At the Conference of the Parties (COP27) in Egypt, President Biden’s Environmental Protection Agency (EPA) released the text of a supplemental proposed rule regulating methane emissions from the oil and natural gas industries that is more stringent than the original proposed rule in 2021. The 2021 rule targets emissions from existing oil and gas wells nationwide, rather than focusing only on new wells as previous EPA regulations have done. The new rule released at COP27, however, includes all drilling sites, even smaller wells that emit less than 3 tons of methane per year. Small wells currently are subject to an initial inspection but are rarely checked again for leaks. The new proposal also requires operators to respond to credible third-party reports of high-volume methane leaks. These more stringent requirements result in a near doubling of the economic costs, which are estimated to produce a 13 percentage point increase in reduced emissions from 2005 levels by 2030. Increasing costs will increase bills for consumers at a time when natural gas prices are already expected to climb.
Oil and gas companies have asked the EPA to exempt the nation’s small wells that produce less than 6 barrels per day from the upcoming methane rules, arguing that including them would be costly and inefficient. Owners of low-producing wells lack the resources to monitor all their sites with the latest technology. And, smaller wells often produce only insignificant methane emissions that do not warrant the cost and effort of a monitoring program. Companies also want to use new or less expensive technology to scan for leaks to reduce costs, instead of optical gas imaging cameras that can cost tens of thousands of dollars and require intensive training.
Last year, Biden’s EPA unveiled a proposal that would require oil and gas companies to monitor 300,000 of their biggest well sites every three months to find and fix leaks, ban the venting of methane produced as a byproduct of crude oil into the atmosphere, and require upgrades to equipment such as storage tanks, compressors, and pneumatic pumps. Those rules are expected to take effect in 2023 and are expected to reduce methane from oil and gas operations by 74 percent from 2005 levels by 2035. Those rules left aside how the industry should manage methane emissions from its smaller “marginal” wells – those producing less than 15 barrels per day.
EPA Administrator, Michael Regan indicated that the old and new rules should be able to reduce about 36 million tons (32.6 million metric tons) of carbon emissions. The EPA will accept public comments through February 13 and issue a final rule in 2023.
Other Changes in the Supplemental Rule
One significant change is a more stringent requirement to find and fix emissions leaks from equipment. Whereas the 2021 proposal relied on estimating a site’s emissions due to leaks, the supplemental proposal relies instead on the types and amount of equipment present at the site, which EPA believes will make it easier for the industry to comply. Another major change in the supplemental proposal is that abandoned and unplugged wells are included. EPA requires the site owners to continue to monitor emissions, submit a closure plan, and complete a closure survey to ensure that no emissions are present. Other changes include increasing the stringency of requirements pertaining to flaring, pneumatic pumps, and dry seal compressors and the creation of a Super-Emitter Response Program for sites that emit a lot of methane.
Other Biden Methane Reduction Initiatives
At COP26, the United States pledged to cut methane emissions by 30 percent by 2030 from 2020 levels. Besides the EPA rule, Biden’s climate/tax bill, labeled the Inflation Reduction Act, includes a methane emissions reduction program that imposes a fee on energy producers that exceed a certain level of methane emissions. The fee, which increases from $900 per metric ton in 2024 to $1,500 per metric ton of methane emissions in 2026 and thereafter, is the first time the federal government has directly imposed a fee, or tax, on greenhouse gas emissions. The law allows exemptions for companies that comply with the EPA’s standards or fall below a certain emissions threshold. It also includes $1.5 billion to help operators and local communities improve monitoring and data collection for methane emissions, with the goal of finding and repairing natural gas leaks. Nonetheless, one estimate indicates that natural gas bills would increase by 17 percent on average due to the fee.
Cost of EPA’s Supplemental Rule
EPA’s analysis estimates the total compliance costs of the supplemental proposed rule to be $15 billion (at a 7 percent discount rate) from 2023 to 2035, which are offset by product recovery requirements from sales or use of methane that previously would have been lost through leaks or intentional release. EPA estimates the value of the recovered methane at around $3.3 billion over the same period, resulting in a net cost of approximately $12 billion (based on EPA’s rounding), making the rule the seventh most expensive proposed rule of the Biden Administration. According to EPA, the climate benefits of the proposal are $48 billion using the social cost of methane at a 3 percent discount rate, though use of other discount rates show benefits between $19 billion and $130 billion.
Direct comparisons to the 2021 proposal costs are not able to be made because of changes EPA made to its modeling over the past year. Using the cost estimate from the 2021 proposal, however, shows the net costs of the supplemental proposal to be nearly double the 2021 proposal cost ($12 billion versus $6.3 billion). A notable difference from the modeling change is on the emissions benefits side. EPA’s new model updates “assumptions and methodologies” that lead to a decrease in projected absolute emissions reductions compared to the 2021 proposal but an increase in the percentage reduction of total methane emissions. The new model assumes that industry emissions are less than previously estimated.
According to EPA, emissions in 2030 are estimated to be 87 percent less than 2005 under the supplemental proposed rule compared to a 74 percent reduction projected for the 2021 proposal. Emissions reductions, however, are 110 million metric tons of carbon dioxide equivalent less than last year’s proposed rule. The estimated climate benefits of the supplemental are $7 billion less than 2021, and the range of climate benefits based on other discount rate is anywhere from $3 billion to $20 billion less.
Conclusion
It is not sufficient for the Biden administration to just tax methane emissions as the Inflation Reduction Act requires and to place regulations on methane emissions from new and existing wells, but Biden and the EPA have decided they must also go after small wells where the costs of monitoring equipment may make the oil produced unaffordable. It is again a way for Biden to increase the price of oil and natural gas to the consumer without a direct tax that would be more noticeable to the public. EPA’s supplemental rule results in about a doubling of the cost to the economy with the estimated climate benefits being $7 billion less. On the surface that doesn’t make much sense, which is why the EPA estimates a higher reduction in emissions of 13 percentage points for the supplemental proposal. Biden keeps telling oil companies that he wants more production and that he wants oil companies to invest more in producing more oil, but at every turn, he takes away profits through regulation and taxes, whether the benefits are worth it or not.
