Week Ending May 20, 2016

EPA Unveils Final Methane Emission Standards for “New Sources” from Oil and Gas Industry As Part of Broad Move to Harness Greenhouse Gas Emissions

This Article Appears as Published in Foster Report No 3100
EPA Unveils Final Methane Emission Standards for “New Sources” from Oil and Gas Industry As Part of Broad Move to Harness Greenhouse Gas Emissions

On 5/12/16, the Environmental Protection Agency (EPA) issued its final rule promulgating both amendments and new standards to complement its current New Source Performance Standards (NSPS) addressing methane emissions from the oil and gas industry.  Citing Clean Air Act section 111 as legal authority, the issuance culminates a process that was launched last August 18 with its package of proposed new regulations.[1]  On another front – methane emissions from existing oil and gas industry production, processing, and transmission facilities – the EPA put out for public comment an “Information Collection Request” (ICR), the first step in gathering technical data on which to develop new regulations to shave methane escaping from those sources.

EPA highlighted a pair of changes it made in the proposed regulations, increasing stringency in light of public comments.  First, the final rule requires the monitoring of “low production wells” for leaks (rather than exempting them); second, it requires compressor stations to monitor for leaks four times per year rather than twice.  Owners and operators will have one year to conduct an “initial leaks monitoring survey.”[2]

EPA’s current initiative builds upon the NSPS it issued in 2012 aimed at VOC[3] emissions for natural gas wells.  At the time, EPA had noted that the emission controls required would also be effective in capturing methane as a “co-benefit”; however, in tune with the Administration’s recent, high-visibility emphasis on driving down greenhouse gas (GHG) emissions from a wide range of sources, EPA revised its NSPS for the oil and gas industry to expressly target methane.  Moreover, while the 2012 regulations did not cover fracked oil wells (which can also emit methane), the revamped 2016 rule fills that gap.

The expanded methane rule was also linked by EPA to the international Paris accord, struck in December 2015, which requires follow-up in the form of specific, nation-by-nation commitments to reduce GHG emissions.  The president’s goal for the oil and gas sector, set forth in his Climate Action Plan:  Strategy to Reduce Methane Emissions, is to cut methane emissions 40-45% by 2025, as compared with 2012 levels.

EPA’s initiative was cheered by environmentalist groups such as the Sierra Club, whose May 12 press release stated: “We applaud today’s announcement…, which will help protect communities around the country from dangerous methane pollution from future oil and gas development.  In taking this important first step, the EPA and the Obama Administration are rejecting the status quo that has allowed the oil and gas industry to recklessly pollute communities around the country for so long.”

In contrast, the American Petroleum Institute (API) expressed dismay; its press release warned that EPA’s new standards “could harm America’s shale energy revolution that has lowered U.S. carbon emissions, lowered costs for American consumers by more than $550 at the pump in 2015, and added $1337 in disposable income per household.”  Observing that the industry “is already leading the way on methane reductions,” API panned the new regulations as “unreasonable and overly burdensome,” imposing a “one-size fits all scheme” that could “actually stifle innovation and discourage investments in new technologies that could serve to further reduce emissions.”

The Natural Gas Supply Association’s May 12 press release likewise questioned the wisdom of the new rule, calling it a “misguided approach” since “voluntary methane emission reduction programs have proven effective.”  It noted that the industry has implemented an array of “market-driven improvements in equipment, technology, infrastructure, and best practices,” and, much like the API, worried that these types of industry initiatives could be “stifled” by EPA’s “cookie-cutter, inefficient, and costly approach.”  To buttress its point, the NGSA noted that the natural gas industry has cut methane emissions by 15% since 1990, even while production has gone up by over 35%.

Purpose.  In describing the lead-up to its final rule, EPA recounted an extensive process of interchange with the public.  Beginning with the issuance of technical “white papers” for expert review, EPA moved on to conducting a “structured engagement process” with states and stakeholders.  The proposed rule put out last fall solicited another round of public and stakeholder comment; the agency stated that it received some 900,000 comments.

The agency regards methane to be a major contributor to climate change and the oil and natural gas “source category” to be “one of the country’s largest industrial emitters of methane.”[4]  The final rule, noted EPA, not only imposes new standards on the industry to address GHGs and VOCs, but also tweaks the 2012 standards in ways related to “implementation.”  These “improvements,” EPA insisted, do not change any of the requirements in the existing regulations for operations and equipment.

Scope.  The NSPS for VOC and methane emissions applies to “certain new, modified, and reconstructed equipment, processes, and activities” throughout the oil and gas source category.  As noted, this round of expansion of the 2012 NSPS will explicitly impose limits on methane and extends its application to “additional equipment and activities in the oil and gas chain.”

The new standards cover:

  • Sources that are unregulated under the current (2012) NSPS (hydraulically fractured oil well completions; pneumatic pumps; and fugitive emissions from well sites and compressor stations);
  • Sources that are currently regulated for VOCs but not for GHGs (hydraulically fractured gas well completions and equipment leaks at natural gas processing plants);
  • Equipment that is used across the source category for which the current NSPS regulates emissions of VOC from only a “subset” (pneumatic controllers; centrifugal compressors; and reciprocating compressors).[5]

EPA offers an extensive table that summaries (1) the various “source categories” (i.e., equipment and processes) brought into the scope of the NSPS coverage; (2) the “best system of emission reduction” adopted for each such source, and (3) the associated performance standard for GHGs and VOCs.

Costs and Benefits.  EPA “carefully reviewed” stakeholder comments regarding the costs and benefits stemming from the rule.  According to the agency, the rule is “cost-effective” and its benefits “outweigh these costs.”  It adds that the targeted reductions in GHG /VOC emissions as a result of “direct regulation” will also bring about reductions in “hazardous air pollutant [HAP] emissions” as a “co-benefit.”

The agency evaluated emissions reductions, costs, and benefits for two individual years – 2020 and 2025.  However, it observed that the actual emission reductions, benefits, and costs that will have accrued by those two years (i.e., the sum of the costs and benefits from the years leading up to the selected years plus those years themselves) “would be potentially significantly greater” than its estimates.

With that preface, EPA asserted that in 2020 it expects the rule will prevent “significant new emissions” including 300,000 tons of methane, 150,000 tons of VOCs, and 1900 tons of HAP.  In 2025, it estimates emission reductions of 510,000 tons of methane, 210,000 tons of VOCs, and 3900 tons of HAP.

Since EPA views methane emissions as significantly more potent than CO2 as a GHG – by a factor of 25 over a 100-year period – it provides a carbon dioxide-equivalent.  By this measure, it estimates CO2- equivalent emissions reductions in 2020 of 6.9 million metric tons and in 2025, 11 million metric tons.  It then attempts to put a dollar figure on the “monetized climate benefits” from these emission reductions.   It estimates a $360 million savings in 2020, and a $690 million savings in 2025.[6]

In representing the costs to be incurred by the oil and gas industry from implementing these regulations, EPA estimates capital costs of $250 million in 2020 and $360 million in 2025.  When EPA incorporates the “total annualized engineering costs,” these estimates grow to $390 million in 2020 and $640 million in 2025.  The agency then computes a substantially lower net cost to industry by deducting cost savings attributable to selling captured methane that would otherwise have been lost in the atmosphere; the resulting net costs are estimated at $320 million and $530 million for 2020 and 2025 respectively, based on an estimated wellhead natural gas price of $4/Mcf.[7]

As a result of these calculations, EPA projects a net “climate benefit” from the final rule of $35 million in 2020 and $170 million in 2025, stated in 2012 dollars and employing a 3% discount rate.

EPA also provides a table indicating the types of industry participants that will be affected.[8]  The breadth of the rule is reflected in the list:

  • Crude petroleum and natural gas extraction;
  • Natural gas liquids extractions;
  • Natural gas distribution;
  • Pipeline distribution of crude oil;
  • Pipeline transportation of natural gas.

Effective Date.  The date by which owners and operators will have to begin complying with the emission reduction requirements is 180 days following the publication in the Federal Register (which has not yet occurred).  Following this six-month interval, owners/operators of fracked oil wells will have to employ the process EPA calls “green completion” to separate GHGs from the liquid hydrocarbons.

Information Collection Request for Existing Sources.   On May 12 EPA also put out for public comment its first draft of an ICR with an eventual goal of framing emission standards applicable to existing sources.  The effort can be traced back to EPA’s announcement on March 10 to undertake, in partnership with Canada, a joint initiative to reduce methane emissions from the oil and gas sector, including existing sources.  The agency claims that information that has only recently become available indicates that “methane emissions from this large and complex industry are much higher than previously understood.”[9]

The ICR is intended to educate EPA on how to get its arms around the issue.  The inquiry is designed to gather information on “how equipment and emissions controls are, or can be, configured; what installing those controls entails; and the associated costs.”  The emissions sources within EPA’s sights include “natural gas venting that occurs as part of existing process or maintenance activities, such as well and pipeline blowdowns, equipment malfunctions and flashing emissions from storage tanks.”

The industry will be “legally required” to answer the final ICR, the agency adds.

As another leg of this inquiry, EPA promises to issue a “Request for Information” in the near future that will solicit suggestions from industry operators, states, academic experts, and others on “innovative strategies to accurately and cost-effectively locate, measure and mitigate methane emissions.”

Other Final Rules.  The EPA issued two other final rules at the same time as it promulgated the final NSPS for new, modified, or reconstructed sources.

One of these is described as a clarification of permitting requirements – specifically, the determination of whether a source qualifies as a “major” source for permitting purposes.  This final “Source Determination Rule” establishes criteria for determining whether multiple assemblies of equipment or activities in the oil and gas industry should be aggregated into a single source.  Basically, the rule requires aggregation when the equipment/activities are located on the same site or sites that share equipment and are within ¼ mile of each other.

The second rule pertains to EPA’s Minor New Source Review Program applied to Indian country.  The agency states the oil and gas industry has “expanded rapidly in some areas of Indian country.”  The rule employs what EPA calls a “Federal Implementation Plan” (FIP) to make “the preconstruction permitting process more streamlined and efficient for this industry.”  The FIP will be used in lieu of the “site-specific minor New Source Review” and incorporates emissions limits and other requirements from eight federal air standards– including the final NSPS –to ensure air quality is protected,” the agency explained.

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[1]   80 Federal Register 56,593 (Sept. 18, 2015); FR No. 3064, pp 2-9.

[2]     In addition to specifying acceptable methodologies for leak monitoring, the regulations give covered entities the “opportunity” to request approval for “emerging, innovative technologies.”

[3]   The acronym stands for Volatile Organic Compounds.

[4]   EPA states that methane is the second “most prevalent” GHG caused by human activities in the U.S. and that the oil and gas industry is responsible for emitting about one-third those emissions.

[5]   EPA here notes an exception for “compressors located at well sites.”

[6]   EPA adds that these calculations do not attempt to put a money value on reductions in VOC and HAP emissions due to modeling difficulties; but it discusses these reductions as “unquantified benefits.”

[7]   EPA’s volume estimates for recovered gas are 16 Bcf in 2020 and 27 Bcf in 2025.

[8]   The list is a “guide for readers” and not intended to be “exhaustive.”

[9]   EPA cites its own Greenhouse Gas Reporting Program, industry organizations, and “research studies” by government, academic, and industry researchers as authority for this proposition.

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Copyright © 2016 by Concentric Energy Publications, Inc.  All rights reserved.

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