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EPA Shifts Policy on Aggregation of Sources in Oil and Gas Industry

Beveridge & Diamond, P.C., October 21, 2009

The Environmental Protection Agency (EPA) has rescinded its 2007 policy for making major stationary source determinations in the oil and gas industry.  In accordance with a Memorandum issued on September 22, 2009 by Gina McCarthy, Assistant Administrator for the Office of Air and Radiation (McCarthy Memorandum), EPA will no longer simplify the stationary source determination process in the oil and gas industry by focusing primarily on geographic proximity.  Instead, the agency will apply its standard stationary source analysis to determine whether emission units in the oil and gas industry belong to what EPA has traditionally viewed as the same facility.  Generally, this policy shift is expected to result in more aggregation of facilities in the oil and gas industry and therefore a higher likelihood that oil and gas exploration and production activities will require major source air permits. 

EPA has traditionally analyzed source aggregation under the New Source Review construction permitting program (NSR) and the Title V operating permit program (Title V) by considering the following factors: (1) whether the activities are under the control of the same person (or persons under common control); (2) whether the activities are located on one or more contiguous or adjacent properties; and (3) whether the activities belong to the same industrial grouping.  EPA has then applied these factors on a case-by-case basis, with a fairly aggressive interpretation of when aggregation is appropriate.  There is a significant body of published guidance and applicability determinations applying these aggregation factors. 

The terms “contiguous or adjacent” imply a geographic test for whether two or more facilities constitute a single source.  And, indeed, EPA originally interpreted the test in this manner.  In the original 1980 preamble, for example, EPA noted that the “source” would not include “activities that would be many miles apart along a long-line operation,” and that facilities 20 miles apart would be too far to be considered a single source.  45 Fed. Reg. 52,676, 52,695 (Aug. 7, 1980).  Over time, however, this geographic approach has been largely superseded in EPA guidance by a functional test that also includes factors such as operational dependence and proximity.  This broader “functional” test has allowed the Agency to find that two facilities are part of the same source, even though they are many miles apart; geographic distance has become relevant to EPA only if it is so great that it prevents the two facilities from operating as a single plant.  The “functional” approach has enabled the Agency to find a single source over much greater geographic distances than appears to have been contemplated in the 1980 preamble.

On January 12, 2007, EPA’s Acting Assistant Administrator William Wehrum attempted to clarify how EPA would assess sources within the oil and gas industry, i.e. whether and when exploration and production activities should be aggregated into a single “stationary source” under NSR and Title V (the Wehrum Memorandum).  The Wehrum Memorandum first noted that even where facilities are under common control and within the same SIC Code, the “unique geographical attributes of the oil and gas industry” (e.g., well sites located hundreds of miles from the natural gas processing plant; production fields many square miles in size; and the separation of surface and subsurface property rights) require a detailed, complex analysis of whether the facilities can be considered “contiguous or adjacent.”  Given the importance of these geographical considerations, the Wehrum Memorandum concluded that it would be appropriate to focus first on geographic proximity in making source determinations.  The Memorandum thus suggested that permitting authorities begin their analysis by evaluating whether each individual surface site would qualify as a separate stationary source; it further explained that two or more sites should be aggregated only if the sites are under common control and in close proximity to each other. This was significant because it moved away from the more subjective “functional” approach set forth in other Agency determinations, and instead moved back toward the original focus on  geographic proximity and “common sense notions of a plant.”

The McCarthy Memorandum rescinds this approach.  Instead, EPA now explains that source determinations within the oil and gas industry must follow the same analysis of the three “fundamental criteria” as other source categories.  Specifically, EPA instructs permitting authorities to conduct source determinations for the oil and gas industry by applying the three traditional aggregation criteria in a manner that is consistent with historical EPA permitting practice, i.e., on a case-by-case basis.  The simplified aggregation analysis for single source determinations under NSR and Title V that was adopted in the Wehrum Memorandum is no longer acceptable to EPA. 

For additional information on this development, please contact Stephen Richmond at srichmond@bdlaw.com, Laura McAfee at lmcafee@bdlaw.com, or Anne Finken at afinken@bdlaw.com.