BP Seeks Clarity in Proposed Carbon Capture Credit Regs

August 3, 2020

lnternal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C., 2A044

Subject: bp America lnc, Comments on Notice of Proposed Rule Making (REG-112339-19), 85 Fed. Reg. 34050 (June 2, 2020)

Dear Mr. Selig:

bp has over a 150-year history in America and remains committed to contributing significantly to America's economy and energy security. In the United States, bp has a larger economic footprint than it does in any other country. Between 2005 and 2019, bp invested more than $125 billions in the U.S. and our operations contributed $90 billion to the national economy in 2019 alone. We employ more than 13,000 people across the country and support more than 200,000 additional American jobs through our operations and activities.

bp's purpose is reimagining energy for people and our planet. We have an ambition of becoming a net-zero company by 2050 or sooner and helping the world get to net zero. This ambition is underpinned by ten aims. Carbon capture, use and storage ("CCUS") is essential to meeting these ambitions and leveraging the Internal Revenue Code ("IRC") Section 45Q tax credit likely may accelerate the deployment of CCUS.

We commend the Internal Revenue Service ("IRS") and the U.S. Treasury ("Treasury") for the recently issued Notice of Proposed Rulemaking (hereafter referred to as the "Proposed Regulations" or the "NOPR") addressing numerous critical aspects of the Section 45Q program. bp has reviewed the NOPR and identified several items that merit clarification or further elaboration in the final regulations (or, in some instances, other IRS and Treasury guidance documents). bp has also provided comments on the topics on which the IRS specifically seeks comment in the NOPR.

Executive Summary of bp Comments

For convenience, this transmittal letter provides an executive summary of our detailed comments which are attached.

Utilization of Qualified Carbon Oxides: bp makes several proposals regarding Utilization Projects:

• In lieu of requiring pre-approval of Utilization Projects, the IRS should implement an interim process allowing taxpayers to work with IRS (and the Department of Energy and Environmental Protection Agency, as appropriate) on specific utilization projects, so all stakeholders develop confidence in these projects. Since pre-approval would not be required under this approach, the taxpayer would not receive audit protection.

• If pre-approval of Utilization Projects is deemed necessary, the taxpayer should receive audit

• protection and the process must be specified in significant detail as suggested in Appendix I to bp's detailed comments.

• The IRS should clarify the following key terms:

  • define "commercial market" broadly to include industrial grade materials, not just consumer goods and products; and

  • either drop the distinction between "displacement" and "isolation" or better explain the distinction and its significance.

• Measurement/Calculation of allowable Section 45Q credit: a lifecycle analysis ("LCA") is at the heart of the Utilization Program. bp supports the IRS endorsement of ISO 14044 but recommends that the IRS also refer to ISO 14067, as that standard builds on and provides more detailed guidance on performing a product LCA. bp also recommends that the IRS explicitly acknowledge that an LCA done consistent with ISO 14044/14067 satisfies the statutory requirement to assess the greenhouse gas ("GHG") emissions from the full product lifecycle.

• Third-party LCA preparation and/or review: bp supports third-party review of LCAs but suggests that the IRS:

  • substitute the ISO 14044/14067 defined concept of "critical review" for the otherwise undefined "verification" concept currently invoked under Proposed Regulation Section 1.45Q-4(c); and

  • should not extend the "critical review" to verifying the "direct measurement" of the CO2 that is captured or utilized. Adequate safeguards against fraud or misstatement of such measurement exist in the form of the LCA review and the standard tax return filing and audit process.

Transfer Elections: bp generally supports the IRS approach but requests several clarifications:

• allow multiple transfer elections among parties in the value chain, provided each beneficiary of an election meets the requirements set forth in the NOPR; and

• the final regulations should specify what information is required to be reported on Form 8933 or otherwise where the QCO is destined for use in a section 454(f)(5) project.

Recapture of Previously Claimed Section 45Q Credits: the NOPR implies that the recapture rules do not apply to Utilization Projects; bp supports that view and recommends this be explicitly stated in the final regulations.

Secure Geological Storage (SGS): bp agrees with the IRS that ISO Standard2T9LG should provide

another pathway to demonstrating SGS for enhanced oil recovery ("EOR") operations. In addition, bp agrees with the IRS that independent certification of SGS is appropriate to build public confidence in CCUS. We think it would be helpful to clarify that independence requires the use of a third-party unrelated to the taxpayer and other entities in the value chain.

Clarify Certain Key Definitions: bp suggests that IRS further clarify certain key definitions in the NOPR:

• Clarify the general definition of "Qualified Facility" so that it is clear that a large facility (that is not an electricity generating facility) with annual emissions of QCO in excess of 500,000 metric tons may qualify as a Section 45Q(d)(2)(C) facility if at least 100,000 metric tons of QCO are utilized consistent with 45Q,

• Address the "cliff" approach to emission/capture thresholds for Qualified Facilities by allowing a taxpayer to average thresholds over a designated period of time. This will help avoid punishing a taxpayer if, e.g., an economic downturn reduces the volume of carbon it captures and disposes of or utilizes below the statutory thresholds.

• 80/20 Rule: bp supports including this rule but the final regulations should clarify that in determining the value of "old" (or existing) equipment as compared to "new" equipment, the general principles of Rev. Rul. 94-31 will apply.

Ramp-up period: The IRS should allow a ramp-up period (e.g., not to exceed 180 days) for new Carbon Capture Equipment before starting the 12-year clock for claiming the credit. This will allow a new facility to optimize its operations, which may include start-ups and shutdowns, before the credit clock starts to run.

bp's detailed comments are set forth in the attachment to this letter. We look forward to discussing these comments, and we encourage the IRS to finalize this NOPR as soon as possible in light of the January 1, 2024 deadline to begin construction. If you have any questions, please contact Jim Nolan at james.nolan@bp.com or Rob Guido at robert.guido@bp.com.

Sincerely,

Joe Ellis
Vice President and Head of US Government Affairs
bp America, Inc.
Washington, DC