Comments to the Bureau of Land Management on Waste Prevention, Production Subject to Royalties, and Resource Conservation, Proposed Rule;

81 Federal Register 6615 (February 8, 2016)
RIN: 1004-AE14
Document Number: 2016-01865

Dear Director Kornze:

Thank you for the opportunity to offer comments on the proposed rule on Waste Prevention, Production Subject to Royalties, and Resource Conservation. For more than two decades, Taxpayers for Common Sense has advocated for responsible natural resource development on federal lands and waters that ensures taxpayers receive a fair return for the resources they own and prevents long-term liabilities associated with resource development from being passed onto the taxpayer. 

TCS is pleased to see the Bureau of Land Management taking steps to reform oil and gas development practices to better protect taxpayers.  The outdated rules that govern current development are costing taxpayers billions of dollars in lost revenue. Therefore, we urge you to move forward quickly to finalize this rulemaking.

In regards to the proposed rulemaking, Taxpayers for Common Sense offers the following comments for the record.

Summary of Problem

The Bureau of Land Management (BLM) within the Department of the Interior (DOI) administers mineral leasing on 245 million acres of public lands, including onshore federal oil and gas leasing. Venting, flaring, and royalty-free uses of oil and natural gas on BLM-administered leases are currently governed by NTL-4A, which was issued by the U.S. Geological Survey on December 27, 1979. Over the past 36 years since NTL-4A was issued, technologies and practices for oil and gas production, such as hydraulic fracturing and horizontal drilling techniques, have advanced considerably.

The problems with the existing regulations for venting, flaring, and royalty-free uses of oil and natural gas and the BLM’s failure to ensure a fair return for these resources are well-documented. Almost 10 years ago, the Royalty Policy Committee emphasized the need for BLM to strengthen its processes for verifying gas production. In 2010, the Department of the Interior Inspector General recommended that the BLM clarify its requirements for royalty-free use of gas.^[ii] The same year, the Government Accountability Office (GAO) found that around 40 percent of natural gas being vented and flared from onshore Federal leases could have been captured economically with the use of control technologies already available, and that Interior’s oversight of the oil and gas program had significant limitations—specifically, that its regulations did not address significant sources of lost gas.^[iii] In 2011, GAO added Management of Federal Oil and Gas Resources to its list of government programs considered to be at high risk—defined as having “greater vulnerabilities to fraud, waste, abuse, and mismanagement.” GAO found that, “Interior did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands.”^[iv]

Despite these findings and the high priority placed on resolving these issues, the problem of loss of gas and royalties is getting worse. According to BLM, federal and Indian onshore lessees and operators wasted 375 billion cubic feet (Bcf) of natural gas between 2009 and 2014—enough gas to serve about 5.1 million households for a year. 81 FR 6616. In 2013 alone, 98 Bcf of natural gas was vented and flared from federal and Indian leases, double the amount lost in 2009. 81 FR 6631. This lost gas in 2013 had a sales value of $392 million and a royalty value of $49 million. RIA at 3.

Federal onshore oil and gas minerals are a public trust resource, and preventing waste of these resources will encourage more responsible use. TCS agrees with BLM that NTL-4A neither reflects today's best practices and advanced technologies, nor is particularly effective in requiring their use to avoid waste. NTL-4A relies on broad, generalized directives that have created ambiguity and variation regarding the circumstances under which venting or flaring is approved and when royalties are paid on vented and flared gas. There is also some ambiguity regarding what properly constitutes royalty-free on-site use. 81 FR 6628.

Legal Authority

BLM holds considerable authority to promulgate new or revised rules to prevent waste as a result of changing circumstances and conditions. BLM is responsible for stewardship of public lands and resources under the Federal Lands Policy and Management Act (FLPMA), which requires that “the United States receive fair market value of the use of the public lands and their resources …” 43 USC 1701. Further, BLM has both authority and responsibility under the Mineral Leasing Act to take “all reasonable precautions to prevent waste of oil and gas,” 30 U.S.C. 225.

Federal law requires that “Each lease shall contain provisions for the purpose of insuring the exercise of reasonable diligence, skill, and care in the operation of said property;” 30 U.S.C. 187; and that “Any lessee is liable for royalty payments on oil or gas lost or wasted from a lease site when such loss or waste is due to negligence on the part of the operator of the lease, or due to the failure to comply with any rule or regulation, order or citation issued under this Act or any mineral leasing law.” 30 U.S.C. 1756. BLM is responsible for enforcing these rules.

BLM is also responsible for setting royalty rates and determining the quantity of produced oil and gas that is subject to royalties under the terms and conditions of a federal lease. 81 FR 6629. The BLM's authority to require royalty payments derives from the Mineral Leasing Act: “A lease shall be conditioned upon the payment of a royalty at a rate of not less than 12.5 percent in amount or value of the production removed or sold from the lease.” 30 U.S.C. 226(b)(1)(A).

Need for BLM Requirements

This BLM rulemaking is distinct from other rulemakings in the oil and gas sector. 

BLM correctly reports that no other proposed rules cover all BLM-regulated activities, and therefore all potential sources of lost gas. Unlike other agencies, BLM has a duty to plan and manage oil and gas development on public lands to avoid waste, controlling leasing activity and the pace and place of drilling and infrastructure. 81 FR 6636.

Additionally, BLM correctly notes that some states have regulations in place to reduce waste of natural gas, but the states do not have a statutory mandate to reduce waste of federal oil and gas. 81 FR 6636. No state has established a comprehensive set of requirements addressing all three avenues for waste—flaring, venting, and leaks—and only a few states have significant requirements in even one of these areas.

Limits on Flaring

Unavoidable Losses of Gas

BLM is proposing to find a loss of gas “unavoidable” where produced gas is flared from a well not connected to gas capture infrastructure, as long as BLM has not otherwise determined that the loss of gas is avoidable, subject to a limit of 1,800 million cubic feet (Mcf) per month per well (discussed in more detail below). Because this gas would be considered unavoidably lost, it would be royalty-free. At the same time, BLM is proposing to charge a royalty on gas that is flared from wells that are connected to capture infrastructure.

BLM justifies this distinction by arguing that where operators are connected to capture infrastructure, but are nevertheless flaring, they have made an economic choice to flare, and flaring in those instances should not be considered an unavoidable consequence of oil production. However, it goes on to say that operators may be able to use alternative on-site gas capture equipment to put the gas to productive use during any period in which gas production exceeds transport capacity. Similarly, when downstream equipment is temporarily brought down for maintenance, operators could curtail production for a short period or use on-site capture equipment to avoid wasting gas in the interim. 81 FR 6644.

The widespread existence and accessibility of on-site gas-capture technology is repeated at different points in the proposed rule and given as justification for other provisions of the rule:

• In the preamble to the proposed rule, BLM cites findings by GAO and others that significant volumes of natural gas estimated to be vented and flared on onshore federal leases could be economically captured with currently available control technologies. 81 FR 6617.
• In establishing the proposed flaring limit, BLM notes that operators have multiple avenues to reduce high levels of flaring, including on-site capture technologies. BLM also assumes that all over-the-limit quantities of gas would be captured instead of flared. 81 FR 6639.
• BLM says the primary means to avoid flaring of associated gas from oil wells is to capture, transport, and process that gas for sale, using the same technologies that are used for natural gas wells. BLM characterizes these technologies as long-established and well understood. 81 FR 6636. (emphasis added)

In contrast to BLM’s statement above that gas capture technology is long-established and well understood, the preamble also says, “on-site capture technology is not always effective and affordable.” Yet the proposed rule assumes these technologies are effective and affordable enough to justify limiting total flaring amounts and charging royalties for flaring from connected wells. The preamble also goes on to say that, “the effectiveness and affordability of on-site capture technology may mean that an operator could avoid flaring gas from a well not connected to capture infrastructure.” 81 FR 6643.  Considering these conclusions that flaring is avoidable in other contexts, it is hard to understand how BLM has concluded that up to 1800 Mcf/month should generally be treated as unavoidable.

BLM should charge royalties for flaring of associated gas from all wells for the same reasons it proposes to charge royalties from gas flared from only those wells connected to gathering infrastructure. On-site gas-capture equipment is equally available to wells not connected to gas capture infrastructure as it is to wells that are connected to gas capture infrastructure. The proposed distinction is arbitrary and unsupported.

BLM’s blanket exemption from royalties for flaring of 1800 Mcf/month from unconnected wells stands in contrast to the proposed rule’s treatment of the renewable, 2-year exemption from the flaring limit. BLM cites a 2015 study by the entity Carbon Limits AS, titled Improving Utilization of Associated Gas in US Tight Oil Fields, which suggests that on-site capture is most cost-effective within a 20- to 25-mile radius of gas processing facilities. It goes on to say that while leases located more than 25 but less than 50 miles from gas processing facilities might similarly find on-site capture less cost-effective, this might not always be the case. Those leases could make a case-by-case showing under the proposed provision for alternative flaring limits. Unlike the general exemption from royalties for flaring below the 1800 Mcf/month limit, BLM would not provide an across-the-board exemption for flaring above the limit for all wells located far from capture infrastructure. Instead, BLM’s proposal would require an operator submit a Sundry Notice with an affidavit certifying that the lease meets the specified criteria. 81 FR 6641 (emphasis added) If case-by-case review is appropriate above the limit, then why not below the limit as well?  No justification is provided for determining that on-site gas-capture should not ever be required below the 1800 Mcf/month limit.

Furthermore, by not charging royalties, BLM is reducing the incentive to install or extend gas capture equipment. Again, referring to the difference between connected and unconnected wells, BLM says flaring from connected wells may be a rational business decision for an operator, but with better planning or more deliberate development, both the oil and gas resources could be developed without waste. 81 FR 6644. Similarly, with better planning and more deliberate development, oil and gas resources could also be developed without waste from unconnected or development wells.

TCS supports BLM’s decision in the proposed rule to narrow the definition of “emergencies” where royalty-free flaring can occur. Specifically, TCS agrees with BLM that repeated failure of the same piece of equipment within a given span of time indicates that the equipment is not properly sized or may need to be replaced, and that the operator should have taken action to address the problem. 81 FR 6643.

Proposed Per-Well Flaring Limit

BLM is requesting comment on the proposed 1,800 Mcf per month per well limit on the quantity of flared gas that will be treated as unavoidably lost, or whether the flaring limit should be 1,200 Mcf/month/well. 81 FR 6641.

BLM proposes to set a flaring limit of 1,800 Mcf/month/well, averaged over all producing wells on a lease. The BLM reports this proposed limit is consistent with Wyoming's and Utah's approaches: Wyoming and Utah limit flaring from a well to 60 Mcf/day and 1,800 Mcf/month, respectively. BLM’s proposed limit would be somewhat less stringent than the state limits, however, because operators would be able to average flaring across all of the wells on a lease, rather than being required to meet the limit at each individual well. 81 FR 6640.

Although BLM reports that it used venting and flaring data reported to Office of Natural Resource Revenue (ONRR) by operators of oil and gas leases on federal and Indian lands as well as the BLM Automated Fluid Minerals Support System database for the number of total active wells associated with the lease or unit in order to calculate an appropriate flaring limit, the justification for choosing the 1,800 Mcf/month/well limit is vague. BLM says this limit would effectively maximize flaring reductions while minimizing the number of affected leases, but it gives little evidence in support of this claim or why it would be more effective than 1,200 Mcf/month/well limit. If BLM considers all the losses above the threshold amount to be avoidable, then the agency needs to provide a justification for that conclusion.

In fact, when looking to the states for examples of flaring limits in practice, BLM could also follow the example of Alaska, which adopted regulations in the 1970s that prohibit venting or flaring of gas except in narrowly defined circumstances. According to BLM’s own description, the practical effect of this prohibition has been widespread reinjection of associated gas into the field for conservation and oil recovery purposes. Alaska estimates that roughly 0.4 percent of gas production is flared, which is far lower than in most other states. 81 FR 6633 (emphasis added). By contrast, as discussed above, BLM describes the primary means to avoid flaring of associated gas from oil wells is to capture, transport, and process that gas for sale. 81 FR 6636. Nowhere in the proposed rule does the BLM explain why reinjection is not also an option as a way to lower the flaring limit or to effectively prohibit venting and flaring as Alaska has done.

The rulemaking also needs to provide a more direct statement that all flaring above the flaring limit constitutes avoidable losses that are subject to a royalty payment and possible penalties. As stated above, a civil penalty based on a per-incident or per-day charge would provide more appropriate incentives. In addition to penalties, the rule should expressly note that any gas flared in excess of the flaring limit (and not subject to exemption) is avoidably lost and subject to royalty.

Renewable, 2-Year Exemption

BLM proposes that operations on an existing lease would qualify for an exemption from the flaring limit if: (1) The lease is not connected to a gas pipeline; (2) The closest point on the lease is located more than 50 straight-line miles from the nearest gas processing plant; and (3) The rate of flaring or venting from the lease exceeds the applicable flaring limit by at least 50 percent. 81 FR 6641.

The minimum limit for flaring in order to qualify for the exemption creates an incentive for operators located more than 50 miles from gathering infrastructure to flare more than 50 percent of the limit in order to renew the exemption. Once the amount of flaring drops below this amount, the operator would no longer qualify for the exemption. BLM must eliminate this perverse incentive, perhaps by requiring decreases in gas loss, or creation of waste minimization plans for wells granted an exemption. At a minimum, BLM should impose a limit to the number of 2-year exemptions an operator can receive.

Royalties

Royalty Rates on New Competitive Leases

TCS strongly supports BLM’s decision to make the rule text parallel to the corresponding Mineral Leasing Act text for competitive leases issued after the effective date of the rule. BLM’s current regulations for royalty rates collected from onshore oil and gas leases set a flat rate of 12.5 percent for competitive leases and non-competitive leases. Although BLM is authorized to specify a higher royalty rate, it has not done so. BLM’s failure to raise onshore royalty rates, or to amend the regulations to allow further increases of royalty rate above the minimum by administrative action, represents a significant loss to taxpayers for resources developed on federal lands. This failure also contradicts the agency’s previously stated goal to design an oil and gas fiscal system that ensures both that the United States' oil and gas resources are developed and managed in an environmentally-responsible way that meets our energy needs, and also that the American people receive a fair return on those resources. 80 FR 22150. (RIN: 1004-AE41)

Fair return to taxpayers is a competitive rate of return—a royalty rate that is consistent with royalty rates charged on state and private lands. As BLM has noted, state and private lessors charge royalty rates higher than 12.5 percent. 80 FR 22152. BLM should increase the royalty rate to 18.75 percent for onshore oil and gas production, a rate consistent with federal offshore oil and gas production and the prevailing state and private royalty rates.   

Similar to the system in place for offshore federal oil and gas leasing, BLM’s regulations should make it possible to adjust royalty rates for onshore federal oil and gas leases without a full rulemaking, by setting a minimum rate instead of a fixed rate. In a December 2013 report, GAO recommended that the Secretary of the Interior “take steps, within existing authority, to revise the BLM’s regulations to provide for flexibility to the bureau to make changes to onshore royalty rates, similar to that which is already available for offshore leases, to enhance Interior’s ability to make timely adjustments to the terms for federal onshore leases.” GAO-14-50 at 29.  The proposed rule, by tracking the language of the Mineral Leasing Act, would give BLM the necessary flexibility to make adjustments responsive to changing economic conditions.

Royalty-Free Use of Lease Production

TCS supports elimination of the term “reasonable use” as a generic definition of what uses of gas are royalty-free. Defining specifically what uses on the lease will be considered exempt from royalty will resolve some of the long-standing problems with NTL-4A of ambiguity of which gas is royalty-bearing.

Royalty “Adder”

BLM is considering a provision that would allow royalty rates on new competitively issued leases to vary after the first year, based on the lease holder's record of routine flaring of associated gas from the lease during the previous year. BLM requests comment on both the concept and the implementation of the royalty adder. 81 FR 6660.

While TCS supports the idea of penalizing operators for excessive flaring, the royalty adder provision is not the best approach because it does not apply directly or immediately to gas flared in excess of the limit. Under the proposal, the additional royalty would be charged on oil and gas that enters the production system at some point in the future. Because the degree of the incentive depends on the amount and value of oil and gas produced in the future rather than the amount of gas lost, its impact would vary from lessee to lessee. Furthermore, if BLM decides to adopt a system of sliding-scale royalties to increase royalties when the value of oil goes above a certain level, an additional royalty adder would create confusion and complexity in the royalty rate calculation.

It would be more appropriate to base penalties on the amount of gas lost and to assess those penalties at the time of the violation. The Secretary has civil penalty authority under the Mineral Leasing Act (though the penalty amounts are not large), and a fine based on a per-incident or per-day charge would provide more appropriate incentives.

Waste Minimization Plans

BLM is proposing to require submission of a waste minimization plan together with the Applications for Permit To Drill (APD), but the agency is not proposing to include the submitted plan as an element of the APD or otherwise to enforce the terms of the plan. 81 FR 6642.

TCS supports the requirement to create and submit a waste minimization plan prior to drilling, but we urge BLM to strengthen this provision in order to make it meaningful. If BLM is going to require waste minimization plans, the agency should at a minimum set standards for these plans or at least provide documentation that the lessees have considered the full range of gas collection alternatives, and then enforce them.

BLM believes that making the elements of the plan enforceable might create an unintended incentive for operators to understate the degree of capture they anticipate achieving, or to write a very general plan, with few specifics. 81 FR 6642. However, if the plans are not enforceable, it does not matter how specific they are. There is no evidence to support BLM’s belief that not making the waste minimization plans enforceable will necessarily lead operators to develop more thorough and practical plans. BLM’s belief appears to be based more on a hope that this will occur. BLM does not explain why it cannot ensure that lessees submit waste minimization plans that are more than “very general, with few specifics.”

In response to earlier commenters’ suggestions that the BLM address the waste issue not only through requirements under the Mineral Leasing Act, but also through the BLM's land-use planning and environmental review processes, the BLM responds that this proposed rule is limited to the requirements that apply to operators as they develop wells and produce oil and gas from lands under federal leases and that it will not make any changes to BLM land use planning regulations. 81 FR 6662.

BLM offers little rationale to support its decision not to make changes to the land use planning regulations in this rulemaking, or to tie changes in energy development planning to a full rewrite of the land management rules. BLM acknowledges that flaring sometimes results from development of oil wells in advance of gas capture infrastructure, when existing gas capture and processing infrastructure is inadequate, or when operators find flaring easier or less costly than connecting to existing gas capture infrastructure. BLM concludes that part of the solution to flaring, therefore, is to align the timing of well development with that of capture and processing infrastructure development, and to create incentives for operators to capture rather than flare. 81 FR 6662.

BLM is correct that “part” of the solution to lost gas is better alignment of well development and capture infrastructure and incentives to capture gas, but BLM is then abandoning its responsibilities by ruling out any changes to improve those processes in this rulemaking. In the preamble to the proposed rule, BLM agrees that the land use planning are important to sound oil and gas development on Federal land, and that the land use planning could be used to create a more integrated approach. 81 FR 6662. In 2010, the GAO specifically recommended that BLM assess the potential use of venting and flaring reduction technologies to minimize the waste of natural gas in advance of production wherever applicable. 81 FR 6662. (emphasis added)

BLM is in the process of developing a separate “Planning 2.0” regulation that may address energy development and lead to waste minimization, but that is a broad regulation that is not intended to specifically address methane waste, as this rulemaking is. Nor is there any guarantee the “Planning 2.0” regulation will ultimately be finalized. BLM should address lease planning to avoid waste in this rulemaking, and one good option for the BLM to do this is to require operators to submit detailed waste minimization plans that are enforceable.

Measures To Reduce Waste

BLM proposes to take other agency requirements, specifically the Environmental Protection Agency (EPA), into account in finalizing this proposed rule to avoid conflict or burdensome duplication. 81 FR 6636. Although the underlying purpose of EPA’s rule is pollution prevention, and not royalty collection, having the rules consistent and coordinated will increase efficiency and avoid inconsistent standards for industry – and will likely simplify standards to be applied for the royalty collection as well.

Record Keeping Requirements

The BLM is proposing to require operators to estimate or measure all volumes of gas vented or flared, and report those volumes under applicable ONRR reporting requirements. BLM is soliciting comment on the most efficient and least burdensome means to make appropriate data available to the public. BLM is also proposing to require operators to keep records on the cause, and duration of each venting event, as well as estimates of the quantities released and to keep records on the dates, equipment covered, monitoring methods used, and results of the leak inspections, as well as the dates that repairs are attempted, completed, and confirmed. BLM is requesting comment on whether operators should be required to provide this information in an annual report, consistent with Colorado's requirements. 81 FR 6660-61

Updates to the process for collecting and disclosing data on lost gas are critical, as there are numerous problems with the existing data reporting and disclosure system. ONRR collects two different data sets to measure volumes of gas extracted and sold from federal leases: 1.) production and disposition data from drilling operators in the Oil and gas Operations (OGOR) report, and 2.) sale and royalty data from federal lessees in the Report of Sales & Royalty Remittance (Form 2014). There does not appear to be any correlation between these two data streams, even in the aggregate. Aggregate data reported by federal lease holders for sales volumes, sales amounts, and royalties from Form 2014 is currently available on the ONRR website (statistics.onrr.gov), while data reported by drilling operators for beneficial purposes, venting, flaring, and other disposition volumes from the OGOR is not available online.

TCS strongly supports BLM’s proposal to require operators to estimate or measure and report all volumes of gas vented or flared. ONRR should make this data available on its website (statistics.onrr.gov) in a format similar to what it already provides for data recorded on the Form 2014. Specifically, the public should at a minimum be able to query the ONRR database for aggregate amounts of gas vented or flared by source, mineral ownership, state, and year. An example of reporting of source and mineral ownership is available in “Table 1b: Estimated Flared Gas from Federal and Indian Leases in 2013, by Mineral Ownership, Volume in Bcf” on page 3 of the Regulatory Impact Analysis (RIA).

TCS strongly supports a requirement that operators report to BLM data on the cause, date, time, duration, and quantity of gas leaked. Currently, there is no reporting on gas leaked by operators as it is utilized on the lease site for “beneficial purposes.” As stated above, TCS agrees with BLM that repeated failure of the same piece of equipment within a given span of time indicates that the equipment is not properly sized or may need to be replaced, and that the operator should have taken action to address the problem. 81 FR 6643. BLM will need this data to make these determinations, and it should consider monthly reporting. BLM should set a limit, such as a percentage of production, on the amount of gas that can be leaked from a lease site, and any leakage above that limit is considered avoidably lost and is subject to royalty. To the extent possible, ONRR should make data about leaked and vented gas available to the public on its website similar to “Table 1a: Estimated Vented Gas from Federal and Indian Leases in 2013, by Source” on Page 3 of the RIA.

Conclusion

Thank you for the opportunity to comment today. TCS this effort to reform oil and gas development practices to better protect taxpayers.  The outdated rules that govern current development are costing taxpayers billions of dollars in lost revenue. We urge you to move forward quickly to finalize this rulemaking. For more information on lost gas and natural resource royalties please visit www.taxpayer.net/issues/energy.