Recent Air Regulatory Changes in Colorado Affecting the Oil & Gas Industry

1. Recent Air Regulatory Changes in Colorado Affecting the Oil & Gas Industry By John R. Jacus, Esq. Davis Graham & Stubbs LLP Presented to the Natural Resources & Energy Section of the Colorado Bar Association June 11, 2004

2. Scope of Presentation • Ozone Controls in the Denver Deferred Non-Attainment Area • Colorado and Region 8 Information Gathering Regarding Oil & Gas Facilities • Region 8 Energy Strategy • Brief “Heads Up,” Regarding: • Coming BART requirements under Regional Haze Rule • Final Non-Road Diesel Rule • Environmental Defense, et al. V. Norton

3. Ozone Controls in Colorado • Denver area made progress under old 1-hour ozone standard (NAAQS), moving from non-attainment to attainment • In 1997, EPA changed how it measures ground-level ozone, and promulgated the current 8-hour standard of .080 ppm • Biogenic and upwind sources of ozone contribute 55-65 ppb of the ozone measured by regional monitors

4. Early Action Compact • Colorado and air agencies signed compact with EPA in 2002 • Defers the negative consequences of possible non-attainment designation by EPA, provided specific controls are implemented according to a fixed timetable to reach attainment in 2007

5. Ozone Controls in Colorado • Basic Regulation No. 3 Permit Framework changed December 30, 2002 • Previously APEN-exempt condensate storage tanks below 40,000 gal. capacity became regulated, to control flash emissions of VOCs - an ozone precursor • Only tanks with less than 730 BBL/year throughout remain APEN-exempt

6. Ozone Control Plan Developed • Based on EPA-required air modeling, prepared for CDPHE and the RAQC by Environ • Confirmed a number of things about ozone formation in Denver: • Area is NOx limited, i.e., NOx reductions will contribute to O3 formation in urban core • Key to meeting standard is improvement at the Rocky Flats monitor

7. Ozone Control Plan • Modeling very rushed, results delayed even during rulemaking • APCD proposed plan relies heavily on VOC controls on gas industry in the ozone control area for its: • engines • condensate tanks and • gas processing plants

8. Expanded Ozone Control Area • In light of 8-hour ozone monitoring data, EPA and Colorado both proposed an expanded ozone control area, beyond boundaries of prior Denver air quality control region and former 1-hour ozone non-attainment area • Control area includes parts of Rocky Mountain National Park, Weld and Larimer counties to the North

9. Ozone Control/Deferred Non-Attainment Area

10. Specific Ozone Controls Adopted in Regulation Number 7 • Engine controls • Condensate tank controls • Dehydrator controls • Gas processing plant controls

11. Engine Controls • Natural gas fired reciprocating internal combustion engines (RICE units) • Over 500 hp • Required to implement catalytic controls for VOCs • Lean-burn RICE units subject to exemption if control costs exceed $5000/ton of VOCs • Related requirement: EPA’s Federal RICE MACT • Only existing 4SRB engines required to add catalytic controls - new rich and lean burn engines will have to control for formaldehyde

12. Condensate Tank Controls • Controls atmospheric pressure condensate tanks upstream of gas processing plants for which APENs are required under Regulation No. 3 (> 730 BBL/year production)

13. Condensate Tank Controls • Requires an enclosed, smokeless flare with 95% destruction efficiency, or comparable device, on some, not all, tanks to achieve 37.5% VOC reductions in 2005, and 47.5% reductions in 2006

14. Condensate Tank Controls • Reductions are reported by April 30, 2006, and April 30, 2007, and are measured against “uncontrolled actual emissions” • Pollution prevention to achieve reductions is allowed, encouraged

15. Gas Plant Controls • Requires compliance with New Source Performance Standard at 40 CFR Part 63, Subpart KKK in ozone control area • Leak detection and repair (LDAR) provisions applicable to both existing and new gas plants in control area

16. Dehydrator Controls • 90% efficient control on any still vent or vent from any GCG separator at E&P sites, compressor stations, drip stations or processing plants in control area • Allows for various combustion devices or more efficient condenser controls on dehys in control area

17. Some Practical Pointers on Ozone Controls • When to file an APEN? • How to track reductions? • Site specific testing vs. Colorado’s emissions factor for E&P condensate storage tanks • H.B. 1435 - Local government notice of control installation • Lean-burn engine costs of control - get started now

18. Colorado & Region 8 Information Gathering re: Oil & Gas Facilities • Letters sent in January by CDPHE, EPA, Utah, Wyoming and Montana to larger operators • Very broad request, seeking much information in regulatory files already, and in specific electronic formats • Appears aimed at source aggregation of oil & gas facilities separately permitted to date

19. Source Aggregation Counter-Arguments • Only possible when sources are in same industrial grouping, are contagious and adjacent, and under common control • EPA’s “support facility” analysis ignores one or more of these conjunctive requirements

20. Source Aggregation Counter-Arguments (cont.) • “Adjacent” and “contiguous” are common sense terms • States with primacy under CAA to decide issue • Distances between separate lease and tract facilities renders them non-adjacent

21. Business Confidentiality of Responses to Statutory Information Requests • C.R.S. § 25-11-7-111(4) says APCD “shall assure” the confidentiality of trade secret information gathered, just as under federal and state law • Potential problems, burdens on respondents highlighted in CF&I Steel v. APCD, case,

22. EPA Region 8’s Energy Strategy Goal 2: Meet Federal Requirements, Maintain or Improve Environment for Energy Projects • Activity 2: Air • Activity 5: Enforcement

23. BART Requirements of the Regional Haze Rule • Best available retrofit technology • For sources with > 250 tpy of visibility - impairing pollution and in one of 26 categories - not including E&P facilities • Built between ’62 and ’77 • States to conduct BART determinations • Rule to go final April 15, 2005 • GCYTC annex approved by EPA

24. PM Standards Reveiw • CASAC review of EPA staff paper • Denver and all of Colorado well below existing standards • Denver barely below possible lowered standard • Not just an urban issue • Final staff paper due out in September • Proposed rule changes due out by March 31, 2005

25. Non-Road Diesel Rule • Reduces sulfur in fuel to allow for better engine controls • Will affect new and existing diesel engines in service over period of years out to 2030 • Convergence of Ozone, PM and Regional Haze rules could be greatly complicated by regional litigation

26. Regional Litigation – Environmental Defense v. Norton (D. Mt.) • Based on air impacts of CBM development in Wyoming and Montana • Has very broad implications for energy industry

27. Conclusion – Questions and Answers

28. To obtain PowerPoint slides via email: Contact John Jacus at john.jacus@dgslaw.com