The Bureau of Land Management (“BLM”) recently circulated a Proposed Rule on Waste Prevention, Production Subject to Royalties, and Resource Conservation (“2022 Proposal”). This iteration, as BLM acknowledges, is a revamp of its fraught 2016 attempt to issue a similar rule ostensibly aimed at reducing natural gas waste on federal and Indian leases (“2016 Rule”). The 2016 Rule was ultimately struck down two years ago as unlawful. To the Wyoming federal court, the 2016 Rule sought to regulate air emissions—a role reserved for the Environmental Protection Agency (“EPA”) and the states—rather than prevent the waste of resources through flaring and other means. Undeterred, the Biden Administration believes it has learned from and theoretically fixed the flaws in the 2016 Rule through the 2022 Proposal. The 2022 Proposal claims to focus on reducing operator costs and generating taxpayer revenue. This is a shift from the 2016 Rule, which relied on the benefits from reduced carbon emissions to justify its issuance. Nevertheless, the question to many stakeholders remains: does the 2022 Proposal still exceed BLM’s authority, or has the agency done enough to win a future legal challenge?
BLM’s Perilous Past
After a few turbulent years, the 2016 Rule met its end in Wyoming. BLM claimed that the 2016 Rule was a permissible use of its authority to prevent the “undue waste” of oil and gas resources and ensure all lessees take “reasonable precautions to prevent” such waste under the Mineral Leasing Act (“MLA”). The Wyoming federal court, however, in Wyoming v. DOI, 493 F. Supp. 3d 1046 (D. Wyo. 2020) fervently disagreed with BLM.
The Wyoming court concluded that while the 2016 Rule contained some arguably waste-specific components, the rule was “transparently driven by air quality requirements.” Such an approach was an impermissible use of BLM’s waste-prevention authority and improperly intruded on EPA’s roles under the Clean Air Act (“CAA”). Despite that conclusion, the court went on to find BLM acted arbitrarily and capriciously in developing the 2016 Rule. In particular, the Wyoming court determined BLM failed to: (1) assess the impacts of the 2016 Rule on marginal wells; (2) explain and support the 2016 Rule’s gas-capture requirements; (3) consider the 2016 Rule’s domestic costs and benefits; and (4) follow its longstanding application of the prudent operator standard and interpretation of the term “waste.”
The Revamped Rule
Having licked its wounds and assessed the Wyoming court’s decision, the 2022 Proposal purports to focus more on waste prevention than minimizing the carbon emissions.
The 2022 Proposal ultimately requires operators to use all reasonable precautions to prevent the waste of oil or gas resources. The proposed rule seeks to accomplish this in a variety of ways. Operators will now be required to submit a waste minimization plan with all applications for permits to drill. Further, the 2022 Proposal (1) prohibits the use of natural-gas-activated pneumatic controllers or pneumatic diaphragm pumps with a bleed rate exceeding 6 standard cubic feet an hour; (2) requires oil storage tanks to be equipped with a vapor recovery system, where technically and economically feasible; and (3) requires operators to maintain leak detection and repair (“LDAR”) programs designed to prevent unreasonable and undue waste.
To avoid the 2016 Rule’s pitfalls, the 2022 Proposal also shifts and retools its justification for the rule and modifies the agency’s application of the prudent operator standard and LDAR requirements.
The Financial Costs and Benefits
Emphasizing taxpayer returns from reduced waste is the stated goal of the 2022 Proposal. That said, BLM acknowledges that the 2022 Proposal’s costs will likely outweigh the gains from reduced waste. To justify this approach and avoid the Wyoming court’s cost critique, BLM shifts the characterization of its authority under the MLA and the objectives of the prudent operator standard. For BLM, the MLA requires the agency to focus on overall resource recovery rather than individual operator economics. The agency also contends that the MLA does not mandate that BLM’s regulations “pay for themselves.”
BLM’s interpretation of the prudent operator standard is similarly lessor focused. BLM attempts to modify its approach to the standard by asserting that the standard’s focus is on mutual benefit as opposed to profit maximization. This shift is important for justifying the costs of the rule. Essentially, it allows BLM to reduce operator profits and emphasize the interests of lessor and taxpayer, while claiming to be acting consistently with the agency’s prior application of the standard.
A Reduced Focus on Carbon
The 2022 Proposal repeatedly states it expressly excludes the social cost of greenhouse gases from the considerations underpinning any of the proposed waste prevention requirements. One of the greatest critiques of the 2016 Rule was that BLM claimed the rule’s objective to be waste management while justifying its considerable costs almost entirely on climate change benefits. BLM does include estimates of social cost benefits in its 2022 Proposal, but asserts that these benefits are included “solely to provide the most complete and transparent accounting of the costs and benefits of the proposed rule for the public’s awareness and consideration.”
The 2022 Proposal also addresses the Wyoming court’s agency overreach and marginal well conclusions head on. First, the 2022 Proposal limits the application of its waste prevention measures to production on Federal or Tribal lands. By limiting the proposal’s application, BLM no doubt hopes to avoid the assertion that it is usurping the authority of the States to regulate operations. Next, BLM asserts that while the 2022 Proposal’s regulations overlap with certain EPA air quality regulations, BLM’s regulatory measures are necessary to fill gaps in the EPA’s requirements and avoid the loss of substantial taxpayer royalties. And with respect to marginal wells (produced less than 200 barrels of oil per month), the 2022 Proposal acknowledges the issue and attempts to create flexibility in the rule’s application. In particular, the 2022 Proposal focuses on ensuring the costs of compliance are ultimately paid for over a reasonable period of time.
But will the 2022 Proposal Succeed?
Although BLM implemented changes in response to court and public commentary, the costs of the proposal will weigh heavily on its prospects for success. Further, BLM’s apparent eschewing the mutual-benefit concept embodied by the prudent operator standard and focus on maximizing royalty revenues will create additional complications. It is also unclear whether the courts will accept BLM’s attempt to remove the social cost of carbon from its justification from the rule, even though those cost savings appear essential to overcome the 2022 Proposal’s adverse economic impact. Whether the courts will accept BLM’s interpretation of the standard and characterization of its mandate under the MLA will surely be tested.
One step that industry stakeholders should take to influence the 2022 Proposal is to partake in the public comment period. The comment period on the 2022 Proposal is now open, and comments will be accepted until January 30, 2023. The Wyoming court cited public and industry comments extensively in finding the 2016 Rule to arbitrary and capricious. The weight the court gave the commentary is just one example of the reasons why participation in the commentary process by industry participants is important. Operators should be keen to assess and comment on the feasibility, cost saving, conservation, and royalty generation assertions made by BLM.
For assistance on navigating the 2022 Proposal and its impacts on operators and others in the oil and gas industry, the Energy and Natural Resources Section of Husch Blackwell can help. Andrew Glenn, Miguel Suazo, Katie Andersen, and our team of attorneys can assess the legalities and shape comments to shape the rule and prepare the administrative record. Contact Andrew Glenn or another member of our team for further information.