Significant Proposed Rule for Aggregation of Oil and Gas Sources



On August 18, 2015, U.S. EPA proposed a suite of new regulations affecting the oil and gas industry, a significant element of which is a proposed clarification regarding adjacency and oil and gas sources. EPA has proposed to clarify the term “adjacent” for oil and gas sources in the definitions used to determine a “stationary source” under the Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NNSR) programs.  It is also clarifying the term “adjacent” as it relates to the “major source” determination under the Title V program.  As EPA states in the preamble, this proposed change is “geared towards the oil and natural gas production and processing segments, generally known within industry as ‘upstream’ and ‘midstream’ operations.”

EPA has proposed two options for source aggregation within the upstream and midstream industry.

Option 1: Aggregation of all sources within ¼ mile of a “target” facility (EPA’s preferred option)
Under this first option, EPA is proposing to consider facilities “adjacent” if two or more sources share the same two-digit SIC code (Major Group 13, “Oil and Gas Extraction”), are under common control, and are contiguous or are located within ¼ mile of each other.  An operator would not be allowed to include any sources beyond the ¼ mile boundary.  EPA is seeking comment on limiting the linking of sources outside of a target facility, also referred to as “daisy-chaining.” Presently, the Louisiana Department of Environmental Quality (LDEQ) specifically does not allow sites to be “daisy-chained” together.1  EPA is seeking feedback whether ¼ mile is appropriate, and whether it should extend its consideration beyond ¼ mile.

Option 2: Aggregation of all sources within ¼ mile AND sources that are functionally interrelated,
regardless of distance. 

Under Option 2, EPA is proposing to consider facilities “adjacent” if one of the following circumstances apply and if they are in the SIC Major Group 13 (Oil and Gas Extraction):

  • The sources are separated by a distance of ¼ mile or more and there is exclusive functional interrelatedness; or
  • the sources are separated by a distance less than ¼ mile.    

EPA has proposed the source aggregation changes in the following regulations:

  • 40 CFR Part 51, Requirements for preparation, adoption, and submittal of implementation plans and Appendix S to Part 51 – Emission Offset Interpretive Ruling
  • Part 52 – Approval and Promulgation of Implementation Plans, 52.21, Prevention of significant deterioration of air quality
  • Part 70 – State Operating Permit Programs, 70.2, Definitions
  • Definitions Part 71- Federal Operating Permit Programs, 71.2, Definitions

EQ_OG pumps 
In the “Supplementary Information” portion of the proposed rule, EPA identifies the following NAICS Codes as potentially impacted by these proposed changes:

Oil and Gas Extraction 21111
Crude Petroleum and Natural Gas Extraction 211111
Natural Gas Liquid Extraction 211112
Drilling Oil and Gas Wells 213111
Support Activities for Oil and Gas 21311
Natural Gas Distribution 221210
Pipeline Distribution of Crude Oil 486110
Pipeline Distribution of Natural Gas 48621

The NSR program (and Title V, which incorporates these concepts and definitions by reference) applies to stationary sources, which is defined as “any building, structure, facility or installation which emits or may emit a regulated NSR pollutant” [40 CFR 52.21(b)(5); 40 CFR 51.165(a)(1)(i); 40 CFR 51.166(b)(5)].  The terms “building, structure, facility, or installation” are further defined in NSR regulations as “all of the pollutant-emitting activities which belong to the same industrial grouping, are located on one or more contiguous or adjacent properties, and are under the control of the same person (or persons under common control).”  The term “same industrial grouping” refers to the two-digit Standard Industrial Classification code (SIC code) [40 CFR 52.21(b)(6); 40 CFR 51.165(a)(1)(ii); 40 CFR 51.166(b)(6)].

While the rules use the term “adjacent,” they do not define it.  Over the years, EPA has never defined a distance beyond which it would always consider sources to be separate; nor has it established a distance within which sources must always be aggregated.  While some states have specific guidance (Texas, for example, cites ¼ mile as the distance between sources in order to consider them separate), EPA has handled this very much on a case-by-case basis and has urged states to do the same.

“Major Source” Definition under NESHAP

The definition of ‘major source’ in regards to hazardous air pollutants under the Section 112 National Emission Standards for Hazardous Air Pollutants (NESHAP) is different than the definition of ‘major source’ for purposes of NSR permitting.  It does not include “adjacent properties” and in fact specifically forbids the aggregation of oil and gas sources “for any purpose under this section” [CAA Section 112(n)(4)(A); 40 CFR 63.760(b)].  Therefore, these proposed changes would not be applicable for purposes of determining whether a stationary source is a major source of HAP (i.e., has the potential to emit more than 10 tons/year of a single HAP or greater than 25 tons/year of all HAPs combined).

A Tale of Two Memos: Source Aggregation Guidance from EPA

On January 12, 2007, EPA released a guidance document, “Source Determinations for the Oil and Gas Industries.”  This was the first guidance issued directly that addressed the potential complexities related to source determinations for the oil and gas industry.  Ultimately, the memo concluded that EPA “[does] not believe determining whether two activities are operationally dependent drives the determination as to whether two properties are contiguous or adjacent…”2   The memo goes on to recommend the approach used under the Section 112 NESHAP regulations as the starting point for determining the boundary of a source, and to only consider aggregation on a case by case basis if the sites are in close proximity to each other.
EQ_OG quote

On September 22, 2009, EPA withdrew the 2007 memo3 as EPA believed Mr. Wehrum’s approach over simplified this complex issue by relying largely on physical proximity.  With this memo’s withdrawal, EPA reinstated the use of the fundamental criteria for making source determinations for the oil and natural gas sector based on the use of the three factors contained in the regulations—same SIC code, common control, and location on contiguous or adjacent property (the “three pronged” test) when making single-source determinations, and reinstated the importance of case-by-case determinations.

Summit Petroleum Court Case—More Memos, Another Lawsuit

The Summit Petroleum case in particular is an area of focus for this proposed rulemaking.  In 2010, EPA determined that Summit’s gas sweetening facility and associated wells were under common control and the same two-digit SIC code; additionally, the wells were determined to be functionally interrelated to the gas sweetening plant. Therefore, EPA determined the gas sweetening facility and the natural gas production wells were one site for purposes of Title V permitting.

Summit appealed the determination to the United States Court of Appeals for the Sixth Circuit, which overturned EPA’s single-source determination.4  In its decision, the court said that EPA’s use of ‘interrelatedness’ in determining whether a source is ‘adjacent’ is unreasonable and contrary to the plain meaning of the term.  Ultimately, the court found that the term ‘adjacent’ was unambiguous and related only to physical proximity.

EPA responded to the Summit court case by issuing a memo which instructed its Regional Air Directors that EPA intended to apply the outcome of the Sixth Circuit court case only within areas under the Sixth Circuit jurisdiction; EPA regions operating outside the Sixth Circuit jurisdiction were instructed to continue to make stationary source determinations for PSD and Title V purposes without taking the court’s decision into consideration.

This guidance was challenged by the National Environmental Development Association’s Clean Air Project (NEDA/CAP) in the D.C. Circuit Court of Appeals.5  NEDA/CAP claimed that the memorandum was in direct violation of EPA’s Regional Consistency regulations by using inter-agency guidance to apply inconsistent permitting criteria in different parts of the country.  The D.C. Circuit agreed with NEDA/CAP’s allegation and instructed EPA to revise its own Regional Consistency regulations, as well as consider revising the source determination regulations to require consideration of functional interrelatedness.  As a result of this ruling, EPA proposed changes to its Regional Consistency regulations6 in August 2015.

EPA’s Stated Benefits of Source Aggregation

EPA has identified the following benefits to aggregation of oil and gas sources: 

  • Reduction of uncertainty for the oil and gas industry.  EPA believes clarifying this concept will be a time-saving measure for permitting authorities and will provide more consistency for the industry which otherwise would have to rely on case-by-case determinations from permitting authorities which can delay the permitting process.  
  • Environmental benefits. Aggregating multiple pollutant-emitting activities into a single source will require more major sources or major modifications at major sources to implement Best Available Control Technology (BACT) or Lowest Achievable Emission Reduction (LAER) controls. BACT and    LAER could provide even more stringent control requirements than what is found in NSPS or NESHAP, therefore resulting in decreased emissions.   
  • More Title V permits. By aggregating sources, more facilities will be subject to the provisions of Title V permitting.  While Title V permits do not require the use of controls, the program does require recordkeeping and reporting thereby increasing visibility to the public and regulators of these operations.  It also allows more EPA oversight, and allows for citizens to petition EPA to object to permits.
  • The more sources aggregated together when evaluating PSD/NNSR, the easier it is to take credit for a reduction and “net” out of requirements.  A source consisting of multiple emitting activities may be able to “net out” of further PSD or NNSR permit review by reducing emissions in one part of a source in order that emissions at another part of the source may increase.  This allows sources to avoid additional permitting requirements for modifications to an existing facility under PSD and NNSR by taking credit for reductions that have already occurred within the facility.  A smaller source offers less opportunity to “net out” because there are fewer emitting activities that can be reduced if a modification results in an increase. Netting is usually not available under minor NSR programs, so smaller minor sources would likely not be able to take advantage of netting to avoid minor NSR permitting requirements.

    Industry and the general public will have sixty (60) days following publication in the federal register to comment on these proposed changes. Potentially affected facilities should review these proposed changes, and analyze the potential effects on operation including permit issuance times.  

     
    1 http://www.deq.state.la.us/portal/tabid/2347/Default.aspx
    2 Wehrum, William. “Source Determinations for Oil and Gas Industries.” January 12, 2007.
    3 McCarthy, Gina. “Withdrawal of William Wehrum’s January 12 1007 Issued Guidance Memo ‘Source Determinations for Oil and Gas Industries.” September 22, 2009.
    4  Summit Petroleum Corp. v. U.S. Environmental Protection Agency, 690 F.3d 733 (6th Cir. 2012)
    5  National Environmental Development Association’s Clean Air Project v. Environmental Protection Agency, 690 F3d 733 (6th Cir. 2012)
    6  Proposed changes to EPA’s Regional Consistency regulations can be found here: https://www.federalregister.gov/articles/2015/08/19/2015-20506/amendments-to-regional-consistency-regulations