On March 8, 2024, the US Environmental Protection Agency (EPA) issued a final rule targeted to reduce methane emissions, as well as other volatile organic compounds (VOCs). 89 Fed. Reg. 16,820 (the Rule). The Rule seeks to reduce 58 million tons of methane emissions between 2024 and 2038 from the oil and natural gas industry. The Rule focuses on four areas, including new source standards; existing source guidelines; Congress’s disapproval of a prior rule under the Congressional Review Act on June 30, 2021; and a protocol for certain leak-detecting technology. Id. at 16,826–27. Each of these areas raises different issues, but the new existing source guidelines have already generated legal challenges. States and industry groups anticipate the Rule will lead to a large shortage in supplies needed with respect to current wells and a huge gap in the necessary manpower to implement the regulations. They also contend the cost of compliance on small or marginal wells may be too great to overcome, forcing smaller oil and gas producers out of business. The EPA has argued that these costs are outweighed by the benefits the Rule will produce through methane emission reductions.
Forty-five states have appeared in suits challenging the Rule, either against or in favor of the new regulations. Texas and Oklahoma each filed suit in the D.C. Circuit, seeking a stay and challenging whether the agency has exceeded its authority under the Clean Air Act (CAA). Twenty-three other states joined Oklahoma in its request to stay the final Rule (Petitioners), which was consolidated with Texas’s challenge. California is one of 20 states that have opposed the stay and intervened in support of the Rule along with the EPA. A number of industry and environmental groups also have entered the fray. On May 6, 2024, the EPA proposed minor changes based on two technical issues, related to monitoring and emergency operations for flares, but the Rule otherwise remains final unless stayed by the D.C. Circuit pending Petitioners’ legal challenges.
The legal challenges raised by Petitioners largely focus on the provisions of the Rule related to new existing source guidelines. The Petitioners argue that they have standing to seek review of the Rule based on economic harm resulting from (1) hiring hundreds of additional employees and/or diverting financial resources from other state programs in order to meet its obligations under the Rule; (2) assuming the task of properly plugging wells from businesses that are forced to close as a result of the Rule; (3) losing those investments already made in promulgating and implementing states’ regulatory structures; and (4) harm to states’ sovereign and quasi-sovereign interests by violating principles of federalism. See Docketing Statement at 1–2, State of Oklahoma. v. EPA, No. 24-1059 (D.C. Cir. Apr. 15, 2024).
In the Rule, EPA finalized emissions guidelines (EGs), presumptive standards for states to follow in developing, submitting, and implementing state plans. Those state plans must establish performance standards to limit emissions from existing sources. EPA’s authority, with respect to the existing source guidelines, stems from Section 111 of the CAA. 42 U.S.C. § 7411. In the Rule, EPA employed the same “best system of emission reduction” applicable to new sources to existing sources, reasoning that the analysis did not meaningfully change between new and existing sources. 89 Fed. Reg. at 16,995. The regulations at Subpart OOOOc set out these EGs that states must follow. 40 CFR pt. 60.
The amount of time states have to create and submit their respective state plans was a major issue raised during public comment, and at the heart of the current litigation. While the final Rule extended the time for submission of state plans from 18 months to 24 months in response to these concerns, states say it is still too short of a time frame. States are obligated to submit a plan establishing standards of performance based on the EGs for each designated facility. They must show that the regulated sources, meaning the state’s list of designated facilities, match EPA’s list of designated facilities, and also demonstrate that the requirements for designated facilities result in emissions reductions that are equal to or greater than emissions reductions from the EGs. The impact this could have on small or marginal wells is potentially significant. One industry group estimates that under the Rule, 34% of existing wells would become uneconomic, largely impacting around 750,000 marginal wells. Indep. Petroleum Ass’n of Am., Letter to Congressional Leadership (Feb. 9, 2024). For those well owners, the time frame for passage of the state plan as well as subsequent compliance is likely to be difficult. Small well owners must deal with challenges associated with supply chain issues creating shortages from the various elements needed to comply, including finding equipment, to qualified installers, construction and siting, and significant financial limits. The reality is that the cost associated with compliance means that economic viability for wells will favor much larger companies, potentially driving many of the small oil and gas companies out of business.
In states where many of these marginal wells are located, the states argue that the increase in necessary staffing itself becomes a significant and costly endeavor. For example, West Virginia estimates it will need more than 2,700 new employees to comply, given the vast number of wells in the state that are now newly regulated, at a cost of more than $278 million annually. Motion to Stay, State of Utah v. EPA, No. 24-1054 (D.C. Cir. Apr. 12, 2024). Ohio estimates the cost to be between $5.7 million and $16.3 million. Id. One of the costly elements that shifts to the state is plugging abandoned wells. Plugging an abandoned well often does not provide a significant reduction in emissions but can take up state resources to complete.
EPA, in contrast, suggests that the impact on oil production overall will be small because the estimated 30% of wells that may cease production are marginal wells, making up a very small percentage of the overall oil and gas production annually. Opp. to Motion to Stay, State of Utah v. EPA, No. 24-1054 (D.C. Cir. May 6, 2024). Similarly, EPA estimated the annual cost of state plan development to be much lower, at around $175,705 annually per state. Id. It argues that some states having a larger number of oil and gas sources does not create irreparable harm. EPA concluded that “based on the totality of circumstances, the advantages that the rule provides—namely in the form of a substantial and meaningful reduction in methane and VOC pollution, and the associated positive impacts on public health and the natural environment . . . outweighs its disadvantages, namely cost of industry compliance in the context of the industry’s revenue and expenditures.” 89 Fed. Reg. at 16,868. States in support of the Rule similarly argue that concerns of excessive demands on staff and hiring needs is not a cost applicable to the planning process but rather the implementation and enforcement process, which does not have to occur within the 24-month deadline. State Opp. to Motion to Stay, State of Utah v. EPA, No. 24-1054 (D.C. Cir. May 6, 2024).
EPA’s final rules issued under the CAA have faced—and will continue to face—many legal challenges, and its Methane Rule is no exception. The issues and provisions highlighted above represent just a small portion of controversy surrounding the overall Rule. As EPA considers the appropriate regulatory measures from this Rule and future regulatory actions, it is important to consider how the agency can work together with state and industry interests effectively, considering the different position of states and their unique circumstances.
