Another rocky year may be coming for oil and gas law, regulation

The largest uncertainty in US federal policy awaiting the oil and gas industry in 2022 so far is the same big, elaborate legislation that has been fiercely argued for more than half a year: the budget bill dubbed the Build Back Better Act.

The bill has been the focus of relentless disagreement among Senate Democrats and the White House. The latest talk in the nation’s capital has focused on the idea of breaking the bill apart to salvage some elements, such as the climate provisions. Presumably, those provisions encompass all of the bill’s proposals to increase the costs and environmental controls for oil and gas operations.

The year also is expected to include tougher regulations from the Environmental Protection Agency (EPA) for emissions of methane and volatile organic compounds. Industry representatives have been hoping to convince the agency to see the value of flexibility in emission monitoring methods.

For the renewable fuels mandate, EPA is not signaling flexibility. The agency is proposing a blanket rejection of all efforts by small refiners to win hardship exemptions from renewable fuel standards, and the agency is increasing annual obligations for use of renewable fuels.

The Interior Department may initiate its own rulemaking steps in 2022 to impose higher royalties and fees for oil and gas work on federal lands. The department has a certain amount of discretion on raising costs, although the changes generally would apply to new leases, not existing operations.

The White House Office of Environmental Quality promised late last year that it soon would revise more of its guidelines on application of the National Environmental Policy Act. Its revisions are mostly anticipated to be reversions to Obama administration requirements.

Methane emission fee

The first order of business for Congress in February will be the authorization needed to allow continued federal spending beyond Feb. 18. After that, the budget bill is expected to return to the front burner.

The $2 trillion budget bill has been slowed by its own ambitious nature. It cuts across the spectrum of domestic policy. Most of the public arguments over the bill have centered on such subjects as childcare deductions and state and local tax deductions rather than energy issues.

If the bill is slimmed down enough to win the unanimous support of Senate Democrats needed for passage, it may still have the elements that would raise costs for new oil and gas operations on federal lands and most worrisome to the industry, a new fee or tax on methane emissions from any production operations and a large percentage of transmission, storage, and processing operations.

“We have to stop this natural gas tax,” Mike Sommers, president of the American Petroleum Institute, said in January.

“There are still negotiations ongoing,” said Dan Naatz, executive vice-president of the Independent Petroleum Association of America (IPAA), referring to negotiations among Senate Democrats over the energy and climate provisions. And industry representatives continue to talk to Democrats about the oil and gas subjects, Naatz said.

Because the methane fee is on emissions, it is sold as a pollution tax. Lee Fuller, another IPAA official, warned that because there are no easy ways to eliminate the methane emissions, “ultimately, it’s going to be passed on to consumers.”

An initial step in the fee would apply to basin-wide exploration and production operations emitting 25,000 (metric) tonnes/year of carbon dioxide (CO2)-equivalent emissions, but after 2 years the EPA would be required to apply the fee to operations with 10,000 tonnes of CO2-equivalent emissions. The lower threshold means hitting more of the smaller companies.

Fuller added that the methods of calculating emissions “tend to be questionable in terms of accuracy.”

The fee would be $900/tonne for methane emissions above a certain threshold in 2023, $1,200 in 2024, and $1,500 thereafter. A Capitol Hill source said it was based on estimates of the “social cost” of methane, with guidance drawn from top-performer voluntary programs, and the estimates for what might be accomplished by the Oil and Gas Climate Initiative, a voluntary industry effort.

EPA and methane controls

The public comment period was set to end Jan. 31 for EPA’s proposed rule on control of methane and volatile organic carbon (VOC) emissions from the oil and gas upstream, from both new and existing sources.

When the proposed rule was announced in November, EPA Administrator Michael Regan said the proposal was “building on existing technologies and encouraging innovative new solutions” and “the latest cost-effective technology.”

Industry, accepting the idea of direct regulation of methane, focuses on urging flexibility in the technologies and methods of monitoring for emissions. EPA in announcing the proposed rule in November said it included “a compliance option that allows owners and operators the flexibility to use advanced technology that can find major leaks more rapidly and at lower cost than ever before.”

So industry hopes. There has been much concern about the cost of infrared camera surveys to spot methane leaks. The mandated frequency of surveys is a concern along with the cost of the cameras and the scale of what must be surveyed.

Renewable fuels mandate

Much remains to be seen. The overall proposal is so vague that most people would characterize it as an advance notice of proposed rulemaking rather than a proposed rule, Fuller said. “It puts out concepts. It suggests the scope,” he said.

The proposed rule should be accompanied in the near future by an EPA proposal of guidelines for states to conform to federal standards—in particular, the time frames that will be given to states for compliance, Fuller said. He suggested that might be finalized by the middle of the year. Toward the end of the year, after EPA has its rules finalized, the burden will shift to the states to write their compliance strategies for existing sources, a process that could carry into 2023.

EPA is not showing any hint of flexibility on the Renewable Fuel Standard. It issued a proposal in December to set volume requirements for renewable blendstocks in 2022 at a record high level, despite the fact that gasoline market volumes are depressed by a pandemic. EPA also proposed to deny 65 hardship exemptions to small refiners.

 Such a blanket rejection of waiver requests has never been done before, said Derrick Morgan, senior vice-president of federal and regulatory affairs at the American Fuel & Petrochemical Manufacturers.

Refiners that cannot make or purchase renewable blendstocks can buy credits called renewable identification numbers (RINs). EPA is suggesting that the RIN cost is passed through, so no economic hardship can be calculated.

But there are thousands of wholesale racks across the country, with small refiners in a number of different competitive markets. And because competitive data is confidential, it is impractical for refiners to prove that they as a class are not facing “disproportionate economic harm,” in the jargon of the law, Morgan explained.

His group argues that EPA ought to give consideration to the economics of each refiner as has been done in the past. That would allow a fair examination of each refiner’s application for a hardship exemption, in his view.

Members of Congress have taken note. A Jan. 27 letter questioning the validity of a blanket denial of exemptions was sent to the EPA administrator by 15 Republican senators led by Sen. Shelley Moore Capito (R-W.Va.).

“The current proposal neglects not only its own economic impacts but negates the intent of Congress in deliberately amending the Clean Air Act to allow for exemptions for small refiners,” the letter said.

Federal lands fight

The relationship between industry and the Biden administration may be at its rockiest when it comes to drilling and production on federal lands. President Biden tried imposing a moratorium on new federal leasing, but that was struck down by a court as a violation of the Mineral Leasing Act and the Outer Continental Shelf Lands Act.

The Interior Department has moved to obstruct an exploration plan for the coastal plain of the Arctic National Wildlife Refuge by announcing better environmental studies are needed. It has also announced that it plans to shrink the available acreage for exploration in the National Petroleum Reserve-Alaska.

Interior Secretary Deb Haaland has consistently adopted Biden’s rhetoric of “climate crisis” as context for steps that could restrict oil and gas work. Her department has much authority to raise royalty rates and a variety of other costs, such as minimum bonus bids, acreage rental fees, and bonding. A report issued by the department near the end of November recommended such changes.

“Our nation faces a profound climate crisis,” Haaland said when the report was released. “This report outlines significant deficiencies in the federal oil and gas programs, and identifies important and urgent fiscal and programmatic reforms.”

The report drew an angry response from Sen. Lisa Murkowski (R-Ala.), normally one of the mildest senators.

“This report is exactly what we thought it would be: a series of preordained conclusions that are designed to end federal oil and gas production,” Murkowski said. “What is especially upsetting is that it took Interior 10 months to produce a document that is just 15 pages long, lacking any meaningful analysis, and that repeatedly misrepresents how development actually works.”

Meanwhile, Interior’s Bureau of Ocean Energy Management will need to get to work on the next 5-year plan for leasing in the offshore under the Outer Continental Shelf Lands Act. The current plan runs through mid-2022.

Much more could be coming from Interior during 2022-2024, IPAA’s Naatz said, mentioning as an example Endangered Species Act regulations that might be applied to such species as sage grouse, and the setting aside of more federal land for wildlife habitat and wilderness.

The evolution of energy policy in Washington has transferred more and more initiative to regulators from Congress, said Steve Everley, a managing director at FTI Consulting Inc., where he specializes in energy and natural resources.