Seven states plan to sue the Environmental Protection Agency. They want the federal government to regulate methane gas emissions from the nation's oil and gas wells. Up to now, the EPA has preferred to rely on existing state and regional regulations. If the EPA continues with current policies, a legal battle will likely ensue, and that battle could reach the U.S. Supreme Court. But no matter what happens between the litigants, the industry will likely continue drilling and producing oil and natural gas.
In their notice of intent to sue, the states of New York, Connecticut, Delaware, Maryland, Massachusetts, Rhode Island and Vermont informed the EPA administrator that they believe the EPA failed to determine whether standards of performance are appropriate for the nation's methane emissions from oil and natural-gas operations. The states are demanding the EPA establish such standards and related guidelines for new and existing sources.
To provide perspective, methane is one of the most lethal greenhouse gases known. Methane can do far more damage to the atmosphere than can carbon dioxide. Some believe it is 25 times more lethal than carbon dioxide.
Either the EPA acquiesces and begins regulating methane, or the states will follow through and file suit in the federal courts. If the states reach the point of filing the suit, they will likely win.
How do we know they will win? Because this suit is not the states' first rodeo. Some of the same states filed a similar suit against the EPA in 2005 -- they won, and they won big. They demanded that a reluctant EPA regulate carbon dioxide, and the Supreme Court agreed. In the suit, Massachusetts v. EPA, 12 states and several cities set a precedent to force the EPA to regulate all greenhouse gases, which include methane gas.
While some believe the recent flurry of EPA's new rules regulating coal and greenhouse gases came about only because of political inclinations, the Supreme Court's decision in Massachusetts v. EPA required the new rules. Of course, the U.S. Congress could have amended the Clean Air Act, making new rules unnecessary. But three Congresses elected to do nothing, so the EPA was forced to act.
It appears new federal regulations are on the horizon. If those new regulations are implemented, it is clear that domestic exploration-and-production costs will climb.
But new regulations controlling methane may not be as bad as they may sound. Of course, they will affect all participants, but they will affect them equally. Also, most major exploration-and-production companies, such as Exxon Mobil (XOM), Anadarko Petroleum (APC), EOG Resources (EOG), Chesapeake Energy (CHK) and other major developers, already use many of the best available control technologies. Any added regulations should have only small impacts on their production costs.
New regulations would likely have a larger impact on the marginal players that may be looking to profit by taking shortcuts. While federal and state officials could prosecute most violators under existing federal and state regulations, at least seven states want uniform regulations.
It's easy for some to look at the states' notice of intent to sue and develop convenient political conclusions. But if new regulations and developed thoughtfully, they could be the basis for streamlining disparate regional regulations, and they could actually make regulatory compliance more efficient and predictable.
While nobody wants more regulations, the news is not all bad. The net impact on the industry may be limited. The impact on the environment could be substantial.