sboxermanFeatured Expert Column – Environmental Law and Policy

by Samuel B. Boxerman, Sidley Austin LLP
with Ben Tannen, Sidley Austin LLP

On January 22, 2016, the U.S. Department of Interior’s (“DOI”) Bureau of Land Management (“BLM”) issued a proposed rule governing oil and natural gas production on onshore Federal and Tribal lands. Bureau of Land Management, Pre-Publication Proposed Rule, Waste Prevention, Production Subject to Royalties, and Resource Conservation (Jan. 22, 2016) (“Proposed Rule”). Coming on the heels of U.S. EPA’s proposed regulation of emissions from certain new and modified oil and gas sources, the BLM proposal represents a further expansion of the federal government’s regulation of the oil and gas business. The draft rule mainly addresses two topics—(1) the release of natural gas into the environment during oil and gas production and (2) the royalty rates paid by developers that produce on Federal and Tribal land. BLM frames its proposal as a tool to combat climate change, since methane, the main component of natural gas, is considered a more potent greenhouse gas than carbon dioxide. BLM asserts the Proposed Rule will produce net benefits of $115-$232 million, Proposed Rule at 12, in part due to the revenue industry would earn if it is in fact able to capture and sell more gas, but primarily from assumed benefits derived from EPA’s formula for calculating the “social cost of methane.”   Industry, however, already has every incentive to maximize the gas produced and collected, and has issued a statement criticizing the proposed rule, arguing it is unnecessary given new and existing policies and declining emissions in the face of increasing production.

BLM proposes to minimize gas released during production in several ways. First, it proposes requirements governing the venting and flaring of gas. Specifically, BLM is seeking to prohibit venting of natural gas except for certain situations, such as emergencies. Id. at 14. It would also limit the rate of routine flaring of associated gas from oil wells to 1,800 cubic feet per month per well (averaged across all producing wells on a lease), while leaving BLM with discretion to allow higher rates of flaring if the agency believes doing so is warranted. Id. at 14, 16. BLM is proposing to retain existing exemptions from gas-capture requirements for gas flared under certain situations, such as gas lost in the normal course of well drilling and completion. Id. at 14. The Proposed Rule would also update existing royalty provisions by defining when a loss of gas would be “unavoidable” and thus royalty-free. Id. at 17.

Second, the Proposed Rule addresses leakage and other fugitive emissions from operations on Federal and Tribal lands by proposing to require oil and gas operators to implement an instrument-based Leak Detection and Repair program. Id. at 20. This program would include semi-annual inspections at well sites and compressor locations, with the potential for the frequency of inspections to increase or decrease depending on their results and an obligation to repair identified leaks within 15 days of discovery. Ibid.

Third, BLM is also proposing to establish a range of technical requirements for various equipment used in the oil and gas production process. For example, the Proposed Rule would require operators to replace high-bleed pneumatic controllers with low-bleed or no-bleed pneumatic controllers by no later than one year after the effective date of any final rule. Id. at 23. It would also address gas losses from existing storage vessels by reducing venting. Ibid.

Finally, the Proposed Rule would amend existing regulations governing royalty rates for onshore oil and gas leases. The Proposed Rule would clarify that the fixed rate found in the Mineral Leasing Act (“MLA”) of 12.5 percent is the royalty rate for all noncompetitive leases issued after the effective date of any final rule. Id. at 33. It would also change existing regulations so that they match the statutory text of the MLA, which BLM states allows for the royalty rate of competitive leases to be at or above 12.5 percent. Ibid. Existing regulations set royalty rates for competitive leases at 12.5 percent. Ibid.

The Proposed Rule could have negative implications for the oil and gas industry and the economy more broadly. Oil and gas production on onshore federal lands accounts for 11 % of natural gas and 5 % of oil production nationwide. “Oil and Gas,” U.S. Dep’t of the Interior, Bureau of Land Mgmt. This draft rule duplicates aspects of efforts by U.S. EPA and states to regulate oil and gas production, as well as voluntary industry efforts, and would add costs at a time when the industry is under significant stress from falling oil prices and low natural gas prices. Comments on the Proposed Rule will be accepted until 60 days after its publication in the Federal Register.