August 7, 2012

Oil and Natural Gas Sector: New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants Reviews

Summary

Score: 31 / 60

Additional details
Agency
Environmental Protection Agency
Regulatory Identification Number
2060-AP76
Rule Publication Date
08/23/2011
Comment Closing Date
10/24/2011
Dollar Year
2008
Time Horizon (Years)
Not Reported by Agency

RULE SUMMARY

In this regulation the Environmental Protection Agency (EPA) proposes the adoption of the New Source Performance Standards (NSPS) for volatile organic compounds (VOC) and sulfur dioxide emissions from Natural Gas Processing Plants, adding any oil and gas operation not currently covered under the listing. The rule requires specific changes in the technology used so that fewer pollutants are emitted or a greater fraction of emitted pollutants are captured. The regulation also proposes new standards for the National Emission Standards for Hazardous Air Pollutants (NESHAP), addressing provisions related to periods of startup, shutdown, and malfunction.

COMMENTARY

Based on the EPA's analysis, one can assume that the regulation is a win-win. That is, society can benefit from lower air emissions and Natural Gas Processing Plants (NGPP) can benefit from increased output through the recovery of otherwise emitted gas. Some costs seem to have been ignored, specifically labor costs and regulatory oversight costs. The cost-effectiveness estimates might still be negative with these costs included, but it would be beneficial to see by how much the gap closes. Given that the processes proposed in the regulation are reportedly cost-effective for the processing plants, it would be interesting to explore another solution to the problem without regulation. Given that the agency suggests that firms are not undertake the to-be-required capital investment due to imperfect information problems, might an educational campaign be more cost effective at solving the emissions problem at wells? Might this study eliminate the imperfect information? This option was not considered by the agency. Furthermore, natural gas price has been below $4.00 since August 2011. Currently it is around $2.75. At that low a price, costs of implementation would then be between 150 and 200 million dollars, not -74 million dollars. Though the RIA states, "As indicated by this difference, EPA has chosen a relatively conservative assumption (leading to an estimate of few savings and higher net costs) for the engineering costs analysis. The natural gas price at which the proposed NSPS breaks-even is around $3.77/Mcf." It appears to be not conservative enough. This suggests that maybe the industry has a better idea of expected costs than the agency.

MONETIZED COSTS & BENEFITS (AS REPORTED BY AGENCY)

Dollar Year
2008
 
Time Horizon (Years)
Not Reported by Agency
 
Discount Rates
3%
7%
Expected Costs (Annualized)
Not Reported by Agency
-$29,000,000
Expected Benefits (Annualized)
Not Reported by Agency
Not Reported by Agency
Expected Costs (Total)
Not Reported by Agency
Not Reported by Agency
Expected Benefits (Total)
Not Reported by Agency
Not Reported by Agency
Net Benefits (Annualized)
$0
$29,000,000
Net Benefits (Total)
0
0

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
RIN and keyword searches readily return the rule in regulations.gov. A RIN and keyword search on the EPA webpage also delivers the final rule and RIA, though there are a number of supporting documents with similar keywords.
5/5
2. How verifiable are the data used in the analysis?
Data regarded expected changes in drilling activity and in price, production, consumption, and trade quantities of both crude and natural gas are derived from the National Energy Modeling System (NEMS), which is publicly accessible. In other instances, it is not readily apparent from where the data were derived. A number of research citations are not linked.
2/5
3. How verifiable are the models and assumptions used in the analysis?
The proposed rule states assumptions on why oil and natural gas mining, processing, and transporting emits certain levels of pollutants but simply asserts as to why they continue to do so even though, according to the rule, it would be more profitable to capture much of the pollutants.
2/5
4. Was the analysis comprehensible to an informed layperson?
The discussion is highly technical, and the extensive use of acronyms in the NPRM further prohibits access by the layperson. With this said, the discussion in the RIA is much more reader-friendly. Logical process explained: reduce emissions through capture/recovery and thus improve health, visibility, etc., associated with ambient air quality.
3/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
3/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
By capturing a larger amount of pollutants that are often emitted in the mining of natural gas and oil, air quality is improved. Reduced emissions are expected to lead to reduced exposure to various harmful pollutants that negatively affect neurological, cardiovascular, liver, kidney, and respiratory, immune, and reproductive function. The reduced emissions are expected to also improve visibility impairment, reduce vegetation damage, and reduce potency of greenhouse gas emissions.
5/5
Does the analysis identify how these outcomes are to be measured?
Though they do provide estimates of the extent of the reduction in emissions, the RIA does not measure how the reduction in emission will directly enhance citizens' quality of life.
0/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
The RIA does list how these pollutants can negatively affect citizens' quality of life. The regulation also notes the amount of pollution reduction. The rule does not provide a test of how these reductions will affect the citizens' quality of life.
4/5
Does the analysis present credible empirical support for the theory?
The RIA does cite numerous peer reviewed research on the negative health effects of emitted chemicals, VOCs, particulate, methane, etc., on the various organs and systems of the human body. The RIA does not, however, look at the direct effect of the current emission levels on human welfare. Nor does the RIA look at the direct effect these emission reductions may have on human welfare. The RIA simply extrapolates previous studies of exposure.
1/5
Does the analysis adequately assess uncertainty about the outcomes?
The proposed rule does mention the uncertainties over measured emissions, pollutant dispersal, inhalation of pollutants, dose-response relationship, multi-pathway environmental effects, and facility-wide effects. The RIA recognizes the spatial uncertainty associated with a number of pollutants. Though none of these potential benefits are used in the benefit analysis.
3/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
3/5
Does the analysis identify a market failure or other systemic problem?
The RIA does briefly mention the potential difference between private return and social benefit, which is the standard externality case: emissions are released into the air at no direct monetary cost to the firm, but they do harm bystanders exposed to the emissions (see 3-14 and Chap. 4 of RIA). However, the RIA places a greater focus on the idea that firms are unaware or unwilling to use new—and, according to the RIA, profitable—technology to capture more fuel and reduction emissions. If RIA is correct, then simply providing this information to firms will solve much of the information asymmetry problem without need for the regulation. The RIA mentions the costs of irreversibility and cost uncertainty as well, though, if that is the case, then the agency may have underestimated the costs of using the new technology.
5/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
The EPA has a number of theories to explain the problem. Although the EPA briefly mentions the externality theory, the EPA focuses more attention on the fact that new technology is available for firms to capture a portion of emissions. Much of these emissions are valuable as fuel, and thus can be captured and sold. According to the EPA, the net effect of using all these new controls is an increase in the profit from the mining activity. However, this is not the case for each type of control technology. For some specific technologies, the rate of return is quite high, so the EPA then relies on information asymmetry and uncertainty theories. For other technologies required in the regulation, the rate of return is not high enough for the firm to invest in.
3/5
Does the analysis present credible empirical support for the theory?
That current pollution levels are above what is efficient is stated as truth.
1/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
Mentions the uncertainty, but does not report a range of estimates based on these uncertainties.
1/5
7. How well does the analysis assess the effectiveness of alternative approaches?
3/5
Does the analysis enumerate other alternatives to address the problem?
Three options are discussed, each one requiring additional standards. Option 1 applies a set of standards to only new wells, Option 2 applies the same standards to both existing and new wells, and Option 3 adds some additional standards in addition to those of Option 2.
5/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
The range of options are narrow. The EPA presents three technology specific/command options that are slight variants of one another. Option 1 is identical to Option 2 except that it would apply only to new wells. Option 3 differs from the proposed option (Option 2) by adding a suite of additional equipment leak standards.
1/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Emission reductions for the NSPS options are discussed (see Table 4-1 in the RIA, for example). However, these benefits are not monetized nor are they adequately transcribed into health improvements, environmental improvements, etc.
2/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
The baseline number of wells and price are produced based on the NEMS model. Details are not directly provided, but a citation to documentation is provided. It is not clear from where the baseline emissions were derived (possibly the NAAQS). According to the baseline used by the EPA, MORE natural gas will be produced with the regulation in place than without. Moreover, the price of natural gas will be lower with the regulation than without it. Thus the regulation claims that the baseline has higher prices and less production. The baseline price is lower than the current price, but with the regulation it is lower than the baseline.
2/5
8. How well does the analysis assess costs and benefits?
3/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The rule does report the incremental costs associated with each component that can be altered so that less pollution is released or a larger amount is captured. The rule does present the overall reductions in emissions and the costs associated with each regulatory alternative, which could then be used to calculate the incremental cost of each of the three options. Does not estimate reporting and recordkeeping costs customized for Options 1 and 3; for these options, the EPA uses the same $18,805,398 for reporting and recordkeeping costs for these options. This may make the first option less costly relative to the second option.
4/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
The rule covers the key capital expenditures as well as the record keeping that will be required under the new rule. The analysis does not appear to acknowledge any changes in wage costs, despite addressing in the RIA that there is likely a positive impact on employment. Given the discussion, employment costs are likely small relative to the capital costs, but it is nonetheless ignored. Further, the analysis treats recovered gas as a negative cost rather than a benefit. Lastly, the analysis does not address whether this regulation will impose additional costs on the regulatory authority.
3/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The EIA forecast wellhead price of natural gas is $4.22 and the price of crude oil is $94.60 based on the NEMS model. It is estimated that the price of both will fall slightly with the regulation: $4.18 and $94.58 due to increased output (recovered rather than emitted). The impact on consumer prices is also estimated.
4/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
The NEMS model does account for changes in both producer and consumer behavior. For instance, with increased production and lower price of natural gas, consumption of natural gas will be greater, leading to higher CO2 emissions. It is less clear how the regulation is expected to impact the number of wells—the number of wells changes across the different options, but the process by which this takes place is not discussed.
3/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Costs are presented as point estimates. However, given that the value of the recovered gas fluctuates with the market price and that it is treated as a negative cost, some discussion is devoted to what range of prices would allow this regulation to be cost-effective for the firms. Figure 6-1 presents the break-even diagram for alternative natural gas prices.
3/5
Does the analysis identify the alternative that maximizes net benefits?
Although they do not include the health benefits of reductions in VOCs, methane, and other pollutants, they do identify the alternative that maximizes net benefits or in this case higher net (negative) costs. The fact that they do not include the health benefits is suspect, especially for VOCs, particulate matter, and methane.
3/5
Does the analysis identify the cost-effectiveness of each alternative considered?
The rule reports the cost-effectiveness of changing a number of components that either reduce emissions or capture a larger fraction of emissions before they escape into the atmosphere. RIA Table 3-4 presents the "cost-effectiveness" (cost per tons reduced) of all three options for VOC reductions assuming no benefits from reductions in methane and HAP. While not computed, similar calculations could be completed for methane and HAP given the information provided.
4/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
3 8H Compliance costs are estimated for various emissions points (processing plants, transmission compressor stations, etc.) for the proposed option. It is discussed that secondary costs (such as increased CO2 emissions) may exist, but such costs are not monetized. Possible additional costs to the EPA are not discussed. The rule does discuss large versus small producers. The rule also presents the amount of proven oil and natural gas reserves by state, but does not explicitly estimate the effects on various states.
3/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
The rule claims natural gas producers will receive net positive profits from NPS rule, while a slight loss from NESHAP. The rule mentions health and environmental benefits but does not assess the incidence of benefits. The expected wellhead price reduction from $4.22 to $4.18 and the expected additional revenue from recovered gas are measurable benefits discussed. Further, the price reductions are estimated to impact different consumers differently, and these estimates are provided.
2/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
It appears as though the EPA had decided upon reducing emissions via performance standards prior to conducting the analysis. Doing nothing does not appear to have been an option. Simply disclosing the benefits of the technology also appears to have been ignored as an option. Of the three slightly different options, it is possible the analysis played a role, but it is more likely that only options 2 and 3 were realistically considered, with option 1 clearly offering limited benefits in the short term due to only applying to new wells.
2/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
The EPA does maximize net benefits given the alternatives proposed by choosing option 2. Whether this is the option that maximizes net benefits for society is not known because the EPA does not included these in its calculation. Maximizing net benefits was not presented as the reason for choosing option 2, but it very well could have influenced the decision.
4/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
Although human health and the environment appear to be the goals, the rule does not monetize the benefits, so no specific measures are given upon which to track the benefits of the regulation results in the future.
0/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
There is a provision in place for assessing technology based standards. The EPA is required to review "technology-based standards and to revise them ‘‘as necessary (taking into account developments in practices, processes, and control technologies)’’ no less frequently than every eight years, under CAA section 112(d)(6)" (52741). There did not appear to be a discussion of what data will be used, however.
1/5
 
Total 31 / 60