Methane Emissions: A Three-pronged Regulatory Blitz

Driven by efforts at the U.S. Environmental Protection Agency (EPA) and other federal entities to lower greenhouse gas (GHG) emissions, there are a number of regulatory forces in motion that are going to have a profound impact on the U.S. oil and natural gas industry in the coming years. These actions will ultimately impact industry by: 1) requiring the measurement of all GHG emissions, including methane, from certain oil and gas operations; 2) implementing inspection and mitigation requirements designed to reduce methane emissions; and 3) assessing a fee on methane emissions.

In 2009, the EPA launched the Greenhouse Gas Reporting Program (GHGRP) as a mechanism for gathering emissions data from different industries. Subpart W of the GHGRP instructs owners and operators of petroleum and natural gas systems emitting more than 25,000 metric tons of GHGs annually to report that data to the EPA.

The Inflation Reduction Act of 2022 (IRA) expanded the GHGRP to require reporting of emissions from additional categories, including “large emissions events;” more site-specific emissions reporting (such as reporting on nitrogen removal units, produced water tanks and mud degassing); direct measurement (including satellite and aerial flyovers) where possible; more detailed monitoring and estimating for pneumatic controllers and pumps; and comprehensive engine emissions capture.

The EPA estimates that the annual costs from the rule will be $82,701 for E&P reporters; $15,245 for gathering and boosting reporters; $24,670 for gas processing reporters; and $1,656 for pipeline reporters. These requirements are expected to be finalized in August 2024 and to take effect at the beginning of 2025.

In December 2022, the EPA issued a supplementary regulatory proposal in its ongoing rulemaking on methane and volatile organic compounds (VOCs) as part of the New Source Performance Standards for oil and gas facilities (including pipelines) under the Clean Air Act Amendments Subpart 0000 rules. For the first time, the amendments would establish emissions guidelines for methane emissions sources from existing facilities. Comments from industry mostly focused on the rule’s $14 billion in estimated compliance costs, potential disincentives for new technologies, the overall regulatory burden of the rule and the outsourcing of enforcement, such as having environmental NGOs identify “super emitters.”       

Another looming regulation is the IRA’s fee on excess methane emissions from oil and gas operations covered under the EPA reporting regulations under Subpart W. The fee will be assessed on methane emissions occurring after Jan. 1, 2024 from offshore oil and gas production, onshore oil and gas production, gathering and boosting; onshore gas processing, transmission compression and pipeline transmission; underground gas storage; and LNG storage, and import and export equipment.

The fee applies to applicable facilities that report more than 25,000 metric tonnes of CO2 equivalent per year on their GHG reporting forms. The fee will be assessed on methane emissions thresholds that include greater than 0.20% of natural gas sent to sale from the facility or 10 metric tons on methane per million barrels of oil sent from the facility if no natural gas is sent to sale. For gathering, boosting, gas processing and LNG, the threshold is 0.05% of the natural gas sent to sale from the facility. For onshore gas compression, pipeline transmission and underground storage, the threshold is 0.1% of gas sent to sale. The fee is set out on a sliding scale, starting at $900 per metric ton in 2024, increasing to $1,200 per metric ton in 2025 and settling at $1,500 per metric ton for 2026 and beyond.

EPA anticipates that actions taken in the IRA, including the methane fee and financial and technical assistance available for methane emissions reduction will result in a 40% methane emissions reduction by 2030. 

The federal government’s three-pronged approach to methane emissions will have a profound impact on the oil and gas industry, which is already undergoing capital investment and implementing new processes to address this carrot and stick approach to regulations. The EPA continues to tighten restrictions on oil and gas operations, requiring regular inspections of all wellheads, reporting of larger sources of GHGH emissions including methane, require new inspections and mitigation measures and impose a significant fee on methane emissions.

At the same time, service companies large and small are finding new opportunities for helping the domestic oil and gas industry address this regulatory offensive and comply with increasing strict emissions standards. In the near-term, it appears highly unlikely that Congress or any other force within the government, including the courts, will have the political capability of reversing these methane emissions regulations.