The determination of whether air emissions from oil and gas operations are primarily regulated under state or federal permitting programs depends on whether the emissions from the “source” exceed one or more federal thresholds. If a threshold is exceeded, the facility qualifies as a “major source” and is subject to federal New Source Review, Title V Permitting, or both. The permitting requirements for these federal programs generally demand more resources and time to complete, making it important for regulated facilities to understand which programs will apply. Given the significant increase in exploration and production in shale formations across the country, whether these activities are federally regulated major sources or state-regulated minor sources is of significant interest.

Clean Air Act regulations define a source as “any building, structure, facility, or installation which emits or may emit a regulated pollutant.”[1] However, several processes, buildings or other activities may constitute a single, aggregated source if they (1) are under common control; (2) are “located on one or more contiguous or adjacent properties;” and (3) are in the same two-digit Standard Industrial Classification group.[2] For oil and gas operations owned by the same company, aggregation depends on an analysis of the “contiguous or adjacent” factor.

The Environmental Protection Agency’s stated position is that the aggregation analysis is a case-by-case determination. Neither “contiguous” nor “adjacent” is defined in the Clean Air Act or its regulations, and EPA withdrew in 2009 a guidance document that provided some clarity by stating that proximity would require physical adjacency or have a separation of at most a short distance.[3] In its place, EPA has indicated that “functional interdependence” would replace physical proximity in its aggregation analysis, leading to uncertainty for operators. However, recent decisions of both the Sixth Circuit and the Pennsylvania Department of Environmental Protection have declined to accept this position.

In Summit Petroleum Corp. v. United States Environmental Protection Agency, EPA made a determination to aggregate a Summit sweetening plant with roughly one hundred of its production wells, some as many as eight miles distant from the plant. None of the production wells actually abutted the sweetening plant, and none of the individual processes emitted enough pollutants to trigger the federal thresholds. Disagreeing with EPA’s determination, Summit petitioned for judicial review. In a concise opinion, the United States Court of Appeals for the Sixth Circuit agreed with Summit, rejecting EPA’s position and concluding that “both the dictionary definition and etymological history of the term ‘adjacent’, as well as applicable case law, support Summit’s position.” The court was particularly persuaded by amicus American Petroleum Institute that EPA’s purported functionality test was “inherently unreasonable,” noting that the time and cost required to obtain EPA’s decision was burdensome. Ultimately, the court vacated and remanded the determination back to EPA to apply the “proper, plain meaning” criterion of physical adjacency.

Even more recently, the Pennsylvania Department of Environmental Protection issued final guidance with additional clarity on the aggregation question.[4] Like the Sixth Circuit, PaDEP stated that physical distance between operations should be dispositive in analyzing whether the “contiguous or adjacent” factor was satisfied.[5] “Because of the nature of the oil and gas extraction industry, … well production pads and compressor stations are dispersed across a wide area that could encompass many square miles …. Such expansive operations would not generally comport with the ‘common sense notion of a plant.’”[6] In further simplification, PaDEP explicitly identified a distance of one-quarter mile as an indication that activities were contiguous or adjacent, noting that other states have utilized a similar distance.[7] While the agency also noted that properties further situated might still be deemed contiguous or adjacent on a case-by-case basis, the use of the one-quarter mile guidepost is expected to import more certainty for operators.

Although neither the Sixth Circuit’s decision in Summit Petroleum nor the PaDEP guidance has legal effect nationwide, both provide a practical roadmap for courts and state agencies to import a similar degree of practicality. Operators in other parts of the country will undoubtedly be watching with interest to see if this roadmap proves influential.