Company Comments on Carbon Capture Credit Regs

August 3, 2020

Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC 20224

Re: Docket No. IRS-2020-0013 Credit for Carbon Oxide Sequestration (REG-112339-19)
85 Fed. Reg. 34,050 (June 2, 2020)

Baker Hughes (NYSE:BKR) is pleased to submit comments to the United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) on the proposed regulations regarding the credit for carbon oxide sequestration under section 45Q of the Internal Revenue Code (Code), as amended by Section 41119 of the Bipartisan Budget Act of 2018 (BBA). Pub. L. No. 115-123 (February 9, 2018).

Baker Hughes is an energy technology company that provides solutions to energy and industrial customers worldwide. Built on a century of experience and with operations in over 120 countries, our innovative technologies and services are taking energy forward — making it safer, cleaner and more efficient for people and the planet.

Many Baker Hughes products and services are applicable to carbon capture, use and storage (CCUS) projects, including a full range of services for subsurface studies, site preparation, supply chain management, and drilling equipment, as well as all formation evaluation services, including coring, wireline, drilling fluids, and cementing. Baker Hughes' experience with CCUS to date includes:

• Decades of CCUS experience: Baker Hughes has been involved in early-stage CCUS pilot projects in Norway, Illinois, Wyoming and West Virginia dating back to early 2000s.

• Deploying CCUS at world-class scale — Gorgon project: Baker Hughes technology is deployed in the world's largest carbon capture & storage project — the Chevron Gorgon project in Australia.

• Fit-for-purpose CO₂ process technology: 50 years of experience with CO₂ compression and transport equipment and a global installed base of 180 machines.

• CO₂ Enhanced oil recovery (EOR): experience with 25 active CO₂EOR projects and a decades-long track record across multiple basins.

In short, Baker Hughes is uniquely positioned to deliver products and services to address customer needs across the entire CCUS value chain. Our future CCUS roadmap includes the development of integrated solutions to address a range of project challenges.

We believe CCUS will be a critical component of the emerging lower carbon energy system and that section 45Q of the Internal Revenue Code, as amended in the BBA, provides a significant incentive for CCUS deployment at scale in the United States. We commend the work of the IRS to further refine those amendments following passage of the BBA. In the spirit of supporting that effort, we offer the following recommendations.

§1.45Q-1 Credit for Carbon Oxide Sequestration — Contractual Assurance

Section 45Q generally holds that the § 45Q tax credit is attributable to the person that owns the carbon capture equipment and physically or contractually ensures the capture and disposal, utilization, or use as a tertiary injectant of such qualified carbon oxide¹. §1.45Q-1(h)(2)(i) of the proposed regulations require that such contracts must be enforceable under State law against both the taxpayer and the party that physically carries out the disposal, injection, or utilization. Further, a taxpayer may enter into multiple binding written contracts with multiple parties for the disposal. Injection, or utilization of qualified carbon oxide². Baker Hughes supports these and the other standards set forth in the proposed regulations that are necessary to contractually ensure disposal, injection, or use of qualified carbon oxides.

However, the proposed regulations do not make clear whether the contracting requirement provisions would be satisfied if the actual disposal, injection or utilization is subcontracted to a third party. That is, if the owner of the carbon capture equipment contracts with one party to dispose, use or inject the carbon oxide and then there is a further subcontracting of that disposal, use or injection to a third-party subcontractor. In such a case, the subcontractor would be the party that physically carries out the activity and there would be no direct contractual privity between the capture equipment owner and the subcontractor.

Final regulations should clarify (with an example) that the taxpayer to which the credit is attributable need not contract directly with the person who physically disposes, injects, or utilizes the qualified carbon oxide (i.e. privity of contract is unnecessary) so long as there is a chain of contracts ultimately connecting those parties, with each contract satisfying the contracting requirements of § 45Q as amended.

In conclusion, our view is that Treasury and the IRS should clarify that direct privity of contract is not required between the taxpayer to which the credit is attributable and the party that ultimately carries out the required disposal, utilization, and injection activity, as long as there is a chain of contractual privity ultimately connecting those parties and satisfying the regulations' contracting requirements in each relevant contractual arrangement regarding the disposal, injection or utilization of the carbon oxide.

§1.45Q-1 Credit for Carbon Oxide Sequestration — Credit Transfer

Section 45Q(f)(3)(B) generally provides that a taxpayer may elect to transfer attributable credits under § 45Q to the person that disposes of the qualified carbon oxide, utilizes the qualified carbon oxide, or uses the qualified carbon oxide as a tertiary injectant. In the Baker Hughes comments submitted in response to the Treasury Request for Comments (Notice 2019-32)³ we made the case and recommendation that permitting taxpayers to make section 45Q(f)(3)(B) credit transfer elections to any third party entity, whether they are an owner, operator, service company, supplier, partner, or project finance participant along the CCUS value chain, will enable the market to work more effectively and new business models to be developed. As stated previously, the high upfront capital cost in addition to ongoing operating costs of CCUS projects combined with the annual payment schedule of § 45Q credits means that projects can experience long periods of negative cash flow. A robust and diverse tax equity market would stabilize project cost, attracting more project participants and facilitating wider investment in CCUS.

We continue to support this recommendation and urge Treasury and the IRS to again consider expanding the section 45Q(f)(3)(B) credit transfer election provision to include the full range of participants within the CCUS value chain. However, assuming Treasury and the IRS adopt the chain of contractual privity provision described above, we recommend at a minimum that section 45Q(f)(3)(B) election be extended to include any party within the chain of contractual privity that meets the contracting requirements of the final § 45Q regulation.

In conclusion, we reiterate our view that enabling transfers of § 45Q credits to any third-party entity will maximize market efficiency, enable new business models, and thereby promote CCUS projects to the benefit of society.

However, at a minimum we recommend that Treasury and the IRS adopt new provisions in the final rule to expressly permit taxpayers to make section 45Q(f)(3)(B) elections to any party in a chain of contractual privity satisfying the regulations' contracting requirements regarding the secure geological storage or utilization of the carbon oxide.

§1.45Q-3 Secure Geological Storage

Baker Hughes commends Treasury and the IRS for including the standard adopted by the International Organization for Standardization (ISO) and endorsed by the American National Standards Institute (ANSI), CSA/ANSI ISO 27916:19, "Carbon Dioxide Capture, Recovery (CO₂-EOR)," as a viable alternative to subpart RR for establishing secure geological storage for the use of qualified carbon oxide for enhanced oil recovery (EOR). As we stated in our response to the Treasury Request for Comments (Notice 2019-32)⁴, we believe the ISO 27916:19 can provide a relevant standard for demonstrating secure geological storage of CO₂ injected in EOR operations, provided that rigorous procedures are followed that ensure conformance with the guiding principles of assuring environmental integrity for the safe, long-term containment of CO₂ within the EOR formation complex.

§1.45Q-3(d) of the proposed regulations state that for qualified enhanced oil or natural gas recovery projects in which the taxpayer determined volumes pursuant to CSA/ANSI ISO 27916:19, a taxpayer may prepare documentation as outlined in CSA/ANSI 27916:19 internally, but such documentation must be provided to a qualified independent engineer or geologist, who then must certify that the documentation provided, including the mass balance calculations as well as information regarding monitoring and containment assurance, is accurate and complete.

We continue to stress the importance of a nationally or internationally recognized accreditation body, such as the American National Standards Institute (ANSI), establishing a program for accreditation for validating and verifying the qualifications of parties certifying the secure geological storage of CO₂ associated with EOR production pursuant to CSA/ANSI ISO 27916:19.

Further, we believe that it is this accreditation process that provides the necessary certification credentials for individuals or parties certifying the annual documentation of taxpayer determined volumes pursuant to CSA/ANSI ISO 27916:19. As such, we recommend Treasury and the IRS strike "a qualified independent engineer or geologist" in Prop. Treas. Reg. §1.45Q-3(d) and replace that language with "a CSA/ANSI ISO 27916:19 accredited individual or entity".

In conclusion, our view is that section Prop. Treas. Reg. §1.45Q-3(d) should require annual certification of determined taxpayer volumes pursuant to CSA/ANSI ISO 27916:19 by an individual or party accredited by a nationally or internationally recognized CSA/ANSI ISO 27916:19 accreditation body and that such certification will assure environmental integrity in the demonstration of secure geological storage with impartial and competent input.

§1.45Q-2 Definitions: Industrial Facility Exclusion

Prop. Treas. Reg. § 1.45Q-2(d) defines an industrial facility as a facility that produces a carbon oxide stream from a fuel combustion source or fuel cell, a manufacturing process, or a fugitive carbon oxide emission source that, absent capture and disposal, would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release. An industrial facility may meet the definition of a qualifying facility eligible for § 45Q credits if it meets certain other requirements as defined in Prop. Treas. Reg. §1.45Q-2(g).

However, Prop. Treas. Reg. § 1.45Q-2(d)(1) excludes from the definition of an industrial facility a facility that produces CO₂ from CO₂ production wells at natural CO₂-bearing formations or a naturally occurring subsurface spring. The proposed rule further sets an arbitrary 10% CO₂ by volume limit to define a natural CO₂-bearing formation. A natural formation with less than 10% CO₂ by volume is not a CO₂-bearing formation; for deposits with CO₂ by volume greater than 10%, whether a well is producing from a natural carbon dioxide bearing formation will be based on "all the facts and circumstances"⁵ The proposed rule does not provide rationale for the 10% by volume limit nor does it list the specific facts and circumstances which will be evaluated in determining whether a well is producing from a CO₂-bearing formation.

Baker Hughes supports the exclusion of volumes from section 45Q if the CO₂ is being produced for its standalone value. However, we recommend Treasury and the IRS apply the manufacturing test found at Prop. Treas. Reg. § 1.45Q-2(d)(3) when determining whether a facility producing CO₂ derived from a CO₂-bearing formation(s) should be considered an industrial facility and therefore eligible for § 45Q credits. Prop. Treas. Reg. § 1.45Q-2(d)(3) defines a manufacturing process as a process involving the manufacture of products, other than CO₂, that are intended to be sold at a profit, or are used for a commercial purpose. If applied, § 45Q would support the capture and storage of naturally occurring CO₂ that is a by-product of a manufacturing process and that may be otherwise vented to the atmosphere but would not promote CO² production from CO₂ bearing formations that but for § 45Q would not be produced.

In conclusion, our view is that a facility producing CO₂ from a CO₂-bearing formation should meet the definition of a manufacturing process, and therefore should be an eligible industrial facility under § 45Q, as long as that facility also manufactures products other than CO₂ that are intended to be sold at a profit, or are used for a commercial purpose.

§1.45Q-2 Definitions: Carbon Capture Equipment Ownership

The proposed regulations provide that, in general, the person who owns the carbon capture equipment and who physically or contractually ensures the disposal, injection, or utilization of qualified carbon oxide may claim the § 45Q credits generated by that equipment.

Prop. Treas. Reg. § 1.45Q-2(c) establishes the definition of carbon capture equipment and its use and includes a long list of carbon capture equipment components, as well as components excluded from the definition. However, the proposed regulations do not address cases where more than one taxpayer owns distinct pieces of qualifying carbon capture equipment.

The final regulations should address whether a taxpayer is required to own all the carbon capture equipment producing a single stream of qualified carbon oxide in order to claim section 45Q credits. If not, final regulations should define how ownership, and therefore § 45Q credits, will be apportioned among different taxpayers that own different components of the capture equipment. We recommend using the fair market value of each piece of carbon capture equipment at a given qualifying facility, assessed at the start of construction, as the basis for apportioning carbon capture equipment ownership purposes of tax equity partnerships under Rev Proc. 2020-12.

In conclusion, our view is that the proposed regulations should clarify how carbon capture equipment ownership and § 45Q credit attribution is apportioned in the case where individual components of a carbon capture system are owned by multiple parties.

We thank you for the opportunity to provide you with our comments. Please do not hesitate to contact the undersigned with any questions or if we can provide any additional information that would assist the IRS in its deliberations in any way.

Yours sincerely,

Allyson Anderson Book
Vice President, Energy Transition
Baker Hughes
Washington, DC