Offtake and Transportation Agreements for U.S. Carbon Capture Projects
Offtake and transportation agreements are critical for securing investments in capital-intensive infrastructural projects that depend on delivering or selling the output at a commercial scale. An ideal offtake agreement involves an offtaker buying, subject to agreed terms and conditions, all or a substantial portion of the output from the designated facility and providing the revenue stream that makes the project economically viable.
The output in this regard could be liquified natural gas from a liquefaction facility or carbon dioxide (CO2) captured from an industrial or power plant that emits CO2 and other carbon oxides. Other emerging ‘captured’ CO2 sources include Direct Air Capture (DAC) systems. Generally, the main forms of offtake agreements are “take-or-pay” contracts, “take-and-pay” contracts, throughput contracts, and long-term sales and purchase agreements.
The carbon capture, utilization, and storage (CCUS) value chain involves: 1) installation of carbon capture technology on an existing or new industrial or energy facility, 2) securing access to CO2 transportation networks, 3) providing storage in predetermined geologic formations or delivery for uses such as the production of CO2-based synthetic fuels, chemicals, building aggregates, etc. (see International Energy Agency’s CCUS Policies and Business Models, 2023, pp. 49-57 on various business models for commercializing CCUS projects).
Parties to a CCUS project may adopt some variation of the CO2 Purchase and Supply Agreement (CPSA) or the Carbon Dioxide Sequestration Services Agreement (CSSA) contractual models. Like a purchase agreement, the CPSA could provide for the terms and conditions under which the owner or operator of the CO2 point source facility is the seller and supplies the capturer (i.e., the buyer) with CO2 from the point source facility or facilities.
Here, the business plan may be to sell the CO2 to an end-user such as an oil and gas producer using the CO2 for enhanced oil recovery operations. Such an end user could be a subsidiary of the buyer. The CPSA may also be adapted to a CO2 transportation and storage scenario where for instance, the owner of a DAC system (i.e., the capturer) engages an offtaker (i.e., buyer) who aims to deliver the captured CO2 to the owner of an underground storage facility for permanent sequestration or appropriate utilization schemes.
The CSSA involves a service provider with a business plan to own, lease, construct, operate, or maintain a CCS system that will capture, transport, and sequester CO2. Here, the emitter (or cluster of emitters) agrees to engage the service provider to exclusively carry out sequestration services as defined under the contract.
The emerging U.S. policy and regulatory landscape has a notable influence on the bankability of projects, as well as delineating the respective roles of parties comprising the project sponsors, financiers, tax equity investors, emitters, the owner(s) of the capture equipment, and providers of needed transportation or storage services.
To create a commercial structure for the project, interested parties may establish a consortium in the form of a special-purpose company or partnership to raise equity while obtaining syndicated project loans from project financiers to cover the debt side of the required capital.
Presumably, the sponsor(s) will bear all residual risks not otherwise allocated to another party under the contractual framework. Such other parties may have the role of guaranteeing permanent CO2 sequestration or representing that the capture equipment can take and process adequate volumes of CO2 to secure sufficient revenue.
Currently, the main source of revenue for U.S. projects comprises government policy measures under Section 45Q or Section 48C of the Internal Revenue Code. Other considerable revenue streams apart from policy measures include 1) using the captured CO2 on site or selling it to a third party for utilization, or 2) selling low-emissions products or environmental attributes that arise from the project (e.g. low-emissions fuels mandate, low-emissions steel or cement; and CO2 storage services).
These commercialization factors must be considered alongside the project risks arising from issues such as:
- Ownership and transfer of title to captured CO2 on one hand and sequestered CO2 on the other hand
- CO2 recapture due to unexpected leakages or future events (see 26 U.S.C. § 45Q(f)(4))
- A material change in government policy or law during the lifespan of the project
- Transportation bottlenecks
- A shutdown of the emitting facility that is the source of the captured CO2. A shutdown could be due to unforeseen circumstances beyond the parties’ control that arise during the lifespan of the project.
The main economic driver for developing commercial-scale CCS projects is by and large the value of the CO2 captured and stored and its potential uses. Thus, any material factor that would likely impact such value(s) would be worth considering by contracting parties. For a synopsis of the options for mitigating investment risks see CCS Global Institute on Financing CCS (pp. 8-10).
CO2 offtake and transportation arrangements set out the terms under which an interested buyer can purchase, take, transport, use, or sequester the captured CO2 from an emitting or carbon-capturing facility. Apart from contractual tools such as insurance provisions and indemnities to allocate risks amongst parties, federal and state environmental and torts liability rules can serve as additional risk management avenues as CCUS projects become more prevalent and scalable.
