No Distinction Between Smaller Operators and Large Petroleum Companies

Key Takeaways:
  • Regulations published in Jan. 2024 by the EPA would cap the amount of methane emissions allowed per well.
  • Smaller oil and natural gas producers are concerned the regulations do not distinguish between them and the giant petroleum companies.
  • Assuming there are no delays due to legal action, existing facilities may have approximately five years to comply with the methane emission reduction requirements, since enforcement will generally be accomplished through state-level plans.

 

New federal regulations aimed at reducing the amount of methane gas emitted during oil and gas extraction may impact smaller producers dramatically, potentially changing the way business is done in the Kansas oil and gas industry. 

The regulations published in Jan. 2024 by the Environmental Protection Agency would cap the amount of methane emissions allowed per well. These regulations were created to implement the Methane Emissions Reduction Program, a provision of the Inflation Reduction Act of 2022 that commits $1 billion in technical and financial assistance to the oil and gas industry to help achieve the targeted emissions savings.  

Through a coalition of organizations, including the Kansas Independent Oil and Gas Association and the National Stripper Well Association, which both represent smaller oil and gas producers, the industry is opposing the EPA’s regulations through lawsuits, administrative petitions and lobbying efforts. 

On April 30, 2024, KIOGA and 21 other oil and gas groups from across the U.S. filed a Petition for Review of the EPA Oil & Gas Methane Rules with the Court of Appeals for District of Columbia Circuit. The Independent Petroleum Association of America, et al v. EPA case has been consolidated with a previously filed lead case (State of Texas, et al v. EPA). Additionally, KIOGA is working on a request for reconsideration of the rule with EPA, which may be filed within weeks. 

What is Methane? 

Methane is a component of natural gas, which is a cheap and abundant source of energy that produces less carbon dioxide than other fossil fuels when burned. However, methane itself is a more potent greenhouse gas than carbon dioxide, and methane leaks from wells, pipelines or processing equipment can increase the greenhouse gas emissions of the natural gas sector. 

Methane is produced in one of two ways. Thermogenic methane, which is associated with natural gas reserves, is produced by the effects of heat and pressure on deeply buried remains of marine microorganisms. Biogenic methane is produced by microbes in the stomachs of cows, sheep, goats and other ruminant animals, and in manure, shallow coal and oil deposits and wetlands. 

Oil and gas production is responsible for 30% of all methane emissions in the U.S., according to the EPA. 

How Emission Reductions Will be Achieved 

The EPA’s final methane rule is aimed at achieving an 80% reduction in methane emissions from oil and natural gas extraction, through a variety of measures, including: 

  • Leak detection & repair: Periodic inspections of well sites and compressor stations for methane leaks are required. The frequency of these inspections varies based on the type of facility and survey method. Follow-up repairs and inspections are required on a prescribed timetable. 
  • Restrictions on flaring & venting of methane: Routine flaring of gas at most types of oil well sites will be fully phased out over time. Venting of methane must be eliminated or minimized during well liquids unloading, and process controllers (formerly referred to as pneumatic controllers) and pumps are generally required to meet a zero-emissions standard. 
  • Third-party monitoring of “super emitter” events: The Super-Emitter Response Program provides a process for third parties to monitor large methane releases and report them to EPA, which in turn can require owners or operators to investigate and address the releases and report the results to EPA. 

In response to comments from industry stakeholders, the EPA modified its proposed rule somewhat, such as including longer timelines for compliance with certain required equipment upgrades and work practice improvements, as well as the finalization of regulation of existing sources under state plans. Other provisions, however, including a near-total phase out on flaring at well sites and new regulations on storage vessels, may increase compliance burdens on the oil and gas industry as compared to earlier proposals. 

A Question of Scale 

Smaller oil and natural gas producers are concerned that the regulations do not distinguish between them and the giant petroleum companies. Small producers typically produce fewer than 15 barrels of crude per day, while the large multinational petroleum companies can produce hundreds of thousands of barrels per day and, thus, have a much more significant impact on the environment. 

In the U.S., independent producers, which are often smaller operators, produce approximately 90% of the nation’s natural gas, according to the Independent Petroleum Association of America (IPAA). Operating in 33 states and offshore, these companies employ an average of 12 people. 

Key Concerns 

Of particular concern to the smaller producers are questions such as how smaller operators will be regulated, how allowable methane emissions will be calculated, how the emissions will be captured and what kind of infrastructure may be required to achieve compliance. Moreover, what will the impact be on smaller producers, both financially and operationally? 

An estimate from the IPAA noted that the impact of an earlier proposed regulation – on which the current regulation is based – could lead to the shutdown of 300,000 of the nation’s 750,000 low-production wells. 

The EPA places the overall compliance costs to the oil and gas industry between $22 billion and $31 billion over the period of 2024 through 2038, or an average of roughly $1.5 billion to $2.2 billion per year industrywide.  

But a disproportionate share of that cost may fall on smaller producers. The EPA acknowledges that certain sectors of the oil and gas industry may experience more significant impacts than others, since many larger companies have been anticipating limits on methane for many years and may be more well positioned to comply. 

Smaller companies operating existing lower production wells are more likely to experience strong impacts, particularly those located in states that don’t already regulate methane emissions. Kansas has taken broader steps to address greenhouse gas emissions, but specific regulations targeting methane emissions from oil and gas wells are not explicitly outlined in the state’s emission reduction plan. 

Moreover, publication of individual state plans may be slowed by legal action that petroleum producing states and the industry are mounting against the methane emission regulations. Texas has already filed suit against the EPA, and other states are considering legal action, as well. 

Timeline 

Assuming there are no delays due to legal action, existing facilities may have approximately five years to comply with the methane emission reduction requirements, since enforcement will generally be accomplished through state-level plans. States have 24 months (from Jan. 2024) to submit their regulatory plans to the EPA for approval. Moreover, states may give existing facilities up to 36 months after submitting their plans to the EPA to bring their facilities in line with the new regulations. 

If you have questions about how the Methane Emissions Reduction Program regulations may affect your oil or gas extraction activities, contact an Adams Brown oil and gas accountant.