New Oil & Gas NAICS Codes National Oil and Gas Emissions Committee Monthly Committee Call January 11, 2018 New Oil & Gas NAICS Codes Tom Richardson Rules & Planning Section Air Quality Division, Oklahoma DEQ

Background The Instituto Nacional de Estadística y Geografía (INEGI) of Mexico, Statistics Canada, and the United States Office of Management and Budget (OMB) have updated the North American Industry Classification System (NAICS). The NAICS revision for 2017 became effective in the 4th Quarter of 2017 in Canada and the United States. It will be implemented in 2018 in Mexico. NAICS was developed to provide a consistent framework for the collection, analysis, and publication of industrial statistics used by government agencies, researchers, businesses, and the public. Revisions for 2017 were made to account for changing economic conditions. https://www.census.gov/eos/www/naics/2017NAICS/2017_NAICS_Manual.pdf

Changes to Oil & Gas NAICS Codes Crude Petroleum and Natural Gas Extraction (2012 NAICS Code 211111) will be broken into two new codes in 2017: NAICS 211120 – Crude Petroleum Extraction NAICS 211130 – Natural Gas Extraction Natural Gas Liquid Extraction, (2012 NAICS Code 211112) will become:

U.S. Census Bureau Guidance 10. Who assigns NAICS codes to businesses and how? There is no central government agency with the role of assigning, monitoring, or approving NAICS codes for establishments. Individual establishments are assigned NAICS codes by various agencies for various purposes using a variety of methods. The U.S. Census Bureau has no formal role as an arbitrator of NAICS classification.   The U.S. Census Bureau assigns one NAICS code to each establishment based on its primary activity (generally the activity that generates the most revenue for the establishment) to collect, tabulate, analyze, and disseminate statistical data describing the economy of the United States. Generally, the U.S. Census Bureau's NAICS classification codes are derived from information that the business establishment provided on surveys, census forms, or administrative records. Various other government agencies, trade associations, and regulation boards adopted the NAICS classification system to assign codes to their own lists of establishments for their own programmatic needs. If you question the NAICS code contained on a form received from an agency other than the U.S. Census Bureau, you should contact that agency directly. https://www.census.gov/eos/www/naics/faqs/faqs.html

How to Classify Wells that Produce Both Gas and Hydrocarbon Liquids NAICS codes are assigned based on economic activity. EPA is following U.S. Department of Commerce/U.S. Census Bureau guidance regarding the assignment of the primary NAICS code to each facility. U.S. Census Bureau guidance is to assigns one NAICS code to a facility based on its primary economic activity; the primary economic activity is usually considered to be the activity that generates the most revenue for the facility.

NAICS Assignment Based on Revenue Following the Census Bureau’s guidance we could assign one of the new NAICS codes to a wellhead site based on the relative production of oil and gas and the prices those commodities command in the market.  Consider the current market prices: Crude Oil (WTI): $61.74/bbl Natural Gas (Henry Hub): $3.03/MMBtu   Using those prices, the classification threshold = 19.88 Mcf/bbl.  A well would be a gas well (new NAICS Code 211130) if it produced more than 19.88 Mcf per bbl of hydrocarbon liquids. It would be an oil well (new NAICS code 211120) if it produced less gas per bbl. This threshold will change as commodity prices change and production changes.

State Oil and Gas Conservation Commissions State oil and gas conservation commissions also establish rules for well classification. These rules are used to determine well spacing, they affect royalty payments, and they often reflect the operation of the wells (including equipment installed).  Absent clear guidance to the contrary, owners/operators may expect to use the NAICS code that reflects the well classification approach used by the state oil and gas commission.  The Oklahoma Corporation Commission (OCC) well classification is based on the gas/oil ratio (GOR): GOR ≥ 15 Mcf/bbl = Gas Well GOR < 15 Mcf/bbl = Oil Well

Notes and Concerns If we ask owner/operators to assign a NAICS code to a facility based on most valuable revenue stream (oil or gas), the classification will depend on the current market price of those commodities and their relative production. Both are subject to change over time. The U.S. Census Bureau FAQ states that no government agency is the official arbiter of the NAICs code assignment. Different agencies may choose to use the NAICS codes in the manner that best fits their programmatic needs. State oil and gas conservation agencies have different rules for classifying wells. An owner/operator may use an oil or gas NAICS code that best ensures accordance with rules established by the state oil and gas conservation agency. The GHGRP uses a 100 Mcf/bbl classification threshold. There may be confusion between the GHGRP classification and the use of the new NAICS codes. Companies may assume that they should use the GHGRP approach in assigning NAICS codes.

Notes and Concerns (Continued) The trend toward greater use of horizontal wells with multistage hydraulic fracturing has resulted in wells that are more difficult to classify. These wells typically produce large volumes of both gas and hydrocarbon liquids. The liquids tend to have an API gravity in between that of traditional crude oil and condensate. It is odd that, with this trend increasingly dominating oil and gas production, the new NAICS codes are attempting to create a distinction that appears to be increasingly artificial. The previous code 211111 grouped oil and gas wells into a single category.

Notes and Concerns (Continued) We have concerns about making inappropriate comparisons between emissions from different classes of wells. Emission factors developed based on one set of assumptions may no longer be appropriate if the criteria for classifying wells are changed. This is especially important for the National Oil and Gas Emissions Estimation Tool, where surveys were used to gather data on various input variables. If the survey asked for information on emissions units at a typical “gas well,” it is important that we understand how that request was interpreted by the respondent. As industry practices change, we need to be cautious about making assumptions about equipment types and expected emissions based on studies performed years ago. We would also encourage EPA to be cautious in writing rules that refer to “gas wells,” without providing more detailed guidance on how wells should be classified.

Final Thoughts When an owner/operator asks which NAICS code to apply to a wellhead facility (which may include more than one well), which is the preferred response? Follow the guidance from the U.S. Census Bureau.  Use NAICS code 211120 if most of the revenue produced from the facility is from the sale of oil and NACIS code 211130 if most of the revenue is produced from the sale of gas. Or Use the NAICS code that corresponds with the well’s classification according to the state oil and gas conservation commission. Or… How will we use that information to characterize emissions from the sector?