Introduction

On August 18 2015 the Environmental Protection Agency (EPA) proposed three significant regulatory actions extending the reach of its controls over the energy sector by expanding regulations over the oil and gas industry.

First, the EPA issued a proposed New Source Performance Standards (NSPS) under Section 111 of the Clean Air Act that would establish new restrictions on emissions of methane and volatile organic compounds (VOCs) from certain new, modified or reconstructed sources in the oil and gas industry.

Second, along with the proposed rule, the EPA issued draft Control Techniques Guidelines (CTG) for reducing VOC emissions from existing oil and gas sources in certain ozone non-attainment areas and states in the Ozone Transport Region.

Third, the EPA has proposed to change how it defines 'adjacent' onshore oil and gas emission points for the purpose of aggregating them under the act into a single stationary source under the New Source Review (NSR) programme and as a major source under the Title V programme. These regulatory actions are key components in achieving the Obama administration's goal of reducing methane emissions from the oil and gas sector by up to 45% of 2012 levels by 2025 and its overall efforts to reduce greenhouse gas emissions by regulating the development and use of fossil fuels.

Comments on each action will be due 60 days after the EPA publishes the formal notice of its action in the Federal Register.

Proposed NSPS

The NSPS would:

  • extend the EPA's regulatory reach into oil production that was not covered by its 2012 NSPS for oil and gas sources;
  • impose broad leak detection and repair requirements across the industry; and
  • extend restrictions on methane and VOC emissions from equipment currently used across industry downstream of production sites.

Highlights include:

  • regulation of both VOCs and methane;
  • inclusion of oil wells completed using hydraulic fracturing;
  • an expanded leak detection and repair programme;
  • additional restrictions on compressors, controllers and pumps;
  • issues raised in petitions for reconsideration;
  • application to existing sources; and
  • a social cost of methane.

Regulation of both VOCs and methane

In previous rules, the EPA imposed restrictions on VOC emissions, which it found had the co-benefit of also reducing methane emissions. Now, it expressly proposes to regulate methane in addition to VOCs. This includes adding methane standards to sources already regulated for VOC emissions, as well as new methane and VOC standards for additional emission sources. The EPA is not, however, proposing to change current VOC standards for sources addressed in the 2012 NSPS.

Inclusion of oil wells completed using hydraulic fracturing

The EPA further seeks to extend its reach into oil production and development by proposing to require hydraulically fractured oil wells to employ measures to reduce methane and VOC emissions. For production wells, owners/operators would have to employ reduced emissions completions in combination with a combustion device, except where technically infeasible. For exploratory and site delineation wells, a combustion device would be required, but not reduced emissions completions.

Expanded leak detection and repair programme

Under the proposal, oil and gas production well sites, natural gas transmission compressor stations and natural gas production gathering and boosting stations would survey for fugitive emissions semi-annually using optical gas imaging (OGI) and promptly perform any necessary repairs. At well sites, this covers ancillary equipment in the immediate vicinity of the well that is necessary for or used in production, including separators, storage vessels, heaters and dehydrators. However, the EPA would exclude sites that have wellheads only, as well as certain lower production sites.

The EPA is seeking comment on whether the survey should be done annually and whether EPA Method 21, which uses a portable VOC monitor, should be used instead of OGI technology. The proposal also overlaps with existing rules (Part 60, Sub-part W) that require compressor stations with emissions that exceed 25,000 metric ton carbon dioxide equivalent to report fugitive emissions and the EPA has asked for comment on how to address this. Also, some well owners/operators already have voluntary leak detection programmes and the EPA has asked for comment on how those could satisfy or be integrated under a final rule.

Additional restrictions on compressors, controllers and pumps

The EPA has also proposed restrictions on methane and VOC emissions from certain equipment located at oil and gas well sites, as well as at downstream natural gas operations. These generally match the types of restriction that the EPA imposed in its 2012 NSPS on VOC emissions from equipment located at natural gas production sites. As proposed, new and modified wet seal centrifugal compressors, reciprocating compressors and natural gas-driven pneumatic controllers and pneumatic pumps would need to meet methane and VOC emission reductions or be subject to operating requirements. The EPA would exclude compressors at oil and natural gas well sites, finding that they are typically small and low emitting.

Issues raised in petitions for reconsideration

The EPA also proposes to address a number of issues raised in administrative reconsideration petitions on the 2012 NSPS (and subsequent amendments), including:

  • amended requirements for storage vessel control device monitoring and testing;
  • recordkeeping for repair logs for control devices that fail a visible emissions test;
  • clarification of the deadline for the initial annual report under the 2012 NSPS;
  • flare design and operation standards;
  • leak detection and repair for open-ended valves or lines;
  • compliance period for leak detection and repair for newly affected units;
  • exemption from notification requirement for reconstruction and disposal of carbon from control devices; and
  • the definition of capital expenditure for determining when a modification could occur.

Application to existing sources

The EPA's proposal will not apply automatically to existing sources, but it will be important to understand how an existing source could become subject to the new requirements. For example, the EPA will consider a well site to be modified and subject to the proposed requirements when a new well is completed or an existing well is fractured or refractured after the effective date of the rule. The standards will not, however, apply to existing well sites where additional drilling activities are conducted on an existing well, as long as those activities do not include fracturing or refracturing. How the EPA interprets these triggers would inform when existing sites could face these requirements, if finalised.

A social cost of methane

The EPA's cost-benefit analysis of the proposal rests, in part, on the calculation of the social cost of methane (SC-CH4). Similar to the controversial social cost of carbon, SC-CH4 is a modelled estimate of monetised future damages. Using the same suite of integrated assessment models and discount rates as the social cost of carbon, the EPA estimates that the proposed rule would avoid between $80 million and $550 million in damages by 2020 through a reduction in methane emissions.

Control Techniques Guidelines

While the NSPS addresses new or modified sources, the CTGs provide guidance to states for reducing VOC emissions from existing equipment and processes in the oil and natural gas industry.

CTGs are not binding regulations, but can lead to state rules

CTGs do not impose legal requirements, but provide recommendations to state and local air agencies on establishing reasonably available control technology for reducing emissions from covered processes and equipment. Moreover, for ozone non-attainment areas and states in ozone transport regions, the act requires state implementation plans to include reasonably available control technology for each category of VOC sources covered by an EPA CTG document until the area reaches attainment.

CTGS are based on EPA's 2012 NSPS and latest proposal

The draft CTGs provide recommendations for storage tanks, pneumatic controllers and pumps, centrifugal and reciprocating compressors, equipment leaks from natural gas processing plants and other potential sources of fugitive emissions. The recommendations are similar to the 2012 NSPS, as well as the EPA's new proposal. While the CTGs refer to VOCs, the EPA's goal to address methane is clear as it acknowledges that it based most of the VOC emission estimates presented in the CTGs on available methane emissions data.

Definition of 'adjacent' for aggregation

The EPA is proposing to change how it aggregates upstream and midstream onshore oil and gas emission points for NSR and Title V permitting.

EPA's preferred option relies on proximity

For multiple emission points to be aggregated into a single stationary source or major source, they must be contiguous or adjacent. The EPA had previously interpreted 'adjacent' to include emission points that were functionally interrelated, even if several miles apart. The Sixth Circuit rejected that interpretation, holding that 'adjacent' can only mean physical proximity. The EPA has now proposed, as its preferred option, to interpret 'adjacent' to mean physical proximity. This requires emission points to be located on sites within one-quarter of a mile of each other before they can be aggregated. The EPA requests comment on whether to use a different distance.

Functional interrelatedness test is still on the table

The EPA is also soliciting comments on whether to reinstate the functional interrelatedness test by amending its regulatory definitions of 'stationary source' and 'major source'. The proposal states that factors that could contribute to a finding that emission points are functionally interrelated could include a connection by pipeline, the delivery of product from one emission point to another via train or truck or whether one type of emission point can operate when the other is not. The proposed rule also solicits comments on various additional factors that a permitting agency could use to determine that emission points are functionally interrelated.

For further information on this topic please contact Roger Martella, Samuel Boxerman, Joel Visser or Jim Wedeking at Sidley Austin LLP by telephone (+1 202 736 8000) or email (rmartella@sidley.com, sboxerman@sidley.com, jvisser@sidley.com or jwedeking@sidley.com). The Sidley Austin LLP website can be accessed at www.sidley.com.