Regulations Could be a Boon for Pipeline Industry

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S WeilerMethane Gases, Clean Power Plan Hot Topics in an Election Year

During the last year, the Obama administration has proposed a number of regulatory initiatives that make it abundantly clear it wants to reduce greenhouse gas (GHG) emissions. The administration began with the Environmental Protection Agency’s (EPA) Clean Power Plan, a regulatory rule that seeks to reduce carbon dioxide emissions in 2030 by 32 percent from 2005 levels. The administration is also hammering home GHG reduction with a number of other initiatives that will impact the oil and gas pipeline industry.

You probably know that natural gas is principally composed of methane. But most of us don’t know that methane is a GHG, and that EPA considers the oil and natural gas industry to be one of the country’s largest emitters of methane. According to the EPA, methane is 80 times more powerful than carbon dioxide in trapping heat in the atmosphere. In the United States, methane emissions make up almost 10 percent of all greenhouse gas emitted because of human activity. [It’s unclear whether EPA includes emissions from the cattle and dairy industries in this estimate.] And its impact on climate change is estimated to be more than 20 times greater than carbon dioxide over a 100-year period. Against this backdrop, the administration is focused on reducing methane emissions, in general, and methane emissions from the oil and gas industry, in particular. As you might expect, the administration’s favorite hammer is the EPA. Interestingly, there’s a new hammer in the toolbox — the Bureau of Land Management (BLM), which recently issued a proposed rule that would likely reduce methane emissions.

EPA and BLM

Last summer, EPA proposed a voluntary methane emission reduction program (using capture and other controls) for the oil and gas industry. It followed that up in the fall by issuing a Notice of Proposed Rulemaking entitled “Oil and Natural Gas Sector: Emission Standards for New and Modified Sources.” EPA proposes to subject methane to some of the regulations involving the already regulated emission of volatile organic compounds (VOCs), that is, pollutants that easily become vapors or gases (such as, carbon, hydrogen, oxygen, fluorine, chlorine, bromine, sulfur or nitrogen). EPA estimates that the proposed rule will cost the industry between $150 million to $170 million, but produce climate benefits of approximately $200 million by 2020.

Specifically, EPA is proposing to regulate methane emissions from compressors, pneumatic controllers and pumps, and hydraulically fractured oil well completions.

In February, BLM followed with proposed regulations to reduce waste of natural gas on federal and Indian lands. Specifically, BLM proposes to prohibit venting, except in a few limited circumstances, limit the rate of routine flaring during the development of oil wells, require operators to detect and repair leaks, and mandate reductions in venting from pneumatic controllers and pumps, storage vessels, and activities to unload liquids from a well, and well drilling, completion and testing. Sound familiar?

BLM recognizes that EPA (as well as some oil and gas producing states) is attempting to reduce flared and vented gas. But BLM contends it has a separate and independent responsibility to act. First, BLM is legally responsible as the federal lands manager to oversee oil and gas production. Second, BLM is concerned with waste of natural gas, while EPA is concerned with methane pollution.

Federal onshore production accounts for about 10 percent of the nation’s gas supply, that is, more than $27 billion in revenues, which accounts for approximately $3 billion in royalties. The proposed rule builds on the 12.5 percent royalty rate based on the value of production removed or sold from a lease. Currently, operators must apply to the BLM on a case-by-case basis for approval to flare royalty-free based on economic criteria. The proposed rule would reduce the need for such applications by clarifying when flared gas is subject to royalties.

Specifically, the rule proposes to limit routine flaring of associated gas from development wells to 1.8 Billion cubic feet (Bcf) per month per well, averaged across all of the producing wells on a lease. BLM estimates that this limit would reduce flaring by up to 74 percent, although it admits that there is more than a little uncertainty regarding the estimate. BLM would retain the ability, on a case-by-case basis, to grant an exception to the proposed limit, if the compliance costs would cause the operator to shut in production. That said, if the BLM’s proposed rule is implemented, there will be a need for more pipelines and associated facilities to gather and transport more natural gas.

Supreme Court Stay

By far and away, the big news from Washington is that the Supreme Court halted implementation of the Clean Power Plan until litigation is concluded. To recap, last summer EPA issued the Clean Power Plan under a seldom-used provision of the Clean Air Act and provided each state with a goal for reducing (existing) power plant emissions of Carbon dioxide. States are required by September 2016 to submit plans explaining how they would meet their goals, begin reducing Carbon dioxide emissions by 2022, and keep reducing until and through 2030. By 2030, EPA projects that power plant emissions of Carbon dioxide should be 32 percent lower than 2005.

The Clean Power Plan has produced intense feelings, with slightly more than half the states opposing and slightly less than half the states supporting it. The opponents immediately sought judicial review by the DC Circuit and asked the court to stay the effectiveness of the rule until issuance of a ruling. After the appellate court denied the request in December 2015, a large group of states and state agencies requested the Supreme Court to stay the Clean Power Plan. On Feb. 9, the high court granted a stay until the it issues its decision on appeal.

What’s this mean? First, the appeal is still pending at the DC Circuit, which will hear oral arguments on June 2. This is a complex case, which under normal circumstances could easily take a year to resolve. However, many predict that the DC Circuit will uphold EPA’s rule. Given that the rule is stayed until the Supreme Court issues an opinion, the DC Circuit judges will be motivated to issue their decision quickly to allow the Supreme Court to begin deliberation sooner — because no matter who wins, the DC Circuit’s opinion will be appealed.

Second, the Supreme Court approved the stay request by a 5-4 vote. That means a majority of the court believed that the Clean Power Plan may not pass judicial muster. But a few days after the stay was issued, Supreme Court Justice Antonin Scalia died. Until another justice is nominated and confirmed, the Supreme Court will likely split 4-4 on any appeal of the Clean Power Plan. The effect of such a vote would affirm the lower court’s decision. Unless something changes, expect the DC Circuit to issue an opinion upholding the rule, and the Supreme Court’s allowing the DC Circuit opinion to stand.

Third, in the meantime, EPA is encouraging states to continue working towards development of implementation plans. About 20 states that support the Clean Power Plan will voluntarily continue working with EPA. However, 18 states that oppose the Clean Power Plan have halted compliance plan efforts. Indeed, Wyoming recently passed legislation that would bar state regulators from devoting any funds to compliance with the Clean Power Plan. Similar legislation is pending in other states.

Some utilities in states that oppose the Clean Power Plan are telling their regulators to continue pressing forward with compliance. Those utilities apparently recognize that the goals of EPA’s initiative — reducing coal-fired generation, while increasing renewable and gas-fired generation — though rife with legal problems and implementation hurdles may be not only inevitable, but also cost-effective, especially with low-priced natural gas supplies, lower-cost renewable generation and technological advances in energy transmission and storage.

The Bottom Line

The scope and breadth of methane emissions will likely increase under the current administration and any subsequent Democratic administration; that regulation, however, should require more natural gas facilities to be constructed. On a related matter, look for more confusion and increased tension as the Clean Power Plan winds its way through the appellate process and the politicians debate who and when a successor to Justice Scalia should be nominated and confirmed. In the long term, smart money says that the DC Circuit (and the Supreme Court, unless a conservative justice is appointed) will uphold the Clean Power Plan, which will ultimately result in more natural gas-fired electric generation (to replace coal-fired facilities and balance renewable resources) and, in turn, more natural gas pipeline construction.

Washington Watch is a bimonthly report on the oil and gas pipeline regulatory landscape by Steve Weiler, a partner in the Washington, D.C., office of Stinson Leonard Street LLP. Contact him at steve.weiler@stinsonleonard.com.

 

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