A North Dakota Supreme Court decision last month changed the rules of leasing pore space from landowners and their rights to compensation for its use by oil and gas operators. This decision and the US Inflation Reduction Act recently passed by the US Congress, which significantly increases tax incentives for operators’ carbon capture and storage (CSS) projects, is likely to spur other states to clarify ownership, associated rights, and compensation for pore space.
The bottom line: The North Dakota court struck down key parts of a Senate bill that authorized oil and gas operators to use pore space without landowner compensation and consent. The Northwest Landowners Association had challenged the state law as amounting to the unconstitutional taking of private property rights.
"The impetus for the recent litigation arose when, in 2019, the North Dakota legislature enacted Senate Bill (SB) 2344, which restricted surface owners, long recognized as the owners of pore space, from requiring consent or seeking compensation for its use in operations for enhanced oil recovery (including operations involving carbon dioxide) or any other operation authorized by the North Dakota Industrial Commission.”
North Dakota surface owners historically were entitled to compensation for an operator’s use of pore space for saltwater disposal. Before the enactment of SB 2344, those owners could sue an operator for trespass for use of the surface estate that was not “reasonably necessary” for development. The supreme court’s decision said portions of the bill permitted operators to “physically invade a landowner’s property by injecting substances into the landowner’s pore space” and concluded that “surface owners have a right to compensation for the use of their pore space for disposal and storage operations.” The court said the provision of SB 2344 allowing the use of carbon dioxide for enhanced recovery of oil and gas was not an unconstitutional taking.
The decision highlights the need for consideration of surface owners prior to the use of pore space. Haynes Boone, a US-based law firm with offices around the world, wrote in an alert on 10 August, “Producers seeking to use pore space may consider contractual agreements with surface owners, such as surface use agreements, before using pore space to avoid claims, including those in tort that SB 2344 formerly barred. And even when such agreements are not necessary because of other contractual or administrative rights, producers may still want to consider compensation for pore space under the Oil and Gas Production Damage Compensation Act.”
North Dakota is not alone in its attempts to add clarity to laws pertaining to pore space. In May, the Global CCS Institute emphasized the uncertainty in US pore space rights in a brief. “The issue of pore space ownership is largely settled for CCS in many other jurisdictions around the world. However, as the US law is not sufficiently settled, each party should consult local counsel to draft leases and other carbon dioxide storage-related documents.” The brevity of the report is telling. Of the 18 states listed, pore space ownership is noted for two as “unsettled,” five “undecided,” and five “appears to be.” Only five are listed as “surface owner.”
Texas, with its onshore storage capacity for carbon dioxide estimated between 661 million and 2.4 billion tons by the US Department of Energy, has not settled the issue of who owns the rights to lease subsurface pore space for the storage of carbon when the mineral and surface rights are held by separate interests.
More-specific regulations are also being developed for federal lands. On 8 June, the US Department of the Interior’s Bureau of Land Management (BLM) issued formal guidance, effective immediately, describing its policy for authorizing use of federal public lands for site characterization, injection, and geologic sequestration of carbon dioxide for CCS. It included the authorization of rights-of-way at appropriately classified injection well locations in connection with sequestration projects.
It also included authorization of the use of BLM-managed pore space when surface facilities, including injection wells, are on private or state-owned lands or lands managed by another federal agency. The guidance required authorizations for the use of federal pore space during and after injection operations.
Pore space storage could become an even bigger player in the coming years as more CCS projects are developed. Worldwide, according to the Global CCS Institute, 24 facilities capturing and injecting carbon dioxide were operational in 2020, half of those located in the US.
Will the boost in tax credits act as an incentive to ramp up the US tally? If so, selling reservoirs’ empty pore space may become a new, big business.
