and scientific study and regulatory negotiation and permitting.

Conclusion

Despite the time, money and difficulty involved in the CCUS process, it will become more common. As it does, the law will catch up with the technology; the process will become clearer; and permanent CCUS will become more efficient.

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