On February 8, 2016, the BLM published its long awaited proposed rule to control venting, flaring and leaks of natural gas from oil and gas operations on onshore Federal and Indian lands. 81 Fed. Reg. 6616. The primary purposes of the rule are to: (1) update regulatory requirements in light of newer technology; (2) increase royalties payable to the government and Indian Tribes by capturing more gas; and (3) address concerns about climate change by reducing the amount of methane released to the atmosphere. The rule would supersede requirements dating back to 1979 – Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases (NTL-4A), 44 Fed. Reg. 76600 (Dec. 27, 1979).
BLM studied Colorado’s Air Quality Control Commission Regulations and consulted with State regulators, referring to Colorado more than 40 times in the description of the proposed rule. Because Colorado has already adopted aggressive regulations to control methane emissions, the effect of the proposed rule would not be as great in Colorado as in other states. The proposed rule would more significantly affect operators in states such as North Dakota, South Dakota and New Mexico, where over 90 percent of routine flaring of associated gas from development oil wells occurs.
Waste Minimization Plan
A novel feature of the proposed rule that would complicate the drilling of development oil wells is a waste minimization plan that operators must submit with each Application for Permit to Drill (APD). The waste minimization plan must provide a strategy explaining how the operator will capture associated gas upon the start of oil production and include the following information:
The pipeline infrastructure location and capacity in the area of the well or wells; the anticipated timing, quantity, and production decline curve of oil and gas production from the well or wells; a gas pipeline system location map showing the operator’s wells, gas pipelines, gas processing plant(s), and proposed routes for connection to the pipeline; certification that the operator has provided one or more midstream processing companies with information about the operator’s production plans, including the anticipated completion dates and gas production rates of the proposed well or wells; the volume and percentage of produced gas the operator is currently flaring or venting from wells in the same field and any wells within a 20-mile radius of that field; and an evaluation of opportunities for alternative on-site capture approaches, if pipeline transport is unavailable.
Failure to submit a complete and adequate plan would be grounds for denying the APD.
Royalties
Although the proposed rule would not itself raise royalty rates above the current maximum of 12.5 percent, it would give BLM the flexibility to ask for a higher percentage on new leases. Recent BLM data “showed that the royalty rates charged on private and State lands range from 12.5 to 25 percent, and that the average rate assessed exceeds 16.67 percent.” Royalty rates on existing BLM leases would not be affected, but BLM is clearly paving the way to increase royalty rates on certain leases in the future.
BLM would also impose royalties on more flared gas. In addition to royalties that are due on any “avoidably lost” oil or gas, operators would also owe royalties on any gas vented or flared above a certain threshold. No more than 1,800 Mcf per month per well, averaged over all of the producing wells on a lease, could be vented or flared from development oil wells. This limit would be phased in over three years, starting with 7,200 Mcf in the first year. In the second year the limit would be 3,600 Mcf and then drop to 1,800 Mcf in the third and subsequent years.
BLM estimates that engineering compliance and other costs to industry from the proposed rule would be in the range of $117 to 161 million per year. These costs would be partially offset, however, by revenue from the sale of natural gas that would otherwise have been lost. It remains to be seen how much of a disincentive the new rule will be for drilling on public lands. Will the royalties from newly captured gas be more than the revenues lost due to operators deciding to drill elsewhere because of the new rule?
Comments on the proposed rule must be received by April 8, 2016.
The text of the proposed rule may be found at: https://www.gpo.gov/fdsys/pkg/FR-2016-02-08/pdf/FR-2016-02-08.pdf