There has been considerable activity at the state and federal level over the past few months regarding when companies must “aggregate” emissions from operations to determine whether they are subject to the more stringent “major source” permitting requirements under the New Source Review (“NSR”) and Title V provisions of the Clean Air Act (“CAA”).  Although there have been positive developments at the state level, the news from EPA Headquarters and individual Regions is problematic and troublesome. 

As discussed in greater length in the August IOGA Newsletter, under current federal guidance regulators must consider three factors when deciding whether to aggregate emissions from wells, compressor engines and associated equipment as a single facility or source:  (1) whether the activities belong to the same industrial grouping; (2) whether the activities are under common control of the same person or entity; and (3) whether the activities are located on one or more contiguous or adjacent properties.  Recent developments have focused on what constitutes “contiguous or adjacent properties” and whether activities are under “common control.” 

With regard to the contiguous or adjacent properties factor, the Pennsylvania Department of Environmental Protection (“PADEP”) published Guidance for Performing Single Stationary Source Determinations of Oil and Gas Industries (“Guidance”) on October 12, 2011.  While the Guidance may be revised based on public comments accepted through November 21, 2011, it is helpful in that it establishes a “rule of thumb” that “sources within [. . .] a quarter mile distance should be aggregated so long as they meet the other two regulatory criteria (same industrial grouping and common control” and that “facilities should not be ‘daisy-chained’ together to establish a contiguous grouping . . ..”  While PADEP acknowledged the existence of non-binding EPA guidance that “interdependence may be considered when conducting a single source determination, [PADEP concluded that] the plain meaning of the terms “contiguous’ and ‘adjacent’ should be the dispositive factor when determining whether stationary sources are located on contiguous or adjacent properties.”  Although the Guidance discusses six factors for PADEP to consider when determining if sources are “contiguous or adjacent,” establishing a quarter mile cut off and focusing on the actual proximity of the sources is an improvement over EPA’s “interdependency” analysis and provides much-needed clarity and creates a favorable presumption for industry.

On the other end of the spectrum is EPA Region V’s October 18, 2010 determination that Summit Petroleum Corporation’s (“Summit”) gas sweetening plant, associated flares and 100 sour gas wells – some as far as eight miles from the sweetening plant and spread out over 43 square miles – are “adjacent” for purposes of the aggregation analysis.  EPA Region V focused on the “degree of interdependence between” the wells and the sweetening plant, concluding that the sour gas wells are “truly interdependent on the sweetening plant – the wells provide all of their sour gas to the sweetening plant, the sour gas cannot flow anywhere else, and Summit owns and operates the sweetening plant and well sites.”  As this quote demonstrates, Region V blurred the lines between evaluating the “common control” factor and “contiguous or adjacent” factor, and it appears that the common ownership of the wells and the sweetening plant made it easier for EPA to conclude the wells were “adjacent” to the sweetening plant.  Summit challenged EPA’s determination, arguing in part that EPA inappropriately created a fourth criterion – interdependence – that does not exist in the regulations.  The matter is pending before the Court of Appeals for the Sixth Circuit and the American Petroleum Institute has filed a brief in support of Summit. 

With regard to the common control factor, developments at the federal level from EPA Headquarters are not favorable.  In early 2010, WildEarth Guardians (“WildEarth”) petitioned EPA to object to the issuance of a Title V permit by the New Mexico Environment Department (“NMED”) to Williams Four Corners, LLC for its Sims Mesa CDP Compressor Station. WildEarth alleged that NMED “failed to consider emissions from all adjacent and interrelated pollutant emitting activities, namely the natural gas wells and associated equipment that supply natural gas to Sims Mesa CDP.”  Although a separate entity owned the upstream wells, WildEarth argued that the gas supplied to the compressor station is integral to and contributes to the output of the station and that the “wells appear to entirely support the Sims Mesa CDP and likely rely on the Sims Mesa CDP to process all or most of their gas . . ..”  On July 29, 2011, EPA Administrator Jackson agreed with WildEarth and objected to issuance of the Title V permit.  The Administrator indicated that there was insufficient or conflicting data in the record to support NMED’s determination that the upstream production wells were not within the common control of Williams and therefore should be excluded from the emissions calculations for the compressor station.  The conflicting assertions by Williams involved its contractual obligations to accept gas from the upstream wells on the one hand, and, on the other hand, a statement by Williams that the “contracts do not allow the well owners/operators . . . [to] influence or exercise any degree of control over the compressor station.”  The Administrator stated that NMED failed to adequately explore these conflicting statements and directed NMED to establish a more thorough record in order to determine if the upstream wells are in fact within   Williams’ control. 

In addition to the traditional administrative challenges to state permit decisions, Citizens for Pennsylvania’s Future (“PennFuture”) filed a novel citizen suit against Ultra Resources, Inc. (“Ultra”) on July 21, 2011.  The suit alleges Ultra failed to aggregate emissions from its multiple natural gas drilling sites and thus avoided the more stringent NSR permitting provisions.  The suit has been characterized as a collateral attack on PADEP’s permit decision and an inappropriate use of the CAA citizen suit provision.  The suit also faces procedural hurdles such as PennFuture’s failure to provide Ultra a 60-day notice of intent to sue. 

Finally, EPA recently resolved two additional cases involving WildEarth.  The first matter involved a November 17, 2010 petition with the Environmental Appeals Board, challenging a Title V permit renewal issue by EPA Region VIII to BP American Production Company for its Florida River Compression Station.  The second matter involved an April 25, 2011 petition in the Untied States Court of Appeals for the Tenth Circuit challenging EPA’s February 2, 2011 order denying WildEarth’s administrative petition to object regarding the issuance of a renewed Title V permit for Anadarko Petroleum Corporations Fredrick Compressor Station.    According to the proposed settlement (which is out for public comment until December 16, 2011), “EPA would agree to undertake a pilot program for the purpose of studying, improving, and streamlining source determinations in the oil and gas industry in new or renewal Title V permits for which Region 8 is the initial [. . .] permitting authority.”  Additional information regarding the pilot program can be obtain from EPA Docket ID EPA-HQ-OGC-2011-0915. 

Based on the recent developments discussed above and the in the August Newsletter, it appears the state regulators are inclined to stick with a common sense approach to determining when emissions sources should be aggregated, while EPA under the Obama Administration seems inclined to expand on concepts such as interdependency and blur the lines between regulatory criteria to aggregate physically disparate emission sources.  The outcome of the previously discussed cases will have a critical impact on future permitting decisions for the industry.  Stay tuned.