EPA Proposes Methane Fee Rule for Oil and Gas Industry

The EPA recently announced a proposed rule to assess a charge on certain large emitters of methane waste from the oil and gas sector that exceed emissions intensity levels set by Congress.

The Inflation Reduction Act (IRA) of 2022 amended the Clean Air Act (CAA) to add Section 136: Methane Emissions and Waste Reduction Incentive Program for Petroleum and Natural Gas Systems.

If finalized, the regulation would impose and collect a “Waste Emissions Charge” (WEC) on methane emissions that exceed statutorily specified waste emissions thresholds from owners or operators of applicable facilities. The proposed rule will require a per-metric-ton (mt) fee on methane emissions above the identified thresholds released by most oil and gas operations.

“The waste emissions threshold is a facility-specific amount of metric tons of methane emissions calculated using the segment-specific methane intensity thresholds defined in CAA section 136(f)(1) through (3) and a facility’s natural gas throughput (or oil throughput in certain circumstances),” states the proposed rule. “Facilities that have methane emissions below the threshold would not be required to pay the charge; facilities that have emissions above the threshold would be required to pay the charge.”

Impacted industries

The WEC program applies to facilities reporting more than 25,000 mt of carbon dioxide equivalents (CO₂e) of greenhouse gases (GHGs) emitted per year pursuant to the GHG Reporting Rule’s requirements (under Subpart W) for the petroleum and natural gas systems source category, which includes:

• Onshore petroleum and natural gas production
• Offshore petroleum and natural gas production
• Onshore petroleum and natural gas gathering and boosting
• Onshore natural gas processing
• Onshore gas transmission compression
• Onshore natural gas transmission pipeline
• Underground natural gas storage
• Liquefied natural gas import and export equipment
• Liquefied natural gas storage

Proposed fees

If finalized, the fees will be as follows per each metric ton exceeding the threshold level:

• $900 mt in 2024
• $1,200 mt in 2025
• $1,500 mt in 2026 and the following years

Under the proposed rule, the first WEC will be due no later than March 31, 2025.

Exemptions

The proposed rule includes three exemptions that may lower a facility’s WEC or exempt the facility entirely from the charge:

• Unreasonable delay: This exemption would apply to methane emissions caused by unreasonable delay in environmental permitting of gathering or transmission infrastructure necessary for the offtake of increased volume as a result of methane emissions mitigation implementation.
• Plugged wells: This exemption would apply to the methane emissions from wells that have been permanently shut in and plugged in the previous year in accordance with all applicable closure requirements.
• Regulatory compliance: This exemption would apply to facilities that are subject to and in compliance with methane emissions requirements promulgated pursuant to CAA sections 111(b) and (d) when and if certain statutorily specified conditions are met.

“Under the ‘unreasonable delay’ exemption, EPA has proposed that WEC Applicable Facilities that exceed the waste emissions threshold will not be responsible for fees resulting from flaring if the flaring: (i) is in compliance with applicable laws; and (ii) would not have occurred if a necessary permit had been granted for gathering or transmission infrastructure to mitigate the flaring,” explains Jones Day. “To qualify for the exemption, a designated amount of time must have passed since the application was deemed complete (likely between 30 and 42 months), and the applicant cannot be responsible for the permitting delay. Note that EPA has limited this exemption to flaring (rather than including vented emissions) even though the Section 136 language does not require this limitation.

“To receive the ‘plugged wells’ exemption, WEC Applicable Facilities must plug the well permanently so that all federal, state, and local requirements for closure are met. Although not explicitly required by the statute, only production industry and not storage wells would qualify for the exemption.”

The IRA’s Methane Emissions Reduction Program three-part framework:

1. Using funds from the IRA, the EPA is partnering with the Department of Energy (DOE) to provide over $1 billion in financial and technical assistance to accelerate the transition to no- and low-emitting oil and gas technologies, including funds for activities associated with low-producing conventional wells; support methane monitoring; and reduce pollution from oil and gas operations.
2. The EPA is working with industry and other stakeholders to improve the Greenhouse Gas Reporting Program and increase the accuracy of reported methane emissions.
3. The EPA seeks to encourage facilities with high methane emissions to meet or exceed the performance levels set by Congress—performance that’s already being achieved by leading oil and gas companies, according to the Agency news release.

Final details

“EPA’s proposed rule addresses details regarding how the charge will be implemented, including the calculation of the charge and how exemptions from the charge will be applied,” the news release adds. “Facilities in compliance with the recently finalized [CAA] standards for oil and gas operations would be exempt from the charge after certain criteria set by Congress are met. The agency expects that over time, fewer facilities will face the charge as they reduce their emissions and become eligible for this regulatory compliance exemption.

“In the meantime, the [WEC] will help encourage the oil and gas industry to stay on target to lower emissions. Oil and natural gas operations with methane emissions in excess of the emissions intensity levels established in the [IRA] can reduce or eliminate any charge by deploying readily available technologies to reduce harmful and wasteful emissions. This program will help to level the playing field for industry leaders already employing best practices and drive near-term opportunities for more widespread methane reductions while EPA and states work toward full implementation of the [CAA] standards.”

Impacted industry is advised to carefully evaluate the applicability of the exemptions provided in the rule and to reduce WECs by using the “netting analysis” feature in the proposed rule, which allows owner/operators with multiple applicable facilities reporting more than 25,000 mt of CO₂e to Subpart W under common ownership or control to sum the emissions above and below the waste emissions thresholds from all applicable facilities to calculate net emissions.

“Obligated parties should closely monitor Subpart W reporting regulations (to be finalized by August 2024), which may directly impact how facilities calculate methane emissions and, therefore, whether they are categorized as a WEC Applicable Facility subject to the WEC,” advises Jones Day. Comments on the proposed rule can be made until March 26, 2024, on the Federal eRulemaking platform under Docket #: EPA-HQ-OAR-2023-0434.