Widely anticipated on both sides of the aisle, on May 12, 2016, the U.S. Environmental Protection Agency (“EPA”) released final regulations to curb emissions of methane and volatile organic compounds (“VOC”) from additional new, modified, and reconstructed sources in the oil and gas industry.  The Final Rule, titled,  ‘Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources’ (“Final Rule”), amends the new source performance standards (“NSPS”) for the oil and natural gas source category.  This action follows EPA’s publication of proposed regulations in August 2015, and is extremely significant because it is the first instance of such regulation of VOC and methane emissions by the EPA.  In addition to yesterday’s announcement, the EPA is completing final Control Techniques Guidelines for reducing VOC emissions from existing oil and gas sources in ozone nonattainment areas, which are expected to be released later this spring.

Background: The Climate Action Plan

Over the past few years, the Obama Administration has taken an aggressive stance on climate change regulation, and the Final Rule is the Administration’s most recent action to specifically address methane and short-lived climate pollutants.  In June 2013, the Administration released the Climate Action Plan which directed the EPA and other federal agencies to develop a comprehensive regulatory scheme to reduce methane emissions.  In March 2014, as a follow-up to the Climate Action Plan, the Obama Administration issued the Climate Action Plan: Strategy to Reduce Methane Emissions.

According to the Obama Administration, methane makes up approximately 9% of human-generated greenhouse gas emissions in the United States, and “[r]educing methane emissions is a powerful way to take action on climate change.”  Burning natural gas, or methane, releases carbon dioxide into the atmosphere, and unburned methane itself is also a potent greenhouse gas, 20-25 times more potent than carbon dioxide.  In the fight against climate change, methane is a low-hanging fruit because methane has an atmospheric life of 12 years, meaning that it is a short-lived climate pollutant.  Approximately one-third of the atmospheric methane emissions come from oil production and natural gas production, processing, transmission and storage.

The Final Rule

The Final Rule establishes methane and VOC standards for several emission sources not covered by the 2012 NSPS, including hydraulically fractured oil wells and fugitive emissions from well sites, and establishes methane standards for sources that were covered by the 2012 NSPS, such as hydraulically fractured gas wells.  In addition, the Final Rule requires owners and operators of oil and gas activities to find and repair leaks, or “fugitive emissions,” which are significant sources of methane and VOC pollution.  The EPA encourages the use of emerging technology in leak monitoring, by offering owners and operators the opportunity to use innovative, approved technologies to monitor leaks, such as camera detection and “Method 21,” which uses a portable VOC monitoring instrument.  Further, the Final Rule sets a fixed schedule for monitoring leaks, rather than a schedule that varies with performance: twice per year for all well sites.

Most importantly, the Final Rule will keep the Administration on track to achieve reduction of emissions from oil and gas operations by 40-45% from 2012 levels by 2025.  The EPA anticipates that the revised NSPS will result in a reduction of 510,000 short tons of methane emissions, 210,000 tons of VOC emissions, and 3,900 tons of hazardous air pollutants (“HAP”) by 2025.

The Final Rule is significant for oil and gas operators because it forecasts the next step in EPA’s regulation of methane: limiting the methane emissions from oil and gas operations.  In addition, compliance under the Final Rule will be costly for operators – more costly than the requirements under the draft rules issued in August 2015.  The EPA estimates that the Final Rule will cost companies approximately $530 million in 2025.  Further, operators may find the rules unnecessary and costly because many companies already prevent methane leakage by capturing it and selling it.

Regulation of Methane in California

The EPA’s Final Rule follows recently proposed rulemaking for methane emissions in California.  In April 2016, the California Air Resources Board (“ARB”) published a Proposed Short-Lived Climate Pollutant Reduction Strategy (“Strategy”) which will regulate three main pollutants: black carbon, fluorinated gases, and – the big target – methane.  While the Strategy is not aimed solely at oil and gas sources, ARB is also in the process of finalizing greenhouse gas (“GHG”) emission standards for certain new and existing oil and natural gas facilities.  The recent flurry of regulation will likely result in overlap of federal and state rules for oil and gas methane emissions.  The EPA states that the Final Rule will provide “greater certainty about Clean Air Act permitting requirements for the industry,” but operators in California should be mindful of the potential for two layers of regulations.

By Michael Mills, Allison Smith and Shannon Morrissey