On October 15, 2012, Spilman Thomas & Battle, PLLC filed suit in the D.C. Circuit Court of Appeals on behalf of the Independent Petroleum Association of America (“IPAA”) and six other state-level oil and gas associations (PA, WV, OH, KY, IL, IN), (referred to herein as “the Associations”) challenging the U. S. Environmental Protection Agency’s (“EPA”) New Source Performance Standards (“NSPS”) promulgated for the oil and natural gas industry on August 16, 2012. On the same day, this group of associations also petitioned EPA Administrator Lisa Jackson to reconsider certain aspects of the regulations that disproportionately impact the smaller, independent natural gas producers. Issues of particular concern to the associations are the misguided and inappropriate definition of a “low-pressure gas well” and EPA’s inappropriate use of industry-wide averages to calculate the cost-effectiveness of various requirements on well completions and storage tanks.

In addition to the Associations, eight other groups or entities challenged EPA’s air regulations: five groups representing industry, four environmental organizations and one state. The other petitions were filed by (1) the American Petroleum Institute; (2) the Gas Processors Association; (3) the Natural Resources Defense Council, Environmental Defense Fund, Sierra Club, Group Against Smog and Pollution, and Clean Air Council; (4) the Domestic Energy Producers Alliance; (5) the California Communities Against Toxics, Clean Air Council, Coalition for a Safe Environment, Desert Citizens Against Pollution, Natural Resources Defense Council and Sierra Club; (6) the Texas Oil and Gas Association; (7) the Western Energy Alliance; and (8) the State of Texas. The petitions for review have been consolidated into a single case and the parties were originally directed to inform the court of the issues they wish to raise on appeal by November 16, 2012, but that date has been delayed until December 21, 2012 to facilitate negotiations with EPA.

Although the petitions for review filed with the D.C. Circuit do not elaborate on the concerns of the parties, the Associations’ petition for reconsideration focused on a few key issues likely to be raised on appeal. A principal concern is that EPA’s exclusion of “low-pressure wells” from certain provisions of the regulations is inadequate and was illegally promulgated.  During the notice and comment period on the proposed rule, several commenters highlighted technical issues that prevent the implementation of reduced emission completions on low pressure gas wells due to the lack of the necessary reservoir pressure to flow at rates appropriate for the transportation of solids and liquids from a hydraulically fractured gas well completion into an imposed back-pressure. EPA acknowledged this issue and agreed that a “low pressure” threshold was appropriate to account for these technical limitations, and in the final rule defined a “low-pressure gas well” as “a well with reservoir pressure and vertical well depth such that 0.445 times the reservoir pressure (in psia) minus 0.038 times the vertical well depth (in feet) minus 67.578 psia is less than the flow-line pressure at the sales meter.” 40 C.F.R. § 60.5430. EPA’s discussion of how the agency arrived at this formula spans over 20 pages in the Supplemental Technical Support Document for the final regulation. The formula reflects well over a dozen assumptions made by EPA in its development of the formula, none of which were subject to public review and comment prior to the issuance of the final regulations.

In addition to EPA’s failure to meet the required notice and comment obligations of the Administrative Procedure Act, EPA’s concept of a low-pressure well based on the pressure of the sales line misconstrues the traditional notion and understanding of what constitutes a “low-pressure well.” Traditionally, low-pressure wells include vertically fracked wells, low-volume production wells or marginal wells. Low-pressure wells often require energized fracks using inert gases because the reservoir pressure is insufficient to overcome the pressure created by a column of water. While somewhat acknowledging differences with marginal wells, energized fracks and vertically fracked wells, EPA’s definition of a “low-pressure well” does little to nothing in terms of providing relief to what industry has generally considered a low-pressure well. EPA’s failure to differentiate low-pressure/low-production wells that utilize hydraulic fracturing techniques from the large Marcellus Shale horizontal wells that are dramatically different in scale is arbitrary and capricious. EPA’s failure to recognize the differences between different types of hydraulically fractured wells renders the economic justification for well completion requirements on low-pressure wells insufficient. EPA should have provided an exemption for these types of well based on the traditional notion of a low-pressure well, not based on the pressure in the sales pipeline.

Another key issue raised in the Associations’ petition for reconsideration, and an issue likely to be raised on appeal, is EPA’s use of industry-wide averages based on inadequate data to justify various controls on well completions and storage tanks as being cost-effective. EPA acknowledges in the rulemaking that the characteristics of emissions from production operations, specifically VOC content, vary considerably within an individual basin, let alone among different basins across the country. EPA’s own data demonstrates that the VOC percentage in natural gas in the US ranges from 0.0% by weight to 52.22%. Yet, to justify various controls EPA uses an industry-wide average of 18.28% by weight to calculate cost-effectiveness. This means that for wells with low VOC content, EPA’s selected control options are not cost-effective. Although EPA picked an average VOC content to calculate cost-effectiveness, it rejected a VOC threshold to exempt low-VOC-emitting wells because the agency indicated it could not know with certainty or in advance the VOC content of any given well. In addition to relying on a single VOC percentage to assess cost-effectiveness, EPA relied on as little as four data points to characterize the emission profile of certain activities for the entire industry.

The Associations are in the process of evaluating specific issues to raise on appeal. For example, EPA’s assumptions and subsequent controls on storage tanks are suspect. In the proposed rule, EPA suggested that emission controls on storage tanks emitting more than 10 tons per year (“TPY”) of VOCs would be cost-effective. Almost unanimously industry argued that the threshold should be 12 TPY. In the final rule, EPA lowered the threshold to 6 TPY. Industry also took exception to EPA’s estimate of the number of storage tanks affected by the proposed regulations. EPA estimated that only 304 tanks would be affected nationwide. Commenters estimated the number would exceed 10,000 in Texas alone. The issues associated with storage tank controls are also covered by the petition for reconsideration.