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CCUS Tax Incentives and in the Big Beautiful Bill Act with Elizabeth McGinley, Tax Attorney, Bracewell | Ep 338
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A
Oil and gas production is the union of natural systems with advanced science and complex engineering. Smart people across the globe create this remarkable place we call Upstream, and each day brings a new challenge. This is the Oil and Gas Upstream podcast where we look at how these systems come together and learn from the people who make it happen.
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B
Welcome to Oil and Gas Upstream. I'm Elena Melkert, your host. Some of you know me as the former Director for Oil and Gas Upstream Research at the US Department of Energy. I retired from the doe, founded Energia Consulting, and joined the Oil and Gas Global Network. As a podcast host, I'd like to shout out to my sponsor ifs. Through one comprehensive platform, IFS supports the unique needs of the oil and gas industry, resulting in streamlined workflows, automated business processes and improved efficiency. Learn more@ififs.com and today I'm delighted to introduce our guest, Elizabeth McGinley. She's a tax lawyer with Bracewell LLP. Liz, thank you for joining us today.
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C
Thank you for inviting me.
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B
Absolutely. Like I said, I'm very excited to have you join us here today. You are a subject matter expert I feel, in CCUs. Tell us something about your background a little bit Liz, and we'll go from there. Thank you.
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C
Thanks Alaina. Happy to I have been a tax attorney for almost 30 years and I started out with a broad base of experience in transactional work. About 18 years ago I moved to Bracewell and my practice focused around the energy industry. I spent many years doing project development largely around conventional energy, oil and gas, upstream, midstream, conventional power and downstream projects. Probably about six or seven years ago the carbon capture credits really captured my attention. Them they being very relevant for a number of my clients, really focused on that and that really led my career into doing many more projects around the energy transition space, predominantly those projects supported by federal income tax credits, some of the first of those being carbon capture projects. I have worked on probably more than 30 carbon capture projects, was involved in Navigator, Tallgrass, Talos, Chevron, a number of industrial emitters, having clients, gas processing companies, midstream companies, really across the spectrum of participants in the CCUS industry. And I do a lot of work around credit qualification issues, negotiating contracts for CCUS projects, project development, CO2 capture, transport, storage contracts, and also project financing for CCUs.
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B
Oh excellent, excellent. You are the right person. Thank you so much again for joining us. We were trying to get together at Sarah Week a couple of weeks ago now, didn't quite get there. And then on the heels of Sarah Week was the CCUS conference, the 2026 CCUS conference sponsored by SPE, AAPG and SEG. And I just was really anxious to get you into this conversation. CCOS is just, I feel like it's almost into its own. It's almost there. And what's really important to it is the tax credits, as you were talking about earlier. So give us a sense. Oh, I'm sorry. Let me interrupt myself and just give a overview of what CCUS says, because some of the people who listen are not oil and gas people, but basically the carbon capture, utilization and storage industry, hope to be soon to be industry is the notion of going to sites that are emitters of various kinds of emissions, including carbon dioxide. And there are new technologies and the Department of Energy has invested a lot of money in the development of carbon capture technology, but basically capturing those emissions, taking the CO2 from it, and then transporting it to a site where it can be deposited and injected into the subsurface where it'll stay there forever. And that is a hope. So there's the carbon capture part. There's a utilization in the sense of being able to use the CO2 for enhanced oil recovery, which is a very longstanding stimulation technique, and then storage in subsurface depleted oil and gas reservoirs, but saline reservoirs as well. And there's been a lot of technology, a lot of research, I should say, for a very long time to try to optimize that, improve that, and ensure that the CO2 would stay in the subsurface forever. One of the pieces in terms of stimulating this industry is the notion of tax credits. And that's what Liz is going to talk to us about here. What is it? 45Q and a 45X. What do those Q's and X's mean anyway?
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C
45Q is the primary credit for carbon oxide sequestration. And that is what we call a production credit. It is a tax credit based upon the metric tons of carbon oxides. So carbon dioxide or carbon monoxide captured and then as you noted, either permanently sequestered in subsurface wells used for enhanced oil or gas recovery, or there's a third category utilized. And there is now a developing market for the utilization of industrial source CO2 in a number of industries. The poultry industry, the beverage carbonization industry. And those opportunities are really just growing. The credit is available based on the metric tonight captured and stored or utilized, and the credit in nors to the benefit of the party that owns at least one component of the carbon capture equipment and contracts for the disposal of the CO2. This credit is really important in the CCUS realm because in many CCUS projects it can be the only source of revenue associated with the carbon capture. If you are not selling the CO2 that you're capturing, typically the installation and operation of the system, including engaging for services, if third parties are engaged for the transport and disposal or storage of that CO2, it's purely an expense. So ensuring that you are eligible for the credits and properly documenting your qualification for those credits and if applicable, planning for the monetization of those credits is extremely important. There are other credits that we see typically come up in carbon capture projects. I have done a lot of work decarbonizing the clean fuels industry. And a very common credit that we see on those projects is the 45Z credit. That's the clean fuels credit. It is available based on the amount of clean fuels produced and sold. But that fuel has to have sufficiently low carbon intensity to qualify for the credits. And a lot of clean fuels producers, for example, ethanol producers, are not able to reduce their carbon intensity to be eligible to further credits without adding carbon capture to their projects. And you can't claim generally both credits on the same project. But I've worked on a lot of projects where we toggle back and forth where the 45z credit is claimed by the fuel producer until it expires at the end of 29. I believe it'll be extended again, but currently the end of 29, and then for the remainder of the 12 year period under 45Q, they'll toggle over and claim the Q credits with respect to the carbon capture equipment for the remaining term. So there's a lot of planning that goes on around that, making sure you can qualify for both, obviously not at the same time, and toggle back and forth. And that opportunity has really led to a lot of development for CCUs in the northern Midwest around those ethanol facilities.
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B
Yeah, yeah. Okay. So the notion that I want to make sure that I understand it, the credit goes to the emitter because that's the revenue for that pays for the capture. Is that how that works?
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C
It depends, Elena, on the arrangement for the 45Q carbon capture credit. It goes to the entity that owns at least one component of carbon capture equipment and arranges for the disposal or sequestration of the CO2. In some projects, the owner of the industrial facility owns the carbon capture equipment, but that's not necessarily the case. I have worked on projects where a third party owns the carbon capture equipment that may be the owner and developer of carbon capture equipment. Maybe the party that has the technology and they own it. Sometimes it's the transportation and sequestration service provider that will be willing to build and own the carbon capture equipment as well. So it doesn't necessarily have to be owned by the owner of the industrial facility. That's probably most commonly the case, but it's not the only way to structure the transaction. And typically if the carbon capture equipment is owned by someone different from the industrial facility owner, there is an arrangement between those parties to purchase the emissions that come off of the industrial facility. Because in a way, it's those emissions that are the feedstock for generating the 45Q credit.
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B
Yeah, yeah. Oh my goodness. I guess you said there were different arrangements and I think. Did you say that it would be possible for even the storage company, the location where it just creates this whole chain as well as the pipeline. So does the credit become available in the same year that you transport and store?
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C
The credit effectively accrues as the CO2 is captured and stored or utilized.
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B
So do you get your money right away?
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C
Good question. Typically not. So let's talk about monetization, the credits. There are a number of components, as I see to carbon capture deals. One is ensuring that you're going to be eligible for the credit, right, that you're going to check all the boxes once you do your development. The second is making sure credit qualification and indemnity for any credit loss under certain circumstances is properly incorporated into all of your transaction documents. Transaction documents typically arise when different components of the carbon capture train are owned by different parties. The components, as I see it, are the industrial facility that is doing the emitting, the carbon capture equipment owner, the owner of the transportation of the CO2. Sometimes that's long distances, sometimes it's a quarter of a mile. And then the party that owns either the site for permanent sequestration in or or the offtaker for utilization that in some projects can all be one taxpayer. In other projects it can be four or five or six involved, each owning a different component. And sometimes you have multiple offtakers for CO2 from a single project. So for instance, if you're the owner of an industrial facility that builds carbon capture equipment, but you don't own anything off site with respect to CCUs, you need to contract with a third party to move your CO2 to its destination and then contract with someone to store that CO2 or utilize it, as the case may be. And it's very important in those contracts that you have certain covenants to make sure they are operating in accordance with the requirements to earn the credits. And also usually covenants and indemnities if your CO2 is lost or if it's permanently stored but somehow leaks into the atmosphere from that facility. So there's a lot to address in those contracts. And something else that's really interesting is because everyone in that value chain for CCUs is aware of the party that earns the credits, which is the one that owns the carbon capture equipment. It is not uncommon for other parties in that chain to negotiate a B arrangement where they share in some of that credit value. So they'll realize that one party is getting $85ametric ton and they'll negotiate maybe for a flat fee for transportation or sequestration, plus whatever it is, 20% of the credit value or whatever they negotiate for. And that sounds pretty straightforward. It just sounds like it's a formula. But there's really not a lot to effectively negotiating those contracts if the party earning the credits is giving a lot of the credit value away to other parties, imagine they're giving away 80% of their credit value to other parties that are involved. You have to think about is that taxpayer claiming the credits that I'm going to get a little bit of the value of through what I call synthetic credit value sharing. It's just contractual terms. Do I think on audit, if there's a challenge that they're really going to vigorously defend their claim for the credits, they're only keeping a small piece of it. So I need contractual provisions to ensure they're going to vigorously defend any claims challenges to those credits. I might also want to participate in an audit or have visibility into the audit to make sure that's happening. Also, something to discuss is clawbx, what if, down the road, those credits are lost either because CO2 leaks from the sequestration site, or they didn't properly claim their credits and this is found out years down the road, are they able to come back to me and claw back those payments so that I don't have full use of that liquidity? So there's a lot to consider in those contracts and as I said, the indemnities as well, and potentially insurance as well, to ensure the value of the credits and to ensure the sequestration site. So that's why I really like this area because there's a lot of complexity below the surface.
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Is it fair to say that the best deal would be to have your industrial facility own the capture equipment and not have far to transport and then store it right underneath the plant? I guess is a way to put it. That would be the most lucrative position. Is that fair?
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C
It would be the easiest in terms of not having to negotiate with counterparties. But actually you need to inject it into a properly permitted well. Class 2 well is eligible for CO2 brought to the surface in connection with oil and gas development. So basically CO2 from capturing natural gas processing facilities. But a Class 6 permit is necessary for storage of all other CO2, even if it's just one molecule of CO2 from another source. And those permits are complex to obtain. There are monitoring, reporting and verification plans that have to be monitored. Even if you have the right geology at your site, which isn't always the case, it's a big undertaking to obtain that permitting either from the EPA or from the state. If you're in a state with primacy and operating that and ensuring that you don't have leakage. Not everybody wants to undertake that. Some people like to leave that to the large industrial experts in that area and they're more than happy to pay someone else for the permanent sequestration. Otherwise it can be a big undertaking if it's not within your regular scope of business.
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Yeah, that's fair. That's fair. The One Big Beautiful Bill act, did that create some changes? Did that help CCUs? What happened as an outcome of the law?
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Great question, Alaina. Going into the first half of last year, prior to the One Big Beautiful Bill, some of my clients had a fair amount of trepidation about what might happen. Could they eliminate the credits? Limit the credits? They were very nervous about the reception CCUs would get. And very interestingly, the changes to 45Q and the one Big Beautiful Bill generally were favorable. They really showed an interest in and support for CCUs. So that really, I think was a catalyst for more development in the industry. There seemed to be much less trepidation after that point. Now, we all know things change year to year, but it was viewed as a pretty strong endorsement. And probably the most significant change was what we call rate parity, which is it used to be that there was a higher rate for permanent sequestration of CO2 and lesser for utilization. And that was all moved up to the higher rate for permanent sequestration, generally $85ametric tonight. And that had some interesting consequences to it. Number one, people were very happy about that generally, not only for the increased value, but because, as I said, it was viewed as support for and an endorsement for the industry. But that had an interesting impact, I would say more on what I call pre combustion capture Aspects of the industry. CCUs can capture CO2 pre combustion. That is most typically when you have a manufacturing process that has amine treaters or other CO2 separation equipment that separates out a pretty pure stream of CO2 that's natural gas processing, ethanol facilities, methanol facilities. It was really a bump to those projects for a number of reasons. Pre combustion carbon capture equipment generally is relatively inexpensive compared to post combustion. Right. Because you're capturing what is already coming off of an Amy treater or similar equipment in a pretty pure stream of CO2. You're not filtering out a lot of other contaminants. So it's relatively inexpensive, simple equipment. Relatively in the scheme of things. And also because the carbon capture credits are calculated as the amount of carbon dioxide or carbon monoxide captured and sequestered or utilized, having a very pure stream of CO2 means nearly everything coming off of that facility is creditable. As I said, you have a high credit value and a relatively low cost. So when they. And a lot of that CO2, particularly in gas processing is going for EOR. So that was a real boom for that industry. Higher credit value if you were sending your CO2 for EOR and a relatively low cost of capture. So we saw a lot more gas processing companies adding carbon capture equipment as a result of that. On the other end of the spectrum, post combustion capture, industrial manufacturing, fossil fuel fired power plants, that is more expensive equipment. Right. You have a much greater mix of elements in that emission stream. It can be dirtier, so to speak. And you also generally have a lower concentration of CO2 so that only the portion that CO2 that you capture is potentially credible. So higher cost of capital, lower percentage of emissions eligible for the credits. We can turn to in a minute about why I'm seeing more opportunities for carbon capture on fossil fired, fossil fuel fired power plants. But just to stay for a minute with the one big beautiful bill, I did see it as an endorsement and I saw it mainly driving more pre combustion capture. But also I think it had an impact on some post combustion capture as well. Less of that I think goes for eor. But nevertheless, even that portion of the industry I think saw the one big beautiful bill as an endorsement, gave people comfort and believe that the current administration at least viewed CCUs favorably. There was some DOE funding that was curtailed, but overall the credit support was there. And I think that really calmed anxiety in the industry.
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The notion of increased consumption of electricity, data centers. And is that part of the answer with the natural gas fired power plants?
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Yeah. No, it's been really interesting, Elena, and we've been doing a lot of work around power generation for data centers, data center development. And I think you've seen as there is more and more demand for power, whether it's for AI and data centers, or just shoring more manufacturing, or the combination of all of the above, the growth in power has really changed the mindset. My experience a couple of years ago it had been moving away from fossil fuels to clean power development. And now I think with the ever increasing demand, everyone's really focused more on an all of the above approach. And data center developers are primarily looking for speed in their power development and also reliability. And depending on the hyperscaler you're talking about, somewhere in that list of priorities, maybe not the first or second, but for some very high in their list of priorities, is that power, whenever possible, is clean or at least decarbonize to the extent possible. So as there is a lot of work being done to try to tap or connect data centers with natural gas pipelines so they're in close proximity and they can delete, they can develop power generation facilities to draw gas from that natural gas pipeline in the vicinity and use it for the data centers. That's very well worn technology, it's reliable, we have good supplies of natural gas, relatively inexpensive, and that's become very popular. Some hyperscalers are focused however, on that potentially being a long term power source. And what does that mean in terms of their decarbonization goals? So we've been looking at a number of projects to add carbon capture to those gas fired power plants. In some cases they want to do it upfront, in other cases it's phase two. And in some of the concerns around it is it adds some project on project risk. Right. The reliability of the carbon capture equipment goes down or does it have an impact on the power generation? Carbon capture can also require a lot of power itself to operate. It's a little bit of a draw on the power source that otherwise would go to the data center. But it is certainly something that we have looked at over and over again and whether there are some cases where folks are going to be relying on potentially blue hydrogen for these sources as well. And with the early termination of the hydrogen credits, can they build these projects with the help of the 45Q credits? So I really think that's where we're going to see the next phase of large scale carbon capture development. But of course, in order to get that done, you need a place to send the CO2 that is commercially feasible. You need something that is off taker for utilization or EOR or permanent sequestration that is commercially reasonable, reasonable proximity, it becomes very costly if you're looking at moving CO2 out very long distance.
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B
Yeah, yeah. And it seems that that distance is a issue for any commodity, anything, be it CO2 or water or whatever.
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C
Very good.
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So 45Q and 45Z survived the one big beautiful bill and that was a good thing. Showing some support, momentum, maybe at least a nod for CCUs and then demand for power increasing. So that's another feature. Are there challenges, more challenges for ccs that we are looking at?
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C
Yeah, there are definitely still some challenges. The permitting process, as I said, for sequestration sites that was initially operated solely by the epa and then some states have gained primacy. Texas recently gained Primacy for Class 6 permitting. And the state primacy, particularly in Wyoming, has really accelerated the process in those states. But it's still a time consuming process. And in states without primacy, you're still going through the epa. Louisiana has primacy, but right now they have a moratorium. So it's still a process. It's not something that can be done particularly quickly and you're dependent upon the regulator's timeline to some degree. So there's that. Another significant issue that I think is curtailing really large scale national CCUS development and that is the difficulty in developing interstate pipelines to ship supercritical CO2. So some of the projects that have moved forward, one of the most notable is the Tallgrass Trailblazer Line. Instead of building a new CO2 pipeline, they repurposed a natural gas pipeline. So they got permission to take it out of natural gas service, which our great regulatory team supported, and moved it into CO2 service. So they built some new pipe, but generally most of it was there. So that was an easier process for them. There's still a lot of difficulty getting permitting for these pipelines in states. And phmsa, the regulator for these pipelines still has not issued regulations for the transport of supercritical CO2. So higher pressure, higher content CO2 pipelines. And that is not expected until I think next year, possibly later. So it's making it difficult at the local level to get these pipelines approved, particularly because there's this lack of federal guidance as well, which raises some local concerns about safety. And there's been a fair amount of opposition, concern about safety, the appropriateness of CO2 pipelines. I know we have a lot of arguments as to their safety and the importance of them to overall clean power Goals, Decarbonization goals. But still, there are challenges out there.
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B
Yeah, yeah. Could we pause just a little bit on the. Who's in charge? The permitting is for class six wells is epa, unless they have declared that a particular state has that authority now in their act. And then you talked about interstate pipelines. Is that FERC? Not FERC.
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C
FERC does not regulate the CO2 pipelines. That's governed by the PHMSA regulations.
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Okay. Which is Department of Transportation. Yeah. See, that's another element of confusion for us with all these moving parts. Okay. That's why PHMSA is. Because it's CO2. Otherwise it would be ferk does gas. Natural gas, I should say. Very good. Okay. Oh, boy. It's important to have people like you who have spent their careers building all of this and understanding it for and advising us. Because this can be a very tricky place to be and a lot of complexities both in terms of the deal as well as in the requirements and what you have to do to be able to do the project and to build it commercially, have a commercial operation there. So this is fabulous. We are out of time. But if you had a few things you wanted to mention. Was there anything that I didn't ask you or that you wanted to be sure that people do understand?
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C
The last element I would add is that these credits are unique in that for the first five years of the 45Q credits, they are fully refundable. You can get a check back from the government if your tax credits exceeds your federal tax liability. And after that, for the remainder of the 12 year term, you can sell your credits to any unrelated party for cash. So that's really valuable because before transferability of credits, before the ira, if you couldn't use your credits yourself, you could carry them forward, but that importates time value of money. But now you can pretty readily monetize that. And there's a whole industry too, around monetizing them and obtaining financing for another podcast.
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Yeah. And I think that's so important because that's why we do this for the money. And being able to pursue that and have a whole new arena in which to make money and help the planet, if you will, is really valuable. Oh, my gosh. Elizabeth McGinley, Liz, tax lawyer for Bracewell. Thank you so much for joining us today.
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C
Thanks, Elena. I appreciate your time.
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B
Oh, absolutely. And thank you everyone for listening. This is Elena Melkert, your host for Oil and Gas Upstream. More next time.
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