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Climate Change Hero

Climate Change Blog

  • 06
  • July
  • 2016

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EPA Finalizes Oil and Gas Source Definition: The Evolution of EPA’s Source Determination Rule

On May 12, 2016, EPA issued the final version of its source determination rule, defining when activities will be considered “adjacent” for purposes of major source air permitting in the upstream oil and gas sector. Under the new rule, new or modified equipment or activities are “adjacent” if they are on the same surface site or on sites that share equipment and are within one-quarter mile of each other. Notably, states and local agencies with approved permitting programs—the majority of states—may, but need not, adopt similar changes to their definitions of “adjacent.” Accordingly, for large parts of the U.S., the new source determination rule will have no direct effect on the existing practices of the relevant permitting authority.

Background: Uncertainty in Air Permitting

The definition of “adjacent” is significant to oil and gas operators because the adjacency of equipment and activities is a critical factor in determining whether they will be deemed a single source under various air permitting programs. For many of EPA’s air permitting programs, the stringency or even the applicability of air permitting requirements depends on the source’s potential to emit. When more activities are aggregated together into a single source, it increases the potential emissions of the “source,” which may increase the stringency of air permitting reviews required to build or operate upstream facilities.

In the past, uncertainty about whether to aggregate individual activities in the oil field as a single source resulted in litigation, including challenges to projects by non-governmental organizations. Over the years, EPA’s definition of a source evolved in a piecemeal fashion through memos and case-specific determinations to include all emitting activities that were “functionally related” to a source, regardless of how geographically far apart such activities may be from one another. In 2012, the Sixth Circuit invalidated EPA’s approach, holding that it was contrary to the plain meaning of “adjacent.” Following this decision, EPA issued guidance calling for its “functional interrelatedness” test to be used in every state other than those in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee). The D.C. Circuit invalidated that approach in 2014, holding that the guidance conflicted with EPA’s rules requiring consistency across regions. In order to resolve the uncertainty created by these developments, EPA co-proposed two options for source aggregation in the oil and gas industry in a proposed rule issued in August of 2014.

EPA’s Proposed Definitions

In the proposed rule, EPA considered two options for defining what constitutes a source for onshore oil and gas operations: one based solely on proximity, and another based on proximity within a certain distance and on functional interrelatedness beyond that distance. Under the first option, a “source” would have included all commonly owned emitting activities within one-quarter mile of each other. Under the second proposed option, the “source” boundary would have encompassed not just activities within the one-quarter mile distance, but all commonly owned “functionally related” equipment, regardless of distance. This “functional interrelatedness” test would have rendered it much more difficult for operators to judge with confidence the scope of any source, and could have led to greater litigation risk, uncertainty, and costly delays in permitting determinations.

Final Definition: Clarity for the Oil and Gas Industry but Flexibility for the States

In the final rule, EPA adopted a bright-line distance of one-quarter mile within which equipment and activities located on separate surface sites must be aggregated. Equipment on separate surface sites located more than one-quarter mile apart is not “adjacent” and, therefore, is not part of the same stationary source. EPA recognized that oil and gas operations frequently do not have fences or other distinct boundaries, and specified that the one-quarter mile boundary should be measured from the center of the emitting activities for construction permits, and from the center of the equipment on each surface site for Title V permits. Additionally, in response to recommendations submitted by various commenters, EPA determined that not all emitting equipment located on separate surface sites within one-quarter mile of each other will be considered “adjacent.”

Using language somewhat reminiscent of the “functionally related” standard suggested under the proposed rule, EPA determined that aggregation will occur under the final rule only if the separate surface sites are within one-quarter mile of each other and also use “shared equipment necessary to process or store oil or natural gas.” Equipment satisfying these criteria will meet the “common sense notion of a plant,” and will be aggregated. Alternatively, separate surface sites that do not include shared equipment, even if located within one-quarter mile, will not be aggregated. While the “shared equipment” standard under the final rule is better defined than the “functionally related” standard suggested in the proposed rule, significant questions remain as to how EPA will determine the existence of “shared equipment.”

EPA has indicated that the clarifications contained within the final rule will “provide greater certainty for the regulated community and for permitting authorities,” and will result in “more consistent determinations of the scope of a source” by avoiding a more detailed case-by-case evaluation based on the relationship of the emitting equipment. Still, many states with EPA-approved permitting programs will likely choose to retain their existing approach to source determination, allowing oil and gas operators to avoid any uncertainty associated with the implementation of the final rule.

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Author

Rachel D. Comeskey

Rachel D. Comeskey Associate