You’ve probably heard a lot recently about methane regulation, and with good reason. Reducing methane emissions from the oil and gas sector is one of the most achievable and impactful ways to mitigate global greenhouse gas emissions in the short term. The industry has demonstrated that it can be accomplished while also meeting the growing global demand for affordable and reliable oil and natural gas. Which is why for years now American oil and natural gas producers have been leading the charge to drive down methane from their operations. Today the US not only leads the world in responsible production, but we also have one of the lowest methane emissions intensities in the world, which is a ratio of methane emitted relative to natural gas production or throughput. The International Energy Administration (IEA) has reported that only five other producing countries have a lower methane intensity – but the US produces more than all five of these countries combined. Having campaigned on a platform of climate change, the Biden administration has from day one pursued efforts to get in on the methane reduction action through an all-of-government approach. These efforts include an aggressive suite of major regulations recently finalized, proposed, or soon to-be proposed targeting American energy producers—a tangled web of rules and requirements that have the potential for significant unintended consequences. Below are brief explanations of three of these significant federal methane policies and their implications on the American oil and natural gas industry.
EPA Methane Rule, or OOOO b/c:
What is the Methane Rule? Originally noticed in draft back in November 2021, the Biden administration released a final Methane Rule on December 2, 2023. Officially, the new rule updates EPA’s New Source Performance Standards to dramatically expand the federal regulatory standards for monitoring and controlling methane and other emissions from new sources in the production sector. It also creates a first of its kind set of Emissions Guidelines, which directs states to implement near identical requirements on existing sources within their borders. Overall, it seeks to further reduce methane emissions from the oil and gas industry through regulation and enforcement. The final rule did meaningfully incorporate feedback from industry in many areas where there were legal vulnerabilities and critical need for practical improvements. However, a number of significant flaws persist in the final regulatory text which are likely to increase production costs, burdens, and uncertainties.
Among other prescriptive requirements this new methane rule requires new facilities to use only zero-emitting pneumatics, and over the next few years requires that existing facilities meet the same standard in most cases. This sets the federal standard in apparent conflict with recently erected state programs like those in Colorado and New Mexico who have more workable definitions, which means facilities recently constructed or updated to meet those new state rules will likely have to be overhauled for negligible, if any, reductions in emissions. EPA’s new rule would also phase in a ban on routine flaring unless technical infeasibility can be demonstrated to EPA’s satisfaction, which may create limited options for continued production in areas where the build-out of infrastructure and increased take-away capacity has been inhibited by a broken permitting system.
The rule increases leak detection monitoring requirements to require more frequent surveys, but misses the mark when it comes to allowing for emerging technologies to help detect and repair leaks faster. Though EPA attempts to provide a pathway for the use of newer screening technologies to perform required surveys, the regulations would make using them so burdensome that it will more likely disincentivize their use as an alternative compliance option. The rule also drastically increases flare demonstration and monitoring requirements, in some scenarios basing them inappropriately on refinery standards created for very different kinds of facilities; this misapplication will create significant new costs for upstream operations without meaningful benefit.
EPA estimates that compliance with the new rule will cost industry in excess of $30 billion—making it one of the most expensive rules ever proposed by EPA on any sector. For some instances, the rule sets the standard below what is realistically possible in real-world operations, or it requires technology that is not readily available at the scale or in the time frames that are required. This may make the cost of the rule even higher if facilities are forced to shut-in production because there is no practical pathway to compliance.
Given its length and complexity, many in the industry, including AXPC, are still evaluating the final rule in its totality. Industry leaders have expressed appreciation for EPA’s commitment to bringing industry stakeholders to the table and have noted improvements compared to previous drafts. As mentioned, however, some of the rule’s provisions remain flawed and risk undercutting US production. This can lead to increased energy costs and reduced energy security. Further, the rule may actually chill further investments in emerging technologies, since they will not be a competitive option for compliance, which could slow progress deploying at scale the best and most cost-effective ways to detect and eliminate methane emissions.
Revisions to Subpart W Reporting:
AXPC member companies support the EPA’s Subpart W database and believe that it is in the best interest of all stakeholders for the Subpart W database to be as reliable of an estimation as of annual oil and gas GHG emissions as possible—however, several of the proposed revisions to Subpart W are extremely concerning. Established by Congress in 2008, and first implemented in 2011, Subpart W requires owners or operators of oil and natural gas facilities and systems to report an annual accounting of GHG emissions data to EPA. According to EPA’s design, these inventories are based primarily on emission factors derived scientifically from well-reasoned engineering and academic studies which are then applied to operational facility data. These factors are also periodically updated to account for improvements in understanding emissions, advancements in facility design and evolving technological capabilities. For over 10 years now, and still today, the Subpart W database represents the most comprehensive and consistently reported publicly available estimation of oil and gas emissions from any oil and gas producing country in the world.
For this reason, during the last decade the industry has used Subpart W reporting and methodologies as the basis for emission inventories. It is the foundation for assessing and disclosing emissions performance, setting emission reduction goals, and making smart investments in emission reduction projects. This is how stakeholders like the Clean Air Task Force know that the industry has reduced its methane intensity by 48% since 2015 alone.[1] And since that time we continued to see drastic improvements in operational efficiency and emission reduction, which is why since 2022 EPA has been working with industry and other stakeholders to develop revisions to major sections of the GHGRP including Subpart W emission factors. Then, as part of the Inflation Reduction Act (IRA), Congress directed further changes to specifically allow for greater use of empirical data in Subpart W reporting to improve the accuracy of annual emissions accounting. In response, on August 1, 2023 EPA published a new revised proposal for comment specific to Subpart W. Unfortunately, many of the revisions proposed are biased, flawed, and fail to align with Congressional direction and the myriad of other rules being finalized by the Biden Administration. As written, there is a risk of double counting, overestimating, or misrepresenting emissions in a way that could show increasing emissions from American-made energy – even when, in fact, the opposite is true. The implications of requiring artificially exaggerated emissions reporting risks putting US oil and natural gas a competitive disadvantage—even though it is among the cleanest production in the world.
[1] https://cdn.catf.us/wp content/uploads/2023/05/22103159/OilandGas_BenchmarkingReport_2023.pdf
AXPC has expressed serious concerns about the Subpart W proposal as drafted and has urged EPA to refine the calculation, estimation, and measurement methodologies to make critical improvements. Absent such changes, the revised Subpart W would result in grossly inflated emissions estimates – not because there are real-world emissions increases, but simply because the underlying math is being changed to overestimate emissions of several sources. And contrary to Congress’ direction in the IRA, some provisions in the proposed rule will make it more difficult to use empirical data, when available, to improve the accuracy of emissions accounting. Even when a company can demonstrate lower, or higher emissions, using site specific data, for these instances they would be forced to report instead using the factor-based emissions figure. The regulations tangle further when you consider that Subpart W is to be used as the basis of the methane tax (more on that below) – which means that US producers will have to pay significantly higher fees as a result of these changes to Subpart W.
What is Empirical Data, anyway? Empirical data is any facility-specific, or site-specific, data gathered or observed from real-world operations. Fundamentally, its use in emissions estimation is the opposite of “factor-based” approaches which reflect wider generalizations and don’t account for individual site performance, configurations, or a multitude of other conditions. Empirical data can refer to metered data, operational data, samplers or sensors, or as technology improves may someday include remote emission estimates like from satellites.
It is important to note that though the methane detection and measurement technology ecosystem has surged over the last several years, methods to perform accurate annual site-level quantification have still not yet been achieved. Even still, data generated by some of the point in time techniques, especially when combined with process knowledge can result in improved emissions estimation and accounting.
Methane Tax:
The problems of Subpart W are compounded when the Methane Tax is taken into account. Congress, in its passage of the Inflation Reduction Act in 2022, amended the Clean Air Act (CAA) to create a charge on methane emissions under a new Methane Emissions Reduction Program (MERP). Companies hit with this tax will pay $900 for every metric ton of methane (as reported under Subpart W) in excess of a level set by the statute, rising in increments to $1,500 per ton by 2026. According to its authors, the methane fee was designed to incentivize “bad actors” to reduce their methane emissions through the addition of costs. The methane fee will be assessed starting with 2024 emissions, though EPA still has not proposed the critical details on how that fee is to be calculated nor issued any implementing guidance including specifics on exemptions to the fee that were to be created according to the statute. In other words, operators are already on the hook for what will be the basis of their fees with no information on how to reduce their exposure.
Industry leaders have expressed concerns that the fee on methane is an inefficient and punitive tax on domestic production on top of the costly requirements companies must comply with under the new methane rule and others in development for these same facilities. The Congressional Budget Office estimated the newly enacted charge will result in $6.35 billion in taxes and that it will result in higher energy costs to Americans, but this was before EPA proposed to revise Subpart W in a way that will egregiously inflate reported emissions. EPA’s Subpart W revisions will drastically expand the impact of the tax – both in number of companies affected and in total fees paid. And in limiting the ability for operators to take credit for deep emission reductions, Subpart W revisions would directly undermine the purpose of the methane tax to incentivize such reductions, and in some scenarios even oddly incentivize operational practices with greater environmental impacts rather than inverse.
Not only will Subpart W changes significantly increase the cost and scope of the methane fee far in excess of what Congress intended, in doing so it will punish “.” For example, using 2022 reported emissions and assuming a reasonable calculation methodology we estimated that initially less than a third of AXPC companies would likely have been subject to fees under the original vision for the methane tax. Assessing that same 2022 production instead under the Subpart W revisions, over 75% of our member companies would now be subject to the MERP fees solely due to the changes to Subpart W factors. Preliminary analysis suggests that fees assessed will be three-and-a-half times higher than originally estimated (or more) as a result of the Subpart W revisions.
Additionally, EPA has failed to undertake an analysis to understand the impacts of the Subpart W revisions in the Regulatory Impact Analysis of the methane tax and the interrelated aspects of its rules. Highlighting this concern, in a strongly worded December 14, 2023 letter to EPA Administrator Michael Regan, Senate Environment & Public Works Ranking Member Shelley Moore Capito (R-WV), and committee members Kevin Cramer (R-ND), Markwayne Mullin (R-OK), Pete Ricketts (R-NE), and Dan Sullivan (R-AK) urged the EPA to reconsider and revise its Subpart W proposal. The agency’s proposed revisions “blatantly disregard and overstep even the partisan mandates of the statute as enacted and will excessively increase the tax burden” on U.S. energy production. The current proposal, if finalized, will be an ill-advised regulatory policy with the perverse effect of also increasing a tax to be borne by energy producers, manufacturers, and consumers across the economy.”
The Bottom Line: US oil and gas companies are unwavering in their commitment to reduce methane from their operations. Many companies and industry trades, including AXPC, have even come out in support of federal regulation of methane, provided those regulations are workable and recognize the need to meet the growing global demand for oil and natural gas. An overlapping regulatory program that drives up compounding costs without meaningful benefits, and inhibits development of new technologies and innovative approaches, will only frustrate further progress on both of these fronts. The administration should work with industry to develop practical regulatory solutions that work in harmony to achieve the mutual goals of reducing methane emissions and continuing to improve the quality of US emissions reporting.
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