Montana v. U.S. Dep't of the Interior

• Decision Date: 16 January 2017
• Docket Number: Case No. 2:16-CV-0280-SWS,Case No. 2:16-CV-0285-SWS (Lead Case)
• Parties: STATE OF WYOMING and STATE OF MONTANA, Petitioners, STATE OF NORTH DAKOTA, Intervenor-Petitioner, v. UNITED STATES DEPARTMENT OF THE INTERIOR; SALLY JEWELL, in her official capacity as Secretary of the Interior; UNITED STATES BUREAU OF LAND MANAGEMENT; and NEIL KORNZE, in his official capacity as Director of the Bureau of Land Management, Respondents, WYOMING OUTDOOR COUNCIL, et al.; EARTHWORKS; STATE OF CALIFORNIA and STATE OF NEW MEXICO, Intervenor-Respondents. WESTERN ENERGY ALLIANCE, and the INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, Petitioners, v. SALLY JEWELL, in her official capacity as Secretary of the United States Department of the Interior; and BUREAU OF LAND MANAGEMENT, Respondents.
• Court: U.S. District Court — District of Wyoming

STATE OF WYOMING and STATE OF MONTANA, Petitioners,
STATE OF NORTH DAKOTA, Intervenor-Petitioner,
v.
UNITED STATES DEPARTMENT OF THE
INTERIOR; SALLY JEWELL, in her official
capacity as Secretary of the Interior; UNITED
STATES BUREAU OF LAND MANAGEMENT;
and NEIL KORNZE, in his official capacity as
Director of the Bureau of Land Management, Respondents,
WYOMING OUTDOOR COUNCIL, et al.;
EARTHWORKS; STATE OF CALIFORNIA and
STATE OF NEW MEXICO, Intervenor-Respondents.

WESTERN ENERGY ALLIANCE, and the
INDEPENDENT PETROLEUM
ASSOCIATION OF AMERICA, Petitioners,
v.
SALLY JEWELL, in her official capacity as
Secretary of the United States Department of the
Interior; and BUREAU OF LAND
MANAGEMENT, Respondents.

Case No. 2:16-CV-0285-SWS (Lead Case)
Case No. 2:16-CV-0280-SWS

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF WYOMING

January 16, 2017

ORDER ON MOTIONS FOR PRELIMINARY INJUNCTION

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This matter comes before the Court on the respective motions for preliminary injunction filed by the Petitioners and Intervenor-Petitioner (collectively, "Petitioners"): Wyoming and Montana's Motion for Preliminary Injunction (ECF No. 21),¹ North Dakota's Motion for Preliminary Injunction (ECF No. 39), and Motion for Preliminary Injunction filed by Petitioners Western Energy Alliance and the Independent Petroleum Association of America (ECF No. 12 in 16-CV-280). The Court, having considered the briefs and materials submitted in support of the motions and the oppositions thereto, having heard witness testimony and oral argument of counsel, and being otherwise fully advised, FINDS and ORDERS as follows:

BACKGROUND

On November 18, 2016, the Department of the Interior, Bureau of Land Management ("BLM") issued its final rule related to the reduction of waste of natural gas from venting, flaring, and leaks during oil and natural gas production activities on federal and Indian lands. See 81 Fed. Reg. 83,008 (Nov. 18, 2016), Waste Prevention, Production Subject to Royalties, and Resource Conservation (the "Final Rule" or "Rule"). By their motions, Petitioners request that the Court enjoin the Rule before it takes effect on January 17, 2017. Petitioners contend the Rule represents unlawful agency action because it exceeds BLM's statutory authority and is otherwise arbitrary and capricious.

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During oil production, operators frequently dispose of the associated gas by venting or flaring if the gas cannot be easily captured for sale or used on-site. Associated gas is the natural gas that is produced from an oil well during normal production operations and is either sold, re-injected, used for production purposes, vented (rarely) or flared, depending on whether the well is connected to a gathering line or other method of capture. AR at 457 (BLM Regulatory Impact Analysis for the Final Rule ("RIA") at 11). In addition, emergency flaring or venting may be necessary for safety reasons. Id. Venting is the release of gases into the atmosphere, such as opening a valve on a tank to relieve tank pressure. Flaring is the controlled burning of emission streams through devices called flares or combustors, releasing the byproducts of that combustion into the atmosphere. While venting or flaring is sometime unavoidable, it is also sometimes done in the absence of infrastructure to transport the gas to market.

The Department of the Interior ("DOI") has regulated venting and flaring to prevent the waste of federal and Indian natural gas since 1979 when it issued Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases ("NTL-4A") (ECF No. 13-3), which the Waste Prevention Rule purports to replace. See 81 Fed. Reg. 83,008. NTL-4A prohibits venting and flaring of gas produced by oil wells, except when the gas is "unavoidably lost" as defined in NTL-4A and when the operator has sought and received BLM's approval to vent or flare. NTL-4A § IV.B. While unavoidably lost gas and gas vented or flared with BLM approval are exempted from royalties, gas that is "avoidably lost" - that is, gas lost due to an operator's negligence or failure to comply with the law - is subject to royalties. NTL-4A § I, II.A & C. NTL-4A also requires

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operators to measure and report each month the volume of gas sold, avoidably or unavoidably lost, vented or flared, or used for beneficial purposes. NTL-4A § V.

Over the past decade, oil and natural gas production in the United States, and on BLM-administered leases, has increased dramatically. AR 366 (81 Fed. Reg. at 83,104). Domestic production from over 96,000 federal oil and gas wells now accounts for 11 percent of the National's natural gas supply and 5 percent of its oil supply. In FY 2015, federal and Indian leases produced oil and gas valued at $20.9 billion, which generated $2.3 billion in royalties. Id. BLM represents that this increase in oil production has been accompanied by "significant and growing quantities of wasted natural gas." Id. According to the DOI's Office Natural Resources Revenue ("ONRR"), between 2009 and 2015, operators reported venting or flaring 2.7 percent of the natural gas produced on BLM-administered leases - purportedly enough natural gas to supply over 6.2 million households for one year. AR at 367 (81 Fed. Reg. at 83,015). According to the BLM, the problem of natural gas loss on BLM-administered leases is growing, evidenced by a 318 percent increase in reported volumes of flared oil-well gas and an increased number of operator applications to vent or flare royalty-free (between 2005, 2011, and 2014, the number of applications per year went from 50, to 622, to 1,248). Id.

While recognizing that flaring is sometimes unavoidable, the BLM determined the majority of flaring on its leases results from the rate of new well construction outpacing the existing infrastructure capacity. AR 5 (81 Fed. Reg. at 6619) (Proposed Rule). The other situation resulting in substantial flaring of associated gas on BLM-administered leases is when capture and processing infrastructure has not yet been built out. Id.

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Flaring in these circumstances may be due to insufficient information about how much gas will be produced or to an operator's decision to focus on near-term oil production rather than investing in the gas capture and transmission infrastructure necessary to realize a profit from the associated gas. Id.

In December 2007, the Royalty Policy Committee issued a report recommending the BLM update its rules and identified specific actions to improve production accountability. AR 369 (81 Fed. Reg. at 83,107). In 2010, the DOI's Office of Inspector General and the U.S. Government Accountability Office ("GAO") both recommended that BLM's regulations regarding the royalty-free use of gas be updated to take advantage of new capture technologies. Id. The GAO estimated that the economically recoverable volume of natural gas being wasted through venting and flaring at oil and gas production sites on federal and Indian lands represents about $23 million in lost royalties. AR 448 (RIA at 2). The GAO determined that around 40 percent of the natural gas vented and flared on onshore federal leases could be economically captured using currently available technologies. AR 16 (81 Fed. Reg. at 6630). In 2016, the GAO issued another report finding that BLM's regulations failed to provide operators clear guidance on accounting for and reporting lost gas. AR 369 (81 Fed. Reg. at 83,017).

Concluding there is a "compelling need to update [NTL-4A's] requirements to make them clearer, more effective, and reflective of modern technologies and practices" (id.), BLM published the Proposed Rule on February 8, 2016 (81 Fed. Reg. 6616). The BLM accepted public comments, met with stakeholders and state regulators in states with significant federal oil and gas production, and discussed the Rule with personnel from the

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Environmental Protection Agency ("EPA") on over 40 conference calls between January 2015 and October 2016. Only 9 months after publishing the Proposed Rule, BLM issued the Final Rule, with an effective date of January 17, 2017.

The Final Rule prohibits venting, except in certain limited situations such as emergencies or when flaring the gas is technically infeasible. 43 C.F.R. § 3179.6. Unlike the Proposed Rule's monthly flaring limits, the Final Rule adopts a more flexible capture-percentage approach, modeled on North Dakota's regulations, that requires operators to capture a certain percentage of the gas they produce each month, excluding specified volumes of allowable flared gas. 43 C.F.R. § 3179.7; AR 374-76 (81 Fed. Reg. at 83,023-24). Both the capture percentage and the flaring allowance phase in over a ten-year period. Id. The Final Rule allows operators to choose whether to comply with the capture targets on a lease-by-lease, county-wide, or state-wide basis. Id. at 83,023.

The Final Rule retains NTL-4A's distinction between avoidably and unavoidably lost gas - with royalties owed on the former but not the latter - but eliminates BLM's discretion to make unavoidable loss determinations on a case-by-case basis and instead lists twelve categories in which a loss is always considered unavoidable. 43 C.F.R. § 3179.4. Any gas flared in excess of the capture requirements is deemed an avoidable loss. Id. The Final Rule also requires operators to measure and report the amount of gas vented or flared above 50 million cubic feet per day. Id. § 3179.9. For leaks, the Final Rule requires that all operators inspect equipment twice a year and timely repair any leaks found. Id. §§ 3179.301-304. It also requires that operators update old and

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inefficient equipment that contributes to waste and minimize gas lost from storage vessels and during well maintenance, drilling, and completion. Id. §§ 3179.201-204.

BLM characterizes the environmental benefits of reducing the amount of methane and other air pollutants released into the atmosphere as ancillary to the Rule's primary purpose of waste prevention. As...