On Thursday, the US Environmental Protection Agency (EPA) took a significant step toward meeting the Obama administration's pledge to reduce methane emissions from the oil and gas sector to 40‑45 percent below 2012 levels by 2025. Specifically, EPA released three final rules on methane emissions from the oil and gas sector. Arguably, more importantly, EPA issued a draft Information Collect Request (ICR) that will help the agency gather information to inform its future rulemaking on existing oil and gas sources.

Methane is a short-term but potent greenhouse gas (GHG) pollutant that has 28‑36 percent greater global warming potential than carbon dioxide (CO2) according to a 2013 Intergovernmental Panel on Climate Change report. Thus, while the shift from coal to natural gas generation in the electricity sector has helped to reduce CO2 emissions in the US electricity sector, EPA's actions are responding to increased concerns regarding the impact of methane emissions from shale gas production on broader efforts to reduce GHG emissions. EPA's actions also come in the context of increased US bilateral and multilateral engagement and cooperation on climate change, exemplified by December's Paris Agreement and the US-Canada Joint Statement on Climate, Energy, and Arctic Leadership of March 10, 2016.

Specifically, EPA released the following final rules on Thursday:

  • Established Clean New Source Performance Standards (NSPS) for methane emissions from various new, reconstructed and modified oil and gas equipment and processes
  • Clarified how emissions from oil and gas sources should be aggregated for determining whether such sources are subject to the Clean Air New Source Review, Prevention of Significant Deterioration and Title V operating programs
  • Issued a federal implementation plan for the Minor New Source Review Program in Indian Country for oil and natural gas production

Industry stakeholders and states may file lawsuits against EPA's NSPS, and Congress may attempt to block the rule, though legislative efforts are likely to fail.

In addition to these final rules, EPA's draft Information Collection Request (ICR) to the oil and gas industry will require that operators and facilities submit a variety of information relating to methane emissions from existing sources. The broad swath of this ICR will impact 22,500 operators and 698,800 facilities. This information is intended to aid EPA as it begins developing standards for existing oil and gas sources—restrictions that environmentalists argue are necessary to meet the Obama administration's methane targets, but that industry contends will be complex and costly to implement. With a little more than eight months left in President Obama's term, the job of finalizing methane regulations will likely be left to the next administration. Under a Democratic administration, EPA would likely forge ahead with methane restrictions; under a Trump administration, it would be expected to abandon this rulemaking.

ICR request: Precursor to methane regulations on existing oil and gas sources

As part of President Obama's Climate Action Plan: Strategy to Reduce Methane Emissions, EPA is moving forward with a methodical approach to regulating emissions from existing sources in the oil and gas industry. As a necessary first step, EPA issued a draft ICR. An ICR is a set of documents that describes reporting, recordkeeping, survey or other information collection requirements imposed on a given industry by EPA. The ICR was issued and published in the Federal Register by EPA's Sector Policies and Programs Division within the Office of Air Quality Planning and Standards on May 12, 2016.

Comments on the draft ICR are due no later than 60 days from May 12, 2016. After receiving public comment on the draft ICR, it will be submitted for review and approval by the Office of Management and Budget (OMB). After its own review, OMB will issue a second draft for a 30-day public comment period. EPA anticipates issuing the final ICR to covered industry facilities by October 30, 2016. The agency anticipates that the total industry cost for responding to the final ICR will be approximately US$40 million.

Noting that oil and gas facilities are the largest industrial emitters of methane in the United States, EPA's ICR will require companies to gather and submit information that EPA indicates will enable the agency to "develop comprehensive regulations to reduce emissions from existing sources" in the oil and gas sector. Covered industry sources will include methane emissions that occur during the production, gathering, processing, transmission and storage aspects of the oil and gas sector. EPA's ICR also seeks information on innovative, accurate and cost-efficient strategies that members of the industry are using to monitor and mitigate methane emissions.

Collecting this information will enable EPA to determine the way forward on its commitment to develop performance standards pursuant to Section 111(d) of the Clean Air Act. EPA notes that there are "hundreds of thousands" of equipment components that use a wide variety of practices in different circumstances across the country, and the agency needs a comprehensive understanding of the scope of industry efforts before moving forward with meaningful rulemaking. EPA cites a need to better understand the scope of currently deployed emission controls, processes for upgrading controls and related costs and electricity uses in those processes. Collectively, this information will provide sufficient information for EPA to determine the "best system of emission reduction (BSER) the Administrator determines has been adequately demonstrated" and the degree of achievable emissions reductions through a given system.

There are two parts to the information collection process. Part 1 is an "Operator Survey" covering onshore oil and gas production facilities. The Operator Survey will be sent to all oil and gas wells in the United States. EPA anticipates that it will not require submission of confidential business information during this process. Specifically, the agency would like more information on various sources of methane emissions, including natural gas venting from process and maintenance activities, equipment malfunctions and flashing emissions from storage tanks. EPA estimates that 22,500 operators and 698,800 facilities will be covered by Part I of the ICR. Once issued, a covered facility will have 30 days to respond to EPA using the agency's electronic Greenhouse Gas Reporting Tool (e-GGRT).

Part 2 is a "Detailed Facility Survey" that will be sent to selected oil and gas facilities across different industry segments including processing, gathering and boosting, natural gas storage, pipelines, onshore production and liquefied natural gas (LNG) storage and export/import facilities. The Detailed Facility Survey is intended to retrieve enough information to have accurate statistical sampling for each segment of the oil and gas industry. It will retrieve "unit-specific information on emission sources" at a covered facility, as well as emission control devices and management practices deployed to reduce emissions. While the agency indicates that most of this information should be readily available through company records, it concedes that in some instances information will need to be collected. Some confidential business information will be necessarily included in the responses. EPA is seeking comment on two different options for establishing sufficient populations within a given industry segment: establishing populations based on well type using gas-to-oil ratios, or establishing populations based on regional groupings of basins. EPA estimates that approximately 3,385 respondents will be covered by Part 2 of the ICR. Once issued, covered facilities will have 120 days to respond using EPA's e-GGRT.

Oil and gas industry New Source Performance Standards

EPA updated its NSPS for the oil and gas industry by expanding the requirements to explicitly include methane and to cover additional equipment and processes not addressed by previous regulations. In 2012, EPA finalized NSPS for volatile organic compound (VOC) emissions for new natural gas sources. EPA declined to directly regulate methane in the 2012 rule, though the agency contended that VOC requirements, such as well completions, would result in the co-benefits of reducing methane emissions.

In Thursday's final rule, EPA estimates that the NSPS will reduce 510,000 tons of methane (6.9 million metric tons of CO2e) by 2025. By 2025, EPA projects that the climate benefits associated with this rule will total US$690 million. EPA estimates total compliance costs of US$530 million, taking into account increased revenues for the industry from capturing additional natural gas. EPA also stated that the NSPS will result in reductions of 210,000 tons of VOCs and 3,900 tons of hazardous air pollutants, though the agency was unable to quantify the economic benefits of these reductions.

EPA is establishing methane standards for hydraulically fractured gas wells and setting both methane and VOC standards for hydraulically fractured oil wells, a source not covered by the 2012 NSPS rule. According to EPA, the operational standards in the final rule "are essentially the same as the VOC standards for hydraulically fractured gas wells" in the 2012 NSPS rule. Specifically, the rule requires that operators employ reduced emissions completion or green completion, a technology that allows for the separation of gas and liquid hydrocarbons during the flowback stage of production. EPA states that reduced emissions completion is projected to reduce methane and VOC emissions by 95 percent.

Owners and operators will have 180 days from when the final rule is published in the Federal Register to meet the reduced emissions completion requirements.

The final rule also establishes additional methane standards on oil and gas equipment, such as centrifugal compressors, reciprocating compressors, pneumatic controllers and pneumatic pumps, which already are subject to VOC requirements. EPA contends that complying with these new methane standards will not require that installation of additional controls since the controls to reduce VOCs also capture methane.

The updated NSPS also requires that owners/operators of oil and gas well sites, natural gas production gathering and boosting stations, natural gas transmission compressor stations and natural gas processing plants develop and implement leak monitoring plans to mitigate fugitive emissions. As part of this plan, owners/operators are required to conduct an initial survey one year after this rule is published in the Federal Register or within 60 days of the startup of production, whichever is later. After this initial survey, owners/operators must also perform semiannual monitoring and repair of fugitive emission components at well sites. EPA also removed an exemption to the fugitive emissions requirements for low-production wells. For the other sources, owners and operators must conduct quarterly monitoring and repair at well sites.

EPA also issued a final rule clarifying permitting rules relating to whether oil and gas sources are subject to the Clean Air Act's New Source Review, Prevention of Significant Deterioration (PSD) and Title V programs. The New Source Review and the PSD program function essentially as pre-construction review processes that apply to a "major stationary source" that emits or has the potential to emit above certain thresholds. Over the last several years, there has been significant confusion as to whether certain oil and natural gas sources are subject to the New Source Review and PSD permitting program.

Under Clean Air Act regulations, a "major source" is defined to "include any building, structure, facility or installation." Federal regulations set forth three criteria for determining if emissions activities belong to the same "building, structure, facility or installation": (1) whether the activities are under common control; (2) whether the activities are located on one or more contiguous or adjacent properties; and (3) whether the activities belong to the same industrial grouping.

In 2009, EPA released guidance that permitting authorities should rely on all three factors in determining whether to aggregate emissions as part of assessing whether sources constitute as major sources under the NSR program. This guidance broke with a 2007 guidance, drafted during the George W. Bush administration, which stated that proximity of activities was the most important factor in making source determinations. In 2012, the US Court of Appeals for the Sixth Circuit struck down the 2009 EPA guidance. Following the Sixth Circuit's decision, EPA issued a directive stating that its 2009 aggregation guidance remained in effect in other regions outside of the Sixth Circuit. In 2014, the US Court of Appeals for the DC Circuit struck down EPA's directive holding that the agency is required to maintain national uniformity in implementing the Clean Air Act.

In response to these court decisions, EPA issued a draft rule last August that proposed two options for how to define "adjacent." The first and preferred option would require permitting officials to aggregate all emissions that are under common control of a single entity and are located within one-fourth of a mile of each other. The second option would have aggregated all emissions within one-fourth of a mile of each other but would also have allowed permitting officials to aggregate other equipment beyond one-fourth of a mile depending on the relationship between the operations. In the final rule, EPA opted for the first option. This aggregation rule applies to onshore oil and natural production and natural gas processing but does not extend to offshore oil and gas operations.

Federal plan for implementing the Indian Country Minor New Source Review Program for the oil and natural gas industry

In the context of continuing delays with oil and gas permitting in Indian country, EPA's Office of Air Quality Planning and Standards published a final Federal Implementation Plan (FIP) for the Indian Country Minor New Source Review (NSR) program covering oil and gas production and natural gas processing. The FIP applies to new or modified true minor sources in these two portions of the oil and gas sector where operations are locating in or expanding to Indian territory. The overall goals of the FIP are to streamline and clarify permitting processes, mitigate greenhouse gas emissions and reduce harmful pollutants covered by the Clean Air Act. The final rule goes into effect on October 3, 2016.

Source categories covered by this action include oil and natural gas production and operations, crude petroleum and natural gas extraction, natural gas liquid extraction, drilling oil and gas wells, support activities for oil and natural gas operations and engines. The FIP provides regulatory standards through emission limits and related emission requirements covering completion of hydraulically fractured oil and gas wells, compression ignition engines, spark ignition engines, process heaters, combustion turbines, glycol dehydrators, fuel storage tanks, reciprocating compressors, centrifugal compressors, pneumatic controllers, pneumatic pumps, storage vessels and fugitive emissions.

In addition, EPA issued a number of amendments to the 2011 Indian Country NSR that clarify the purpose and scope of the program and registration requirements for industry compliance. Most importantly, the FIP provides a series of emissions standards that must be achieved unless a source-specific permit is obtained from EPA or is otherwise not required by the agency. This is a break from the 2011 NSR whereby tribes were allowed to take responsibility for issuing air permits. The rule does not apply in areas that are in nonattainment under the Clean Air Act's National Ambient Air Quality Standard (NAAQS). Those entities will be required to seek a source-specific permit or otherwise comply with applicable reservation FIPs.

The eight emissions standards issued in the FIP include: (1) the final NSPS issued on May 12, 2016, for the broader oil and gas industry, (2) VOC liquid storage tank performance standards, (3) stationary compression ignition internal combustion engine performance standards, (4) stationary park ignition international combustion engine performance standards, (5) new stationary combustion engine performance standards, (6) industrial, commercial and institutional boiler and process heater performance standards, (7) oil and natural gas production facility air toxics standards and (8) stationary reciprocating internal combustion engine air toxics standards. These eight standards incorporate national emissions standards for hazardous air pollutants and NSPS of the Clean Air Act. Beyond emissions standards, there are specific regulations for monitoring, testing, recordkeeping and reporting.

Notably, the final rule also covers issues related to the Endangered Species Act and the National Historic Preservation Act. Industry operators that choose to pursue the FIP approach to compliance, as opposed to source-specific permits, must submit specified documentation to EPA demonstrating already achieved compliance with these laws for the particular operation. Furthermore, compliance requires written confirmation by EPA of compliance with this regulation.

Political and legal challenges

Following the release of Thursday's rules, congressional Republicans criticized EPA's methane NSPS for new sources and pledged oversight of the benefits and costs associated with the new requirements. Congressional Republicans could attempt to block EPA's new rule through either standalone legislation or an environmental rider to the annual EPA appropriations bill. Republicans could also pursue action under the Congressional Review Act, which provides Congress 60 legislative days after a final rule is published in the Federal Register to pass a joint resolution disapproving of the rule. For the remainder of President Obama's term, however, these legislative efforts are expected to fail. The White House would likely veto any legislation blocking these rules, and Republicans lack sufficient support to override a veto.

Some industry stakeholders also expressed opposition to EPA's methane NSPS for new sources, calling the new requirements costly and unnecessary. Industry associations, states and other stakeholders could pursue litigation after the rule is published in the Federal Register. Environmental organizations generally expressed support for the rule and signaled that they would work to defend it in court.

An even larger battle is likely to take shape over EPA's efforts to establish methane standards for existing oil and gas sources. EPA's draft ICR is aimed at garnering the information necessary for the agency to develop standards for existing oil and gas sources, a process that will be left for the next administration to complete. A win by presumptive Republican presidential nominee Donald Trump would likely result in EPA halting its work on regulating existing sources, whereas Democratic presidential front-runner Hillary Clinton has expressed support for methane regulations. The rule also comes at a time when the oil and gas industry is struggling with low commodity prices, along with increased regulatory requirements.

Regulation of existing oil and gas sources could also play a more prominent role in helping the US meet its international GHG reduction commitments as part of the United Nations Paris Agreement. The importance of these regulations to US GHG reductions are arguably enhanced by the US Supreme Court stay on the Clean Power Plan, the centerpiece of the Obama administration's Climate Action Plan that would establish CO2 reduction targets for existing power plants. The US Supreme Court is not expected to consider the Clean Power Plan until 2017, at the earliest. The fate of the rule may hinge on the presidential election and who fills the current vacancy on the court due to the death of conservative Justice Antonin Scalia.

EPA's actions are also part of enhanced North American cooperation on energy and climate change. At the March 10 official visit, the US and Canada issued a joint statement outlining increased cooperation between the two counties on climate change and energy security. The centerpiece of this statement was a commitment by the US and Canada to reduce methane emissions to 40–45 percent below 2012 levels by 2025. As part of this joint statement, President Obama pledged that EPA would pursue Clean Air Act regulation on methane emissions from existing oil and gas sources and the ICR represents the first step in that rulemaking process. Environment and Climate Change Canada, the Canadian ministry principally responsible for implementing climate change policy, is also developing regulations on new and existing oil and gas sources with the goal of issuing a draft rule in early 2017.

In addition to work at the federal level, the Alberta government has announced that it will introduce legislation shortly that will require oil and gas operators to reduce methane emissions from oil and gas operations by 45 percent by 2025 by using the following approaches:

  1. Applying new emissions design standards to new Alberta facilities
  2. Improving measurement and reporting of methane emissions, as well as leak detection and repair requirements
  3. Developing a joint initiative on methane reduction and verification for existing facilities, and backstopping this with regulated standards to take effect in 2020 to ensure the 2025 target is met

This initiative is consistent with the March announcement by Canadian Prime Minister Justin Trudeau and President Obama that Canada and the US will work together to reduce methane emissions from the oil and gas sector.

With the North American Leaders Summit scheduled for June 29 in Ottawa, there may be additional developments related to climate change and energy cooperation between the US, Canada and Mexico.