EPA Proposes Excess Methane Fee Regulations for the Oil and Gas Industry | Practical Law

EPA Proposes Excess Methane Fee Regulations for the Oil and Gas Industry | Practical Law

The Environmental Protection Agency (EPA) published a proposed rule to implement the Inflation Reduction Act's (IRA) waste emissions charge (WEC) provisions for excess methane emissions from the oil and natural gas industry.

EPA Proposes Excess Methane Fee Regulations for the Oil and Gas Industry

Practical Law Legal Update w-041-9795 (Approx. 7 pages)

EPA Proposes Excess Methane Fee Regulations for the Oil and Gas Industry

by Practical Law Oil & Gas
Published on 17 Jan 2024USA (National/Federal)
The Environmental Protection Agency (EPA) published a proposed rule to implement the Inflation Reduction Act's (IRA) waste emissions charge (WEC) provisions for excess methane emissions from the oil and natural gas industry.
On January 12, 2024, the Environmental Protection Agency (EPA) announced a proposed new rule addressing excess methane emissions from the oil and gas industry (Waste Emissions Charge for Petroleum and Natural Gas Systems, 89 Fed. Reg. 5318 (Jan. 26, 2024)) (the Proposed Methane Fee Rule). The rule is intended to implement provisions in the Inflation Reduction Act (IRA) (Pub. L. 117-169, 136 Stat. 1818 (2022)) that assess fees for methane emissions from oil and gas facilities exceeding certain thresholds.
The EPA held a virtual public hearing on the proposed rule on February 12, 2024 and will be holding technical outreach webinars on the rule on February 20, 2024 and March 5, 2024. The EPA has extended the deadline to submit comments on the rule to March 26, 2024.

Background

Methane is a potent greenhouse gas (GHG) that significantly contributes to climate change, with much greater short-term warming effects than carbon dioxide (CO2). The oil and gas industry is the largest industrial emitter of methane in the US, causing approximately 30 percent of US methane emissions. Many upstream and midstream oil and gas operations emit methane, including oil and gas wells and associated equipment, natural gas processing plants, storage facilities, and compressor stations.
In recent years the federal government has taken several steps to reduce oil and gas methane emissions, including:

EPA Regulation of Oil and Gas Methane Emissions

In 2016, the EPA adopted New Source Performance Standards (NSPS) limiting methane emissions from certain oil and gas sources constructed, modified, and reconstructed after September 18, 2015 (40 C.F.R. Part 60 subpart OOOOa or Quad Oa).
In 2021 and 2022, the EPA proposed additional oil and gas methane regulations which were adopted by final rule in December 2023 (the 2023 Methane Rule). This rule adds:
  • 40 C.F.R. Part 60 subpart OOOOb (Quad Ob), which strengthens the methane NSPS for new, modified, and reconstructed oil and gas sources.
  • 40 C.F.R. Part 60 Subpart OOOOc (Quad Oc), which regulates emissions from existing oil and gas infrastructure pre-dating EPA's oil and gas methane regulations. Under Quad Oc, states must prepare implementation plans to regulate methane emissions from existing sources. State plans are due 24 months after publication of the 2023 Methane Rule, and existing sources are required to comply with the new emissions regulations 36 months after state plans are due. Therefore, emissions limitations for existing oil and gas sources may take as long as five years to come into effect.

IRA's Excess Methane Emissions Charge

The IRA amended the CAA by adding a new Section 136, which requires operators of oil and gas facilities with methane emissions exceeding certain levels to pay a fee for excess emissions (waste emissions charge or WEC) beginning in 2024 (42 U.S.C. § 7436). The IRA was enacted after the EPA's 2021 proposal of additional oil and gas methane regulations, but before the 2023 Methane Rule was adopted.
The IRA also includes over one billion dollars in financial and technical support for activities to report, monitor, and reduce methane emissions from the oil and gas industry.

WEC Applicability and Amounts

Subject to certain exemptions (see Exemptions), the WEC provisions apply to most types of upstream and midstream oil and gas facilities that both:
  • Report total GHG emissions exceeding 25,000 metric tons of CO2 equivalent (CO2e) per year from oil and gas sources under subpart W of the EPA's Greenhouse Gas Reporting Program (GHGRP).
  • Have methane emissions exceeding a specified volume (the waste emissions threshold) based on a percentage of natural gas or oil sold by or through the facility. These percentages vary depending on the type of facility. Under the IRA, emissions from facilities under common ownership and control may be netted to account for facility emissions levels that are beneath the thresholds.
Because the GHGRP aggregates oil and gas wells and other types of oil and gas equipment in broad geographic areas into a single facility for reporting purposes, operators often must add emissions from many sources to determine if the 25,000-metric-ton applicability threshold is met.
WECs are calculated based on each metric ton of methane emissions from a covered facility exceeding the waste emissions threshold. The charges are:
  • $900 per metric ton of excess emissions in the calendar year 2024.
  • $1,200 per metric ton in 2025.
  • $1,500 per metric ton in succeeding years.
Because the WEC provisions are slated to take effect starting in 2024, they provide an additional incentive for oil and gas operators to reduce their emissions, particularly operators of existing facilities that will not be required to comply with Quad Oc for several years.

Exemptions

The IRA's methane fee provisions contain exemptions for emissions from:
  • Wells plugged in the previous year in accordance with applicable closure requirements, as determined by the EPA.
  • Unreasonable delay in environmental permitting of gas gathering or transmission infrastructure needed for increased gas volumes resulting from methane emissions mitigation, as determined by the EPA.
  • Facilities:
    • that are subject to and in compliance with methane emissions limits for new and existing sources that have been approved and are in effect in all states with respect to the applicable facilities; and
    • whose compliance with those methane emissions limits will result in equivalent or greater emissions reductions than under the EPA's 2021 proposed methane regulations if the 2021 proposals had been finalized and implemented.
The IRA lacks key details concerning its implementation, especially regarding these exemptions.
For more information on the IRA's methane fee provisions and related EPA GHG reporting requirements, see Practice Note, Greenhouse Gas Reporting and Methane Fees for Oil and Gas Operations.

Proposed Methane Fee Implementation Rule

The Proposed Methane Fee Rule addresses many of the key implementation questions raised by the IRA. Among other provisions, the proposed rule includes:
Under the proposed rule, methane fees would be quantified and paid through a WEC filing submitted no later than March 31 of each year for methane emissions occurring in the prior calendar year. Therefore, as proposed, the initial WEC filing and fees would be due March 31, 2025. The WEC filing would include information relevant to calculating the fee, such as identification of facilities included in netting, eligibility for exemptions, and supporting information necessary for the EPA to verify eligibility for exemptions.

Calculating Emissions Thresholds and WECs

The Proposed Methane Fee Rule contains proposed equations and other details for determining WECs, including for calculating the waste emissions thresholds. The WECs would be calculated primarily using data reported by operators under subpart W of the GHGRP.
Notably, the IRA's waste emissions thresholds are stated in volumes of gas sent to sale from or through a facility (reported under the GHGRP in thousands of cubic feet), while the WECs are based on mass (in metric tons) of excess methane emissions. This feature of the IRA led some commentators to criticize the calculation of WECs as unworkable. To address this difference in units, the proposed rule multiplies the thresholds by the density of methane (0.0192 metric tons per thousand standard cubic feet) to convert volumes of gas to metric tons of methane.

Emissions Netting

Under the proposed rule, emissions netting among facilities under common ownership or control would only apply to oil and gas facilities that both:
  • Are required to file GHGRP reports.
  • Report emissions exceeding 25,000 metric tons of CO2e from oil and gas sources under subpart W of the GHGRP reporting rules.
Therefore, an operator could not net emissions from its smaller facilities that fall under the 25,000-metric-ton threshold against emissions from larger facilities at which the WEC provisions apply. The proposed rule also would not allow netting of emissions from facilities receiving the regulatory compliance exemption (see Exemption for Compliance with Emissions Limits).
The proposed rule would assess common ownership or control from the perspective of a facility owner or operator, as opposed to a facility's parent company, which could encompass a broader range of entities. The EPA noted that its proposed approach tracks the definition of common ownership or control used in the GHGRP regulations, but requested public comment on this issue.

Exemption for Unreasonable Permitting Delay

Under the proposed rule, the exemption for unreasonable delay in obtaining environmental permits would only apply:
  • To emissions from flaring of gas that would not have occurred absent the permitting delay.
  • Where neither the party seeking the WEC exemption nor the party seeking the environmental permit have contributed to the delay.
  • Once a specified number of months have passed after a submitted permit application is deemed complete by a permitting authority. The EPA proposed a range of 30 to 42 months for this period.

Exemption for Compliance with Emissions Limits

The proposed rule also addresses the scope and timing of the IRA's exemption for facilities in regulatory compliance with methane emissions limits. Under the rule, this exemption would not be available to facilities until all of the following occur:
  • Quad Ob emissions standards and Quad Oc state implementation plans are approved and in effect in all states with facilities subject to Quad Ob and Quad Oc.
  • The EPA determines the emissions standards and implementation plans in effect will result in emissions reductions equivalent to or greater than in the originally proposed 2021 rule.
It will take several years at a minimum for all these actions to occur, and possibly longer if some states fail to submit Quad Oc implantation plans or their plans are deemed insufficient by the EPA. Therefore, under the proposed rule, this exemption would not be available in the near term.

Practical Implications

The IRA's WEC provisions have already been subject to oil and gas industry criticism and unsuccessful Congressional attempts to repeal the methane fees. If adopted, the proposed rule would clarify many questions raised by the IRA. However, it is likely to draw significant public comment and criticism, especially from the oil and gas industry. In particular, the proposed rule's limits on exemptions are likely to be heavily criticized because they would make certain exemptions difficult or impossible to obtain in the near term.
In a fact sheet accompanying the proposed rule, the EPA stated that the methane fee program is specifically tailored to impose a charge on high-emitting oil and gas facilities to incentivize actions to reduce wasteful methane emissions while the EPA and the states work toward full implementation of the EPA's new methane emissions limits. If adopted in its present form, the rule would impact oil and gas operators with significant excess methane emissions that are unable to quickly reduce their emissions below the waste emissions thresholds. Because of the 25,000-metric-ton per year threshold for the fees to apply, the rule will not impact some small oil and gas operators.
The IRA's methane fee provisions and any related regulations are likely to face challenges in court by oil and gas operators and industry groups.
For more information on oil and gas methane regulation, see: