Inflation Reduction Act Provides Boost and Benefits to Carbon Capture Utilization and Storage Industry

The newly passed Inflation Reduction Act of 2022 (IRA) is poised to transform the carbon capture utilization and storage (CCUS) industry through significant tax credits and benefits, including through enhancements to Section 45Q of the Internal Revenue Code. The IRA encourages additional capital investment in CCUS projects by developers and sponsors through at least the following:

  1. Tax Credit Increase: The new Section 45Q base credit amounts  (i.e., either $17/metric ton for sequestered qualified carbon oxide (QCO) or $12/metric ton for used QCO) under the IRS are substantially less than the most recent pre-IRS credit amounts.  However, the IRA, significantly increases the Section 45Q tax credit value per ton to $85/metric ton for captured QCO stored in geologic formations, $60/metric ton for the use of captured carbon emissions, and $60/metric ton for QCO stored in oil and gas fields if certain wage and apprenticeship requirements are met. This increase in tax credit further incentivizes incorporating CCUS into industrial facility projects with a specific focus on meeting the wage and apprenticeship requirements.

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IRS Provides Initial and Limited Guidance on Newly Reinstated ‘Superfund Tax’

Last month, the IRS published Notice 2021-66, issued in response to the Infrastructure Investment and Jobs Act’s (Jobs Act) reinstatement of the previously expired “Superfund Tax”—an excise tax imposed on manufacturers, producers, and importers of certain chemicals (i.e., “taxable chemicals”) found in fuels and numerous other industrial products. Understanding whether, and how, the Superfund Tax affects businesses’ tax liabilities will be critical when the tax becomes effective later this year. But given the lack of current IRS guidance and the fact that the Superfund Tax was last in effect over 25 years ago, affected taxpayers will likely face sizable challenges and uncertainties moving forward.

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When the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) was originally enacted in 1980, the excise tax was used, in part, to fund the Superfund cleanup trust for contaminated sites based on certain sales or uses of taxable chemicals. That taxing authority expired at the end of 1995. Now, however, the Jobs Act reinstates the tax effective July 1, 2022, with an initial expiration date of Dec. 31, 2031. The new Superfund Tax is expected to infuse $14.5 billion into the Superfund program over the next decade.[1]

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Swimming Upstream Part II: New Incident and Annual Reporting Requirements for Rural Gas Gathering Lines

In our last article, we introduced the recently finalized New Rule of the Pipeline and Hazardous Materials Safety Administration (PHMSA), which expands safety and reporting requirements to previously unregulated onshore gas gathering lines.[1] PHMSA has now dubbed those previously unregulated lines Type C, for new safety and reporting requirements, and Type R, for new reporting requirements only. In this article, we focus on some of the practical requirements for operators of Type C and Type R lines implicated by the New Rule – specifically, what must be reported, how and by when.

Incident and Annual Reports

Under 49 C.F.R. part 191, operators of Type C and Type R lines must now notify PHMSA of incidents and submit incident and annual reports.[2] Type R lines, however, remain exempt from reporting certain operational changes and safety-related conditions under sections 191.22(b) and (c) and 191.23.[3]

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Fifth Circuit Rules Texas Choice-of-Law Provision Cannot Save Indemnity Agreement from Wyoming Anti-Indemnity Act

Throughout the oil patch, it has become common for parties to enter into agreements that contain Texas choice-of-law provisions, regardless of where the work is being performed or the extent of the parties’ sometimes tenuous relationship to the state of Texas. In Wyoming, parties will occasionally use Texas choice-of-law provisions as a vehicle to bypass the state’s restrictive anti-indemnity act, which forbids oilfield indemnity agreements outright, to instead avail themselves of the less restrictive Texas Oilfield Anti-Indemnity Act, which allows oilfield indemnity agreements to stand in limited circumstances. See Tex. Civ. Prac. & Rem. Code § 127.005. However, on Dec. 10, 2021, the Fifth Circuit Court of Appeals issued an opinion suggesting that these exercises in circumvention are inappropriate, even under Texas law.

The case, Cannon Oil and Gas Well Services Inc. v. KLX Energy Services LLC, No. 21-20115, 2021 WL 5856796 (5th Cir. Dec. 10, 2021), concerns a Master Equipment Rental Agreement (Agreement) entered into by Wyoming-based exploration company Cannon Oil and Gas Well Services (Cannon) and Texas-based KLX Energy Services (KLX). The Agreement contained a mutual indemnity provision under which Cannon and KLX agreed to “protect, defend [and] indemnify” each other against losses involving injuries sustained by the other’s employees. Cannon, 2021 WL 5856796 at *1. It also contained a choice-of-law provision stating that Texas law governs the Agreement. Id.

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Swimming Upstream: PHMSA Extends Reporting and Safety Regulations for Onshore Gas Gathering Lines

Alexander K. Obrecht and Aidan Slavin

The Pipeline and Hazardous Materials Safety Administration (PHMSA) recently finalized the second of three gas transmission and gathering-line safety rules, originating out of a nearly 10-year rulemaking.[1] The focus of the New Rule: extending reporting and, for certain specifications, safety requirements to previously unregulated onshore gas gathering lines. Practically, the rule will shift regulatory requirements normally imposed on the midstream industry further upstream to exploration and production companies that own their own gathering systems.

The New Rule contains plenty to unpack. For example: Which previously unregulated gathering lines are now regulated? What are the reporting requirements and deadlines? What are the safety requirements? Where do production and gathering begin and end? As the first in a series, this post will break down PHMSA’s expansion of regulated gathering lines.

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New Suit over “Reef-Friendly” Alba Botanica Sunscreen Illustrates the Pitfalls of Advertising a Company’s Environmental Friendliness

November 11, 2021

By: Randal Shaheen and Andrea Cohen

A new false advertising case against the maker of Alba Botanica sunscreen demonstrates the risks of marketing a company’s environmental credentials. In a recent article, “The Difficult Art of Advertising Carbon Reductions,” Linda Goldstein and Randal Shaheen of BakerHostetler discussed the potential application of Section 5(a) of the FTC Act’s prohibition on “unfair or deceptive acts or practices” against companies that claim to offer green products or advertise their carbon reductions. The Alba Botanica case shows how consumers can bring claims under similar state statutes and offers more reason for companies to ensure that their environmental claims are adequately substantiated or qualified.

In her Complaint filed October 20, 2021, in the Southern District of California (Case No. 3:21-cv-01794), Heidi Anderberg, on behalf of herself and a proposed class, alleges that Hain Celestial Group violated California law by falsely advertising its Alba Botanica sunscreen as “reef-friendly,” when in fact the sunscreen contains chemicals that can allegedly damage coral reefs and other marine life (and have been banned in parts of the U.S. for that reason). She contends that she and other consumers paid more for Alba products over cheaper alternatives because they believed them to be safe for the environment.

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State of Play on Clean Water Act “Waters of the United States” Jurisdiction

On August 30, 2021, in Pasqua Yaqui Tribe et al. v. EPA et al. (Case No. 4:20-cv-00266-RM, Dkt. 99), the U.S. District Court in Arizona vacated the Trump administration’s 2020 Navigable Waters Protection Rule (“NWPR”), which had significantly walked back the scope of navigable “waters of the United States” (“WOTUS”) regulated under the Clean Water Act to include solely (1) territorial seas and traditional navigable waters; (2) tributaries of such waters; (3) certain lakes, ponds and impoundments of jurisdictional waters; and (4) wetlands adjacent to other jurisdictional waters. The NWPR sought to eliminate the Obama administration’s 2015 “significant nexus” rule, which aligned with Justice Kennedy’s plurality opinion in Rapanos v. United States that defined “navigable waters” to include “water or wetland[s] [that] . . . possess a ‘significant nexus’ to waters that are or were navigable in fact or that could reasonably be so made.” 547 U.S. 715, 759 (2006).

Finding clear agency error in promulgating the NWPR, the Arizona district court cited a substantial risk of environmental harm and inadequate consideration of the Clean Water Act’s statutory scheme and underlying policy goals. Indeed, the Environmental Protection Agency (“EPA”) and the U.S. Army Corps of Engineers had conceded those very concerns, but  sought only remand given the EPA’s ongoing rulemaking and deliberations to further update the definition of WOTUS.

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The Right Way to Obtain Multi-Line Rights in a Right-of-Way Transaction in Texas

There are many misconceptions about how multi-line rights are created in Texas. Contrary to popular belief, a multiple pipeline right-of-way cannot just be created by changing “pipeline” to “pipelines” in the granting provision.[1] In fact, if there is not an express provision in the easement granting the right to lay additional lines, a court will not imply rights beyond those of the easement.[2] In making the determination of multi-line use, Texas courts have routinely turned to the compensation clause and granting provision to see what the parties contemplated at the time of execution.[3]

In Hall, the landowner, Tom Hall, alleged that the pipeline operator, Lone Star Gas Company, excessively used its easement, which granted Lone Star “the right of way and easement to construct, maintain, and operate pipe lines.”[4] Lone Star also had the right of “ingress and egress from the premises, for the purposes of constructing, inspecting, repairing, maintaining, and replacing the property of [grantee].”[5] Although the subject easement agreement used the term “pipe lines,” it did not contain any further expression granting the right to lay additional lines in the future.[6] Furthermore, the compensation clause for future lines was intentionally deleted from the easement agreement.[7] In accordance with precedent case law, the court in Hall weighed the impact of this deletion in order to arrive at the true meaning and intention of the parties.[8] The court concluded that without some express provision addressing the right to lay additional lines or providing for additional compensation for a new line, Lone Star’s proposition that the easement permits future additional lines could not prevail.[9]

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You Don’t Own Me: 8th Circuit’s Definition of ‘Direct Ownership Interest’ in Wind Farms Excludes Parent Entities

Ownership changes at the parent-company level do not constitute a transfer of “direct ownership interests” in distant subsidiaries, a unanimous panel of the 8th Circuit held last month in Laredo Ridge Wind LLC, et al v. Nebraska Public Power District, No. 20-1956, 2021 WL 3731897 (8th Cir. Aug. 24, 2021). The Nebraska Public Power District (NPPD), a public utility company, sued four affiliated wind farm businesses for breach of Power Purchase Agreements (the PPAs) after the wind farms’ parent companies changed hands multiple times. The district court granted summary judgment in favor of the wind farms and a preliminary injunction preventing NPPD from terminating the PPAs, and the 8th Circuit affirmed.

From 2008 to 2010, NPPD signed identical PPAs with four limited liability companies (the Project Entities) that own and operate wind energy-generation facilities in rural Nebraska, each originally developed by Edison Mission Energy (Edison). Under the PPAs, NPPD agreed to buy all energy produced by the Project Entities for 20 years at a predetermined price. The Project Entities have no employees, and each is part of a multi-tier affiliate ownership structure with Edison at the top, the Project Entities at the bottom, and many layers of subsidiary holding companies in between. This tiered structure allows parent companies to allocate federal tax credits and is “largely a function of the syndication of multiple wind energy projects.” Brief of Appellees at 3, Laredo Ridge Wind LLC, et. al. v. Nebraska Public Power District, No. 20-1956 (8th Cir. Aug. 6, 2020). Continue Reading

The Section 401 Water Quality Certification Program and Its Impacts on Energy and Infrastructure Projects

Section 401 of the Clean Water Act (CWA) requires applicants for federally permitted projects “that may result in any discharge into the navigable waters” of the United States to seek water quality certifications from the local certifying authority that has jurisdiction over the project area where the discharge would occur. This cooperative federalism within the CWA gives states and authorized tribes the ability to protect their water resources from impacts related to federally permitted projects. This in turn provides states with the potential to exert significant influence over the development of energy and infrastructure projects, many of which are national in scope. For example, federal projects that require Section 401 certification can include, but are not limited to, natural gas pipelines, liquefied natural gas terminals, coal export terminals, oil pipelines and other interstate projects.

In determining whether to issue a Section 401 water quality certification, states are required to consider whether the proposed activity satisfies effluent limitation standards, water quality standards, national standards of performance, toxic and pretreatment effluents standards, and “any other appropriate requirement of state law.” There are numerous examples of states relying on ambiguous language in their respective rules and regulations in order to halt development projects or place on them impractical conditions that are arguably unrelated to the protection of water quality, including using potential climate change-related impacts as a basis for denying a certification.

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