January 01, 2016

New Methane Regulations for the Oil and Gas Sector

Kristin Hines Gladd

On August 18, 2015, the U.S. Environmental Protection Agency (EPA) proposed a suite of regulations aimed at reducing emissions of methane and volatile organic compounds (VOCs) and clarifying air permitting rules for the oil and natural gas sector. The package consists of four proposed rules/guidelines: (1) New Source Performance Standards (www.federalregister.gov/articles/2015/09/18/2015-21023/oil-and-natural-gas-sector-emission-standards-for-new-and-modified-sources) (NSPS) for methane and VOCs, 80 Fed. Reg. 56,593 (Sept. 18, 2015); (2) draft Control Techniques Guidelines (www3.epa.gov/airquality/oilandgas/pdfs/og_ctg_draft_081815.pdf), Notice of Availability, 80 Fed. Reg. 56,577 (Sept. 18, 2015), for reducing VOC emissions; (3) a Source Determination Rule (www.federalregister.gov/articles/2015/09/18/2015-21026/source-determination-for-certain-emission-units-in-the-oil-and-natural-gas-sector), 80 Fed. Reg. 56,579 (Sept. 18, 2015); and (4) a Federal Implementation Plan (www.federalregister.gov/articles/2015/09/18/2015-21025/review-of-new-sources-and-modifications-in-indian-country-federal-implementation-plan-for-managing) (FIP), 80 Fed. Reg. 56,554 (Sept. 18, 2015), for Indian Country. I provide an overview of each rule below, followed by a discussion of the implications for affected sources.

Before delving into the specifics of the rules, however, it is helpful to place EPA’s proposals in the broader context of the Obama administration’s climate goals and specifically its 2014 “Strategy to Reduce Methane Emissions,” which serves as a blueprint for the administration’s overall strategy. Following this, in January of 2015, the administration announced a goal to reduce methane emissions from the oil and gas sector by 40 to 45 percent from 2012 levels by 2025. Driving this goal is the fact that methane emissions accounted for approximately 10 percent of the United States’ greenhouse gas emissions in 2012, and 30 percent of these emissions are attributable to the production, transmission, and distribution of oil and natural gas. White House, Fact Sheet: Administration Takes Steps Forward on Climate Action Plan by Announcing Actions to Cute Methane Emissions. www.whitehouse.gov/the-press-office/2015/01/14/fact-sheet-administration-takes-steps-forward-climate-action-plan-anno-1 (Jan. 14, 2015).

While methane emissions from the oil and gas sector have dropped over the past two plus decades, emissions from this sector are projected to rise more than 25 percent by 2025 due to increased oil and natural gas production. Id. Given this projection, the administration has outlined a broad, interagency strategy to achieve its emission reduction targets. These actions include a range of regulations and initiatives by a number of agencies, including EPA (not limited to those covered in this article), the Bureau of Land Management (BLM), the Department of Energy, and the Department of Transportation. The package of proposed EPA rules discussed here represents a significant step in the administration’s overall strategy to reduce methane emissions from the oil and gas industry.

New Source Performance Standards. Pursuant to section 111(b) of the Clean Air Act (CAA), 42 U.S.C. § 7411(b), EPA proposes to amend and expand the 2012 NSPS for the oil and natural gas source category, which currently covers only VOC emissions. First, EPA is proposing methane and VOC standards for several emission sources not covered by the current NSPS, including hydraulically fractured oil well completions, fugitive emissions from well sites and compressor stations, and pneumatic pumps. Second, EPA is proposing methane standards for certain emission sources that are currently regulated only for VOCs, including hydraulically fractured gas well completions and equipment leaks at natural gas processing plants. Third, the current NSPS regulates VOC emissions from only a subset of the equipment used across the oil and natural gas sector (pneumatic controllers, centrifugal compressors, and reciprocating compressors). EPA’s proposed amendments would add methane emission limits to this set of equipment and would also extend the existing VOC standards to other equipment not currently regulated. Of these changes, it is worth highlighting that the NSPS would require “green completions” of hydraulically fractured oil wells, or capturing natural gas from oil well completions, as well as leak detection and repair (LDAR) programs.

If finalized, these requirements would apply only to new, modified, and reconstructed emission sources in the production, processing, transmission, and storage segments of oil and natural gas systems—in other words, they would not apply to existing sources, or to the distribution system. In terms of the practical effect of the proposed amendments, sources already subject to the 2012 NSPS would not need to install additional controls, as current VOC controls also reduce methane emissions. Specifically, EPA has proposed that the best system of emission reduction (BSER)—which is required under the CAA—for methane is equivalent to the BSER for VOCs in the 2012 NSPS. Sources not previously covered by the 2012 NSPS, however, would be required to install controls to achieve the methane/VOC emission reductions required by the 2015 NSPS, assuming it is finalized in current form.

Control Technique Guidelines for VOCs. The second of EPA’s proposed rules is the draft Control Techniques Guidelines (CTG). The underlying legal requirement comes from CAA section 172(c)(1), 42 U.S.C. § 7502(c)(1), which requires reasonably available control technology (RACT) to be applied to existing sources of emissions in ozone nonattainment areas. EPA may issue a CTG, as it has done here, to provide recommendations to assist air agencies (state, local, and tribal) in determining RACT standards for existing sources of ozone “precursors,” including VOCs, from oil and natural gas emission sources. Geographically, the CTG only applies to affected sources in ozone nonattainment areas rated “moderate” or worse, as well as in the Northeast’s Ozone Transport Region. In terms of applicability, the CTG only covers VOC emissions, though the RACT measures proposed for VOC control would also result in methane emission reductions. Covered emission sources include storage vessels, pneumatic controllers and pumps, compressors, equipment leaks, and fugitive emissions.

The CTG is a guidance document only and therefore does not create legal obligations. States can either implement the recommendations in the CTG or establish their own. If they adopt their own, EPA must approve the alternative approach as part of the state’s State Implementation Plan (SIP) approval process. Revisions to state SIPs consistent with the CTG are due within two years of the final CTG’s issuance. While the CTG does not impose legal requirements, as a practical matter, states may heavily rely on the CTG to set RACT requirements for existing sources because the federal recommendations are already in place, which saves the state resources and because they then do not need to obtain approval from EPA for alternative RACT determinations. Notably, the CTG’s RACT standards are generally consistent with the proposed NSPS requirements. This means that if states implement the CTG’s recommendations for RACT controls, the proposed NSPS requirements for new sources would generally apply to existing sources.

Source Determination Rule. EPA’s third action, the proposed Source Determination Rule, addresses whether oil and natural gas equipment and activities are considered part of a single stationary source that is subject to major source permitting requirements under the Prevention of Significant Deterioration, Nonattainment New Source Review, and Title V programs. Currently, three factors determine whether a source is considered “major” for these purposes: It is (1) part of the same industrial grouping (SIC code); (2) under the control of the same person/entity; and (3) located on contiguous or adjacent properties. EPA’s proposal goes to the definition of “adjacency,” which has been the subject of much debate and previously addressed by EPA only in memoranda and through permitting determinations. In the proposed rule, EPA sets forth two options: one based on “proximity,” which is EPA’s “currently preferred” option, and the other, on “functional interrelatedness.” Under the proximity definition, equipment or activities would be considered adjacent if they are located on the same site or on sites within a fixed distance (which EPA has currently proposed at a quarter mile, though the Agency is taking comment on this approach and distance). Under the second option, equipment or activities are considered adjacent if they are near each other or are “exclusively functionally interrelated” (e.g., whether they are connected by a pipeline, involve exclusive delivery of product from one equipment group to the other or one group of equipment is able to operate without the other).

While EPA has solicited comment on both approaches, EPA prefers the proximity option because it believes that a definition that centers on a surface site is familiar to industry and regulators and will therefore streamline permitting; that it most closely resembles the common-sense notion of a plant for this industry; and that this definition is consistent with Congress’s intent for regulating hazardous air pollutants. This approach is also most akin to that currently used by individual states; for example, Texas, Oklahoma, Louisiana, and Pennsylvania all use the quarter-mile distance test for determining adjacency. Under EPA’s proposal, however, sources could not include additional emitting activities beyond the fixed distance in the permit, which is different from what some states allow (Pennsylvania, for example, currently permits aggregation beyond a quarter mile on a case-by-case basis).

Federal Implementation Plan for Indian Country. EPA’s fourth action is a proposed FIP that would implement the minor New Source Review (NSR) program in Indian Country for oil and natural gas production. EPA’s intent with the FIP is to improve the efficiency of the permitting process for this group of sources. Specifically, the FIP would create a uniform general permit for certain new and modified minor oil and gas production and gathering sources in Indian Country, replacing site-specific minor NSR preconstruction permits. The proposed general permit would incorporate emissions limits and requirements from six federal rules, including performance standards for VOC liquid storage tanks, stationary compression ignition internal combustion engines, and stationary spark ignition internal combustion engines, as well as air toxics standards for boilers and process heaters and oil and natural gas production facilities. The FIP would apply throughout reservations in Indian Country, as well as other areas where a tribe has demonstrated jurisdiction in areas designated “attainment” or “unclassifiable” for a National Ambient Air Quality Standard.

Taken together, what do these four proposals mean? First, they represent a big step by EPA in regulating methane from the oil and natural gas industry. If finalized in their current form, the rules would create significant new obligations for affected sources. With regard to permitting, EPA asserts that the combined effect of the rules would be to reduce the number of major oil and gas sources, although it would likely increase the number of minor sources. If true, this could potentially result in quicker permitting processes; on the other hand, there may be disadvantages for affected sources, such as lost opportunities to do emissions netting across the source.

From an environmental benefits standpoint, the biggest issue in this package of rules is that the NSPS emission reduction requirements apply only to new sources. As noted above, one question will be to what extent these requirements are nevertheless “translated” into state SIPs and required of existing sources in ozone nonattainment areas through RACT determinations that follow EPA’s draft CTG. As is, standards solely for new sources will not be sufficient to achieve the administration’s goal of a 40 to 45 percent reduction in methane emissions from this sector. EPA has previously taken the position that industry should expect standards for existing oil and gas infrastructure unless voluntary reductions are so deep that they would make regulations for existing sources not cost effective. Looking forward, the focus will be on controlling emissions from existing sources in the oil and gas sector, specifically whether EPA proposes standards under CAA section 111(d) to accomplish this. The public comment process and finalization of the proposed rules discussed here will continue to shape this process.

Kristin Hines Gladd

Ms. Gladd is an associate in the Washington, D.C., office of Beveridge & Diamond, P.C., and a member of the editorial board of Natural Resources & Environment. She may be reached at kgladd@bdlaw.com.