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U.S. EPA's New Methane Emissions Charge – My Wallet or Yours?

On January 12, 2024, the EPA announced a proposed new rule entitled Waste Emissions Charge for Petroleum and Natural Gas Systems (the "Proposed Rule"). As required by Congress pursuant to the Inflation Reduction Act ("IRA"), EPA has proposed to impose and collect an annual charge on methane emissions that exceed specified waste emissions thresholds from applicable oil and gas facilities.

For facilities subject to the Waste Emissions Charge ("WEC") with more than one owner or operator, contractual issues warrant consideration about responsibility for paying the WEC under existing agreements and opportunities to allocate WEC payment obligations in future agreements, especially if parties have the opportunity to net emissions to reduce the WEC across multiple facilities.

The WEC for methane generally applies to petroleum and natural gas facilities that emit more than 25,000 metric tons of carbon dioxide equivalent per year as reported under Subpart W of EPA's Greenhouse Gas Reporting Program, if such facilities' methane emissions exceed statutorily specified waste emissions thresholds set by Congress and the facilities are not otherwise exempt from the charge. The fee is $900 per metric ton of methane above applicable thresholds for emissions in 2024. 

For WEC applicable facilities that have more than one owner or operator, EPA proposes that the owners and operators select among themselves by a binding agreement one owner or operator to be the "WEC Obligated Party," i.e., the party responsible for paying the methane fee. EPA is proposing that WEC Obligated Parties would be required to submit a WEC filing for the 2024 reporting year by March 31, 2025. 

Parties should closely review existing contractual arrangements to determine whether the methane fee is already covered under any existing provisions. In particular, parties should determine if existing contract provisions allocate the financial burden of changes in law, and whether the methane fee falls under any provisions containing contemplated allocations of industry surcharges. For example, while it is less likely that fees would be passed through to royalty interest owners (who are typically paid on a per unit of production basis), parties should closely review joint operating agreements to determine how the WEC may be allocated amongst the joint operators.

Note that EPA anticipates that the binding agreement designating the WEC Obligated Party would be similar to the binding agreement required under Subpart W to designate a representative to report emissions under proposed Subpart W (the "Subpart W Reporting Party")—which perhaps could be handled in a single agreement. However, EPA makes no assertion that the WEC Obligated Party need be the same designated representative as the Subpart W Reporting Party. And the rules do not provide clarity around the WEC Obligated Party's obligation to verify reported Subpart W emissions, which provides the basis for assessing the WEC. As such, if the joint owners and operators of an applicable facility choose to designate different parties to be the WEC Obligated Party and the Subpart W Reporting Party, the parties should consider building contractual protections into their agreement. Such protections may include indemnification obligations to account for the possibility that the Subpart W Reporting Party may incorrectly report emissions, which in turn may result in an error in the ultimate WEC assessed. 

Parties should also consider any benefit or burden of becoming the WEC Obligated Party in the context of netting emissions from their broader portfolio of WEC applicable facilities. Specifically, EPA is proposing an approach for allowing the netting of emissions across different facilities owned by the same owner or operator, as required by Congress. Netting would mean that if an owner or operator has multiple applicable facilities under common ownership or control, the emissions above and below the waste emissions thresholds from all applicable facilities can be summed to calculate net emissions. If net emissions are in excess of designated waste emissions thresholds, a WEC would be owed. If net waste emissions are less than or equal to zero, no WEC would be owed. When designating a WEC Obligated Party, the parties should consider that the value of the WEC owed may not correspond directly to the quantity of methane emissions from the subject jointly-owned or jointly-operated facility, but rather should be valued in light of any potential for netting among all WEC applicable facilities.

In sum, parties should carefully consider the burdens and opportunities the Proposed Rule creates for applicable facility owners and operators when scrutinizing existing contractual arrangements and negotiating new ones. It will be crucial to monitor developments surrounding the Proposed Rule and Subpart W, in particular, how they ultimately function together when finalized.

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