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BLM Wants Royalties for Natural Gas Lost to Venting, Flaring, and Leaks on Federal Land

V&E Environmental Law Update E-communication, January 26, 2016

On January 22, 2016, the Bureau of Land Management (BLM) released a proposed rule aimed at reducing natural gas lost through natural gas venting, flaring, and equipment leaks from both new and existing production activities on federal lands. Except where gas loss is “unavoidable,” as defined by the proposed rule, operators would be charged royalties on natural gas losses from onshore federal and Indian mineral leases administered by BLM. BLM is also revising its royalty regulations to allow the agency to raise royalty rates above the current 12.5 percent levels on competitive leases if it wishes to do so in the future.

BLM will accept public comment on this proposal for 60 days after its publication in the Federal Register. This proposed rule is part of a suite of Obama Administration rules affecting the oil and gas sector that are slated to be finalized before the Administration’s second term ends.

Background

BLM is charged with managing federal and Indian lands, and manages more of these lands than any other federal agency. As a result, BLM has authority over more than a third of the nation’s mineral estate, and regulates roughly 5 percent of domestic onshore crude oil production and 11 percent of onshore natural gas production. There are more than 100,000 oil and gas wells on federally managed lands. In fiscal year 2014, the production value of this oil and gas exceeded $27.2 billion and generated approximately $3.1 billion in royalties.

According to the Office of Natural Resources Revenue (ONRR), lessees and operators on BLM’s onshore lands lost 375 billion cubic feet of natural gas between 2009 and 2014.1 Several reviews by the Inspector General of the Department of the Interior and the Government Accountability Office recommended that BLM revise its regulations to address the loss of natural gas during certain operations. In this proposal, BLM contends that “[f]laring, venting, and leaks waste a valuable resource that could be put to productive use, and deprive American taxpayers, tribes, and States of royalty revenues.”2 To justify these new rules, BLM is relying on the Mineral Leasing Act of 1920 (MLA), which instructs BLM to ensure that lessees “use all reasonable precautions to prevent waste of oil or gas developed in the land.”3 In the proposal, BLM acknowledged efforts by the EPA, state regulators, and industry, to reduce flaring and venting, but argues that these additional rules are necessary to prevent the public’s resources and assets from being wasted. The proposal, therefore, starts from the presumption that the oil and gas lost to venting, flaring, and leaks is “waste.”

Requirements Under the New Proposal

Under the proposal, operators would be required to pay royalties on avoidable gas losses. Specifically, BLM proposes to focus on reducing gas lost from:

  • Flaring of associated gas from development oil wells;
  • Gas leaks from equipment and facilities located at well sites,
  • Gas leaks from compressors;
  • High-bleed pneumatic controllers and certain pneumatic pumps;
  • Gas emissions from vessels;
  • Downhole well maintenance and liquids unloading; and
  • Well drilling and completions.

The proposal would replace current requirements related to flaring, venting, and royalty-free use of production, which are contained in the Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases, Royalty or Compensation for Oil and Gas Lost (NTL-4A), which has not been updated since 1979.

Flaring

Under the current NTL-4A, there is no limit on how much operators may flare, but operators must apply to BLM on a case-by-case basis for approval to flare without paying royalties on the lost gas. These determinations are currently based on economic criteria, and BLM commonly approves the requests. Under the new proposal, operators would no longer have to seek approval. Instead, BLM would limit the routine flaring of associated gas from development wells to “1,800 thousand cubic feet (Mcf) per month per well, averaged across all of the producing wells on a lease.” BLM is proposing to phase in this requirement, so that the first year operators would be limited to 7,200 Mcf per month per well, and the second year they would be limited to 3,600 Mcf per month per well. Operators may estimate gas losses when less than 50 Mcf of gas is flared per day. However, once flared volumes meet or exceed 50 Mcf per day for a flare stack or manifold, operators must use meters to measure the losses.

These new limits would apply only to production wells and would not impact flaring from exploration or wildcat wells. The proposal also contains an exemption for flaring during emergencies, and BLM can grant additional exemptions under certain situations where meeting the limit would cause an operator to cease production and abandon significant recoverable oil reserves. BLM estimates that this limit would apply to about 16% of existing wells, and about 435 to 885 leases in any given year. BLM has estimated that the new limits could reduce flaring by up to 74 percent, but acknowledges that there is substantial uncertainty regarding this estimate.

Under the proposal, an operator would also be required to submit a plan to BLM prior to drilling a new development oil well that includes specific content demonstrating that the operator has considered and planned for gas capture. Operators would be required to share these plans with midstream gas capture companies to “facilitate timely pipeline development.” The plans would be submitted with the Application for Permit to Drill (“ADP), but would not be enforceable elements of the permit.

The proposed rule also provides that BLM can limit production levels from new wells if production from that new well to a gas pipeline is expected to result in one or more producing wells already connected to the pipeline being forced off the line. When gas capture capacity is not yet available on a lease, BLM notes that it can delay approval on an ADP, or add conditions to the ADP.

Unavoidable Flaring

BLM is proposing to update its royalty regulations to define when the loss of gas is “unavoidable” and, therefore, not subject to royalties. The loss of gas will only be considered unavoidable if all of the following four conditions are met:

  1. The operator has not been negligent;
  2. The operator has complied with all applicable requirements;
  3. The operator has taken prudent and reasonable steps to avoid waste; and
  4. The gas is lost from one of the following specified operations or sources: Emergencies; well drilling; well completion and related operations; initial production tests and subsequent well tests; exploratory coalbed methane well dewatering; leaks; venting from conforming pneumatic devices in the normal course of operation; evaporation from storage vessels; and downhole well maintenance and liquids unloading.

In addition, the loss of gas would be considered unavoidable when produced gas is flared (up to the 1,800 Mcf limit) from a well not connected to gas capture infrastructure, as long as BLM has not otherwise determined that the loss of gas is avoidable. By contrast, when a well is already connected to capture infrastructure and the operators have made an economic choice to flare the natural gas, then the flared gas will be subject to royalties.

Leaks

BLM is proposing a leak detection and repair program similar to the one recently proposed by EPA for certain new sources in the oil and gas sector. Unlike EPA’s proposed New Source Performance Standards (NSPS) for methane and VOC emissions, however, BLM’s rule would apply to new and existing well sites and compressor stations. Under BLM’s proposal operators would be required to conduct semi-annual inspections at their well sites and compressor locations. If an operator finds no more than two leaks at a facility during two consecutive inspections, the operator may change to annual inspections at that particular facility. If, however, the operator finds more than 2 leaks at a facility for two consecutive inspections, the operator must inspect for leaks quarterly. The frequency of inspections will continue to adjust during each two consecutive surveys.

BLM’s proposal requires an “instrument-based approach” to leak detection, and notes that optical gas imaging (OGI) is currently the most effective instrument for leak detection. OGI is also the technology of choice under EPA’s proposed NSPS. BLM acknowledges, however, that there are ongoing developments in this field and wants to ensure that operators can take advantage of any new, more effective, and less expensive technologies, as they become available. Under the proposed rule, operators with 500 or more wells must either: (1) use OGI technology; (2) use a “new, equally advanced and effective monitoring device, not yet developed” that is approved by BLM; or (3) implement a BLM-approved program that includes instrument-based monitoring. Smaller operators with fewer than 500 wells within a single BLM field office’s jurisdiction have the additional option of using portable analyzers assisted by audio, visual, and olfactory inspection.

As with the EPA’s proposed NSPS for onshore oil and gas operations, operators would then have 15 days to repair the leak, and then another 15 days after the repair to verify that the leak had been fixed. Operators would also be required to keep records documenting the dates and results of leak inspections, repairs, and follow-up inspections. BLM anticipates that its leak detection and repair rules will impact up to 36,700 existing wellsites, and could impact a total of about 37,000–38,000 wellsites per year.

Venting

The proposal would prohibit venting of natural gas except in limited circumstances, such as emergencies, or when equipment vents in ways authorized by the proposed rule. Each emergency is limited to 24 hours, and an operator may not have more than 3 royalty-free emergencies for a lease, unit, or Conservation Agreement within any 30-day period. The following specific limits are included in the proposal:

  • Pneumatic Controllers and Pneumatic Pumps: Operators would be required to replace high-bleed pneumatic controllers with low-bleed or no-bleed pneumatic controllers within one year of the effective date of the final rule. This requirement would apply only to pneumatic controllers that are not subject to EPA regulations, and would not apply when the operator demonstrates to BLM that replacing the controllers would “impose such costs as to cause the operator to cease production and abandon significant recoverable oil reserves under the lease.”
  • Storage Vessels: The proposal would subject existing storage vessels to the same standards that EPA applies to new and modified vessels on BLM leases. Operators would be required to route VOC emissions from existing storage vessels to combustion devices, continuous flares, or sales lines within six months after the effective date of the BLM rule. BLM can grant exceptions to operators that demonstrate that compliance would cause the operator to cease production and abandon significant recoverable oil reserves under the lease.
  • Downhole Well Maintenance and Liquids Unloading: Operators of new wells would generally not be allowed to purge those wells into the atmosphere, and must comply with best management practices, including requiring the operator to be on-site during well purging events unless the well has an automatic control system. In addition, operators unloading liquids from existing wells would be required to use best management practices.
  • Well workovers: Operators would also be required to capture, flare, use, or re-inject gas released during drilling, completion, and refracturing. Operators must either flare gas generated during these operations, capture and sell that gas, use it in operations on the lease, or inject it into the well. BLM is also proposing to allow operators to demonstrate compliance with EPA requirements for control of gas from well completions in lieu of compliance with BLM requirements.

Costs

BLM estimates that the annual cost to the oil and gas industry of implementing this proposed rule will be $125 to $161 million. BLM concludes that these regulations will nonetheless result in net benefits between $115 to $232 million per year, depending on the discount rate used. In order to reach these figures, BLM assumed that the industry will recover and sell millions of dollars-worth of natural gas as a result of the rule, and also used a controversial model known as the social cost of methane to place a dollar value on the social value of each ton of methane emissions that are reduced by the proposed rule.

Revised Royalty Rates

Under the Mineral Leasing Act of 1920 (MLA), and other statutes, BLM must set royalty rates for non-competitive leases at 12.5 percent, and BLM has no power to change that amount. In contrast, the MLA allows BLM to set a royalty rate of 12.5 percent or greater for competitive leases. Although not required by statute, current BLM regulations also mandate a 12.5 percent royalty rate for all competitive leases. BLM now proposes to change its regulations so that it would have the flexibility in the future to raise the royalty rate on its competitive leases above 12.5 percent. BLM is not proposing to raise the royalty rate at this time, but would have the ability to do so after revising its regulation. More information about BLM’s royalty rates is available here.

For more information, please contact Vinson & Elkins lawyers Casey Hopkins, Larry Nettles, George Wilkinson, or Margaret PelosoVisit our website to learn more about V&E’s Environmental & Natural Resources or Climate Change practices, or e-mail one of the practice contacts.


1 Office of Natural Resources Revenue (ONRR), Statistical Information, http://statistics.onrr.gov/ReportTool.aspx, using Sales Year - FY2014 – Federal Onshore – All States Sales Value and Revenue for Oil, NGL, and Gas products as of December 2, 2015.

2 Bureau of Land Management, Waste Prevention, Production Subject to Royalties, and Resource Conservation at 5, available at http://www.blm.gov/style/medialib/blm/wo/Communications_Directorate/public_affairs/news_release_attachments.Par.15043.File.dat/VF%20Proposed%20Rule%20Waste%20Prevention.pdf.

3 30 U.S.C. § 225.

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lnettles@velaw.com
+1.713.758.4834
gwilkinson@velaw.com
+1.202.639.6774
mpeloso@velaw.com

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.