Authored By: Adriana Peric
The Open University UK
Introduction
Energy transition does not mean that fossil fuel activity stops overnight. In fact, many economies continue to rely on oil and gas, while at the same time expand renewables, carbon capture, and other “transition” technologies. Private equity and private capital play an important role in this landscape, investing both in low-carbon projects and in technologies that extend the productive life of existing energy assets, including Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR). The legal question is not whether these technologies are “good” or “bad”, but whether they can be financed and operated in a way that is in the compliance with the law, commercially workable, and that remain acceptable under changing regulations and disclosure requirements.
This article argues that financing EOR and low-carbon technologies is not primarily constrained by a lack of capital; rather, it is constrained by the legal risk. That legal risk is shaped by environmental permitting, emissions regulation, climate and ESG disclosure obligations, liability attribution for pollution, and cross-border compliance pressures. These issues directly affect how private equity sponsors, lenders, and operators structure transactions, manage and allocate risk, and price assets.
The article proceeds in five steps. First, it outlines the legal framework relevant to EOR and low-carbon projects. Second, it explains the deal structures typically used by private capital and why risk allocation is crucial. Third, it analyses four legal risk categories that commonly determine whether such projects could be financed. Fourth, it provides a short comparative section highlighting how different legal frameworks intensify or shift risk. Finally, it concludes with practical implications for how commercial lawyers support clients in this area.
1. Legal Framework: Regulatory Structure Governing Energy Transition Investments 1.1 Environmental permissions and operational compliance (UK)
EOR and other energy projects are often in a constant battle of conflicts with the environmental permissions, pollution controls, and operational processes. In England and Wales, many regulated activities require permits and compliance regarding emissions, discharges, waste, and monitoring obligations under the Environmental permitting (England and Wales) Regulations 20161. These permitting requirements can create financing risk because non-compliance may lead to enforcement action, operational shutdowns, or costly remediation.
More broadly, environmental liability matters because it determines who bears the cost of historic contamination or new environmental harm. The Environmental Protection Act 19902 provides frameworks for pollution control and waste regulation, and it can be relevant when questions arise over responsibility for environmental harm and other obligations.
1.2 Climate policy and emissions regulation
Climate policy influences both “low-carbon” projects and “transition” technologies. In the UK, the Climate Change Act 20083 establishes legally binding carbon budgets and the overall net-zero framework. While it does not itself dictate deal terms, it creates policy pressure that leads to a challenge in regulation, planning decisions, and the expectations placed on businesses.
At EU level, emissions regulation operates through the EU Emissions Trading System under Directive 2003/87/EC4. This framework influences price signals and compliance costs, which are relevant to asset valuation and long-term financing assumptions.
1.3 Carbon capture and storage regulation (EU and UK)
EOR can overlap with carbon capture and storage (CCS), particularly where CO2 is used for injection and can be stored underground. In the EU, CCS is governed by Directive 2009/31/EC5, which sets rules on site selection, permitting, monitoring, and long-term liability. These matter for investors because long-term liability can extend beyond an investment hold period.
In the UK, the Energy Act 20086 introduced a legal framework regarding offshore gas storage and carbon storage licensing. This is important for structuring where injection and storage are part of the project’s operational design.
1.4 Corporate reporting and disclosure (UK and EU)
Investors and sponsors increasingly face disclosure risk. UK companies must produce strategic reports under the Companies Act 20067, including disclosures required for certain large companies. At EU level, sustainability disclosure has become a major legal constraint through Sustainable Finance Disclosure Regulation (SFDR)8 and more recent disclosure reforms, including the Corporate Sustainability Reporting Directive (CSRD)9. While the details are complex, the key point for the deal structuring is simple: if a fund or portfolio company makes sustainability-related claims, there is a legal risk if those claims are inaccurate or unsupported.
2. Deal Structures: why legal risk allocation matters
Private capital can enter EOR and low-carbon projects through multiple structures, but the legal problem is consistent: the investor’s return depends on performance over time, while many liabilities can arise later, and the regulatory standards can change mid-investment. This is more common than people think and these projects are therefore “structure-dependant”.
2.1 Common entry structures
First, sponsors may invest through direct equity in an operating company, using a standard acquisition structure with warranties, indemnities, and covenants in a share purchase agreement. Second, sponsors may use project finance or hybrid structures where repayment depends on project cash flows and secured assets. Third, joint ventures are common where an operator and technology provider share risk and upside.
The choice matters because it determines which legal protections are available. For example, an asset purchase may allow different approaches to liability allocation than a share purchase; a joint venture agreement may require detailed governance and operational covenants; project finance documentation may require extensive conditions precedent, reporting obligations, and technical performance standards.
2.2 Where lawyers add value
In these transactions, lawyers do not only “paper the deal”. They help make the deal financeable by translating commercial risk into contractual protections. This includes drafting risk allocation tools (warranties and indemnities), building governance rights, managing disclosure obligations, designing conditions precedent and termination rights, and ensuring regulatory compliance is integrated into the structure rather than treated as an afterthought.
3. Key legal risks that affect whether these projects are financeable
3.1 Environmental liability and remediation: Ongoing and Residual Risk
Environmental liability is often the single most important “deal-breaker” risk because it can create unpredictable, open-ended costs. The common law illustrates why.
Under the rule in Rylands V Fletcher10, strict liability may arise where a person brings something onto land that is likely to cause mischief if it escapes. While modern application is limited, the principle matters because investors worry about strict or near-strict exposure for harmful escapes.
In Cambridge Water Co V Eastern Counties Leather plc11, the House of Lords emphasised limits on liability, including foreseeability in nuisance, but the case still demonstrates how environmental harm can lead to substantial claims. In Empress Car Co (Abertillery) Ltd V National Rivers Authority12, the court treated a pollution event as a potentially within an offence even where immediate causation involved third-party action, highlighting the strictness of certain environmental enforcement frameworks.
For financing and PE structuring, the commercial implication is clear: investors must allocate historic contamination risk and operational pollution risk. This is normally managed through detailed due diligence, targeted indemnities, escrow/holdback mechanics, environmental insurance where available, and covenants requiring compliance and reporting.
3.2 Regulatory change risk: “rules can move mid-investment”
Energy transition policy creates a dynamic regulatory environment. Even if a project is compliant at signing, regulatory change can alter economics through new permitting standards, emissions costs, or reporting obligations. For example, climate policy duties can influence government decision-making and litigation risk, as shown in litigation concerning climate strategy and policymaking.13
From a transaction perspective, regulatory change is addressed through a mix of contractual tools: material adverse change clauses, covenant packages requiring compliance or withdrawn, and price adjustment where regulatory cost increases can be shared or absorbed.
3.3 ESG and disclosure risk: “greenwashing” as legal risk
Even when a project is economically attractive, disclosure risk can undermine it. If a fund markets an EOR-linked investment as “green” without strong support, there may be legal exposure through misleading statements and report obligations. EU regimes like SFDR and the broader sustainability reporting environment reinforce the importance of accuracy.14
For deal structuring, this means legal teams must align the actual project characteristics with how the project is described in investor materials and corporate disclosures. From a practical standpoint, this can require internal controls, careful drafting of investor communications, clear definitions of ESG objectives, and governance processes that ensure sustainability claims can be substantiated.
3.4 Cross-border compliance and enforcement
Many EOR and low-carbon deals are cross-border in terms of suppliers, lenders, operators, and regulatory footprint. Cross-border activity increases compliance complexity because there may be overlapping regimes, and enforcement risk differs by jurisdiction. Even where a product is “domestic”, capital providers can bring global, bringing additional compliance expectations.
The US legal context matters particularly in climate and environmental regulation. In Massachusetts V EPA15, the US Supreme Court recognized greenhouse gases as pollutants under the Clean Air Act 1963 (US)16, shaping federal regulatory authority and reinforcement that environmental regulation can materially affect business strategy.
For commercial law firms, cross-border compliance issues affect transaction timetables, due diligence scope, and contractual protections. Parties must understand where approvals are required, how enforcement risk differs, and how disputes will be resolved (including choice of law and jurisdiction).
4. Comparative perspective: why jurisdiction matters
Even with the same asset type, the legal risk differs by jurisdiction.
The EU has built a dense sustainability disclosure system through SFDR and related reforms, which increases compliance and misstatement risk for sponsors marketing products within the EU.17 In the UK, strategic reporting obligations and evolving regulatory expectations create a different but still significant disclosure environment.18 In the US, the regulatory and litigation environment has strong enforcement dynamics in certain areas of environmental law and can involve significant exposure where projects cross with federal regulatory power.19
For private equity and lenders, this means the same “EOR + low-carbon” investment may require different governance, different disclosure language, different compliance processes, and different risk pricing depending on where the asset sits and where capital is raised.
Conclusion
EOR and low-carbon technologies highlight the truth about the modern transition financing: capital follows structure. The projects in energy and infrastructure become investable when legal risk is identified early, priced accurately, and allocated through a strong and supported documentation and compliance framework.
This article has argued that the core legal constraints in financing these projects fall into four categories: environmental liability, regulatory change risk, ESG and disclosure risk, and cross-border compliance. These risks shape the deal structures, investor reporting, long-term governance, and the commercial viability of the asset.
For commercial lawyers and law firms, the value lies in translating uncertainty into workable legal frameworks. That means rigorous due diligence, careful drafting, realistic risk allocation, defensible disclosure practices, and cross-border coordination. In transition financing, the lawyer’s role is not simply to “protect the past” but to enable future-oriented projects to proceed with clarity, enforceability, and credible governance.
Bibliography
Legislation and Regulations:
Environmental permitting (England and Wales) Regulations 2016.
Environmental Protection Act 1990.
Climate Change Act 2008.
Directive 2003/87/EC.
Directive 2009/31/EC.
Energy Act 2008.
Companies Act 2006.
Regulation (EU) 2019/2088
Directive (EU) 2022/2464.
Clean Air Act 1963, 42 USC § 7401 et seq.
Case Law:
Rylands V Fletcher (1868) LR 3 HL 330.
Cambridge Water Co V Eastern Counties Leather plc [1994] 2 AC 264. Empress Car Co (Abertillery) Ltd V National Rivers Authority [1998] 2 AC 22.
R (Friends of the Earth Ltd) V secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 184.
Massachusetts V EPA 549 US 497 (2007).
1 Environmental permitting (England and Wales) Regulations 2016.
2 Environmental Protection Act 1990.
3 Climate Change Act 2008.
4 Directive 2003/87/EC. 5 Directive 2009/31/EC.
6 Energy Act 2008.
7 Companies Act 2006.
8 Regulation (EU) 2019/2088
9 Directive (EU) 2022/2464.
10 Rylands V Fletcher (1868) LR 3 HL 330.
11 Cambridge Water Co V Eastern Counties Leather plc [1994] 2 AC 264. 12 Empress Car Co (Abertillery) Ltd V National Rivers Authority [1998] 2 AC 22.
13 R (Friends of the Earth Ltd) V secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 184.
14 Regulation (EU) 2019/2088 Directive (EU) 2022/2464.
15 Massachusetts V EPA 549 US 497 (2007).
16 Clean Air Act 1963, 42 USC § 7401 et seq.
17 Regulation (EU) 2019/2088; Directive (EU) 2022/2464.
18 Companies Act 2006; Climate Change Act 2008.
19 Massachusetts V EPA 549 US 497 (2007).
Introduction
Energy transition does not mean that fossil fuel activity stops overnight. In fact, many economies continue to rely on oil and gas, while at the same time expand renewables, carbon capture, and other “transition” technologies. Private equity and private capital play an important role in this landscape, investing both in low-carbon projects and in technologies that extend the productive life of existing energy assets, including Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR). The legal question is not whether these technologies are “good” or “bad”, but whether they can be financed and operated in a way that is in the compliance with the law, commercially workable, and that remain acceptable under changing regulations and disclosure requirements.
This article argues that financing EOR and low-carbon technologies is not primarily constrained by a lack of capital; rather, it is constrained by the legal risk. That legal risk is shaped by environmental permitting, emissions regulation, climate and ESG disclosure obligations, liability attribution for pollution, and cross-border compliance pressures. These issues directly affect how private equity sponsors, lenders, and operators structure transactions, manage and allocate risk, and price assets.
The article proceeds in five steps. First, it outlines the legal framework relevant to EOR and low-carbon projects. Second, it explains the deal structures typically used by private capital and why risk allocation is crucial. Third, it analyses four legal risk categories that commonly determine whether such projects could be financed. Fourth, it provides a short comparative section highlighting how different legal frameworks intensify or shift risk. Finally, it concludes with practical implications for how commercial lawyers support clients in this area.
- Legal Framework: Regulatory Structure Governing Energy Transition Investments 1.1 Environmental permissions and operational compliance (UK)
EOR and other energy projects are often in a constant battle of conflicts with the environmental permissions, pollution controls, and operational processes. In England and Wales, many regulated activities require permits and compliance regarding emissions, discharges, waste, and monitoring obligations under the Environmental permitting (England and Wales) Regulations 20161. These permitting requirements can create financing risk because non-compliance may lead to enforcement action, operational shutdowns, or costly remediation.
More broadly, environmental liability matters because it determines who bears the cost of historic contamination or new environmental harm. The Environmental Protection Act 19902 provides frameworks for pollution control and waste regulation, and it can be relevant when questions arise over responsibility for environmental harm and other obligations.
1.2 Climate policy and emissions regulation
Climate policy influences both “low-carbon” projects and “transition” technologies. In the UK, the Climate Change Act 20083 establishes legally binding carbon budgets and the overall net-zero framework. While it does not itself dictate deal terms, it creates policy pressure that leads to a challenge in regulation, planning decisions, and the expectations placed on businesses.
At EU level, emissions regulation operates through the EU Emissions Trading System under Directive 2003/87/EC4. This framework influences price signals and compliance costs, which are relevant to asset valuation and long-term financing assumptions.
1.3 Carbon capture and storage regulation (EU and UK)
EOR can overlap with carbon capture and storage (CCS), particularly where CO2 is used for injection and can be stored underground. In the EU, CCS is governed by Directive 2009/31/EC5, which sets rules on site selection, permitting, monitoring, and long-term liability. These matter for investors because long-term liability can extend beyond an investment hold period.
In the UK, the Energy Act 20086 introduced a legal framework regarding offshore gas storage and carbon storage licensing. This is important for structuring where injection and storage are part of the project’s operational design.
1.4 Corporate reporting and disclosure (UK and EU)
Investors and sponsors increasingly face disclosure risk. UK companies must produce strategic reports under the Companies Act 20067, including disclosures required for certain large companies. At EU level, sustainability disclosure has become a major legal constraint through Sustainable Finance Disclosure Regulation (SFDR)8 and more recent disclosure reforms, including the Corporate Sustainability Reporting Directive (CSRD)9. While the details are complex, the key point for the deal structuring is simple: if a fund or portfolio company makes sustainability-related claims, there is a legal risk if those claims are inaccurate or unsupported.
- Deal Structures: why legal risk allocation matters
Private capital can enter EOR and low-carbon projects through multiple structures, but the legal problem is consistent: the investor’s return depends on performance over time, while many liabilities can arise later, and the regulatory standards can change mid-investment. This is more common than people think and these projects are therefore “structure-dependant”.
2.1 Common entry structures
First, sponsors may invest through direct equity in an operating company, using a standard acquisition structure with warranties, indemnities, and covenants in a share purchase agreement. Second, sponsors may use project finance or hybrid structures where repayment depends on project cash flows and secured assets. Third, joint ventures are common where an operator and technology provider share risk and upside.
The choice matters because it determines which legal protections are available. For example, an asset purchase may allow different approaches to liability allocation than a share purchase; a joint venture agreement may require detailed governance and operational covenants; project finance documentation may require extensive conditions precedent, reporting obligations, and technical performance standards.
2.2 Where lawyers add value
In these transactions, lawyers do not only “paper the deal”. They help make the deal financeable by translating commercial risk into contractual protections. This includes drafting risk allocation tools (warranties and indemnities), building governance rights, managing disclosure obligations, designing conditions precedent and termination rights, and ensuring regulatory compliance is integrated into the structure rather than treated as an afterthought.
- Key legal risks that affect whether these projects are financeable 3.1 Environmental liability and remediation: Ongoing and Residual Risk
Environmental liability is often the single most important “deal-breaker” risk because it can create unpredictable, open-ended costs. The common law illustrates why.
Under the rule in Rylands V Fletcher10, strict liability may arise where a person brings something onto land that is likely to cause mischief if it escapes. While modern application is limited, the principle matters because investors worry about strict or near-strict exposure for harmful escapes.
In Cambridge Water Co V Eastern Counties Leather plc11, the House of Lords emphasised limits on liability, including foreseeability in nuisance, but the case still demonstrates how environmental harm can lead to substantial claims. In Empress Car Co (Abertillery) Ltd V National Rivers Authority12, the court treated a pollution event as a potentially within an offence even where immediate causation involved third-party action, highlighting the strictness of certain environmental enforcement frameworks.
For financing and PE structuring, the commercial implication is clear: investors must allocate historic contamination risk and operational pollution risk. This is normally managed through detailed due diligence, targeted indemnities, escrow/holdback mechanics, environmental insurance where available, and covenants requiring compliance and reporting.
3.2 Regulatory change risk: “rules can move mid-investment”
Energy transition policy creates a dynamic regulatory environment. Even if a project is compliant at signing, regulatory change can alter economics through new permitting standards, emissions costs, or reporting obligations. For example, climate policy duties can influence government decision-making and litigation risk, as shown in litigation concerning climate strategy and policymaking.13
From a transaction perspective, regulatory change is addressed through a mix of contractual tools: material adverse change clauses, covenant packages requiring compliance or withdrawn, and price adjustment where regulatory cost increases can be shared or absorbed.
3.3 ESG and disclosure risk: “greenwashing” as legal risk
Even when a project is economically attractive, disclosure risk can undermine it. If a fund markets an EOR-linked investment as “green” without strong support, there may be legal exposure through misleading statements and report obligations. EU regimes like SFDR and the broader sustainability reporting environment reinforce the importance of accuracy.14
For deal structuring, this means legal teams must align the actual project characteristics with how the project is described in investor materials and corporate disclosures. From a practical standpoint, this can require internal controls, careful drafting of investor communications, clear definitions of ESG objectives, and governance processes that ensure sustainability claims can be substantiated.
3.4 Cross-border compliance and enforcement
Many EOR and low-carbon deals are cross-border in terms of suppliers, lenders, operators, and regulatory footprint. Cross-border activity increases compliance complexity because there may be overlapping regimes, and enforcement risk differs by jurisdiction. Even where a product is “domestic”, capital providers can bring global, bringing additional compliance expectations.
The US legal context matters particularly in climate and environmental regulation. In Massachusetts V EPA15, the US Supreme Court recognized greenhouse gases as pollutants under the Clean Air Act 1963 (US)16, shaping federal regulatory authority and reinforcement that environmental regulation can materially affect business strategy.
For commercial law firms, cross-border compliance issues affect transaction timetables, due diligence scope, and contractual protections. Parties must understand where approvals are required, how enforcement risk differs, and how disputes will be resolved (including choice of law and jurisdiction).
- Comparative perspective: why jurisdiction matters
Even with the same asset type, the legal risk differs by jurisdiction.
The EU has built a dense sustainability disclosure system through SFDR and related reforms, which increases compliance and misstatement risk for sponsors marketing products within the EU.17 In the UK, strategic reporting obligations and evolving regulatory expectations create a different but still significant disclosure environment.18 In the US, the regulatory and litigation environment has strong enforcement dynamics in certain areas of environmental law and can involve significant exposure where projects cross with federal regulatory power.19
For private equity and lenders, this means the same “EOR + low-carbon” investment may require different governance, different disclosure language, different compliance processes, and different risk pricing depending on where the asset sits and where capital is raised.
Conclusion
EOR and low-carbon technologies highlight the truth about the modern transition financing: capital follows structure. The projects in energy and infrastructure become investable when legal risk is identified early, priced accurately, and allocated through a strong and supported documentation and compliance framework.
This article has argued that the core legal constraints in financing these projects fall into four categories: environmental liability, regulatory change risk, ESG and disclosure risk, and cross-border compliance. These risks shape the deal structures, investor reporting, long-term governance, and the commercial viability of the asset.
For commercial lawyers and law firms, the value lies in translating uncertainty into workable legal frameworks. That means rigorous due diligence, careful drafting, realistic risk allocation, defensible disclosure practices, and cross-border coordination. In transition financing, the lawyer’s role is not simply to “protect the past” but to enable future-oriented projects to proceed with clarity, enforceability, and credible governance.
Bibliography
Legislation and Regulations:
Environmental permitting (England and Wales) Regulations 2016.
Environmental Protection Act 1990.
Climate Change Act 2008.
Directive 2003/87/EC.
Directive 2009/31/EC.
Energy Act 2008.
Companies Act 2006.
Regulation (EU) 2019/2088
Directive (EU) 2022/2464.
Clean Air Act 1963, 42 USC § 7401 et seq.
Case Law:
Rylands V Fletcher (1868) LR 3 HL 330.
Cambridge Water Co V Eastern Counties Leather plc [1994] 2 AC 264. Empress Car Co (Abertillery) Ltd V National Rivers Authority [1998] 2 AC 22.
R (Friends of the Earth Ltd) V secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 184.
Massachusetts V EPA 549 US 497 (2007).
1 Environmental permitting (England and Wales) Regulations 2016.
2 Environmental Protection Act 1990.
3 Climate Change Act 2008.
4 Directive 2003/87/EC. 5 Directive 2009/31/EC.
6 Energy Act 2008.
7 Companies Act 2006.
8 Regulation (EU) 2019/2088
9 Directive (EU) 2022/2464.
10 Rylands V Fletcher (1868) LR 3 HL 330.
11 Cambridge Water Co V Eastern Counties Leather plc [1994] 2 AC 264.
12 Empress Car Co (Abertillery) Ltd V National Rivers Authority [1998] 2 AC 22.
13 R (Friends of the Earth Ltd) V secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 184.
14 Regulation (EU) 2019/2088 Directive (EU) 2022/2464.
15 Massachusetts V EPA 549 US 497 (2007).
16 Clean Air Act 1963, 42 USC § 7401 et seq.
17 Regulation (EU) 2019/2088; Directive (EU) 2022/2464.
18 Companies Act 2006; Climate Change Act 2008.
19 Massachusetts V EPA 549 US 497 (2007).
