EPA And PHMSA Seek To Broaden Their Reach Across the Natural Gas Industry

on July 14, 2016 at 10:00 AM

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On separate fronts, two U.S. government agencies have proposed new regulations over the expanding natural gas industry, and industry participants are now focusing their efforts on coping with the costs the proposals will potentially bring, which could be in the hundreds of millions of dollars.

The Environmental Protection Agency (EPA) recently finalized federal regulations intended to decrease methane emissions from the oil and natural gas industry. The regulations are part of an Obama administration initiative designed to reduce methane emissions by 40 to 45 percent from 2012 levels by 2025.

The proposal is part of the EPA’s larger climate change commitment to reduce emissions of greenhouse gases such as methane, which is 25 times more potent than carbon dioxide in contributing to greenhouse gas effects.

Separately, the Pipeline and Hazardous Materials Safety Administration (PHMSA) is in the process of implementing a multiyear Pipeline Safety Reform Initiative to comply with the Pipeline Safety Act’s mandate to reduce the risk of future gas pipeline failures. These reforms propose new compliance obligations that address pipeline replacement, data collection and new safety features.

According to the 2015 Black & Veatch Strategic Directions: U.S. Natural Gas Industry report, respondents are carefully evaluating the costs and implications of complying with these new regulations.

EPA Methane Regulations

The EPA is following the same footsteps it has taken in implementing the Clean Power Plan, which proposes to govern carbon dioxide emissions from new and existing power plants, said Andy Byers, Director of Environmental Services for Black & Veatch’s power business. For the oil and gas industry, the EPA has completed the first step of finalizing New Source Performance Standards for methane emissions from new oil and gas facilities. Under the Clean Air Act, that first step, in turn, gives EPA authority to propose standards for existing oil and gas facilities.

“It is this next step that has the industry concerned about the kind of financial burden that will be placed on them,” Byers said.

Proposals for existing facilities may not be released until late 2017 or early 2018, Byers said. Nevertheless, EPA has already drafted the Information Collection Request (ICR) to be distributed to owners and operators of existing oil and gas facilities. The ICR seeks data to support the development of the methane standards. The ICR will request a broad range of information, including data on processes and activities at facilities that lead to releases of methane, how emissions controls or equipment can be configured, and the efforts and costs associated with installing these controls.

Byers said it is fair to expect proposed rules for existing facilities may also include periodic monitoring requirements recently finalized for new facilities to detect and repair leaks. This impacts the complete chain in producing and transporting oil and gas products, including wells, pipelines, compressor stations, storage facilities, pumps and related equipment.

PHMSA Proposal for Pipelines and Storage Providers

PHMSA announced proposed regulations to update safety requirements for natural gas transmission pipelines. The rules would add new repair criteria for gas transmission pipelines, and expand the protocols to include pipelines located in areas of medium population density, where an incident would pose risk to human life.

PHMSA said the proposal encompasses four Congressional mandates and six recommendations from the National Transportation Safety Board. Specifically, the proposal would do the following:

  • Modify repair criteria for pipelines;
  • Provide evaluation criteria for internal inspections to identify anomalies;
  • Clarify requirements for conducting risk assessment, including seismic risk;
  • Expand mandatory data collection requirements;
  • Require additional post-construction quality inspections;
  • Require new safety features for pipeline launchers and receivers;
  • Require a systematic approach to verify a pipeline’s maximum allowable operating pressure (MAOP); and
  • Require operators to report MAOP exceedances.

In addition, the Department of Energy and PHMSA have initiated an interagency task force on natural gas storage safety. The purpose is to engage industry, state and local leaders and to support them in the development of best practices for ensuring well integrity. The goal is also to develop guidelines for proper response plans, safe operations of storage facilities, and to assess the potential vulnerabilities to energy reliability posed by the loss of storage facilities. PHMSA recently issued an advisory bulletin on best practices for storage well operators and indicated that it will initiate regulatory actions to help ensure the safety of natural gas storage facilities.

Cost Recovery Concerns

Capital costs associated with modernization from the EPA and the PHMSA programs are estimated to be in the hundreds of millions of dollars per pipeline system. The Federal Energy Regulatory Commission (FERC) has stepped in and provided gas pipeline owners a method to recover the significant amounts of capital expected to be spent. FERC created a rate filing mechanism allowing pipeline owners to track costs associated with retrofitting or modernizing facilities to comply with environmental or safety regulations.

“This tracker filing approach provides an avenue for pipeline owners to recover their costs sooner instead of making a full rate case filing,” said Rick Porter, Director in Black & Veatch’s management consulting business. “However, there are major trade-offs that pipeline owners must consider in making a rate filing.”

He said that under the FERC tracker mechanism, pipeline operators cannot compel their captive customers to subsidize funding shortfalls in surcharge collections. As a result, the pipeline’s shareholders must bear some of this cost in the tracker filing option.

“Conversely, a full rate case filing may provide the ability for more complete cost recovery,” Porter said.

As a result, pipeline owners must evaluate each customer’s contract and rate profile to determine whether using a tracker mechanism is preferable to using a traditional rate case filing. However, the owner must also consider the risks versus the rewards associated with the creation of additional potential earnings issues in a rate filing and the relatively quick revenue stream generated by the tracker.

“This process requires a complex data analysis of customer revenue streams,” Porter said. “In that way, the best decision is made for recovering the capital required to meet the new proposed regulations.”

Published originally on Black & Veatch Solutions.