Wednesday, January 11, 2017

Shale Law in the Spotlight: BLM Releases Final Rule on Waste Prevention, Production Subject to Royalties, and Resource Conservation

The loss of natural gas through flaring, venting and leaks is an issue that has received increased attention in recent years. On Federal and Indian lands alone, the Bureau of Land Management (BLM) has determined that 375 billion cubic feet of natural gas was lost in this manner in the period 2009-2014. One environmental organization, the Environmental Defense Fund, calculated the value of lost gas to be approximately $330 million annually in a 2015 analysis.

Understanding that it is a matter of particular importance, and as part of the Obama Administration’s Climate Action Plan to further tackle U.S. methane emissions, the Bureau of Land Management released in February 2016 proposed regulations requiring operators to reduce the waste of natural gas lost to flaring, venting or leaks on Federal and Indian lands. BLM stated that “these proposed regulations would replace Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases (NTL-4A), Royalty or Compensation for Oil and Gas Lost, which addresses venting, flaring, and royalty-free use of gas.”

On November 18, 2016, BLM published in the Federal Register its Final Rule on Waste Prevention, Production subject to Royalties, and Resource Conservation applicable to onshore oil and gas leases. The effective date of the final rule is January 17, 2017. One of the main objectives of the new legislation is to update the current “outdated” regulations codified at 43 CFR Part 3160 to take into account new technologies that could boost the country’s energy efficiency. Furthermore, the rule sets out new royalty rates in order to ensure competitive leasing processes.

First, the BLM rule prohibits oil and gas operators from venting natural gas on Federal and Indian Lands except for technical infeasibility or in cases of emergency. The rule imposes upon operators the obligation to minimize natural gas flaring by using a capture-target approach. For this purpose, BLM requires operators to capture 85 percent of their adjusted total gas volume by 2020, which percentage will keep increasing over time until it reaches 98 percent in 2026. In addition, the final rule establishes new requirements related to certain types of work equipment addressing gas losses from pneumatic controllers and pumps, storage vessels, liquids unloading, and well drilling and completions.

The rule also provides for monthly flaring exemptions for at least 5,400 Mcf of gas per well, which amount should be lowered each year. According to BLM, “once fully implemented, the capture targets will reduce flaring by up to 49 percent relative to 2015 levels.” Moreover, operators will be allowed some flexibility for calculating these targets on a lease-by-lease basis or an average basis over all of their oil production on Federal or Indian lands.  BLM also will permit operators to adjust their targets in cases where they would be disadvantaged in terms of related-costs. Additionally, BLM requires operators to submit a Waste Minimization Plan each time they apply for a permit to drill new oil and gas wells.

Second, BLM stated that “leaks are the second largest source of vented gas from Federal and Indian leases, accounting for about 4 Bcf of the natural gas lost in 2014,” and thus requires operators to use an instrument-based approach for leak detection. In other words, BLM encourages operators to use new technologies for the detection of leakage accidents, such as optical gas imaging equipment. Additionally, the final rule also imposes an obligation upon operators to conduct semi-annual inspections at well sites as well as quarterly inspections at compressor stations, and to keep records of these inspections and their follow-ups.

Third and lastly, BLM determined the existing royalty rates applicable to onshore oil and gas leases to be aligned with the royalty rate of 12.5% allowed under the Mineral Leasing Act, thereby reaffirming BLM’s statutory authority to increase the royalty rate for oil and gas production on onshore Federal and Indian lands. Finally, BLM clarifies the NTL-4A requirements governing the royalty or compensation for oil and gas lost and distinguishes more specifically between “unavoidable” loss, which is royalty-free, and “avoidable” loss, which is subject to royalties.

Interestingly, the BLM states that “this rule will pose costs ranging from $114-$279 million per year (using a 7 percent discount rate to annualize capital costs) or $110-$275 million per year (using a 3 percent discount rate to annualize capital costs) over the next years 10 years.”

On November 15, 2016, the Western Energy Alliance and the Independent Petroleum Association of America filed a lawsuit against the Interior Department before the U.S. District Court for the District of Wyoming challenging the issuance of the BLM’s final rule, a few days before its publication in the Federal Register. The two entities argued that BLM “places arbitrary limits on flaring, relies on flawed scientific, engineering, and economic assumptions and methodologies to estimate regulatory impacts, improperly relies on EPA air quality rules and the administrative record underlying those rules, which themselves are being litigated, and conflicts with or unlawfully usurps the primary jurisdiction of state and tribal governments.”

New legal developments in this lawsuit are to be expected, stay tuned!

Writing by Chloe Marie – Research Fellow

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