Carbon capture and storage: has the insurance market adequately responded to operator needs?

With key climate milestones rapidly approaching, the energy transition is at the forefront of many oil and gas companies’ minds, as they continue investing in carbon capture and storage (CCS) projects to abate their emissions. Between 2022 and 2023, the number of CCS projects in construction and development increased by 57 percent.

The pace of deployment will continue to increase with over 855 million tonnes per annum of carbon capture capacity to be in operation by 2030 globally, 74.5 percent of which will be from projects based in the UK, EU, or US.

The coming years will be crucial in the implementation of this technology as 83% of global CCS projects are still in the development stage. With potential projects ranging from small local solutions to large new international CCS networks, what should CCS stakeholders be conscious of when prioritising regional investment decisions and the associated risks?

CCS insurance considerations

For the capture and storage stages of the CCS value chain, the insurance market considers many of the associated risks to be within business-as-usual appetite. Whether these be risks associated with the construction of capture technology, or the transport of CO2 through pipeline, the market has comfortably understood these risks for several years and provided cover on this basis.

One potential coverage gap in this space is the risk associated with the tax incentives claimed for the emitter of CO2. In the instances where this CO2 is not captured at the expected rate, or the volume of CO2 permanently stored does not equal the volumes claimed, there emerges a tax liability that the emitter may be responsible for. Tax insurance markets are emerging to fill this gap, but it is a nascent product area given the relatively new changes to the 45Q credits.

Conversely, insurance coverage for the storage project is much more troublesome in some areas. If injection of CO2 into a storage site is prevented, for example by leakage (perhaps through a geological fault or inadequate storage integrity), then many regulators require the transport and storage operator (T&SCo) to fix the leak before it resumes operations to store CO2.

In this case, the T&SCo will not receive income during the outage period and a business interruption (BI) policy can be purchased to cover the lost income during the leakage, indemnifying the T&SCo for lost income. This coverage could be extended to cover the emitters whose income stream may be impacted by their inability to offload CO2.

In UK and EU regulation, the T&SCo does not owe the emitter as the regulatory models provide for this coverage. In the US, the ultimate responsibility falls on the T&SCo to repay the 45Q tax credit. The precise terms of this will depend on the agreed contract between the T&SCo and the emitter.

For damage caused to the environment such as groundwater pollution or marine life degradation, environmental impairment liability insurance (EIL) can provide coverage. This incorporates cover for the costs associated with clean up (for sudden and gradual pollution), third-party claims, legal costs, and expenses.

This may be a necessary purchase for CCS T&SCo’s in the UK (if it is commercially viable), Europe and the US, as the T&SCo is the one who is liable in the case of environmental damage.

After the useful life of the asset is complete and the CCS storage facility and wells are closed, there is still the potential for (long-term) liability post-closure, for example from the leakage of CO2.

Despite emerging research from the UK showing exceptionally low leakage probability from the geological studies that have been conducted, the T&SCo remains responsible until the relevant authority agrees the license can be terminated (up to 20 years) post-closure. In the US, some states have a similar timeframe, but the federal regulator has limited long-term liability responsibilities.

Given the long-term responsibility for liability on the T&SCo post-closure in the UK and US – and potentially in the EU, depending on the terms of the T&SCo-to-government handover – the emphasis firmly remains on the operator to protect themselves, possibly via long-term insurance against CO2 leakage.

Good collaboration between government and insurance stakeholders has helped to bridge the technical knowledge gap between the two and is certainly appreciated by the latter. The insurance market and T&SCos must continue to work together to find appropriate liability solutions to match corporate, regulator and insurer risk appetite.

Employing new and long-term monitoring technologies after the closure of a carbon capture site will provide insurers with confidence when quantifying leakage events. This is reliant upon the degree to which financial liability support from government regulators is provided as this will provide clarity concerning the gap in support which insurers must respond to.

Conclusion

The differences in regulation between the UK and Europe are minimal with strong alignment between the two regions. However, there is a wide variation between the US and the UK and Europe, whereby transporters, operators, insurers, and other stakeholders must be alert to these differences when considering their insurance requirements and investment decisions.

The key insurance implications from this article can be categorised into pre- and post-injection. Pre-injection insurance considerations concern physical damage, business interruption, tax insurance and third-party liability policies to cover for damaged plants, lost income, and potential environmental liability for CO2 leakage.

Post-injection insurance requirements should focus on the liability of leakage from a sealed reservoir. The CCS market is forecast to grow rapidly over the coming years, and the insurance market will need to match this pace of development if the technology is to deliver the intended benefits to society and the environment.

This article first appeared in WTW’s Energy Market Review Q1 2024, which is available online .

Within WTW’s natural resources global line of business, Paul Clark is head of innovation and sustainability, Will Richardson is a sales and strategy risk research associate, and Nick Van Der Merwe is an upstream risk research associate.