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Clean Air Act disputes delaying projects, increasing costs

Jennifer Biever, Hogan Lovells US LLP, Denver
Justin Savage, Hogan Lovells US LLP, Washington, DC

The US Environmental Protection Agency, environmental groups, and other federal agencies are increasingly targeting upstream oil and gas operations. The unprecedented regulatory scrutiny and litigation includes: Sierra Club's "Beyond Natural Gas" campaign, EPA's ongoing review of greenhouse gas emissions, the National Enforcement Initiative for natural gas extraction activities, and the Bureau of Land Management's efforts to regulate hydraulic fracturing and emissions from venting and flaring activities.

At the center of these disputes sits the Clean Air Act (CAA). All too often, interested stakeholders use the CAA to delay projects and increase costs, without any corresponding benefit to public health.

Regulatory relief from the act may have arrived. On May 30, the US Court of Appeals for the District of Columbia Circuit decided National Environmental Development Association's Clean Air Project v. EPA. This is a game-changing decision that makes it far more difficult for regulators and citizens to force companies to obtain "major source" permits for minor sources of emissions that are not adjacent to one another, but happen to be physically connected in some way – i.e., as a well and a compressor station. Specifically, the DC Circuit vacated an EPA policy that allowed EPA to add together – or "aggregate" – minor sources of emissions to determine whether the combination of sources could collectively be considered a "major emitting facility" or source required to meet major source permitting and control requirements.

Under EPA's policy, minor emissions sources with any "functional interrelationship" could have been aggregated, regardless of whether these sources were physically adjacent. But, the DC Circuit's ruling means that EPA may only aggregate emissions from minor sources that are physically proximate, regardless of any functional interdependence between the sources.

Limiting aggregation to physical adjacency promotes greater certainty and makes it less likely that a major source permit would be required for upstream minor emission sources such as wells, storage tanks, compressor stations and dehydrators that tend to be spread over large areas. Of course, these geographically dispersed sources could still be required to obtain "minor source" permits, but costs, delays, and litigation risks will be reduced.

Major or Minor Permits: why it matters

The Clean Air Act generally divides permits into two camps: minor and major. Minor permits impose far fewer restrictions and conditions in light of their limited emissions. States administer minor source permitting programs, except in "Indian Country" and a limited number of federal areas. EPA grants states a great deal of latitude in creating minor source permit programs, generally only requiring that states fashion minor source permit conditions to avoid exceeding federal air quality standards. As a result, securing minor source permits generally costs far less than major source permits.

In contrast, because of the complexity of the major source air permitting rules, companies can spend hundreds of thousands, if not millions, of dollars and wait many months to secure a major source permit. In addition, EPA exercises far more oversight over major source permits, creating more opportunities for enforcement and citizen suits.

Operators must obtain one type of major source permit, a New Source Review permit, before beginning actual construction of a project. New Source Review requires an extended public process and may result in a permit that imposes costly emissions controls and, in extreme cases, operational restrictions.

The Clean Air Act also requires major sources of air emissions to secure a Title V operating permit. The review and approval of Title V operating permits can also engender a lengthy public review process. The resulting operating permit contains all of the requirements of the act that apply to the source in question, including monitoring, recordkeeping, and certified reporting obligations that can be burdensome for companies not accustomed to managing a major source.

Aggregating minor upstream sources to require a major permit

The act generally steers companies into major or minor permits based on potential emissions. In general, sources with the potential to emit of at least 100 tons per year of certain pollutants qualify as a "major" source for a Title V operating permit, while such sources in the oil and gas sector that have the potential to emit at least 250 tons per year of certain pollutants qualify as a major source for New Source Review permitting. Most wells, compressor stations, dehydrators, processing plants, and other upstream emission sources individually emit far less than this threshold, qualifying them as only minor sources. Yet, EPA and certain states have directed some companies to obtain "major" permits for their upstream operations by requiring aggregation of emission sources spread over miles of their operations.

EPA's regulations grant the agency authority to require this aggregation of emissions when facilities are (1) under common control, (2) belong to the same industrial group (e.g., oil and gas production), and (3) "are located on one or more contiguous or adjacent properties." In the upstream segment, litigation has focused on the third factor, specifically whether emissions sources related to wells, compressor stations, processing plants, etc. are "adjacent" even if they are located several miles apart.

The industry has taken the position that "adjacency" requires physical proximity. But EPA has argued that adjacency means "functionally interdependent," a nebulous test that, in theory, allowed the agency to consider a number of factors on a case-by-case basis. EPA's test was often applied in an outcome determinative manner, with the agency demanding aggregation of emissions when an array of sources fell under the control of one company.

Summit Petroleum v. EPA

EPA began losing the aggregation battle in Summit Petroleum Corporation v. EPA, a 2012 opinion from the US Court of Appeals for the Sixth Circuit. There, Summit Petroleum challenged EPA's decision to aggregate emissions from a gas sweetening plant and 100 wells spread over a large area. The Sixth Circuit found that aggregation of these sources was unlawful. EPA had argued that Summit's plant and wells were "adjacent" because they were "functionally interdependent": that is, they all worked in concert to produce a single product, natural gas.

The court, however, held that the plain meaning of "adjacency" refers to physical proximity between emissions sources, not functional relationships between the sources. Because Summit's plant and wells were spread over 43 square miles -- separated by properties owned by third-parties -- the court found that none of these sources was physically proximate enough to be adjacent.

Because of the significance of the loss in Summit, EPA sought (but was denied) rehearing from the Sixth Circuit. A few months after that denial by the Sixth Circuit, a senior EPA headquarters official issued the Summit Directive to all of EPA's regional Offices. In the directive, EPA explained that it considered Summit binding in Kentucky, Michigan, and Ohio, the states that fall under the Sixth Circuit's jurisdiction. In practical terms, that meant EPA in those states could only aggregate emissions sources when they were physically proximate to one another. In all other states, however, EPA instructed its staff to continue to apply the functional interdependence test for aggregation.

NEDA v. EPA

On May 30, 2014, the DC Circuit dealt a stunning blow to EPA's aggregation policy in National Environmental Development Association's Clean Air Project v. EPA (NEDA). The DC Circuit held that the Summit Directive violated EPA's "Regional Consistency" regulations by requiring the physical proximity test for aggregation in Kentucky, Michigan, Ohio, and the functional relationship test in the other states. The court explained that having a more stringent functional test in most states created an unfair competitive disadvantage. Importantly, the DC Circuit's decision in NEDA applies nationwide. In the wake of the NEDA, the ability of EPA to demand major source permits for non-adjacent upstream sources will be significantly constrained. Recall that EPA's main hook for requiring major source permits was aggregating the minor emissions at wells, compressors, dehydrators, or gas plants spread over large areas based on the functional interdependence test.

Significant issues to watch going forward

NEDA significantly affects Clean Air Act permitting and compliance strategies. While such strategies necessarily demand a fact-specific approach, four overarching points are critical.

First, the physical proximity test for aggregation now applies to every emissions source, including sources in other parts of the oil and gas sectors. Companies should review whether non-adjacent projects may now enjoy minor source permitting status, even though the projects may in fact be inter-related and serve a common purpose.

Second, the impact of NEDA on existing major source permits needs to be assessed. The permitting files for existing major source permits should be reviewed to determine whether so-called major sources that resulted from the aggregation of multiple minor sources may now be "disaggregated," i.e., broken into several minor source permits. Although the functional relationship test has been declared unlawful, the rules associated with unwinding major source permits should be carefully considered.

Third, NEDA provides a powerful tool for the regulated community to insist upon EPA compliance with the Regional Consistency regulations as applied to EPA permit proceedings, applicability determinations, and enforcement cases. No longer should an EPA region dismiss a decision by a sister region. Similarly, the Regional Consistency Rule may bind EPA in one region with adverse precedent arising in a different region. For example, companies facing enforcement proceedings may now have defenses based on circuit precedent anywhere in the country.

Finally, companies should carefully monitor EPA's next move to guard against any attempts by the agency to recapture lost aggregation ground. The agency, for example, could propose to amend its regulations to address its losses in Summit and NEDA. But unless and until EPA makes such amendments, this much is clear: regulatory relief is here.

About the authors

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Jennifer Biever and Justin Savage are respectively partners in the Denver and Washington, DC offices of Hogan Lovells US LLP. Biever assists companies in Clean Air Act permitting and compliance matters, particularly upstream projects. Savage recently joined Hogan Lovells from the US Department of Justice where he specialized in, among other things, Clean Air Act enforcement in the energy sector.

Environmental groups targeting upstream

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