November 11, 2011
Practice Group(s):
Energy, Infrastructure and Resources
Oil & Gas
By David R. Overstreet and Tad J. Macfarlan
Effective October 12, 2011, the Pennsylvania Department of Environmental Protection (“PaDEP”) is utilizing a new guidance for determining when various wells, compressor units and other equipment in the oil and gas industry constitute a single facility or source. This interim, non-binding policy statement entitled “Guidance for Performing Single Source Determinations for Oil and Gas
Industries” is open for public comment through November 21, 2011. The new state guidance provides clarity on how PaDEP will answer a question of great significance to the Pennsylvania oil and gas industry: Should a widely dispersed collection of well production pads, connected by pipeline to a central processing or compressor station, be considered a single facility for the purpose of air emission regulation?
Like regulators in Texas, Oklahoma, Louisiana and West Virginia before it, PaDEP has indicated that it will generally answer this question in the negative. Because the components of these operations are not located on “adjacent” properties, as required by state and federal law, they will be regulated separately. PaDEP grounded its decision on (1) the plain meaning of the term “adjacent,” which relates to physical proximity and (2) its determination that these operations do not comport with the
“common sense notion of a plant.” Emissions from individual well pads rarely exceed the requisite thresholds to qualify as major sources. Thus, unless their emissions are aggregated with other units, these facilities will not be required to comply with the stringent requirements of Pennsylvania’s
Preventions of Significant Deterioration (“PSD”), New Source Review (“NSR”), and Title V operating permit programs. As discussed below, in taking this approach, PaDEP has departed from
EPA staff guidance which has taken an expansive view of what is adjacent based on factors which have little to nothing to do with how close one unit might be to another.
In Pennsylvania, any person who wishes to construct, install or operate an “air contamination source” must first gain approval from PaDEP. In lieu of obtaining individual permits, PaDEP has created the
Pennsylvania General Plan Approval and/or General Operating Permit for Natural Gas, Coal Bed
Methane or Gob Gas Production or Recovery Facilities (“GP-5”), which provides a (relatively) streamlined process for oil and natural gas companies to request authorization to construct and operate a production facility. GP-5, however, expressly excludes from the ambit of its coverage any facility that triggers more strenuous PSD or NSR review. As mandated by the federal Clean Air Act (“CAA”), the Commonwealth of Pennsylvania has created regulatory regimes implementing the federal PSD,
NSR, and Title V permitting programs. (The Pennsylvania rules have incorporated by reference the federal PSD program in its entirety; with regard to NSR and Title V, PaDEP has enacted its own regulations that meet the federal minimal requirements.) These programs impose significantly more onerous requirements on oil and gas industry permittees than does a GP-5 application.

PaDEP Issues Interim Guidance on Air Aggregation, Moves
Away from "Functional Interdependence" Test
To trigger PSD, NSR, and Title V requirements, an emitter must first qualify as a “major facility” or
“major stationary source” of emissions. The state and federal regulations establish threshold emissions rates that, if exceeded, will qualify a source or facility as “major.” Because all of Pennsylvania is considered in “non-attainment” with respect to the ozone ambient air quality standards, the key thresholds are those for oxides of nitrogen (NO x
) and volatile organic compounds (VOCs), where the triggers are a potential to emit more than 100 tons per year and 50 tons per year, respectively. For many oil and gas operations, individual well pads, compressor stations, and processing facilities do not exceed these thresholds. However, if emissions from each component are aggregated, the combined emissions levels would trigger PSD, NSR and Title V review. Thus, the “single source” determination is critical for both regulator and regulated community.
Under Pennsylvania law, to be considered a single facility or source, pollutant emitting activities must
(1) belong to the same industrial grouping, (2) be located on one or more contiguous or adjacent properties, and (3) be under the control of the same person. (For NSR purposes, the first prong was left out of the definition of “facility” in the Pennsylvania regulations, but the second and third prongs remain the same.) Each prong must be satisfied for a single source determination to be made. The requirements under federal law are essentially the same where the United States Environmental
Protection Agency (“EPA”) is the permitting authority (such as Indian country and states that have not been delegated permitting authority).
Moreover, the preamble to EPA’s PSD regulations, in which the three-part test first appeared, provides additional texture to the analysis. The definition of “source” (1) must carry out reasonably the purposes of the PSD program, (2) is meant to approximate a common sense notion of a “plant,” and (3) should not result in the aggregation of pollutant-emitting activities that as a group would not fit within the ordinary meaning of “building,” “structure,” “facility,” or “installation.” These interpretive guides grew out of a 1980 decision of the Court of Appeals for the D.C. Circuit, Alabama v. Costle , in which the court rejected EPA’s prior definition of a stationary source. Thus, these additional considerations carry the authority of a judicial decree.
The requirement that sources be located on “contiguous or adjacent” properties has been subject to differing interpretations by permitting authorities across the nation in relation to the oil and gas industry. The debate is highlighted here by investigating (1) PaDEP’s recently issued interim guidance and (2) EPA’s contrary position in a case pending before the U.S. Court of Appeals for the Sixth
Circuit, Summit Petroleum Corp. v. EPA (No. 10-4572).
While the interim guidance does not carry the weight of a duly promulgated regulation, it is significant nonetheless because it indicates the manner in which PaDEP intends to interpret its regulations with regard to the oil and gas industry. PaDEP expressed several important positions in this guidance:

PaDEP is agreeing with other state regulators who read the words “contiguous or adjacent” in harmony with their plain meaning. Both the common understanding and dictionary definitions of these terms refer to spatial distance and proximity. Thus, when conducting a “contiguous or adjacent” analysis, PaDEP will not consider interrelatedness or interdependence among oil and gas operation components, such as an extraction well and a compressor station on other property some distance away, in determining adjacency (though this may be taken into account in the analysis under the other prongs). Instead, PaDEP will simply ask whether the extraction, processing and/or compression facilities are close to one another – which, in most cases, they are not. This interpretation will result in determinations that approximate with the common sense notion of what constitutes a “plant”; sources many miles apart will not be aggregated.
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PaDEP Issues Interim Guidance on Air Aggregation, Moves
Away from "Functional Interdependence" Test

As a rule of thumb, PaDEP is adopting a quarter mile as the cut-off point demarcating properties that are adjacent from those that are not. Properties located a quarter mile or less apart will be considered contiguous or adjacent properties; properties located beyond this quarter mile range may only be considered contiguous or adjacent on a case-by-case basis. This approach provides much desired certainty and clarity to industry.

PaDEP explicitly found EPA’s guidance to be non-dispositive.
Meanwhile, EPA’s Region 5 has moved towards the opposite end of the interpretive spectrum. In the currently active Summit Petroleum litigation before the Sixth Circuit, Region 5 has argued for the application of the “functional interdependence” test. Summit Petroleum involves a somewhat unusual fact pattern (which may limit the precedential value of any forthcoming decision) in which EPA acted as the permitting authority for Summit’s facilities located on Indian country. Summit brought suit when EPA determined that all of Summit’s approximately 100 wells should be aggregated. The wells range from 500 feet to eight miles away from Summit’s central sweetening plant.

Region 5 has argued that the word “adjacent” must be interpreted with reference to context, and adjacency determinations should not be based solely upon physical distance. The context that
Region 5 would consider includes the interdependence of oil and gas sources and the broad geographic scope of air pollution. Presumably, the more related and dependent the facilities, the less physically near they must be in order to find that the properties on which they are located are adjacent to each other.

EPA notes that it rejected in 1980 a proposed definition that used the concepts of proximity and control as the sole criteria for aggregating pollutant-emitting activities, because that “definition would fail to approximate a common sense notion of a ‘plant,’ since in a significant number of cases it would group activities that ordinarily would be regarded as separate.
” (emphasis added).
EPA’s original concern was grouping unrelated facilities that happened to be located on the same property. In the oil and gas context, however, a focus on proximity threatens no such outcome. In fact, it would accomplish just the opposite – ensuring that activities ordinarily regarded as separate are considered separately.

Notably, Region 5’s current position is not the one it espoused under the Bush Administration, as captured in the January 12, 2007 guidance entitled “Source Determinations for Oil and Gas
Industries” (“Wehrum Memorandum”). The Wehrum Memorandum endorsed a view more aligned with PaDEP’s current position, through its focus on spatial proximity and rejection of “operational dependence” as a driving factor. This guidance was withdrawn and replaced on September 22,
2009 by the “Withdrawal of Source Determinations for Oil and Gas Industries (“McCarthy
Memorandum”). The McCarthy Memorandum emphasizes that source determinations should rely foremost on the application of the three criteria on a case-by-case basis, and also on the 1980 PSD rule preamble and the decisions of Regional Offices in prior determinations and guidance documents.
While this article has focused on the Summit litigation and interim DEP guidance, oil and gas industry single source determination issues are currently pending before a variety of tribunals and administrative bodies. For example, questions regarding single source determinations are before the
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PaDEP Issues Interim Guidance on Air Aggregation, Moves
Away from "Functional Interdependence" Test
U.S. District Court for the Middle District of Pennsylvania ( Citizens for the Future of Penn. v. Ultra
Resources, Inc.
, 4:11-cv-01360-JEJ), though threshold issues threaten to derail the challenge to
PaDEP’s decision not to aggregate prior to resolution on the merits. Additionally, the Clean Air
Council ("CAC") has recently submitted a letter to EPA Region 3 urging the regional office to intervene in PaDEP's implementation of its guidance. CAC's position that PaDEP has failed to fulfill its duties under the federal CAA represents another iteration of the familiar dispute over the meaning of adjacency and attempts to exalt EPA guidance and staff memos to the status of regulations. It is important for oil and gas operators to be mindful of the continuing precedential developments in these matters; interpretive decisions will provide invaluable insight into the contours of the regulatory landscape that their businesses must operate within.
Authors:
David R. Overstreet david.overstreet@klgates.com
+1.412.355.8263
Tad J. Macfarlan tad.macfarlan@klgates.com
+1.717.231.4513
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