The rapid growth of carbon capture and storage (CCS) projects across the United States has been fueled in large part by the enhanced tax credits available under Section 45Q of the Internal Revenue Code of 1986, as amended (Code).

For developers, investors, and tax credit buyers, CCS represents an increasingly attractive asset class. This has become especially true in Texas, which recently was granted Class VI well primacy by the U.S. EPA (giving it primary enforcement authority to permit and regulate its own CCS wells) and where recent case law[1] seems to indicate that surface owners own the pore space beneath their land. However, CCS in Texas comes with a distinct legal risk industry participants have yet to resolve, specifically: what happens when a Texas CCS developer acquires only surface rights or a surface use agreement, fails to acquire the underlying mineral rights, and injects CO₂ into a depleted oil field?

In that scenario, the interaction between Texas mineral rights law and Section 45Q’s recapture rules may create a scenario in which no legal mechanism effectively prevents a mineral rights owner from producing directly within the CO₂ storage zone with potentially severe consequences for the tax credit holder.

The Hypothetical: A Depleted Field, CO2 Injection, and an Unacquired Mineral Estate

Consider the following hypothetical scenario:

A CCS developer (Developer) identifies a depleted oil field in Texas as a prospective geological storage site for CO₂ captured from an industrial facility. Developer negotiates and obtains the surface rights and acquires a surface waiver from the mineral estate owner. Developer does not acquire the mineral rights to the formation, nor does it acquire an agreement from the mineral rights owner. After obtaining its Class VI permit and completing construction, Developer begins injecting CO₂ into the depleted formation.

Unknown to Developer, the introduction of CO₂ into the depleted formation at high pressure has rendered the remaining oil in the formation commercially producible once again. The mineral owner, who owns the neighboring surface, learns of this development and begins evaluating whether to drill a directional well targeting the now-productive formation.

This was made possible by CO₂ enhanced oil recovery (CO₂-EOR), a widely used technique in which CO₂ is injected into depleted oil reservoirs and mobilizes residual hydrocarbons that would otherwise be unrecoverable. What makes this scenario legally problematic is that Developer has, inadvertently and at its own expense, restored commercial productivity to a mineral estate it does not own.

The Core Legal Problem: Can Anything Stop the Mineral Owner?

The threshold question is whether the mineral rights owner has the legal right to drill a horizontal or directional well into the formation that Developer is using as a CO₂ storage reservoir. Among other risks, wary developers should consider the following:

The mineral owner owns the hydrocarbons in place within the formation. The fact that the formation was depleted does not extinguish title to those hydrocarbons; it simply means that prior production reduced reservoir pressure to the point of non-commercial productivity. The introduction of CO₂ changes that calculus.

A surface waiver may also do little to prevent production since a horizontal or directional well can be drilled from a surface location entirely off Developer’s leased or owned surface, penetrating the subsurface storage formation laterally. This means that the mineral owner may not need to use Developer’s surface at all.

Additionally, a foundational principle of Texas property law is that the mineral estate is dominant over the surface estate. So, it is not clear whether Developer has any right to stop the mineral owner from releasing the CO₂ or has any recourse. While the mineral owner is required to conduct operations in a “reasonable” manner, Texas courts have consistently interpreted that standard in favor of productive mineral development.[2] The reasonableness inquiry is fact-specific, and a court could find that a mineral owner producing commercially viable hydrocarbons from its own mineral estate is engaging in “reasonable” use, even if that production interferes with a CO₂ storage formation.

The 45Q Recapture Consequences

Section 45Q of the Code provides tax credits for qualified carbon oxide that is captured and securely stored in geological formations. However, in acknowledgment of the small risk of storage loss, the U.S. Department of the Treasury (Treasury) regulations implementing Section 45Q impose a recapture mechanism triggered when carbon oxide that was the basis for a prior credit is subsequently released from secure geological storage. Specifically, if CO₂ that was the basis of a Section 45Q credit escapes from the storage formation, the taxpayer faces recapture of previously claimed credits.

If the mineral owner proceeds to drill into the storage formation and produces oil, the consequences for the credit holder are potentially severe.

A release of 40 to 60 percent of injected volumes—which is within the range of release CO₂-EOR can produce[3]—could trigger recapture of a substantial portion of previously claimed Section 45Q credits. For a project that has already sold or transferred credits to a tax credit buyer, the recapture exposure may fall ultimately on the seller, depending on the indemnification and recapture provisions negotiated in the credit purchase agreement.

Risk Mitigation and Due Diligence Recommendations

The hypothetical scenario described above illustrates why mineral rights due diligence is essential to CCS transactions. Arriving at a viable solution for any project will require a deep analysis of that project’s unique situation and the applicable mineral rights framework in the project’s state; however, CCS developers and Section 45Q tax credit buyers may consider the following potential solutions:

1. Acquire Mineral Rights.

The most direct solution to this risk would be for the developer to acquire the mineral rights within the entire storage area, or at minimum, the interval at which CO₂ will be stored.

2. Require Representations Regarding Commercial Producibility.

Section 45Q tax credit buyers and CCS project lenders could require the developer to represent and warrant that there are no commercially producible hydrocarbons within or adjacent to the injection zone, both at the time of closing and on a continuing basis.

3. Obtain Mineral Owner Easements/Agreements.

Where mineral rights cannot be acquired outright, developers could consider negotiating restrictive easements or some other form of agreement that prohibits production with the mineral rights owner for the duration of the project’s active injection and monitoring periods (and during any Section 45Q recapture period).

Conclusion

The intersection of Texas mineral rights law and Section 45Q’s recapture framework creates a potentially significant and underappreciated legal risk for CCS projects sited in depleted oil and gas fields. Under current Texas law, a mineral rights owner whose formation has been made commercially productive through CO₂ injection may have the legal right to develop those minerals through horizontal or directional drilling directly within the storage zone—with no clear legal mechanism available to the CCS developer to prevent it. The consequences of such development could include substantial Section 45Q credit recapture liability that flows to tax credit buyers who had no knowledge of or control over the underlying property rights issue (and ultimately, which may flow to tax credit sellers via tax credit transfer agreement indemnity provisions). As the CCS market matures and projects move from development into operation, the industry will need to develop frameworks for addressing these risks.

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[1] See Myers-Woodward, LLC v. Underground Servs. Markham, LLC, 716 S.W.3d 461 (Tex. 2025) 

[2] See Tarrant Cnty. Water Control & Imp. Dist. No. One v. Haupt, Inc., 854 S.W.2d 909, 911 (Tex. 1993)

[3] See National Petroleum Council, Meeting the Dual Challenge a Roadmap to At-Scale Deployment Of Carbon Capture, Use, and Storage, December 2019, at 8-2. https://www.energy.gov/sites/default/files/2022-10/CCUS-Chap_8-030521.pdf