In a significant victory for the oil and gas industry, but important for any industry with multiple emissions sources at multiple locations, the United States Court of Appeals for the Sixth Circuit reined in an EPA determination that would have expanded the definition of an “adjacent or contiguous property” to such lengths that it could mean that entire gas systems could constitute a single source for permitting purposes.

In September 2009, the United States EPA (EPA) said that Summit Petroleum Corporation’s (Summit) natural gas sweetening plant and various sour gas production wells separately located within a 43-square-mile area constituted a single stationary source under the Clean Air Act Title V program.  EPA based its decision on the “functional relatedness” of the various sources to conclude that they were a single, major emissions source.  Summit filed an Initial Petition for Review in the Sixth Circuit on November 4, 2009.  Proceedings were stayed for additional discussions between EPA and Summit, but a second Petition for Review was filed on October 18, 2010, when discussions between Summit and EPA proved fruitless.

Abandoning its previous guidance document (the Wehrum Memorandum), EPA determined that the various Summit sources were “adjacent” for permitting purposes under the Clean Air Act.  The Wehrum Memorandum made clear that proximity is “the most informative factor in making a source determination involving oil and gas activities,” and Summit had relied on that analysis to argue that its facilities were separate sources.  However, in making its decision, EPA instead stated that it “determines whether two facilities are ‘adjacent’ based on a ‘common sense’ notion of a source and the functional interrelationship of the facilities, rather than simply on the physical distance between the facilities.”  Soon after making its initial determination, EPA issued a new guidance document, the McCarthy Memorandum, which determined that the Wehrum’s “emphasis on physical proximity in the determination of what constituted a stationary source, was no longer appropriate.” 

EPA said that it had never established a specific distance between entities at which they would no longer be considered adjacent.  Reiterating EPA’s historical consideration of factors such as the “nature of the relationship between the facilities” and the “degree of interdependence between them,” EPA reviewed how Summit’s plant, wells and flares worked together to produce a single product and determined that Summit had failed to demonstrate that the various emissions sources were not “truly interdependent.”  Based on that determination, EPA concluded that Summit’s facilities “should not be considered separate emissions sources.”

The Sixth Circuit first looked at both dictionary definitions and case law to determine that the term “adjacent” was not ambiguous and implies physical proximity.  Because it determined that the term was not ambiguous, the Court afforded no deference to EPA’s interpretation of the term.  Interestingly, the Court then assumed arguendo that the term was ambiguous and determined that EPA’s interpretation with respect to Summit’s facilities was “inconsistent with the regulatory history of EPA’s Title V plan and the EPA-issued guidance memorandums.”  The Court then vacated EPA’s determination that Summit’s facilities constituted a single major source and remanded the case back to EPA for a reassessment of Summit’s Title V source determination request “in light of the proper, plain-meaning application of the requirement that Summit’s activities be aggregated only if they are physically contiguous or adjacent properties.”