CHAPTER 7 COMING TO A SHALE BASIN NEAR YOU: EMERGING REGULATORY FRAMEWORKS FOR CONTROLLING METHANE EMISSIONS AND FLARING FROM OIL AND NATURAL GAS SOURCES

• Jurisdiction: United States

Development Issues in Major Shale Plays
(May 2014)
CHAPTER 7
COMING TO A SHALE BASIN NEAR YOU: EMERGING REGULATORY FRAMEWORKS FOR CONTROLLING METHANE EMISSIONS AND FLARING FROM OIL AND NATURAL GAS SOURCES¹
John R. Jacus
Partner
Eric Waeckerlin, Associate
Davis Graham & Stubbs LLP
Denver, Colorado

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JOHN R. JACUS is a partner in the Environmental Practice Group at Davis Graham & Stubbs LLP in Denver, and is currently the Practice Group Leader. He represents clients under all major federal and state environmental laws and regulatory programs, currently devoting much of his practice to Clean Air Act (CAA) matters. His air quality experience includes rulemaking and adjudicatory proceedings, environmental auditing and voluntary disclosure, permitting, compliance counseling and enforcement defense, and related appeals. Mr. Jacus's environmental practice has emphasized the unique legal and operational requirements applicable to the oil and gas, mining, and other natural resources industries, as well as for manufacturing and service industries. Mr. Jacus has represented clients in the favorable resolution of consent decrees and administrative orders under the CAA and state counterparts, as well as rulemaking to adopt NSR reforms and to implement SIP revisions, among other CAA administrative and judicial proceedings. Mr. Jacus speaks and writes frequently on air quality and other environmental issues, and is Chair of the 2014 Fall Meeting Program Committee for the American Bar Association's Section of Environment, Energy & Resources (SEER). John is also a Trustee of the Rocky Mountain Mineral Law Foundation (RMMLF), serving as the SEER Liaison to RMMLF. John has also served as Chair of the Environmental Law Section of the Colorado Bar Association (1996-1997), and twice served on the Executive Council of ABA SEER, among other bar leadership positions. He currently is Chair of the Energy & Environment Council of the Colorado Association of Commerce & Industry (CACI), and was inducted as a Fellow in the American College of Environmental Lawyers in October 2013. John obtained his B.A. in Environmental Policy from Stanford University (The Program in Human Biology) in 1979, and his J.D. from the University of Colorado, School of Law in 1984.

ERIC WAECKERLIN is a senior associate in the Environmental Practice Group at Davis Graham & Stubbs LLP in Denver. Prior to joining DGS, Eric clerked for the Honorable Sam E. Haddon in the United States District Court for the District of Montana and practiced environmental and natural resources law for five years in the Washington D.C. office of a national law firm. His practice focuses on regulatory and litigation counseling in the fields of environmental, natural resources, energy, and oil and gas law. He counsels clients on a number of complex environmental matters under the CAA, CWA, CERCLA, RCRA, TSCA, SDWA, as well as their state counterparts. Mr. Waeckerlin is a frequent writer and speaker on environmental and oil and gas issues, and CAA-related issues in particular. He currently serves as Vice Chair on the American Bar Association's Section of Environment, Energy & Resources (SEER) Climate Change, Sustainable Development, and Ecosystems and Superfund and Natural Resource Damages and Litigation Committees. Eric received his B.S. in Economics from the University of Wyoming in 1998, his M.S. in Resource Economics and Policy from Duke University in 2001, and his J.D. from the University of Montana in 2005.

I. INTRODUCTION

The U.S.-borne shale development revolution has brought about many remarkable things, some quite positive, others decidedly negative or a mix of good and bad, depending upon one's perspective. The recent dramatic U.S. reduction in GHG emissions is among the most positive and significant developments (disputes about methane leakage rates notwithstanding). Because shale development has occurred in many areas where oil and gas activity is new, or has not been conducted on a broad scale for many years, and in populated areas where people live and work, there is also a natural concern about the health and environmental impacts of these activities, in addition to their undisputed potential nuisance impacts of noise, traffic, vibration and odor. Such concerns about hydraulic fracturing more generally, and the impacts of the full gamut of unconventional shale oil and gas development activities on water resources and groundwater quality, as well as air quality and potential health impacts, are among the most negative.

Two of the most significant concerns that are emerging from the ongoing debate and dialogue about our U.S. shale development revolution are (1) the unprecedented level of awareness and concern about the practice of flaring "associated gas," and (2) the issue of fugitive methane emissions from the oil and gas sector and how to regulate them. These flaring and methane emissions concerns are now being much more aggressively examined than in the past, in the context of GHG reporting and earliest-stage federal and state regulation of GHGs (including methane) under the Clean Air Act and its state counterparts, since comprehensive federal legislation regulating GHG emissions has proven elusive. Moreover, both of these regulatory developments are grounded in statutory and case law not specific to the regulation of methane or other GHGs, and which require that proper exercise of the authority to regulate according to traditional measures of the costs and benefits of proposed regulations.

The problem of GHG regulation is very different from that of criteria air pollutant or hazardous air pollutant regulation. Whether recent and anticipated future efforts to regulate methane and reduce flaring discussed below may proceed successfully under authorities not created with the regulation of methane in mind, and for which traditional measures of the benefits of methane or CO2 regulation may not be fully satisfied, is the primary question raised herein. In order to properly frame that question, we review recent and ongoing developments related to flaring associated gas and the regulation of methane emissions from the oil and gas industry. Industry participants and facility operators would do well to follow these two issues closely in the coming months and years, as the implications of such regulation are potentially very significant, and applicable requirements affecting operations are likely to change rapidly.

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II. METHANE: A UNIQUE AIR REGULATORY CHALLENGE

A. Putting Methane Emissions from the Oil and Natural Gas Industry into Context

A quick glance at EPA's most recent GHG inventory reveals a discernable, positive trend in GHG emissions generally, and methane emissions more specifically. While total U.S. GHG emissions increased by 4.4% from 1990-2012, they decreased 3.3% from 2011 to 2012.² Because of this decrease, total U.S. GHG emissions are at their lowest level since 1994.³ None of these estimates is without critics or controversy.

Methane emissions comprise approximately 8.7% of all GHG emissions.⁴ Of this 8.7%, enteric formation (animal agriculture) is the largest anthropogenic source (approximately 25%), natural gas systems are the second largest anthropogenic source (approximately 23%), landfills are the third largest anthropogenic source (approximately 18%), and coal mining is the fourth largest anthropogenic source (approximately 10%). With respect to natural gas systems, field production (i.e., upstream oil and gas production) constitutes approximately 30.7% of methane emissions. Colorado's most recent numbers largely mirror the national emissions data. The oil and gas sector is the fifth largest contributor in the state at just under 6%, and far below the top three contributing sectors (electric power, transportation, and residential, commercial, and industrial fuel use), which comprise approximately 75% of all statewide GHG emissions.⁵

The leakage rate of methane from the oil and gas sector has been a hotly debated subject in recent years. Most recently, the Environmental Protection Agency estimated, albeit with some uncertainty, that fugitive methane emissions are about 1.5% of total natural gas production.⁶ Similarly, a study conducted by the University of Texas in conjunction with numerous industry operators and the Environmental Defense Fund ("EDF") found emission rates comparable to EPA's.⁷ Yet, others have estimated fugitive methane emission leakage rates to be much higher.⁸ Notwithstanding this

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disagreement, overall methane emissions from natural gas systems have decreased 16.9% since 1990.⁹ According to EPA, this decrease is "due to increased voluntary reductions from activities such as replacing high bleed pneumatic devices, regulatory reductions, and the increased use of plunger lifts for liquids unloading."¹⁰ More notably for the up-stream and mid-stream oil and gas sectors, EPA's most recent data indicates that methane emissions from field production decreased a remarkable 25.6 percent from 1990-2012, with a 40.4% decline just in the years 2006-2012 due to the increased control of plunger lifts as well as other voluntary reductions and green completions.¹¹ Meanwhile, natural gas production has increased approximately 26% since 2005.¹²

Much can be said about these numbers, including the ongoing uncertainty with measuring methane emissions inventories and projected emission leakage rate across several key parts of the natural gas production process.¹³ Yet, the macro-trend is compelling and tells a remarkable story. If nothing else, the decrease reflects a phenomenon unique to this sector: companies have an inherent economic incentive to capture as much methane for sale as possible. After-all, methane is this industry's tradable commodity. As EPA notes, much of the decrease in methane emissions from natural gas field production activities is due to "voluntary" efforts. Technological...