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Abstract
Impacts from oil and gas development on air quality is a growing issue across the United States as the sector contributes additional amounts of greenhouse gases to those naturally occurring in the atmosphere, increasing the greenhouse effect and global warming. Since climate change has a huge effect on personal livelihood, health, and future plans, it is not surprising that air quality regulations have become some of the most prevalent legislative changes in recent years. With the federal government taking a bit of a step back on these issues, several states have made significant changes to create stricter regulations on emissions, air quality, and flaring rules recently. These new requirements may impact E&P operators in several ways, while providing opportunities for other areas of the oil and gas sector.
Key Points
- As the U.S. EPA has rolled back some emissions regulations recently, several states have made regulatory changes to their flaring, venting, and fugitive gas emissions standards for the future. Three states which have made notable changes are Colorado, New Mexico, and Texas.
- The Colorado Air Quality Control Commission (AQCC) has enacted emission goals to curb greenhouse gas discharge levels. Using a 2005 emission baseline, reductions in greenhouse gas emissions of 26% by 2025, 50% by 2030, and 90% by 2050 is required. Oil and gas companies must control and monitor emissions from fracking and meet tighter emission-performance standards on the electric motors used at drill sites. Additional rules to flaring, comprehensive planning, and oil and gas development impact were also completed in November 2020, but have not yet been released.
- New Mexico has released a final proposed rule to reduce natural gas waste and methane emissions in producing oil and natural gas fields to be enacted in early 2021. The new regulations will require upstream and midstream operators to capture 98% of gas by 2026. The state will perform an emissions monitoring phase for operators through 2021, then set yearly targets to meet the 98% threshold by 2026.
- The Texas Railroad Commission (RRC) took steps aimed at reducing flaring and improving reporting requirements for any natural gas releases. This was done by making changes to the Application for Exception to Statewide Rule 32, more commonly known as a flaring permit. The new rule changes would reduce the amount of time an operator may flare, provide incentives for using flare reducing technologies, require operators to provide more detail as to why flaring is justified, and tag flares to the producing lease. While these rules have currently taken effect, use of the new Rule 32 form will be required by April 1st, 2021.
- The new requirements in these states may pose additional pain to operators in the short term as they must retool monitoring and reporting processes. One solution for companies trying to reduce overhead may be to outsource personnel to perform these tasks instead of hiring new employees. This creates opportunities for specialized firms that can focus on meeting regulatory deadlines, recording and submitting required data, and staying up to speed with additional changes states may release in the future.
Introduction
The global climate affects nearly every aspect of human life, including food sources, transportation infrastructure, clothing, and vacation spots. It has a huge effect on personal livelihood, health, and future plans. As a result, it is not surprising that across the United States climate change is becoming increasingly prevalent in legislative changes. In a nutshell, climate change is the gradual warming of the earth accelerated by human emissions of greenhouse gases that results in large-scale shifts in weather patterns [1]. Impacts from oil and gas development on air quality is a growing issue across the United States as the sector contributes additional amounts of greenhouse gases to those naturally occurring in the atmosphere, increasing the greenhouse effect and global warming. Of particular concern within the industry is flaring, venting, and the effects of fugitive gas emissions on global climate change. These are the particular issues new legislative changes are targeting.
The U.S. Environmental Protection Agency in August 2020 began rolling back emissions regulations enacted to curb the release of methane during Barack Obama’s two terms in the White House. The action, expected but nonetheless condemned by environmentalists, had a little-noticed side effect. Experts predict it could lead to higher emissions of volatile organic compounds (VOCs) and hazardous air pollutants causing smog and have been linked to cancer, respiratory illnesses, and a growing list of other ailments [1]. With the federal government taking a bit of a step back on these issues, several states have made significant changes to create stricter regulations on emissions, air quality, and flaring rules recently. These new requirements may impact E&P operators in several ways, while providing opportunities for other areas of the oil and gas sector.
Colorado
Despite the substantial growth in production, methane emissions from oil and gas operations are estimated to have generally remained flat between 2005 and 2015 due to increased regulatory requirements adopted by the Air Quality Control Commission (AQCC) that have led to a declining leak rate in the sector. In addition, Colorado has been a leader in developing environmental regulations for oil and gas dating back to 2005 when the first system-wide tank regulations were enacted. Since adoption of that first set of regulatory requirements, Colorado has engaged in a series of rulemakings to further reduce oil and gas emissions. With rulemakings in 2006, 2008, 2014, 2016 and 2017, Colorado has adopted increasingly more stringent requirements for the oil and gas sector aimed at a wide range of sources including: oil storage tanks, glycol dehydrators, engines, gas-driven pneumatic devices, component leaks, and well-unloadings [1]. The state kept pace with its historical push for environmental regulations by releasing the Colorado Greenhouse Pollution Reduction Roadmap in early October. The roadmap, released by Governor Jared Polis’ administration after nine months of work, is intended to curb Colorado’s greenhouse gases through heavy cuts to emissions from power plants and oil and gas operations, but also winds across ambitious reductions in pollution from cars, buildings, and even cows [1]. Led by the Air Quality Control Commission, the state is charged under House Bill 1261 passed in 2019 to cut emissions of greenhouse gases linked to climate change by 26% from 2005 levels in 2025; 50% by 2030; and 90% by 2050 [1]. So how does this apply to the oil and gas sector?
According to the report, transportation, largely as a result of auto traffic, has become the state’s largest source of greenhouse gases followed by emissions from power plants and the oil and gas industry. Therefore, in order to achieve the state’s 2025 and 2030 emissions goals, methane emissions from the oil and gas sector as a whole will need to be reduced by at least 33% by 2025 and at least 50% by 2030 [2]. A rulemaking that included combustion emissions from stationary engines used in this sector, mandatory monitoring for new wells, pre-production emissions controls and other measures was completed in September 2020 and used for the roadmap. In 2005, oil and gas accounted for 20 million tons of carbon-equivalent emissions. To meet the state’s 2025 target emissions, these need to be cut by 6.7 million tons and by 10 million tons to meet 2030 goals [1]. Unfortunately, while there are a lot of ideas in the roadmap, it quickly drew flak from some environmental groups as they claimed it failed to set a timetable for specific actions and some of the reduction estimates were overly optimistic. According to environmental policy makers, the roadmap is “missing the most essential element for progress: concrete regulatory policies to be proposed swiftly, that taken together are fully capable of guaranteeing climate pollution goes down” [1]. In other words: the roadmap lacks specifics.
While not a step by step list, the rules require oil and gas companies to control and monitor emissions from fracking and meet tighter emission-performance standards on the electric motors used at drill sites. The new rules for the pre-production phase are in addition to regulations the AQCC last year issued to reduce emissions from oil and gas storage tanks, pipelines and low-producing wells [3]. While the AQCC did not adopt revisions urged by environmental and community groups, such as mandating uniform air emissions testing protocols and requiring only electric motors at drill sites when feasible, the regulations do require the control of flowback tank emissions. The flowback vessels must be covered and attached to a combustion device that flares fugitive emissions in order to get rid of volatile organic chemicals contributing to ozone pollution [3]. In addition, each site must also have air quality monitoring from 10 days before work begins, an increased timeframe from the original three days, until six months after the well is completed [3]. Unfortunately, one of the most contentious issues was how site emissions would be monitored. The rules leave it up to the operator to select the technology, emissions, and the protocol for monitoring. This issue highlights how vague the policies are and how vague a gradual ramp down of emissions can be.
In November 2020 the COGCC is expected to have completed a series of rule changes to implement updated commission priorities under Senate Bill 19-181. This rulemaking includes revisions to regulations that strengthen flaring restrictions, comprehensive planning, as well as evaluating and addressing the cumulative impacts of oil and gas development. Further detail on the outcome of the COGCC rulemakings, and their expected implications for oil and greenhouse gas pollution will be included in the final draft of the Roadmap once these rulemakings are complete.
New Mexico
Similar to their neighbors to the North, the state Energy Minerals and Natural Resources Department (EMNRD) in New Mexico has released a final proposed rule to reduce natural gas waste and methane emissions in producing oil and natural gas fields. Following up on the Climate Strategy introduced last year by Governor Michelle Lujan Grisham, New Mexico regulators are developing what could become the strictest standards in the nation to regulate the volumes of methane released into the environment by oil and gas operators. Under the rule, operators would be required to capture 98% of gas by the end of 2026 [4]. The agency estimates that the rule will reduce volatile organic compounds by 77,000 tons and nitrogen oxides (NOx) by 21,000 tons [5]. New Mexico has set a date of January 4th for codifying the methane and natural gas regulation set forth by the EMNRD and its Oil Conservation Division (OCD) – EMNRD’s primary compliance arm. Failure to comply with the regulations, if they are approved by the OCD and put into OCD’s regulations, could result in fines, civil action or denial of future permits by state regulators [4].
The regulatory push comes as emission levels have risen sharply in the state, driven in large part by increased oil and gas production. According to a 2019 climate change task force report, the oil and gas sector accounted for 62% of the states methane emissions [5]. As a result, in January 2019 the newly-elected governor signed an executive order calling on state agencies to find ways to reduce their impact on climate change while creating New Mexico’s Climate Change Task Force and aligning the state with the Paris Climate Accord. The task force teamed up with EMNRD to formulate a plan on how to move forward with an industry key to the state while ensuring a commitment to the environment. OCD Deputy Director Tiffany Polak said the EMNRD rules would be implemented in two main phases. In the first phase scheduled to take place through the end of 2021, the agency will collect data related to each operator’s current emissions in order to set baseline emission reduction targets [6]. Then, at the end of next year or into early 2022, those baseline targets will be set. For example, if RARE PETRO were an operator at an 85% gas capture rate, targets will be set annually for the next five years to get to 98% by the end of 2026 [6]. However, a unique aspect of New Mexico’s proposed rules is that it also includes the midstream industry segment, as opposed to rules in other states which only include the upstream part of the business [4]. Similar to the policy changes in Colorado, the new regulations lack specific action points and the reduction estimates are overly optimistic. While these rules are expected to be enacted in early 2021, there is a possibility they will be refined to implement concrete action points and meet less stringent targets to support the local oil and gas industry.
Texas
In August, the Texas Railroad Commission (RRC), regulator of the largest producing state in the U.S., took steps aimed at reducing flaring and improving reporting requirements for any releases by approving “for public comment” proposed changes to the Application for Exception to Statewide Rule 32 [7]. Critics of the previous process have claimed the state’s exemptions to long-term or routine flaring essentially allowed operators to flare unlimited quantities of gas. As of 2019, Texas regulators had never rejected a flaring application. The new rule changes would reduce the amount of time an operator can obtain an administrative exception to the flaring rule, provide incentives for the deployment of technologies that reduce gas flaring, require operators to provide more information outlining how their specific situation justifies a need to flare, and tag flares to the specific production property where they take place [7].
The RRC noted that between June 2019 and May 2020, the amount of produced gas flared in Texas was reduced by 79% while gas production simultaneously rose 13%. In addition, flaring of casinghead gas produced from oil wells decreased by 82% [7]. Therefore, the sharp decline in the flaring rate suggests that the decreased flaring volume was caused by more than simply a decrease in production. More specifically, the data suggests that implementation of the Statewide Rule 32 has reduced flaring volumes. Luckily for operators, reduced flaring is not only good for the environment, but also for their pocketbooks. In fact, the RRC’s actions followed the June release of a report which found operators in the Permian Basin burned a record $750 million worth of natural gas in 2018 [7]. The Institute for Energy Economics and Financial Analysis report calculated 238.1 billion cubic feet of gas was either flared or vented, roughly double the value amount wasted in 2017 [7]. Clearly, the new rules have dual benefits.
On November 4th, commissioners for the Railroad Commission of Texas took a critical step toward further reducing flaring from oil and gas sites in the state by approving a revamped Form R-32, Application for Exception to Statewide Rule 32. The approval will be used by oil and gas operators to apply for an exception to flare gas during oil and gas operations [8]. In addition, the form provides specific guidance on when an exception to flare would be permissible, under which circumstances, and for how long [8]. The commissioners’ action made changes to the application for flaring exceptions, not to the Statewide Rule 32. Without changing any of the state’s rules, the new forms that oil and gas producers must file with the state will in many cases place stiffer limits on how long the flaring can go on. Some exemptions may be reduced by 50% to 80% from current allowable flaring durations, the RCC said in its announcement of the changes [9].
Texas has done a tremendous job reducing flaring this year, flaring less than a half a percent of gas produced in May 2020, but there is still more work to be done [8]. The new form is an important step towards minimizing routine flaring in Texas, as it allows the RRC to collect the information it needs to better determine who is following the rules and who is not when it comes to flaring. The RCC said it will also require more information from operators about why they are seeking to flare or vent gas which will help the agency ensure operators are compliant with current rules as it relates to their reported production rates [9]. Essentially, the form will help collect more accurate data to assess the role of flaring and look for ways to reduce it going forward [8].
While the rules are effective now, operators must start using the new form by April 1st, 2021. After that date, all operators in Texas must show justification as to why wells cannot be shut in to avoid flaring or venting gas. This includes a requirement for operators to explain why the gas cannot be sold or used for “other beneficial uses” [9]. Notably, operators may have to submit data on pipeline availability and include an economic analysis on gas marketability to back up their case [9]. To make it easier for operators to file this information, the RCC is developing an online application process for flaring exemptions that will be ready in March 2021. Form R-32 will be part of the Commission’s development of a Rule 32 computer program, which will facilitate the online submission of flaring requests and provide the agency with a better mechanism for compliance audits and data analytics [8]. Luckily for Texas, the new rules are actionable and have a concrete path towards emissions reductions while working with operators on a smooth transition towards progress.
Conclusion
While there are certainly air quality standards relating to oil and gas activities at the Federal level, the rollback of key emissions standards has caused individual states to take matters into their own hands. While Colorado, New Mexico, and Texas were the focus of this article; other states like California, Oklahoma, and North Dakota are also taking action to improve air quality through legislative changes targeting the oil and gas industry. With each state making regional as opposed to national changes, operators will have to adjust their current operations according to recent rule changes. For example, operators down in Texas will need to figure out how to process more natural gas to be used or sold for beneficial purposes as opposed to flared. This is different from the issues faced in Colorado as companies already must submit a form seeking permission to vent or flare and must regularly report those gas volumes. Instead, Colorado operators are now focusing on how to reduce combustion emissions from stationary engines used in the sector, mandatory monitoring requirements for new wells, and pre-production emissions controls installed on site. Oklahoma is starting down a hybrid path similar to that of Texas and Colorado where they must focus on reducing flaring plus all emissions from storage tanks to the wellhead. While the new regulations in Oklahoma are significantly more stringent than those of their oil producing counterparts, they will be able to utilize what worked well and what did not work well in Texas and Colorado as they begin to formulate their own roadmap for the future.
These new requirements may impact operators in several ways, while providing opportunities for other areas of the oil and gas sector. Due to historically low oil prices and many companies wishing to “tighten the belt”, such legislative changes open the door for specialized consulting companies to support operators that may be strapped for cash. Instead of hiring an internal compliance manager or regulatory expert, some companies may wish to outsource to a group specializing in regulatory compliance and data collection or organization. This may be beneficial in multiple areas for short term work until the backlog of paperwork from rule changes can be addressed and the team can be brought up to speed. While each operator will pick their own path forward, many will be working towards the same tasks. New regulatory changes will require additional limits on greenhouse gases and air pollution. Companies will have to adjust to ensure there aren’t bottlenecks in gas takeaway infrastructure, investing more in power grids for remote areas, revamping air permitting procedures, focusing on better recording standards, and implementing digital technology to optimize data collection for the state reports. While each state has charted its own path, it is a path towards a sustainable energy future that includes oil and gas operations in the domestic energy mix.
References
[1] https://coloradosun.com/2020/10/01/colorado-greenhouse-gas-reduction-roadmap-release/
[2] https://drive.google.com/file/d/1lok5it22y_Eh0Fjp8ioT_BbPMC7zUJpZ/view
[3] https://coloradosun.com/2020/09/24/colorado-adopts-fracking-emission-rules/
[5] http://www.emnrd.state.nm.us/OCD/documents/NaturalGasWasteDraftRules-July202020.pdf
[7] https://shalemag.com/activity-ramps-up-regarding-regulation-of-methane-venting-flaring/
[8] https://www.rrc.state.tx.us/all-news/110920-rrc-conference-flaring-action/
[10] https://conservationco.org/2020/02/10/blog-colorado-largest-sources-of-carbon-emissions/
[12] https://www.rrc.state.tx.us/media/56420/sitton-texas-flaring-report-q1-2020.pdf