EPA Proposes Far-Reaching Methane Rules for the Oil and Gas Sector

Vinson & Elkins LLP

On November 2, 2021 the Biden Environmental Protection Agency (“EPA”) proposed three separate actions under the Clean Air Act that target new and existing air emission sources at oil and natural gas well sites, natural gas gathering and boosting compressor stations, natural gas processing plants, and transmission and storage facilities.

The first action proposes first-time emission guidelines to reduce methane emissions from almost 1 million existing oil and gas wells, almost 2,000 existing interstate natural gas compressor stations, and over 500 existing natural gas processing plants. The second action proposes performance standards for new, reconstructed, and modified sources in the oil and gas sector that are more stringent than similar Obama EPA rules. And the third action proposes to resolve inconsistencies between the two Obama-era rules that were created by the promulgation and then partial disapproval of a series of Trump EPA regulatory actions.

The proposal raises the following critically important issues, discussed in more detail below:

  • The proposal will dramatically expand the number of storage tank batteries that will trigger the 6 ton per year (“tpy”) applicability threshold for volatile organic compounds. The proposal does this by comparing battery-wide potential emissions instead of single storage vessel potential emissions against the 6 tpy threshold.
  • The proposal threatens to disregard “legally and practically enforceable” state emission limits that keep emissions from many storage vessels below the 6 tpy threshold. The proposal does this by proposing a definition for “legally and practically enforceable” that could be more stringent than the standard EPA uses to approve state implementation plan provisions.
  • The proposal prohibits flaring of associated gas from oil wells unless the operator shows that a gas sales line is not accessible.
  • The proposal for the first time subjects well liquids unloading operations to a zero emission limit.
  • The proposal opens the door to public suggestions to regulate abandoned wells, pigging operations, and tank truck loading operations. The proposal also floats as a concept a requirement that operators conduct root cause investigations and corrective actions on the basis of emission detections made by members of the public.
  • Overall, the proposal resets the baseline for methane reduction requirements in the sector so that environmental, social, and governance (“ESG”) policies that tout “beyond compliance” actions might have to be revised.

This publication summarizes: (1) the background for EPA’s November 2 proposal; (2) what EPA is proposing here; (3) what to expect next; and (4) some particularly important developments in the proposal.

What is the background for EPA’s action?

As we wrote in September 2021, EPA finalized in 2016 the New Source Performance Standards (“NSPS”) for volatile organic compounds (“VOCs”) and methane emissions from the oil and gas sector. This rule is commonly called the “Quad Oa” rule, which refers to its place at 40 C.F.R. Part 60, Subpart OOOOa. Before then, EPA had regulated only VOCs from the sector, and because VOCs and methane both come from natural gas leaks, the previous regulations finalized in 2012 (known as “Quad O”) had the effect of also limiting methane emissions.

Quad O and Quad Oa apply only to “affected sources” that are new, modified, or reconstructed after the rule’s effective dates. They do not apply to any of these sources that existed before those dates. As a result, these rules govern only a fraction of sites and equipment used in oil and gas operations.

In 2020 the Trump EPA issued the so-called Policy Rule, which made changes to both Quad O and Quad Oa. Perhaps the most significant change was to remove methane as a pollutant regulated under Quad Oa. Another important change removed the transportation and storage (midstream) sectors from regulation under both Quad O and Quad Oa. In a related Technical Rule, EPA revised certain requirements in Quad Oa to streamline implementation of the rule. The Policy Rule was short-lived. Congress and President Biden used the Congressional Review Act to disapprove the Policy Rule in June 2021. EPA maintains that the disapproval of the Policy Rule caused the original versions of Quad O and Quad Oa to spring immediately back into effect.

Up to that point, EPA had regulated only new oil and gas sources. But under Section 111(d) of the Clean Air Act, once EPA publishes emission limitations for a source category and the limitations relate to an air pollutant like methane that is not listed as a criteria air pollutant or a hazardous air pollutant, EPA must publish standards of performance for existing sources in that source category. In other words, once the 2016 rule for new oil and gas sources sprang back into effect, EPA had a mandatory duty to propose regulations for existing oil and gas sources, which establish guidelines the states must follow. The Biden administration has now done so with great fanfare.

However, EPA cannot simply publish a final rule for existing sources. In a process peculiar to Section 111(d), only states may promulgate final regulations for existing sources. In practice, EPA publishes “emission guidelines” that act as a state model rule. That is what EPA did on November 2, publishing the emission guidelines for methane in NSPS Subpart OOOOc (“Quad Oc”). The states will be required to use this model rule to promulgate a state regulation, subject to EPA approval. If EPA does not approve a state’s rule, then EPA may directly promulgate a federal rule to regulate the existing sources in that state. EPA expects to finalize the emission guidelines model rule at the end of 2022, but doesn’t expect the state planning and approval process to be completed before 2026. Until then, only the new source rules are effective.

At the same time, EPA also proposed a more stringent new source rule for VOCs and methane under NSPS Subpart OOOOb (“Quad Ob”). Unlike the existing source rule, Quad Ob will become effective once finalized. And because of the almost unprecedented interplay between the 2012 rule, the 2016 rule, the 2020 Policy Rule, the 2020 Technical Rule, and the 2021 disapproval, EPA has proposed a series of amendments to the 2012 and 2016 rules that will resolve a number of inconsistencies introduced by later developments.

What has EPA proposed here?

The Quad Ob new source proposal and the Quad Oc existing source proposal identify proposed GHG and VOC standards of performance for the crude oil and natural gas source category. The source category includes upstream and midstream facilities at oil and natural gas well sites, natural gas gathering and boosting compressor stations, natural gas processing plants, and transmission and storage facilities.

Any of these facilities might have one or more of eleven specific emission units or processes covered by the proposal. These emission units or processes are: (1) fugitive emissions from well sites and compressor stations; (2) storage vessels; (3) pneumatic controllers; (4) well liquids unloading operations; (5) reciprocating compressors; (6) centrifugal compressors; (7) pneumatic pumps; (8) equipment leaks at natural gas processing plants; (9) well completions; (10) oil wells with associated gas; and (11) sweetening units.

Owners or operators of these kinds of emission units or processes will have to comply with the specific standard of performance applicable to that unit or process. These standards of performance fall into five general types of control requirements. They are: (1) leak detection using optical gas imaging and subsequent repair requirements; (2) a requirement to reduce emissions by 95 percent through capture and control systems; (3) zero emission requirements; (4) operations and maintenance requirements, especially at compressors; and (5) so-called green well completion requirements.

Pages 34 through 43 of the proposal summarize the applicability of one of these five types of control requirements to each of the eleven kinds of units/processes.

There are some important developments in the proposals

Aside from dramatically expanding the scope of methane regulations in the oil and gas sector, the proposals also present the following important developments.

Storage vessels. Quad O and Quad Oa apply to storage vessels when potential VOC emissions from a single storage vessel exceed 6 tpy. A tank battery with eight storage vessels that each emit 5 tpy could emit 40 tpy and not be subject to the current rules. EPA is proposing to change that. Now, the 6 tpy VOC applicability threshold applies to an individual storage vessel for single vessel facilities and to the entire tank battery where storage vessels are linked together. For existing sources, the applicability threshold is 20 tpy of methane from the entire tank battery. This tank battery approach will most likely dramatically expand the number of facilities to which the new and, eventually, the existing source rules apply. If this proposal is adopted, a very large number of existing tank batteries will have to install vapor capture equipment and route those vapors to a control device, like a flare.

Calculating potential to emit. Many states have emission limits that apply to facilities in the oil and gas sector. EPA has recognized that those limits can reduce the potential to emit VOCs from storage vessels to below the 6 tpy applicability threshold if they are “legally and practically enforceable.” EPA states in the proposal that it believes that some state limits upon which facilities have relied to limit their potential to emit might not be legally and practically enforceable. Consequently, EPA is proposing a definition of legal and practical enforceability. This presents a real risk that well-established state Clean Air Act rules might not meet the requirements of this definition. Existing general permit rules in many oil-producing states might not meet the EPA’s new requirements. In those cases, the EPA would disregard the state limits and treat the storage vessels as legally uncontrolled for purposes of federal regulation. This proposal has the potential to create enormous friction between EPA and the states, and could result in many more facilities becoming subject to federal emission standards.

Federal flaring restrictions. Federal and state oil and gas resource agencies have imposed varying degrees of limitations on the flaring of natural gas associated with the production of oil. For the first time, EPA is proposing a nationwide standard that would prohibit associated gas flaring if a natural gas sales line is “accessible.” EPA has not yet defined “accessible.” If a gas sales line is not accessible, then the proposal requires that the gas be used beneficially on site, and failing that, combusted at a flare that meets the design, operating, monitoring, recordkeeping, and reporting requirements of the NSPS for flares at 40 C.F.R. § 60.18.

Additional units/processes. The EPA has not proposed regulations for, but seeks comment on, expanding the scope of the Quad Ob and Quad Oc rules to include abandoned wells. EPA is requesting comment on who should be responsible for previously abandoned wells, and is suggesting that post-closure financial responsibility for current operators might be acceptable. EPA also seeks public comment on whether to regulate pipeline pigging operations and tank truck loading operations. If proposed and finalized, the rules would greatly expand the scope of methane and VOC regulations.

Response to third-party emission detection. EPA has requested public comment on the concept that a facility would have to perform a root cause analysis and perform corrective actions when a third party informs the facility of the detection of a “large emission event.” The EPA seeks comment on the credibility of these detections and the action thresholds that might be proposed. With the growing availability of optical gas imaging cameras, their use in helicopter facility flyovers, and even satellite-based emission detection, the concept — if finalized — could have a significant impact.

Well liquids unloading operations. EPA proposes for the first time to regulate methane and VOC emissions resulting from the unloading of liquids that have accumulated in wells. The preamble notes that liquids unloading operations represent an episodic but still potentially “high-emitting source.” As proposed, the rule would impose a zero methane and VOC emissions standard for liquids unloading operations, unless it is technically infeasible or unsafe for operators of affected sources to do so. If zero emissions liquids unloading cannot be performed, operators of affected sources must develop and implement best management practices (“BMPs”) for reducing methane and VOC emissions from liquids unloading. Notably, EPA has not proposed liquids unloading standards for existing wells, but that is because the proposal takes the approach that each liquids unloading event is a “modification” under the Clean Air Act subjecting the affected facility to the proposed Quad Ob requirements for liquids unloading from new sources.

ESG implications. While not discussed in the rule, another key takeaway from the EPA’s proposed methane rules is the effect it will have on oil and gas companies’ ESG goals and reporting practices. Many oil and gas companies have attempted to position themselves as an ESG leader in the industry based in part on methane controls and leak detection and repair efforts that go beyond those requirements currently in effect. If finalized as proposed, EPA’s new methane rules would create a new baseline, and companies will have to re-evaluate the accuracy of prior statements and grade their efforts against the new rules or risk claims of greenwashing. In addition, oil and gas companies that have supported stricter controls of methane emissions will need to strategically approach the public notice and comment process to ensure that comments on the rule are aligned with prior ESG disclosures and goals.

What comes next?

In a departure from over 30 years of Section 111(d) administrative practice, EPA has not published proposed rule text for any of these three proposals. Nor has it yet posted the essential technical support documents or regulatory impact analysis necessary to understanding the proposals more fully. Instead, EPA expressed its intention to publish a “supplemental proposal” that would include proposed rule text.

In the meantime, EPA is soliciting public comment on what is effectively a preamble to a proposed rule, without an actual proposed rule. Those interested in commenting on EPA’s current proposals will have only 60 days to do so, starting when the proposals are published in the Federal Register. Public comments play an important role in shaping the final rule, and also serve as a key part of the administrative record, which forms the basis for any future court challenges to the proposals.

Presumably, EPA will solicit comments on the actual proposed rule text when it is issued, likely in early 2022. EPA aims to finalize the rules by the end of 2022. The new Quad Ob rule would become effective at that time, while the Quad Oc emission guidelines would then be processed by the states, with an estimated effective date sometime in 2026.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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