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April 30, 2015 Practice Points

Oil and Gas Industry Permitting under Heightened Scrutiny in 2015

An update on aggregation.

By David M. Loring – April 20, 2015

Recent and anticipated litigation from the U.S. Environmental Protection Agency (EPA) and environmentalists signals that permitting decisions involving whether to aggregate emissions from separate facilities will be at the forefront of environmental enforcement for the oil and gas industry in 2015 and beyond.

At issue is EPA’s so-called aggregation policy and the meaning of "adjacent." The aggregation policy was intended to establish a method for determining when physically separate emission sources are considered "adjacent" and their emissions appropriately “aggregated” as a single source. The EPA has never defined by regulation the meaning of "adjacent," and a wave of changing guidance issued by the agency has left both state agencies and industry uncertain of whether adjacency is based on physical proximity, some functional relationship between the emission sources, or a combination of the two. The U.S. Court of Appeals for both the Sixth Circuit and the District of Columbia, however, struck down the EPA’s attempt to aggregate solely on the basis of the “functional interrelatedness” of separate sources without consideration of physical proximity. See National Environmental Development Assoc.’s Clean Air Project v. EPA, 752 F.3d 999 (D.C. Cir. 2014); Summit Petroleum Corp. v. EPA, 690 F.3d 733 (6th Cir. 2012).

Those decisions have sparked concern among environmentalists and the EPA alike, who both seek to impose more stringent air permitting requirements on the rapidly expanding natural-gas industry. Because of the physical distance that often exists between the various facilities that comprise gas extraction and distribution systems, these sources historically have not triggered major source air permitting requirements that otherwise may have been triggered if the emission sources had been aggregated.   

Most recently, the District Court for the Middle District of Pennsylvania tackled aggregation and the meaning of "adjacent," further muddying the waters. In Citizens for Pennsylvania's Future v. Ultra Resources, Inc., No. 4:11-CV-1360 (Feb. 23, 2015) (PennFuture), the district court departed from the Sixth Circuit's interpretation of "adjacent" in two important respects. First, despite finding that the distance between the compressor stations was too great to aggregate, the district court "decline[d] to hold that functional interrelatedness [could] never lead to, or contribute to, a finding of . . . adjacency." PennFuture, at *13 (quoting Summit Petroleum, 690 F.3d at 753). Second, even absent sufficient physical proximity to establish adjacency, natural gas emission sources could be aggregated if they are connected to each other such that "each source . . . is a stop along a single physically connected process."

The plaintiffs in PennFuture challenged the issuance of separate air permits to eight compressor stations that are separated across an of five square miles. Had the Pennsylvania Department of Environmental Protection (PADEP) aggregated the facilities, a major source permit and significant emission controls would have been required. While the compressor stations are not so interconnected that one station relies on the other to operate, the compressor stations were designed to operate collectively to boost pressure at a given well and to distribute gas to a common metering and regulation station and main transmission pipeline.   

With little factual analysis, the court in PennFuture ruled that the compressor stations should not be aggregated. The court found that the five-square-mile area between the compressor stations was not "sufficiently close to, or near enough, each other to be considered adjacent." Nevertheless, the Court went on to note in dicta that even though the stations were too physically distant to be aggregated, unlike Summit Petroleum, consideration of the functional interrelatedness between facilities was appropriate. Upon examination, the court found that independently functioning compressors that deposited gas from individual wells into a common pipeline did not create a functional interrelationship sufficient to warrant aggregation.

The PennFuture decision likely signals a wave of citizen and government action to force a broader approach to aggregation, including potential regulatory action and litigation challenging decisions to separately permit related but physically separate facilities. Indeed, in February 2015, the environmental group WildEarth Guardian filed a notice of intent to sue EPA Region 8 on certain compressor station permits in Utah, seeking application of the functional-interrelatedness test to aggregate emissions from oil and gas wells surrounding the facilities. In addition, the EPA itself has announced that it plans to take regulatory action as early as May 2015 to bypass case-by-case aggregation determination for the oil and gas industry by defining what constitutes an oil and gas emission source.

David M. Loring is with Schiff Hardin LLP in Chicago, Illinois.

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