Using Surety Bonds to Meet Financial Requirements of Carbon Capture and Sequestration Projects

Developers of carbon capture and sequestration ("CCS") projects permitted under the EPA’s Class VI Underground Injection Control ("UIC") program face stringent financial assurance requirements. Under 40 CFR §146.85(a), operators must demonstrate and maintain adequate financial responsibility to cover the costs of corrective action, injection well plugging, post-injection site care, and site closure.

While several financial mechanisms are permitted, including trust funds, letters of credit, insurance, and surety bonds, many project sponsors are turning to surety bonds as the most flexible and capital-efficient means of satisfying these obligations.

Understanding the 40 CFR §146.85(a) Obligation

The regulation requires that owners or operators of Class VI wells maintain financial instruments that:

• Are sufficient to cover the full cost of performing all required activities under the project’s life cycle (corrective action, injection operations, plugging, post-injection site care, and emergency response).

• Are payable to or for the benefit of the EPA or the state UIC authority, ensuring that funds will be available if the operator fails to perform.

• Remain in force for the duration of the project, including the post-injection care period.

These obligations are designed to ensure long-term protection of underground sources of drinking water and to prevent taxpayers from bearing cleanup or monitoring costs.

Why Surety Bonds Meet—and Often Exceed—EPA’s Requirements

A surety bond is a three-party financial guarantee that provides regulators with assurance that all required closure and post-injection activities will be completed, even if the operator defaults. The surety (a licensed insurance company) guarantees payment or performance up to the penal sum of the bond.

Under 40 CFR §146.85(a), surety bonds are explicitly recognized as an acceptable financial mechanism. When properly structured, they fulfill the following regulatory standards:

• Payment: Bonds are made payable to the EPA or delegated authority, consistent with §146.85(a)(2).

• Continuity: Bonds can be written as continuous instruments that automatically renew until the EPA approves site closure.

• Adjustability: The bond amount can be revised as the project’s cost estimate changes under §146.85(a)(5).

• Independent backing: Bonds are issued by qualified surety companies listed on the U.S. Department of the Treasury Circular 570, ensuring solvency and compliance with §146.85(a)(6).

  
  

Key Benefits of Using Surety Bonds for Class VI Financial Responsibility

1. Preserve Working Capital

Unlike trust funds, surety bonds do not require full capital outlay. The project sponsor pays only a modest premium, preserving capital for development, construction, and operation of capture facilities and pipeline infrastructure.

2. Maintain Borrowing Capacity

Surety bonds generally do not reduce borrowing limits or appear as debt on balance sheets. This gives developers more flexibility in financing and can improve overall project economics compared to cash-backed mechanisms.

3. Flexible Over the Life of the Project

Surety bonds can evolve with the project, from initial site characterization through injection, post-injection monitoring, and closure. The amount of coverage can be increased or decreased as required by the EPA’s periodic reevaluation of cost estimates under §146.85(a)(5).

4. Provide Regulator Confidence

Surety companies are regulated, financially rated, and audited to meet federal standards. Their independent guarantee provides regulators with assurance that funds are available when needed and that performance obligations will be met even in the event of insolvency or abandonment.

5. Streamline Transitions and Ownership Changes

If a CCS project changes ownership, the surety bond can be transferred or reissued under new operator authority, facilitating compliance continuity as required by §146.85(b). This avoids delays that might occur with self-funded instruments.

Practical Application in the CCS Context

For a Class VI project, the surety bond can be structured to cover the cost estimate for the following components:

• Corrective action for wells within the area of review (AOR)

• Plugging of the injection well(s)

• Post-injection site care and monitoring

• Emergency and remedial response

• Site closure activities after the 50-year post-injection period (or other EPA-approved duration)

Because these obligations can extend decades beyond injection operations, the ability to maintain long-term coverage without immobilizing capital makes surety bonds especially well-suited for the CCS industry.

Best Practices for Developers

• Engage early with your surety provider: Involve a qualified surety agency during the Class VI application process to ensure bond language and structure comply with EPA or state UIC requirements.

• Coordinate with legal and financial teams: Integrate the surety bond into the broader financial assurance package required by the permitting authority.

• Select a Treasury-listed surety: Ensure the bond is issued by a company approved under Treasury Circular 570, as required by §146.85(a)(6).

• Monitor and adjust coverage: Review and update the bond amount in step with EPA’s cost estimate revisions throughout the life of the project.

Conclusion

Surety bonds provide a proven, regulator-approved means to meet the financial responsibility requirements of 40 CFR §146.85(a) for Class VI CCS projects. They protect public and environmental interests while allowing developers to maintain financial flexibility, support project financing, and demonstrate long-term stewardship. As CCS deployment accelerates under federal and state decarbonization programs, surety bonds will play an increasingly critical role in ensuring that carbon storage projects remain both environmentally secure and financially sustainable from injection through post-closure.

Oakbrook Agency specializes in surety solutions for energy and environmental compliance, including Class VI carbon sequestration projects. We work with developers, financial institutions, and energy companies to structure compliant, cost-effective surety programs that satisfy EPA financial responsibility requirements under 40 CFR §146.85(a). Contact us at info@oakbrookagency.com to learn more about what we can do to help with your CCS project.