On February 8, 2016, the Bureau of Land Management ("BLM") published its proposed rule concerning Waste Prevention, Production Subject to Royalties, and Resource Conservation in the Federal Register (the "Proposed Rule" or "proposal"). See 81 Fed. Reg. 25, at 6616-6686, available here. While the Proposed Rule is more commonly referred to as the BLM's "Venting and Flaring Rule," the proposal contains several other requirements will likely have significant impacts on operations on federal and Indian onshore oil and gas leases.

Notably, the proposal follows numerous other regulations proposed by the Obama Administration during 2015—many of which will require costly updates to existing well equipment, increased production monitoring, and impose significant regulatory burdens on industry. The Administration's piecemeal regulatory update for the oil and gas industry is difficult to analyze on a cumulative basis, especially when these proposals are being presented on a staggered basis. On March 10, 2016, the Environmental Protection Agency ("EPA") announced that it plans on instituting its own Information Collection Request concerning methane emissions from existing oil and gas wells. This comes at the tail end of the comment period on the BLM's Venting and Flaring Rule, and only shortly after the Administration issued proposed rules to update Onshore Orders 3, 4 and 5 and the EPA's regulation of methane emissions from newly drilled wells.

The comment period on the BLM's Proposed Rule has now expired. However, the agency may still take comments submitted after the deadline date into consideration. In addition, several members of Congress have taken an interest in BLM's proposal. Eleven United States Senators urged the agency for a 30-60 day extension to the comment period for the Rule, and on April 14, 2016, the U.S. Senate Energy Natural Resources Subcommittee on Public Lands, Forests and Mining held a hearing concerning the Proposed Rule.

The BLM's Proposals to Regulate Venting and Flaring

In regards to venting and flaring, the BLM's Proposed Rule seeks to:

  1. Require operators to phase in, over a period of three years, a flaring limit of an average of 1,800 Mcf/month/well. The BLM states that operators could comply with these limits by installing new compressors to increase pipeline capacity, or by connecting wells to existing infrastructure through gathering lines. Alternatively, operators can purchase and install alternative on-site capture technologies or temporarily slow production to minimize losses.
  2. Prohibit operators from venting gas in most situations.
  3. Require operators to replace any "high bleed" pneumatic controllers on the lease with "low bleed" controllers within one year.
  4. Require many operators to replace pneumatic pumps with solar pumps or alternatively route the pumps to flare.
  5. Require operators to capture or flare gas that currently vents from storage tanks whenever the tank vents more than six tons of volatile organic compounds/year.
  6. Prohibit operators of new wells from purging gas emissions into the atmosphere, and requiring operators to use best management practices when unloading liquids from existing wells.
  7. Require operators to capture, flare, use, or re-inject gas released during well completions.

While some of the above requirements are not as controversial as others, many of the requirements will impose substantial costs on industry members. Furthermore, not all of these requirements are feasible. For example, alternative on-site capture technologies may not be reliable or available to operators. Similarly, a 1,800 Mcf/month/well flare limit may not be realistic in every basin.

Additional Requirements that are Tangential to Venting and Flaring

The Proposed Rule additionally seeks to impose several other requirements on operators. First, the BLM proposes to require operators to prepare and submit a pre-drilling plan for gas capture which must be submitted along with the operator's Application for Permit to Drill ("APD"). Oddly, the regulations specify that this plan must contain many items of information which have nothing to do with venting and flaring. For example, the Proposed Rule asks operators to provide a gas pipeline system location map which contains the location and name of the operator of each gas pipeline within 20 miles of the proposed well. See § 3162.3-1(j)(3)(ii). The Proposal also requests the name and location of the gas processing plant(s) closest to the proposed well(s), and the intended destination processing plant, and the maximum current daily capacity, current throughput, and anticipated daily capacity of the gas pipeline to which the operator plans to connect, and any plans known to the operator for expansion of pipeline capacity for the area that includes the proposed well. See § 3162.3-1(j)(3)(i) and (j)(4). It is unclear why this information is necessary or even pertinent, or whether pipelines would be required to provide this information to operators under the rule. Other requirements seek to have operators provide their own confidential and proprietary information as a part of this pre-drilling plan. For example, the proposal would require that operators include a description of anticipated production from each well which includes the expected oil and gas production rates and duration, the expected production decline curve and the expected Btu value. See § 3162.3-1(j)(5).

Second, the BLM proposes to require operators to inspect all wells for natural gas leaks by using infrared cameras. Smaller operators (of fewer than 500 wells) could alternatively conduct these inspections using portable analyzers assisted by audio, visual and olfactory inspection. These inspections will impose additional burdens on industry, with minimal benefits. The inspections must initially be conducted semi-annually. However, if three or more leaks are discovered during two consecutive inspections at wellhead equipment, "facilities," or compressors, the operator must inspect that equipment quarterly for at least two subsequent inspections. All leaks that are detected must be fixed within 15 calendar days after discovery and the repairs must be verified and documented within 15 days using infrared cameras (or other approved leak detection equipment for smaller operators).

Third, the BLM proposes to include regulations which would allow increased royalty rates for new leases. These regulations are (at best) tangentially related to venting and flaring, and should have been proposed in a separate rulemaking. Indeed, the BLM notes in its own commentary to the Proposed Rule that it previously proposed changes to federal royalties in an Advance Notice of Proposed Rulemaking on April of 2015 and that it received 82,074 comments to that proposal. Rather than moving forward with a separate proposal that already has been the subject of industry focus, it appears that BLM has instead buried proposed changes to its royalty regulations within the proposed Venting and Flaring Rule.

The BLM states in the Proposed Rule that it currently has no plans to modify the 12.5% royalty rates. However, the proposal provides absolutely no guidance concerning how royalty rates could or will be increased in the future. Instead, BLM requests comments from industry concerning how it should increase future royalty rates. In addition, BLM requests comments concerning the use of a fluctuating royalty rate for gas that is flared. It is unclear how this would work. Without guidance from the agency, it is difficult for industry members to properly evaluate and respond to these requests.

Comments Submitted by Industry Members on the Proposal

Early on in the comment period, several parties submitted substantive comments to the Proposal. These comments mentioned the following issues:

  1. The BLM's failure to study the cumulative impact of its numerous proposed regulations on the oil and gas industry. In fact, eleven United States Senators have commented that they would like more time to understand how the Proposed Rule related to the EPA's proposed methane rule and the BLM's proposed updates to Onshore Orders 3, 4, and 5.
  2. The fact that the natural gas price relied on by the BLM for its economic analysis in the Proposed Rule is $4/Mcf. That price is based on 2014 price levels and unrealistic in today's market. BLM fails to articulate in the Proposed Rule how or why a $4/Mcf price should be utilized after there have been remarkable amounts of natural gas more recently discovered and that have come on line in the United States which have affected natural gas prices.
  3. The estimated costs of new equipment, reporting, and inspection requirements in comparison to the royalty benefits reported by the BLM. Notably, API recently commented that the BLM has incorrectly valued the federal government's royalty benefit by failing to properly calculate royalties under the existing federal gas royalty valuation regulations. API indicated that BLM may have overstated its purported royalty benefit by 4 times or more.
  4. Finally, many commenters note BLM's slow review of existing APDs and right-of-way applications. As a result, industry members are concerned about needing to obtain yet another approval from the BLM prior to drilling.

In addition, comments from industry members and testimony given at the Senate Subcommittee meeting questioned BLM's statutory authority to regulate methane emissions and highlight how the proposed rule is duplicative of the EPA's methane rule, and the EPA's recently announced goal to cut methane emissions from existing oil and gas sources. Due to public interest in both the EPA's and the BLM's proposals, there will likely be future legal challenges to one or both of these regulations.

In addition, midstream companies may want to pay special attention to the types of information the BLM is asking operators to provide in their pre-drilling plans. To the extent midstream companies deem the information confidential and proprietary, they may want to consider submitting comments to the proposal. This rule is notably being proposed shortly after the BLM sought to impose significant record keeping and reporting burdens on midstream companies in its proposals to update Onshore Orders 3, 4 and 5.