2017 legislative, regulatory actions difficult to predict due to uncertainty surrounding November elections
By Kelli Ainsworth, Editorial Coordinator
As the current administration draws to a close and the US prepares for the incoming president and Congress, several new regulations have recently been proposed or finalized by various regulatory bodies. Three items of concern are especially notable on the regulatory horizon: the Well Control Rule from the Bureau of Safety and Environmental Enforcement (BSEE), the Air Quality Rule from the Bureau of Ocean Energy Management (BOEM), and the Methane Waste Prevention Rule from the Bureau of Land Management (BLM). For many in the industry, the timing of these rules and proposals are clear attempts to push through new regulations before the current administration ends in January.
Well control rule
One of the biggest pieces of regulation to come into force in recent years for the drilling industry is BSEE’s Well Control Rule. Although the rule officially took effect on 28 July, questions remain on several of the rule’s actual requirements and how companies can demonstrate compliance, said Alan Spackman, IADC Vice President of Policy, Government and Regulatory Affairs.
Further, the agency has still not appointed approved verification organizations, which will be tasked with ensuring compliance. “The clock is ticking, and because they haven’t even named the organizations, there’s no way to tell what type of information they’re communicating with the organizations regarding what to look for in implementation and how to verify that companies are in compliance,” Mr Spackman said. “It’s just a big black hole.”
In addition, BSEE has not provided the industry with clear and specific answers relating to accumulator sizing. The rule requires that all accumulators align with sizing specifications outlined in API Standard 53 and that they have bottles dedicated to auto-shear and deadman functions, which could potentially require larger BOP stacks. The industry raised this concern with the regulator, but so far clarification has not been provided.
There are also requirements in the rule that cannot be satisfied with current technology, Mr Spackman said. For instance, proven technology doesn’t exist for shearing any and all drill pipe, electric, wire and slick line to be used in the well. This provision of the rule is set to come into force in April 2018. Another provision calls for a pipe-centering mechanism for shear rams, also a technology that doesn’t yet exist. The industry has until 2023 to comply with this provision.
While many clarifications are still needed, one area of concern that is closer to resolution is the submission and confidentiality of BOP failure reports, which must be submitted to both BSEE and the original equipment manufacturer. Following discussions with BSEE, modifications have been made to the International Association of Oil and Gas Producers (IOGP)/IADC BOP Reliability JIP database to facilitate equipment failure reporting by operators and contractors in accordance with the Well Control Rule. These modifications generate failure reports to the affected operators, as well as the affected OEMs. These can be forwarded directly to the Bureau of Transportation Statistics (BTS), which is acting as a data repository for BSEE. Data reported directly to BTS is protected by the Confidential Information Protection and Statistical Information Act (CIPSEA), which precludes it from discovery under FOIA. BTS itself reports only statistically aggregated data.
As for the remaining challenges associated with implementing the Well Control Rule, dialogue is still continuing between BSEE and the industry to try and resolve them. The Offshore Operators Committee has formed several workgroups to focus on inspection results, BOP flowing conditions, lifeboats, accumulator banks, conditions of approval and intervention and coiled tubing.
BOEM revising air quality regulations
Beyond the Well Control Rule, the offshore industry is also facing BOEM’s Air Quality Control, Reporting and Compliance Rule. The agency has proposed stringent updates, which it says are intended to reduce emissions of volatile organic compounds, nitrogen oxide, sulfur oxide, carbon monoxide and particulate matter from offshore oil and gas activities. Abigail Ross Hopper, BOEM Director, told DC the proposed updates are necessary to reflect the best science around air quality and emissions, as well as the way the offshore oil and gas industry operates, both of which have changed substantially since the regulations were first drafted in 1980.
“All of those things are the same under the current rule and under the proposed rule,” Director Hopper said. “I think that’s a really important piece of this proposed regulation. The framework and the steps to evaluate the impact on the states remain the same.”
What is changing is the input into those calculations. In the three decades since the last BOEM air quality standards were drafted, oil and gas operations have moved farther offshore. This means that support and service vessels have to travel much farther than they used to. “Right now, when we look at emissions from support vessels, we look within a 25-mile radius of the drilling rig,” Director Hopper said. “What the proposed rule calculates is the entire distance from shore to the drilling rig. That could be less than 25 miles, but much more frequently it’s much greater than 25 miles.” BOEM believes this change will more accurately calculate emissions associated with these vessels.
BOEM is also proposing changes that would require emissions from multiple facilities within a nautical mile – that are owned by the same operator and intended to be part of a single project – to be aggregated when emissions are calculated. “Rather than having operators propose and permit small, discrete pieces of the same project where each of them falls below the exemption threshold but holistically they may not, we wanted to make sure that, as whole, they were not going to affect the air quality of a state,” Director Hopper said.
Additionally, rather than calculating emissions at the shoreline, operators will now calculate emissions at the state seaward boundaries, which are generally three nautical miles offshore.
The proposed rule contains a range of exemption thresholds that will be updated based on the findings of two ongoing studies. One study, an air quality modeling study taking place in the Gulf of Mexico, broadly examines the impact of offshore oil and gas activities to states. “One of the outcomes of that will be looking at whether our exemption thresholds are appropriate or whether they need to change based on the science,” Director Hopper said. A similar study is under way in Alaska. BOEM declined to estimate the timeline of completion of either of these studies.
If these studies find that the exemption thresholds need to be updated, but the new threshold falls within the range already published in the proposed rule, the rule will be updated to specify the exemption threshold. However, if studies show exemptions thresholds must be adjusted to a level outside the range stated in the rule, BOEM would potentially start the rulemaking process again.
One of the industry’s chief concerns is the fact that the proposed rule was published before these studies have been completed. “We think the government jumped the gun on these regulations,” Andy Radford, API Senior Policy Advisor, said. “They need to wait and see what these studies show, and then proceed accordingly.” Meanwhile, over the past 15 years, none of the 90 studies performed by BOEM under the National Environmental Policy Act, or by operators when submitting their plans to the government, indicate that offshore oil and gas operations have significantly impacted onshore air quality.
The industry also believes that the new rule would result in calculated emissions levels that are unrealistically high. Moving the measurement point for emissions from the shoreline to the state nautical boundaries is one example of this, he said. “There’s no one living beyond the shoreline, so you’re not really going to have an impact on anyone’s health because of these emissions.”
In addition, aggregating emissions from multiple facilities within one nautical mile could also inflate emissions numbers, Mr Radford said. API has expressed concerns that this requirement could be applied in such a way as to “daisy chain together a number of facilities and, in some areas, this would capture quite a few facilities,” he added. A single calculation does make sense whenever two platforms or facilities are joined by a bridge, however, and API has proposed new facility definitions in their comments to BOEM. “But to try to draw a circle around a large area offshore and say everything in this area should be counted as one source of emissions is really unworkable and could result in levels that are unrealistically high.”
Such calculations would then require operators to model their facility emissions, in turn adding substantial cost to projects, Mr Radford said. In a letter sent to BOEM on 10 February, API said additional modeling requirements on existing facilities could cost operators anywhere from $130 million to $260 million. Additional costs could still be incurred beyond that if modeling shows that emissions will significantly impact air quality onshore. Companies may be forced to install monitors to track emissions, as well as scrubbers and filters to mitigate emissions. “Given the space and weight concerns offshore, it may not be possible to do on existing facilities, and it would be very costly,” Mr Radford said.
IADC has also engaged with BOEM on the Air Quality rule. On 20 June, the association submitted comments to the regulator outlining industry concerns. “It appears to IADC that BOEM is rushing to finalize an exceedingly costly, incomplete rule that assumes purview beyond the scope of its statutory authority under the OCS Lands Act (OCSLA),” the letter stated. “Currently, BOEM is specifically permitted to regulate OCS air emissions as a result of OCS activities only if such emissions significantly affect the air quality of any state for purposes of compliance with the National Ambient Air Quality Standards. Based on the information presented, BOEM has not demonstrated onshore air quality impacts that would necessitate imposing the proposed revisions or justify the adverse effects to future offshore oil and natural gas production that would result from their imposition.”
In addition to submitting comments, API and other industry trades met in January with the Office of Management and Budget, which is responsible for reviewing and measuring the quality of federal agency programs. API expressed its concerns about the rule and recommended that any further action on the rule be delayed until the ongoing studies are complete.
“We’ve tried to clarify some of our concerns, and they’ve been receptive to those comments,” Mr Radford said. “They have some significant work to do to get this rule right, so hopefully we were successful in slowing the progress on this rule so the studies could be completed.”
As of early October, BOEM was still reviewing comments received during the rule’s comment period, which ended 20 June.
As the industry deals with challenges associated with both the Well Control Rule and the Air Quality Rule, it’s likely that these regulations have already turned some potential bidders away from US offshore acreage, said US Rep. Garret Graves (R-La.). “The regulatory environment that Department of the Interior (DOI) has created is really disincentivizing companies to produce energy domestically,” he said. Look at the disappointing results from the 2016 US Gulf lease sales, which attracted only 128 bids. That’s down from 169 bids submitted for the central GOM in 2015. Although low oil prices surely factored into this decline, Rep. Graves said regulations and their associated costs likely played a role, as well.
To try to encourage more participation in upcoming lease sales, Rep. Graves is sponsoring a bill that has been dubbed the Innovation in Offshore Leasing Act. The goal is to bring more competition, interest and transparency to the offshore leasing process. The bill, if enacted, would amend the Outer Continental Shelf (OCS) Lands Act to allow offshore lease sales to be held online.
Currently, offshore leases for the Gulf of Mexico are held in the Superdome in New Orleans. There, bids are unsealed and read aloud. “This process requires a physical presence, which I think prevented some companies from participating,” Rep. Graves said. By moving the process online, he said, more companies could potentially be able to participate.
At the same time, such a move could increase transparency because all bid data and information would be made available online. Any interested party could review the data.
The bill, which was introduced on 24 June, was approved by the US House of Representatives on 6 September with bipartisan support. Co-sponsored by Rep. Alan Lowenthal (D-Calif.), the bill is likely to also receive bipartisan support in the Senate. As of mid-October, the bill was still being reviewed by the Senate Committee on Energy and Natural Resources.
In the meantime, IADC Vice President of Policy and Government Affairs Elizabeth Craddock said the association has been doing its part to help expand E&P access. In particular, IADC has focused on getting more areas open for leasing, especially for the next five-year plan for OCS leasing that is currently being developed by the DOI through BOEM.
In March, the DOI announced that areas in the Atlantic OCS would not be available for lease under the 2017-2022 plan. Immediately, IADC issued a press release expressing industry’s concerns and disappointment with that decision. Leaving the Atlantic off the five-year plan means that the industry will be unable to tap into an estimated 3.3 billion bbl of oil and 31.3 trillion cu ft of natural gas, IADC President Jason McFarland stated in the release. That takes away the potential for thousands of jobs and billions in investments that could have been possible by developing these resources, he added.
Now, it will be at least another five to seven years before the industry even has a chance to do exploratory drilling in the Atlantic. “The new plan won’t expire until 2022, so it will be at least that long before we have any Atlantic possibilities,” Ms Craddock said. There are fears that the Gulf of Mexico lease offerings in the plan will be scaled back and that Arctic leases will be taken off the table entirely, she added.
Over the past year, IADC has met with the DOI, as well as members of Congress, to lobby to keep as many blocks on the table as possible. In particular, IADC supported legislation from members of the US House to prevent any funds from being used to remove three Arctic leases from the plan.
From fracking to flaring
The onshore oil and gas industry scored a major victory in June when US District Court Judge Scott W. Skavdahl for the District of Wyoming ruled that the BLM did not have congressional authority to regulate hydraulic fracturing. The BLM had finalized its Hydraulic Fracturing Rule in March 2015; it would have placed federal regulations on hydraulic fracturing on US federal lands. The Western Energy Alliance and the Independent Petroleum Association of America (IPAA) challenged the rule in court. Not only were the rule’s provisions redundant with state hydraulic fracturing regulations, but BLM also lacked the authority to regulate fracturing at all, the judge determined.
BLM is currently still fighting Judge Skavdahl’s ruling through an appeal filed with the US 10th Circuit Court. However, the industry is confident that the appeal will be denied. “We feel confident because the judge at the district court level said that Congress did not give the federal government the authority to regulate fracking,” Kathleen Sgamma, Western Energy Alliance VP of Government and Public Affairs, said.
The alliance and IPAA had also outlined several procedural challenges to the rule under the Administrative Procedure Act, which were not addressed in the initial ruling. “So we have a second line of defense the courts haven’t even ruled on yet,” Ms Sgamma added. As a fail-safe, the alliance and other industry groups, including IADC, have worked with US Representatives to include language in the House version of the Interior Appropriations Bill that would block BLM from receiving funds to implement and enforce the rule.
If BLM’s appeal is denied, it would likely mean the end of federal efforts to regulate fracking or hydraulic fracturing for the time being. “There’s pretty much a stalemate in Congress on fracking,” Ms Sgamma said. “There’s not enough support on the anti-fracking side to move forward with laws or regulations on the hydraulic fracturing process.”
Although fracking may be out of the BLM’s reach for now, the agency is setting its sights on methane venting and flaring. In January, the bureau proposed the Methane Waste Prevention Rule, which could affect approximately 100,000 wells on federal lands. The BLM estimates that $23 million in natural gas royalties are lost annually to venting and flaring. “We need to modernize decades-old standards to reflect existing technologies so that we can cut down on harmful methane emissions and use this captured natural gas to generate power and provide a return to taxpayers, tribes and states for this public resource,” Interior Secretary Sally Jewell stated in a news release from 22 January 2016.
Under the proposed rule, venting would be prohibited except under certain operational conditions and in emergencies. The flaring of associated gas from development wells would be limited to 7,200 Mcf per month per well, averaged across all producing wells on a lease for the first year the rule is in effect. After a year, the limit would be stepped down to 3,600 Mcf, then down to 1,800 Mcf the following year. Additionally, the rule specifies leak detection requirements, such as regular inspections of facilities and detection equipment, and mandates that operators replace equipment BLM deems responsible for venting too much natural gas. For instance, the rule would require operators to replace high-bleed pneumatic controllers with low-bleed or no-bleed controllers, with certain exceptions.
The Western Energy Alliance plans to challenge the final rule when it is released, likely in December. Across the US, less than 1% of natural gas is flared. In Wyoming, only 0.26% of associated gas is flared, Ms Sgamma said. In North Dakota, operators did flare 36% of associated gas in 2014, but that number has already fallen to a monthly rate of 10%. “North Dakota was on the upswing quickly, and infrastructure lagged,” she said. “But the industry is making significant infrastructure investments of more than $13 billion over the last couple of years.” The industry is also working to bring that 10% rate lower still, she added.
In addition to what industry is already doing to reduce flaring, the alliance points out that flaring is a safe and environmental way to handle excess gas that can’t be delivered to market. Further, the costs imposed by the rule would outweigh the benefits. An economic impact study by John Dunham & Associates indicated the rule would impose more than $1.26 billion in additional costs and would result in 4,700 fewer wells being drilled per year. This could then lead to 1,780 lost jobs.
On the benefits side, the BLM is estimating the rule’s benefits to be between $115 million to $384 million from increased royalties and climate change benefits. The John Dunham economic analysis, however, indicates $90 million is a more realistic expectation.
Upon release of the final rule, the alliance and IPAA plan to file a lawsuit to stop the rule and seek a preliminary injunction. As with the fracking rule, one of the primary arguments will be the BLM’s lack of authority to promulgate the rule in the first place. “BLM certainly does have the authority to limit waste, but they have gone well beyond that authority. They are attempting to regulate air emissions in the same manner as the EPA,” Ms Sgamma said. “We think that this is an overextension of their authority that makes their overextension of authority on the hydraulic fracturing rule pale in comparison.”
Advocating for the industry
Throughout 2016, IADC has worked to educate lawmakers on the benefits of our industry and inform them on the potential benefits and impacts from legislative energy proposals. The association supported several riders in the Interior Appropriations Act, which was approved by the US House in July. One such rider blocks funds for the implementation of the BSEE Well Control Rule until further clarifications are received.
However, due to significant uncertainty around the November elections, when to expect and what the final Interior Appropriations Act will look like is also uncertain, Ms Craddock said in early October. “At this point, what Congress is doing is waiting to see who wins the election.”
IADC has also worked to build and strengthen relationships with lawmakers. In April, association staffers and onshore members visited the capital to meet with legislators, their staffers and agency employees about the onshore drilling industry. A similar meeting focused on offshore drilling was held in September. These meetings not only allowed IADC to liaise with individuals who develop US energy policy, but it also provided an opportunity to educate them about how the industry works, Ms Craddock said.
“Our industry needs to get out a message of pure fact,” she said. “I don’t think people realize how many barrels of oil they use, how we produce the gasoline that they put in their cars, or how our homes are heated. We try to help people understand the role oil and natural gas plays in our everyday lives, our economy, especially our manufacturing sector. We couldn’t build the things we build or enjoy our current way of life in this country without substantial amounts of energy, and it has to come from somewhere. While to some, ‘Keep it in the Ground’ sounds good, it would have drastic and detrimental consequences to our energy supply and energy prices in this country.”
Looking toward 2017, Ms Craddock notes that the impending arrival of a new president and new members of Congress makes it difficult to predict what legislative or regulatory actions will take place. However, regardless of the outcome of the elections, the association will stand ready to build relationships with lawmakers and policymakers to advance sensible and smart laws and regulation. “We strive to be an educative source for staff and members of Congress, as well as the agencies,” Ms Craddock said. “IADC always wants to be a willing partner with regulators and policymakers in developing our nation’s energy policy.” DC