On October 15, 2012, IOGA-WV, the Independent Petroleum Association of America (“IPAA”) and five other state-level oil and gas associations filed suit in the D.C. Circuit Court of Appeals 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. As discussed in greater detail below, issues of particular concern to the associations are the highly complex and technical “low pressure gas well” definition that allegedly was intended to provide relief for low-pressue wells 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 IOGA-WV, 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 have been directed to inform the court of the issues they wish to raise on appeal by November 16, 2012.

Although the petitions for review filed with the D.C. Circuit do not elaborate on the concerns of the parties, IOGA-WV and its fellow associations’ petition for reconsideration focused on a few key issues which are 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. IOGA-WV and its fellow associations have asked EPA to allow industry to review and comment on the formula prior to subjecting industry to such a definition. IOGA-WV’s initial assessment is that the definition is inadequate and does not accurately reflect what has traditionally been considered a low-pressure well.

Another key issue raised in IOGA-WV’s 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.

IOGA-WV and its fellow associations are in the process of evaluating specific issues to raise on appeal of the regulatory package. For example, EPA’s assumptions and subsequent controls on storage tanks are suspect. In the propose 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. Another issue under consideration by IOGA-WV and the associations is EPA’s failure to differentiate low production vertical and some horizontal wells that utilize hydraulic fracturing techniques from the large Marcellus Shale horizontal wells that are dramatically different in scale and how those differences impact the cost-effectiveness of EPA’s controls. Related to IOGA-WV’s concern with EPA’s characterization of emissions from all hydraulically fractured wells as being sufficiently the same to warrant a “one-size-fits-all” approach to regulation, IOGA-WV believes EPA inappropriately included “energized” wells – those wells stimulated with inert gases such as nitrogen or carbon dioxide. Despite acknowledging that energized fractures are a relatively new type of completion method, EPA elected to lump in energized fractures with all hydraulically fractured wells despite very different emission profiles. IOGA-WV members are encouraged to contact me at jelliott@spilmanlaw.com with potential issues to raise on appeal as soon as possible as the November 16 is rapidly approaching.

It is worth noting that without the efforts of Charlie Burd and Bob Radabaugh, chairman of the Environmental and Safety Committee, and the support of IPAA, the independent, low volume producer may not have a had a voice in the litigation as many of the groups that challenged the rule have different priorities than IOGA-WV and IPAA.