Advances in oil and gas production technology, such as horizontal drilling and hydraulic fracturing, have dramatically increased the production of oil and gas in the United States by unlocking shale gas and other resources that were previously difficult and expensive to recover. However, the growth of oil production has led to a commensurate rise in the production of associated natural gas, a portion of which is vented or flared rather than marketed. The Department of the Interior (DOI) announced on Friday, January 22, 2016, that the Bureau of Land Management (BLM) is proposing new regulations to reduce the amount of natural gas that is vented, flared or leaked during production activities on onshore federal and Indian leases.

The Mineral Leasing Act of 1920 (MLA) requires the BLM to ensure that lessees “use all reasonable precautions to prevent waste of oil or gas developed in the land . . .” 30 U.S.C. § 225. The existing regulations relating to venting, flaring and royalty-free use of gas were promulgated in 1979 in the Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases, Royalty or Compensation for Oil and Gas Lost (NTL-4A). According to data reported to the Office of Natural Resources Revenue (ONRR), federal and Indian onshore lessees and operators lost 375 billion cubic feet (Bcf) of natural gas between 2009 and 2014. A stated purpose of the proposed regulations is to attempt to bring the BLM’s requirements to minimize the waste of gas into accord with the advances in technology in oil and gas production that have occurred since its last requirements were published more than 30 years ago.

The BLM is not alone in its recent efforts to reduce the flaring and venting resulting from oil and gas production activities. The EPA recently proposed regulations to amend its 2012 Clean Air Act new source performance standards for certain oil and gas production activities that would set emissions standards for both methane and volatile organic compounds for certain equipment, processes and activities across the oil and natural gas source category. (See Stinson Leonard Street’s previous alert on this topic.) These proposed rules follow the Obama administration’s Climate Action Plan, which seeks to reduce greenhouse gas emissions, and Strategy for Reducing Methane Emissions which seeks to cut methane emissions from the oil and gas sector by 40 to 45 percent from 2012 levels by 2025.

Several states have also legislated in this area. For example, Colorado has adopted the nation’s first state-wide limit on emissions from fracking operations, which focuses on reducing emissions from venting, flaring and leaks in the oil and gas sector, and regulates methane and emissions along the entire natural gas chain. Similarly, North Dakota has adopted a comprehensive program to reduce flaring, which resulted in decreased flaring statewide by 23 percent between the industry’s historical high in February 2014 and October 2015.

The BLM’s proposed rule imposes requirements applicable to several points throughout the production process and royalties owed on federal and Indian leases. Below is a brief description of the proposed changes. Interested parties have approximately two months to provide comments on the proposed rule.

Proposed Changes Regarding Operations

Venting and flaring
The BLM proposes to prohibit venting, except in certain limited circumstances including emergencies, and limit the rate of routine flaring at development oil and gas wells (defined as a well drilled to produce oil or gas from an established field in which hydrocarbons have been discovered, and from which they are being produced at a profit or expected profit). The rule retains the current exemptions from gas capture requirements and royalties for gas flared in other situations, including gas lost in the normal course of well drilling and completion, well tests, emergencies, and gas flared from exploration or wildcat wells or delineation wells.

Typically, under the current NTL-4A requirements, operators must seek BLM approval to flare on a case-by-case basis. The BLM’s proposal limits the routine flaring of associated gas from development wells to 1,800 Mcf per month per well, averaged across all of the producing wells on a lease, but the BLM would still retain the authority to allow higher rates of flaring in specific circumstances where adhering to the proposed flaring limit would impose such a cost on the operator as to cause it to cease production. The BLM also proposes to allow a two-year renewable exemption from the flaring limit available only to certain existing leases located a significant distance from gas-processing facilities and flaring at a rate well above the proposed limit. The new flaring limits would be phased in over two years after the effective date of the rule. The rule would also require operators to submit gas capture plans, in which an operator would have to prepare a plan to minimize waste of associated gas from that well, with their Applications for Permits to Drill new wells.

Leaks
The proposed rule targets leaks at operations by initially requiring operators to conduct semi-annual inspections at their well sites and compressor locations. If the operator finds no more than two leaks at a facility for two consecutive inspections, the operator may conduct annual inspections at that facility. However, if the operator finds more than two leaks at that facility for two consecutive inspections, the operator must inspect for leaks quarterly. Identified leaks must be repaired as soon as practicable, but no later than 15 calendar days after discovery, and the operator must verify the effectiveness of that repair.

Pneumatic controllers and pumps
Pneumatic controllers and pumps emit gas as part of their normal operations. The BLM proposes to require operators to replace high-bleed pneumatic controllers (those with bleed rates of more than 6 scf/hour) with low- or no-bleed controllers within one year of the final rule’s effective date. The BLM also proposes to require operators to either replace pneumatic chemical injection or diaphragm pumps with zero-emissions pumps or route those pumps to a flare. The proposed rule contains certain pneumatic controller and pump exemptions.

Storage vessels
The proposed rulemaking also targets oil and gas storage vessels, which can contribute to the loss of natural gas through the release of vapors. New and modified vessels are subject to EPA emission limits, but the BLM proposes to require existing vessels on BLM-administered leases to meet those same EPA standards by requiring that operators route VOC emissions from existing storage vessels to combustion devises, continuous flares, or sales lines within six months of the rule’s effective date. The proposed rule contains certain exceptions for VOC emissions from existing storage vessels.

Liquids unloading
The removal or “unloading” of liquids that begin to accumulate at the bottom of a natural gas well can release natural gas. For wells drilled after the rule’s effective date, the BLM proposes to prohibit “purging,” or allowing the bottom-hole pressure to increase and then venting the well. For both new and existing wells, the BLM would require the operator to be on-site during well purging, unless the well has an automatic control system and to document liquids unloading events.

Drilling, completion, and post-completion operations
The BLM’s proposed rule aims to reduce gas lost during drilling, completion, and post-completion operations on both conventional and hydraulically fractured wells. During drilling and completion operations, the proposed rule would require operators to reduce emissions by flaring gas generated during drilling or completion, capture and sell that gas, use it in drilling or completions on the lease or inject it into the well. The EPA also currently requires new hydraulically fractured and refractured gas wells to capture or flare gas that would be released during drilling and completion operations and has announced it plans to extend those requirements to new hydraulically fractured and refractured oil wells.

Proposed Changes Affecting Royalties

The proposed rule would also affect when operators must pay royalties on gas flared from federal onshore oil and gas leases and the amount of such royalties. The proposed rule does not currently raise royalty rates, but it does give the BLM the authority to raise royalty rates for new competitive oil and gas leases.

Royalty-free use of production
Under current NTL-4A requirements, operators must apply to the BLM on a case-by-case basis for approval based on economic criteria to flare royalty free. As asserted purpose of the proposed rule is to clarify when flared or vented natural gas is subject to royalties. A loss of gas would be deemed “unavoidable,” and therefore royalty-free, when an operator has complied with all applicable requirements and taken prudent and reasonable steps to avoid waste, and the gas is lost from any of the following operations or sources, subject to some further limits: emergencies; well drilling, completion, and related operations; initial production tests and subsequent well tests; exploratory coalbed methane well dewatering; leaks; venting from pneumatic devices in the normal course of operations; evaporation from storage vessels; and downhole well maintenance and liquids unloading. Gas loss would also be unavoidable when gas is flared from a well that is not connected to gas capture infrastructure, provided the BLM has not otherwise deemed that loss of gas avoidable. Conversely, all loss of gas not specifically found unavoidable is considered “avoidable” and, therefore, subject to royalties.

Royalty provisions for new competitive leases
With regard to the royalty rates applicable to onshore oil and gas leases, the proposed rule purports to do three things: (1) make clear that the royalty rate on all existing leases would remain at the same rate prescribed in the lease or regulations applicable at the time of lease issuance; (2) specify the fixed statutory rate of 12.5 percent, located at 30 U.S.C. § 226(c)(1), for all non-competitive leases issued after the rule’s effective date; and (3) for competitive leases issued after the effective date of the rule, align the rule text with the corresponding MLA text, which would allow the BLM to set royalty rates at or above 12.5 percent.
The proposed rule can be found here, and the public will have 60 days to submit comments on the proposed rule once it is published in the Federal Register. Instructions for the submission of comments are available in the proposed rule.