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August 15, 2011

EPA Proposes Air Standards for Hydraulic Fracturing

The U.S. Environmental Protection Agency ("EPA") recently proposed the first federal air emissions standards for hydraulically fractured wells which will regulate over 25,000 fractured and re-fractured wells nationwide. The proposed regulations will also regulate compressor stations and other related oil and gas facilities used for processing, storage and transmission of natural gas. As a result of the decision by the U.S. Court of Appeals for the D.C. Circuit in WildEarth Guardians v. Johnson, EPA was required to propose rules to regulate air emissions from hydraulically fractured wells and related oil and gas facilities by July 28, 2011 and to issue final rules by February 28, 2012. On July 28, 2011 EPA proposed four regulations, including a New Source Performance Standard ("NSPS") for volatile organic compounds ("VOCs") and for sulfur dioxide ("SO2") and air toxics standards.

New Source Performance Standards

Section 111 of the Clean Air Act requires EPA to review the NSPS for the Oil and Natural Gas Production source category. Currently, there is no NSPS applicable to hydraulically fractured wells and only one for natural gas production facilities. The proposed NSPS rule for VOCs would apply to all hydraulically fractured wells, including new wells and re-fractured, existing wells. The proposed rule would establish standards for VOC emissions from the preparation of wells for gas production, known as "well completions," compressors, pneumatic controllers and storage vessels. EPA has proposed a 95% reduction in VOC emissions from new and modified hydraulically fractured gas wells through the use of "green completions" or "reduced emissions completions" at the wellhead. A "green completion" involves the use of specialized equipment to separate natural gas from liquid hydrocarbons in the flowback of producing wells. The natural gas and liquid hydrocarbons are captured and treated for use or sale. Pit flaring would be required for delineation and wildcat wells not subject to the "green completion" requirement. According to EPA, these requirements will result in a 95% reduction in VOC emissions and 90% recovery of salable natural gas.

The proposed NSPS will also require compressors, pneumatic controllers, condensate and crude oil storage tanks and natural gas processing plants to increase leak detection and reduce, and in some instances eliminate, VOC emissions. Natural gas processing plants using gas with at least 50% hydrogen sulfide content would be subject to the more stringent proposed NSPS for SO2 emissions.

Air Toxics

Pursuant to section 112 of the CAA, oil and gas processing, storage and transmission facilities are subject to Maximum Achievable Control Technology ("MACT") standards for hazardous air pollutants ("HAPs"), including benzene, toluene, ethyl benzene and xylene. EPA last issued MACT standards for emissions from oil and natural gas production, transmission and storage facilities in 1999. For oil and natural gas production, the proposed rule focuses on tanks, equipment leaks and glycol dehydrators used to remove water vapor from natural gas. For natural gas transmission and storage, the rule focuses on large and small glycol dehydrators. Under the proposed rule, the one ton per year benzene compliance option for large glycol dehydrators would be eliminated at oil and gas production, transmission and storage facilities classified as major sources and a 95% reduction in HAPs would be required. The proposed rule would also establish more stringent standards for small glycol dehydrators at major sources and equipment leaks.

Non-major sources emitting less than 100 tons per year of VOCs are exempted from Title V permitting requirements under the proposed rule. For these facilities, compliance will be based on special notification, record keeping and reporting requirements, including a 30-day advance notice of wellhead completion, an initial compliance notification after one year, and annual reporting.

Potential Costs and Benefits

EPA believes that the proposed rule is a cost-effective means of reducing air pollutants that contribute to smog (VOCs), human health impacts (benzene) and global climate change (methane). According to EPA, the proposed rule would reduce annual emissions of VOCs by 25%, air toxics by 30% and methane, indirectly, by 26%. By employing technologies that capture natural gas to separate these emissions at the wellhead, EPA projects that the industry will also realize a net savings of $30 million annually based on the sale of the captured natural gas. Environmental groups have called the proposed regulations "an important first step," but will likely urge EPA for more stringent regulations and to directly regulate methane emissions.

However, some industry groups believe that the proposed rule could cost millions of American jobs and that the smog-reducing benefits claimed by EPA are unfounded. The Marcellus Shale Coalition said that the regulations were "unworkable" and "undercut the production of American natural gas." The American Petroleum Institute has called on EPA to delay adoption of a final rule past the court-imposed February 2012 deadline to allow industry time to review the proposed changes. Meanwhile, EPA will accept public comment on the proposed rule for 60 days after it is published in the Federal Register and will hold public hearings in Dallas, Denver and Pittsburgh.

Please contact us if you would like more information on the proposed rule and its potential impact on your business.


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