Background for EPA’s Methane Proposal
Methane regulation for the oil and gas industry has been a moving target over the past few years because of a combination of policy changes, court proceedings, and legislative action. As we discussed previously in more detail, EPA finalized New Source Performance Standards (“NSPS”) for VOCs and methane emissions from the oil and gas sector in 2016. The rule is commonly called “Quad Oa.” Before then, EPA had regulated only VOCs from the sector, under a 2012 rule known as “Quad O.” Quad O and Quad Oa apply only to sources that are new, modified, or reconstructed after the rules’ respective effective dates — they don’t apply to sources that existed before those dates.
The Trump administration made revisions to both Quad O and Quad Oa, including through the so-called Policy Rule, which made changes to both rules. The Policy Rule removed methane as a pollutant regulated under Quad Oa. It also removed the transportation and storage sectors from regulation under both rules. In June 2021, Congress and President Biden used the Congressional Review Act to disapprove the Policy Rule, essentially placing the Obama-era Quad O and Quad Oa regulations back in effect.
On November 15, 2021, the Biden EPA proposed a new approach to regulation in this sector. While no regulatory text was proposed, EPA requested public comment on: (i) a more stringent new source rule for VOCs and methane under a new Subpart OOOOb (“Quad Ob”); (ii) first-time emission guidelines (“EG”) under a new Subpart OOOOc (“Quad Oc”), which would apply to over one million existing sources; and (iii) a series of amendments to Quad O and Quad Oa that would resolve inconsistencies introduced by a 2020 Technical Rule and the consequences of the Congressional Review Act disapproval of the Policy Rule. We previously summarized the major parts of the proposal a few days later.
Our Top Ten List of Issues from the Comments
Stakeholders from across the spectrum — industry groups (representing both large and independent producers), states, and environmental groups — provided significant comment on the following ten issues.
10. EPA’s proposal will likely create impacts on small businesses with low-production facilities that are disproportionate to the methane reductions achieved.
A number of commenters expressed concern that EPA’s proposals will disproportionately impact small businesses. In particular, the Texas Commission on Environmental Quality (“TCEQ”) notes that low production operations are generally owned and operated by smaller drilling and production companies. Thus, TCEQ believes that the “lack of a ‘low producing’ or ‘small site’ exclusion from regulation under NSPS [Quad Ob] creates a significant regulatory burden considering the sheer quantity of oil and gas production sites within the State of Texas.” Similarly, the Independent Petroleum Association of America (“IPAA”) believes the proposal could impose such significant costs on small businesses that compliance will force them out of operation without meaningful environmental benefits.
Why it matters. According to our review, EPA’s regulatory impact analysis (“RIA”) concludes that up to 25 percent of small business producers will have compliance costs that exceed 3 percent of sales. For small businesses with an EPA-reported median revenue of only $1.4 million, a 3 percent or more “tax” on revenue is significant. EPA needs to improve its justification for the emission reductions this would achieve, or else run the risk of a small business-based challenge to any final rule.
9. EPA’s proposal to let community monitoring of emissions trigger corrective actions raises safety, trespass, and data validation concerns.
EPA requested comment on the concept that a facility would have to perform a root cause analysis and corrective actions when a third party informs the facility of the detection of a “large emission event.” IPAA cautions that such community monitoring raises safety, trespass, and data validation concerns. TCEQ echoes these safety concerns and adds that citizen investigators “would further complicate an already complicated enforcement challenge.” The American Petroleum Institute (“API”) doubts EPA has the legal authority to establish such a program but encourages EPA to more clearly explain “how the Agency will quality assure third-party monitoring, what monitoring levels are actionable, and the mechanism by which monitoring data are determined to be actionable.” Environmental groups support a community monitoring program and believe EPA has “broad authority” under sections 113 and 114 of the Clean Air Act for such a program.
Why it matters. We have seen numerous optical gas imaging (“OGI”) surveys conducted by members of the community. Based on what we have seen, many — if not most — of these images are of insufficient technical quality to support action by an enforcement agency, much less to trigger automatic corrective action by the facility. There could be some benefit from well-trained citizen scientists providing information to enforcement agencies. But the concept that any member of the public — regardless of training — could repeatedly pull a “fire alarm” at a facility needlessly creates opportunities for operational disruptions that are unnecessary given the heightened monitoring requirements that will be a part of any rule.
8. Widespread, mandatory optical gas imaging is probably unworkable for most sources in this sector.
EPA proposed using Appendix K to streamline use of OGI technology and as an alternative to Method 21 leak detection. However, industry commenters generally oppose EPA’s proposed application of Appendix K to upstream well sites, centralized production facilities, gathering and boosting compressor stations, and transmission compressor stations. API stated that it is “impractical for operators to implement the detailed and unnecessarily time-consuming requirements of Appendix K given the hundreds to thousands of well sites and compressor stations to monitor, the geographic dispersion of these facilities and the lack of on-site resources.” IPAA went even further, saying that Appendix K is “unworkable” and “would cause many small businesses to close because they cannot meet the financial, time, staffing, data storage or management obligations of the proposed requirements.”
Why it matters. Any OGI mandate — especially at older, existing facilities — would represent a dramatic expansion of the use of these emission screening devices. Certainly many operators use OGI for emission surveys at larger, newer facilities where production rates may warrant a “beyond compliance” approach to emission minimization. But widespread, mandatory use simply is not practical for the hundreds of thousands of existing well sites across the country.
7. Major oil and gas producing states say they need three or more years of lead time to implement any new rules.
States have asked EPA to provide them sufficient time to implement Quad Ob and Quad Oc. Regarding Quad Ob, TCEQ recommended that EPA delay implementation for at least three years because TCEQ does not currently have a minor source permitting pathway for methane emissions, such that a NSPS affected facility in Texas has no way to obtain a federally enforceable limit for methane. Thus, “[a]dopting the NSPS without allowing the agency time to develop a regulatory framework to create a permitting pathway for methane emissions would [cause] any oil and gas site that commences construction . . . after November 15, 2021 to be out of compliance with the NSPS as there would be no basis to create federally enforceable methane limits in Texas.” Regarding Quad Oc, the New Mexico Environment Department (“NMED”): (i) urged EPA to provide adequate time to collect data required for New Mexico’s state plan from thousands of designated facilities; and (ii) stated that a two-year compliance deadline may be unattainable or unrealistic “given the many thousands of existing designated facilities.”
Why it matters. Many states have delegated authority to administer the Clean Air Act within their borders. And unlike the NSPS program for new sources, where EPA directly sets the rules, for existing sources the states will have to submit plans based on EPA’s EG. States need enough lead time to adjust to EPA’s proposed requirements in order for these environmental programs to run smoothly.
6. EPA’s proposed definition of “modification” is probably unlawful.
EPA proposed three equipment or activity-specific modification definitions that some commenters contend go beyond the bounds of the Clean Air Act. For example, EPA proposed that a storage vessel or battery is modified when it “receives additional crude oil, condensate, intermediate hydrocarbons, or produced water throughput (from actions such as refracturing a well or adding a new well that sends these liquids to the tank battery).” “Modification” is defined in section 111 to mean “[i] any physical change in, or change in the method of operation of, a stationary source which [ii] increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.” API thus contended that EPA’s proposed definition runs afoul of the Clean Air Act because: (i) no physical or operational change occurs to the tank/battery itself (i.e., the change occurs at a different affected facility); and (ii) EPA has not demonstrated that an emission increase will actually occur at the tank/battery. TCEQ similarly expressed concern that at least one proposed definition of “modification” does not “line up with the legally defined definition.”
Why it matters. When an existing source is “modified” as defined by the regulation, it becomes subject to the NSPS requirements. A more expansive definition of “modification” means more sources will face additional regulation when an operational change is made at a facility.
5. Failure to include proposed regulatory text almost certainly disqualifies EPA’s publication as a “proposal” that triggers an applicability date under section 111(b).
In a departure from over 30 years of NSPS rulemaking practice, EPA did not publish proposed regulatory text for any of its three proposals. Industry groups contend that the proposal is thus not a proposed “regulation” under the Clean Air Act and therefore not sufficient to set the Quad Ob applicability date at November 15, 2021. API stated that the proposal fails to provide fair notice because, without regulatory text, “[a]ffected facilities cannot know with certainty what regulatory requirements EPA has proposed and are thus unable to reasonably plan to comply with the final rule.” IPAA maintained that there “is no statutory deadline forcing a truncated comment period.” Industry, states, and environmental groups alike stated that the lack of proposed rule text limits their ability to comment and caveated that their comments are subject to change once EPA actually proposes regulatory text.
Why it matters. Section 111 has a somewhat curious provision that sets the applicability date for performance standards at the date the standard was proposed, not finalized. Existing sources would be all those prior to the proposal date, while new sources would be all those after. With as many as 30,000 new wells estimated to be drilled each year, the dividing line between new and existing wells is consequential. In our view, EPA should set the proposal-applicability date as of the date it publishes proposed regulatory text.
4. States and environmental groups want even more storage vessels to fall under the new rules.
Quad O and Quad Oa now apply to storage vessels when potential VOC emissions from a single storage vessel exceed 6 tons per year (“tpy”). But Quad Ob would apply the 6 tpy VOC threshold to the entire tank battery. This will greatly expand the number of facilities to which the new and, eventually, the existing source rules apply. Yet environmental groups and states like New Mexico called for an even lower threshold. Environmental groups cited several examples of states that have already adopted or are preparing to adopt lower thresholds. For example, New Mexico is considering regulations that would set the threshold for control requirements at 2 tpy for new tanks, 3 tpy for tanks in multi-tank batteries, and 4 tpy for existing tanks in single tank batteries.
Why it matters. EPA’s proposal already expands the number of storage tank affected facilities that would fall under the new rules. The RIA estimates that the proposed approach will increase the number of storage tank affected facilities by a couple hundred per year over the current approach. That number strikes us as very low, considering that up to 30,000 wells are expected to be drilled each year, with many more than a couple hundred storage tank batteries installed each year. Regardless, of the actual number, New Mexico and environmental groups want the number to be even higher, which will push compliance costs onto to ever-smaller sources of methane with decreasing environmental returns on those compliance costs.
3. EPA’s failure to perform a significant contribution finding for methane emissions in this sector creates litigation risk for any new methane rule.
EPA’s proposal declined to perform a methane-specific significant contribution finding (“SCF”) for methane under Clean Air Act section 111(b)(1)(A). Instead, the proposal relied on the 2016 Quad Oa rule’s SCF, which found that methane emissions from domestic oil and natural gas production and natural gas processing and transmission and storage constitute 0.4 percent of global greenhouse gas emissions. The Trump EPA’s 2020 Policy Rule found the 2016 SCF invalid because, among other reasons, it failed to identify criteria by which EPA had determined a 0.4 percent contribution is significant. TCEQ emphasized that the 2016 SCF remains the subject of litigation, such that EPA’s proposal is “premature.” Environmental groups countered that EPA’s 2009 endangerment finding under section 202(a) for mobile source greenhouse gas emissions “fully satisfies any requirement for an endangerment determination under section 111, not only for the [Quad Oa] rule and [new Quad Ob and Quad Oc] proposals, but for any other listed source category for which EPA may set greenhouse gas standards going forward.”
Why it matters. In our view, this is an issue over which combat will take place in the courts at the intersection of the language of Clean Air Act section 111, the consequences of Congressional Review Act disapproval of the Policy Rule, and the pending (renewed) challenges to the Obama administration’s 2016 Quad Oa rule. The stakes are high — if EPA and environmental groups are wrong and EPA may not rely on the 2016 SCF or a 2009 endangerment finding related to greenhouse gases, any new final rules could be summarily vacated.
2. EPA’s use of interim social cost of methane values in the proposal’s regulatory impact analysis is highly controversial, and probably unlawful.
The controversial social cost of methane (“SC-CH4”) interim estimates are central to EPA’s RIA for its proposal. TCEQ asserted that the proposal’s reliance on the interim SC-CH4 is illegal given the metric “has not been available to the public, is not a final agency action subject to judicial review, and that by [EPA’s] own admission is subject to change before this proposal is final.” API agreed that the interim SC-CH4 estimates “present a flawed approach to monetizing the impacts of climate change.” By contrast, environmental groups strongly supported EPA’s reliance on the interim SC-CH4, including the estimate’s consideration of global — rather than merely domestic — costs of methane emissions.
Why it matters. EPA is putting a high value on the benefit of reducing methane, and as a result, the agency is able to conclude that the proposal has a net benefit despite the additional costs it will impose on the oil and gas industry. Specifically, the RIA uses this administration’s interim SC-CH4 to estimate climate benefits from the proposal. At the same time, the Department of Justice has argued aggressively in Louisiana v. Biden, 2:21-cv-0778 (W.D. La. filed Mar. 24, 2021), that the interim SC-CH4 is not subject to judicial review at this time. Using this metric therefore undermines proper administrative processes — on the one hand expressly using the interim SC-CH4 to justify a proposal while on the other seeking to prevent a timely, independent examination of the legitimacy of the values. Regardless, EPA’s use of the interim (or final) SC-CH4 will feature prominently in the challenges to any final rule.
1. EPA is aggressively supplanting state regulation of upstream oil and gas production facilities.
EPA stated 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 proposed a definition of legal and practical enforceability. API noted that this “issue has implications that go far beyond the narrow confines of the storage vessel standard” and cautioned that “[a]ddressing it in a piecemeal, rule-by-rule fashion will ultimately cause confusion and potential inconsistency across the relevant programs.” Meanwhile, environmental groups supported the factors EPA has proposed in its definition but encouraged EPA instead to define (and expand the number of affected) facilities based on actual uncontrolled emissions, rather than potential emissions.
Why it matters. We believe this might be one of the most important issues in the proposal. EPA has exhibited a growing skepticism of state rules limiting emissions in this sector. From enforcement cases that seek to set aside state emission limits as legally and practically unenforceable, to Title V petition responses that challenge state general permit conditions (e.g., permits by rule in Texas) as legally and practically unenforceable, EPA is asserting its predominance in regulating this sector. Some stakeholders will welcome this intervention; others will oppose it. But if EPA finalizes a rule that survives appeal, it will undoubtedly supplant state regulation of emissions from the sector.
