FactSet Research : How to Store CO2 via Class II Wells

How to Store CO2 via Class II Wells Energy

By Carolyn Nuyen| December 16, 2022

The Inflation Reduction Act (IRA) offers several different pathways for claiming the 45Q tax credit for secure geologic storage, including geologic sequestration and utilization for Enhanced Oil Recovery (EOR). Last month, BTU Analytics focused on the Class VI well, which is one of two well types that can be used to inject CO₂ for geologic storage and qualify for 45Q tax credits. In this Energy Market Insight, we shift our focus to the second well type, the Class II well, and discuss the various ways in which this well can store CO₂ and be utilized to acquire 45Q tax credits.

Class II wells are used for three different purposes that all involve the injection of fluids associated with oil and natural gas production: brine and wastewater disposal, liquid hydrocarbon storage, and EOR. While most US states have primacy for Class II wells, which gives them the authority to control the permitting process for this well type, the EPA currently authorizes permits for Class II wells in eight states.

Class II wells that inject CO₂ for disposal or EOR are eligible for 45Q tax credits if they can provide long-term sequestration of the CO₂ post-injection. Any entity that is interested in claiming 45Q tax credits via a Class II well must submit a Monitoring, Reporting and Verification (MRV) plan to the EPA. An MRV plan must provide important project details, such as where the CO₂ is being injected, potential surface leakage pathways for the CO₂, and how the facility will calculate the amount of CO₂ injected. If the MRV plan is approved by the EPA, then the facility can begin counting sequestered CO₂ towards 45Q tax credits. Recent MRV applications have been approved within several months of submission, allowing for a relatively quick turnaround for companies looking to capitalize on existing well infrastructure.

There are currently twelve EPA-approved MRV plans for Class II wells in the US, with the majority of these plans relating to EOR projects. As of 2021, EOR accounted for 89% of the nearly 39 million tonnes of CO₂ that had been stored via Class II wells since 2015. Storage of CO₂through Class II EOR wells is also considerably larger than with Class VI wells. This large proportion of CO₂storage through EOR is due to the relatively high number of Class II injection wells that are involved in EOR operations. Combined, the 12 current MRV plans include seven Class II disposal wells and over 900 active or planned Class II EOR wells. There are also only two Class VI wells that have been permitted and approved for CO₂sequestration. Therefore, the sheer number of EOR CO₂injection wells results in higher sequestration rates for EOR than disposal projects or Class VI wells.

The IRA offers $60/t of CO₂ stored via Class II wells during EOR operations. Operational EOR projects are an attractive option for acquiring 45Q credits since the CO₂ infrastructure is already in place, they operate numerous Class II wells, and the MRV application turnround is relatively quick. EOR operations that claim 45Q tax credits may also be able to leverage their credits as proof of producing low-carbon oil and gas for consumers. Disposal projects are also ideal candidates for similar reasons. However, these projects may gain less from the 45Q tax credits than EOR projects, since they typically have fewer Class II wells and store smaller amounts of CO₂ per year. Regardless, BTU Analytics expects to see a growing number of MRV applications for Class II wells and anticipates that Class II wells will continue to be the main method of geologic CO₂ storage until many Class VI wells are permitted and approved for CO₂ sequestration.

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BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

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