1. 51 st Annual Rocky Mountain Mineral Law Institute July 22, 2005 Hazed and Confused: Clean Air Act Developments Affecting the Oil and Gas Industry by John R. Jacus and Sherry H. Bursey Davis Graham & Stubbs LLP

2. I. Scope of Presentation Petroleum Refinery Initiative to Date Recent NSR/PSD Program Developments Current EPA Source Aggregation Policy MACT for RICE Units (Engines) MACT for Process Heaters and Boilers Ozone Control Requirements Air Permitting on Tribal Lands

3. Petroleum Refinery Initiative Announced mid-90s Now a majority of refineries under consent decree –76 refineries in 25 states –11.6 MM Barrels per day (BPD) –69,500 TPY NOx, 194,000 TPY SO 2 –Injunctive relief value of $3.75 billion, and penalties of $55 MM, with SEPs of $50 MM

4. June 2005 Settlements 18 refineries covered Valero and Tesoro –$700 MM in new controls Sunoco –$285 MM in new controls Negotiations with 11 refiners/24 refineries Starting to focus upstream?

5. II. Regional Haze Final Amendments to Regional Haze Rule and BART Guidelines –1999 Rule requires SIPs for addressing visibility impairment in 156 Class I Areas, federally protected parks and wilderness areas –These areas are concentrated in the Western U.S. where a lot of oil & gas activity is occurring

7. Regional Haze Rule (RHR) 1999 Rule challenged, remanded in part in American Corn Growers, et al. v. EPA June 15, 2005 Final Amendments to RHR address D.C. Circuits concerns raised by: –Broadening States discretion to make Best Available Retrofit Technology (BART) determinations; and –Reproposing BART Guidelines to aid States

8. RHR Framework and Timeline Applies to existing major stationary sources that: –Began operation between August 1962 and August 1977; –Have the potential to emit (PTE) 250 tons per year (TPY) of any pollutant; and –Fall within any of 26 source categories singled out by Congress in the CAA, including petroleum refineries and petroleum storage and transfer facilities with capacity greater than 300,000 BBL

9. RHR and BART Guidelines RHR requires states to set goals for improving visibility and develop regional haze implementation plans with enforceable measures and strategies BART Guidelines intended to aid in determination of what BART-eligible sources must install controls, and the types of controls they must use Plans are due December of 2007

10. BART Guidelines – 5 Factors Cost of Controls Impact of controls on energy usage or non-air quality environmental impacts Remaining useful life of equipment Existing emission controls in place Visibility improvements resulting from additional controls via BART

11. Regional Planning Organizations 1990 CAA Amendments established Grand Canyon Visibility Transport Commission GCVTC to advise EPA on strategies for protecting visibility in 16 Class I Areas on the Colorado Plateau GCVTC issued Report in 1996 with long-term recommendations for improvements

12. WRAP Annex GCVTC succeeded by the Western Regional Air Partnership (WRAP) of states, tribes and federal agencies WRAP members sought option in 1999 RHR for improving visibility via regional planning between 2003 and 2018 WRAP developed an Annex to the 1996 GCVTC Report addressing long-term emission caps for SO 2 with trading program for a back stop – EPA adopted in RHR in May 2003

14. BART not for everyone Clean Air Interstate Rule (CAIR) rule issued March 2005 For electricity generating units (EGUs) in 28 eastern states and D.C., CAIR rule compliance, involving a cap and trade program, projected to deliver more emission reductions than BART Suits filed July 11, 2005 in D.C. Circuit

15. Critical Time for BART-eligible sources Get/stay involved Understand the 5 factors Develop information to support proper application of factors to your operations

16. III. NSR/PSD Reform Since 1977, new or modified major stationary sources required to obtain construction permits through New Source Review (NSR) Program (includes PSD for attainment areas) NSR Program criticized as complex, slow costly, and ineffective December 31, 2002 NSR Reform Package to address these criticisms

17. NSR Reform Package New or modified sources given options for determining whether a proposed project triggers NSR –Actual-to-Projected-Actual threshold test for modifications > 40 TPY Baseline emissions for any 24-month period over last ten years To address varying business cycles, create bright-line test –Plant-wide applicability limits (PALs) or caps –Clean Units exclusion for state-of-the-art controls –Pollution Control Projects flexibility

18. Equipment Repair & Replacement Routine Maintenance, Repair and Replacement (RMRR) very controversial 2002 NSR Reform Package included a proposal to address disputes over RMRR Court challenge resulted in stay of RMRR provisions of NSR Reform Package

19. Final RMRR Provisions Adopted Oct. 27, 2003 and excludes from NSR: –Replacement with identical/equivalent component –Replacement if fixed capital cost plus repair & maintenance costs < 20% of unit replacement value –Replacement doesnt change basic design parameter of unit –Replacement does not cause exceedance of emission limits

20. State & EPA Treatment States reviewed NSR Reform Package for revisions to their Regulations and SIPs Not all states adopted reforms, like Colorado, so some states more stringent Petition to EPA for reconsideration of RMRR provisions was granted June 30, 2005, after 1 year, EPA refused to repeal RMRR exemptions finalized in 2003

21. Recent Court Decisions on NSR United States v. Duke Energy Corp., 4 th Cir., No. 04-1763, June 15, 2005 –Ruled emission increases only occur when plant increases hourly emissions rate, not when increased on annual basis; –Based on consistency between modification as defined under NSPS and NSR regulations –Said EPA cant define differently under different CAA programs

22. Recent Court Decisions on NSR New York v. EPA, D.C. Cir., No. 02-1387, June 24, 2005 –Action was stayed pending RMRR decision on reconsideration petition; –Split EPAs NSR Reform Package Upheld 10 year/2 year window for baseline Upheld PALs and actual-to-projected actual test Remanded recordkeeping exemptions of package, as well as PCPs and Clean Units exemption Also rejected 4 th Circuits Duke Energy holding on modifications definition

23. IV. EPA Source Aggregation Policy Based on definition of stationary source Different sources may be considered a single stationary source if they: –Belong to the same industrial grouping –Are located on contiguous or adjacent properties, and –Are under the control of the same person

24. Source Aggregation Evolved EPA has issues interpretive letter rulings considering the question of source aggregation for PSD and Title V applicability Adjacent facilities under common control in different industrial classifications examined for interdependency Support facility given classification of primary stationary source, thereby aggregating them

25. Numerous Rulings to Date Valero Transmission Company Anheuser-Busch Brewery/Nutri-Turf Great Salt Lake Minerals American Soda (commercial mine and processing plant) Williams Energy Ventures Gallatin Steel

26. Interpretations Lack Support? All three criteria must be met Support facility analysis not in any law or regulation, only applicable if contiguous or adjacent Adjacent has common sense meaning, not many miles apart

27. Source Aggregation in Oil Patch Issue has been reserved and carved out of recent settlements for O&G operators Region 8 states and EPA have been boning up on E&P facilities and systems connecting them, e.g., January 2004 CAA information request letter (sample in materials at 12-C-1 thru 12-C-4)

28. Region 8 Information Request 6 States air divisions and EPA sent to larger mid and up-stream operators Sought all manner of information in letter requests, including maps, GIS locations, legal descriptions, inlet and outlet pressures, condensate production, etc. Most information already available in permit files to states and EPA

29. No Aggregation for Control of HAPs Oil & Gas MACT standards to control major source of HAPs dont aggregate E&P facilities Not like typical industrial facilities in close proximity and under control of same owner EPA decided that pieces of production equipment…located on different oil and gas leases…, whether or not connected by a… pipeline, shall not be considered part of the same facility. 64 FR 32610, 32630 (June 17, 1999)

30. Policy Implications are Significant Major source status for Title V and PSD more likely Raises potential enforcement liability, and complicates/slows permitting of facilities Potential for netting emissions within single source a benefit to be carefully weighed against other negatives

31. V. MACT for Reciprocating Internal Combustion Engines Promulgated June 15, 2004 Limits HAP emissions from certain engines at major sources of HAPs –Generally, if PTE > 10 TPY of any single HAP or 25 TPY of a combination of HAPs –Special provisions apply to determining major source status at oil and gas facilities

32. RICE Definition Internal Combustion Engines Greater than 500 Horsepower (HP) Not mobile Uses reciprocating motion to convert heat energy into mechanical energy MACT is for RICE at major sources of HAPs

33. RICE MACT Applicability Exempt Sources –Nonroad engines (i.e., mobile) –Engines used to drive motor vehicles –Engines used in equipment that is self- propelled, or can be, and is used to serve other functions, e.g., tractors, dozers –Engine in or on, intended to be propelled in operation, e.g. mowers –Engines that change location w/in 1 yr.

34. RICE Requirements Affected RICE units subject to controls Notice due December 13, 2004 for existing affected units 4-stroke rich burn (4SRB) > 500 HP must –Control Formaldehyde via catalysts –Initial notification only (no limits) for new or reconstructed emergency/limited use RICE

35. RICE at Area Sources Must maintain records of HAP emissions for five years So even if thought or told exempt, make sure no recordkeeping is overlooked

36. VI. Boiler & Process Heater MACT 40 CFR Part 63, Subpart DDDDD Applies to boilers and process heaters at major sources of HAPs –> 10 TPY any HAP, 25 TPY combined HAPs Initial Notice due March 12, 2005 Must comply with substantive requirements by September 13, 2007

37. Affected Units At major sources of HAPs > 10 MMBtu/hr heat input Constructed before January 13, 2003 = Existing Unit Constructed on or after 1-13-03 = New Unit

38. Subpart DDDDD Requirements Affected Units subject to exemptions and limitations based on fuel burned and new v. existing status Solid fuel –Existing units: limits PM or total selected metals (depends on frequency of use of unit), HCl (surrogate for inorganic HAPs) and Mercury –New Units: limits PM or metals, HCl, Mercury, and CO (surrogate for organic HAPs)

39. Subpart DDDDD (cont.) Liquid Fuel –Existing Units: no limits –New Units: limits PM, HCl, CO Gas Fuel –Existing Units: no limits –New Units: limits CO

40. Subpart DDDDD Deadlines Effective November 12, 2004 New Affected Units - comply at startup Initial notification - 15 days after startup Fuel analysis plan due 60 days before demonstrating compliance New unit performance test 180 days post- startup Notice of compliance status 240 days post- startup Semi-annual compliance reports Notice 30 days prior to performance and compliance tests

41. Subpart DDDDD Compliance Alternatives Existing Sources –Compliance via emissions averaging plan if demonstrated 180 days before Sept. 13, 2007 –Must be on 12-month rolling avg. basis –Compliance via site-specific fuel analysis plan if demonstrated 60 days before 9-13- 07 –Compliance by demonstrating low risk for HCl and Manganese

42. Subpart DDDDD Compliance Alternatives (cont.) New Source –Compliance by demonstrating low risk for HCl or Manganese, depending on startup date –Compliance through site-specific fuel analysis plan if demonstrated

43. VII. Oil & Gas MACT for Area Sources EPA supplement to 1999 rule for HAP controls at non-major area sources, issued in last 2 weeks Applies to process vents on TEG dehydrators outside urban areas Requests comment on application to all TEG units, other alternatives by 9-9-05

44. VIII. Ozone Control for Oil & Gas Ozone: Natural v. Ground-level Formed by photochemical reaction of precursors, VOCs and NOx, in sunlight 8-hour standard of 0.08 ppm established in 1997 to replace 1-hour, 0.12 ppm Complicated by transport, background

45. 8-Hour Ozone Standard After legal challenges to standard, EPA issued multiple rules (Ozone Rules of 2004) –Designated nonattainment areas and their boundaries –Deferred nonattainment requirements for areas that entered Early Action Compacts

46. Early Action Compacts Areas in attainment with 1-hour standard but at risk of nonattainment for 8-hour eligible for EAC agreement Must implement strategies and controls to control ozone earlier than if simply designated nonattainment w/o deferral Preliminary controls submitted to EPA in June 2003 by EAC areas

47. Early Action Compacts (cont.) Final plans and controls due March 2004 Modeling required to demonstrate attainment of 8-hour standard by 2008 Revisions to SIPS to incorporate EAC terms were due last December

48. EACs in Oil & Gas Country Denver, Shreveport, Central Oklahoma, Tulsa, NE Texas, Austin, San Antonio and an area in New Mexico signed EACs Areas considered and adopted various controls Most focus on a range of controls including mobile source, vehicle I & M and transportation improvements Denver unique in controlling O&G Sector only

49. Denver Ozone Controls Despite very thin source attribution data, Denver area controls include –95% effective VOC controls on condensate tanks –Catalyst Controls on engines > 500 HP, subject to a $5,000/ton economic out for 2SLB units –Compliance with Subpart KKK Leak Detection and Repair (LDAR) requirements at all gas processing plants regardless of when constructed –90% effective controls on dehydrators in area

50. IX. Permitting on Tribal Land Can be difficult to determine whether state, tribe or EPA has permit jurisdiction Indian Country analysis superceded in some locations by EPA, state and tribal agreement on extent of tribal airshed Once tribal/EPA jurisdiction confirmed, things can be interesting

51. No Preconstruction Permit Program Minor source permitting not subject to construction permit and common notice/registration requirements Lack of permit with federally enforceable limits precludes synthetic minor permit option so common on state-governed lands Sources evaluated on PTE, regardless of controls Part 71 transition policy – must be < 50% of PTE to avoid needing Part 71 Operating Permit

52. X. A New Oil & Gas Initiative? Region 8 states, EPA Region and Headquarters developing an initiative Hasnt taken a public written form yet Consists of 5 goals, announced June 22 nd at a conference by Colo. Air Div. Director Developed after review of 2004 information request responses

53. 5 Goals of Initiative Streamline agency interaction Set future requirements for new sources with flexibility in regulatory choices Examine requirements for existing sources to better control emissions Promote better ambient monitoring to fill data gaps Resolve regulatory issues, e.g., source aggregation

54. New initiative (cont.) Not certain of timing New technology to aid in meeting goals Want to move away from rigid PSD and Title V enforcement as deterrent Need to give in order to get May take MOU form to start Need for industry to be at the table

55. Whats it all mean? More important than ever to stay current Trade associations and other access to forums of negotiation are critical Understand the pros and cons as they relate to your clients/company You dont get the deal you deserve, you get the deal you negotiate