News Update: The Oil Industry is Bracing for the Methane Fee. Here’s What to Know.

At Kathairos Solutions, we understand that the upcoming "waste emissions charge" (WEC) poses a significant challenge for the oil and gas industry.

Starting in 2025, companies will be required to pay up to $1,500 per metric ton of methane emissions that exceed certain thresholds. The EPA's regulatory analysis estimates this could amount to $750 million in fees, prompting many operators to take action now to mitigate their exposure.

Dick Brown, CEO and Founder of Kathairos Solutions, was recently interviewed by Jean Chemnick, Politico, about the upcoming methane fees.

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(As published on Politico Pro on September 9, 2024. Read the article below, or click here)

The oil industry is bracing for the methane fee. Here’s what to know.

Companies face millions of dollars in new charges next year, as part of the Biden administration's crackdown on the planet-warming gas.

The oil industry is divided on how to prepare for the new methane tax.

Companies will begin paying the fee in 2025, based on this year's emissions, and could end up paying a total of $750 million, according to EPA's regulatory analysis.

That has prompted many companies to use 2024 to increase methane emissions monitoring and cut leaks. Others, however, are waiting to see if the levy survives a court challenge — and the possible return of former president and fossil fuel ally Donald Trump to the White House. And some are still unsure whether the charge will apply to them, particularly if they are small enough to never have had to report emissions to EPA in the past.

“The majority of companies are just coming to grips with the charge, and they're trying to assess what the charge is versus what the mitigation costs are,” said Dick Brown, CEO of Kathairos Solutions, which helps petroleum firms reduce their leak rates. “I would say it's like early innings as far as companies understanding the charge, what their exposure is and then what the real cost of mitigation of the methane is.”

The “waste emissions charge,” or WEC, was created two years ago as part of President Joe Biden’s signature climate law. Facilities across the oil and gas supply chain — from well pad to pipeline to export terminal — will begin paying $900 per metric ton of methane for 2024 emissions that exceed certain thresholds. That price will climb to $1,500 per metric ton for 2026 emissions.

EPA’s final implementing rule for the fee began White House review Sept. 2 and is expected to be out late this year.

The agency's analysis of its draft rule shows that onshore oil and gas producers will pay most of the WEC fees that come due next year, followed by the gathering and boosting operations that ready the fuel for transport and by natural gas processors.

But the analysis predicts WEC fees will plummet to only $13 million annually after 2027 — the year by which EPA assumes most existing oil and gas producers will be following a separate leak detection and repair rule.

Here's what to know about the fee and how it will affect the fossil fuel industry.

Who pays is still unclear

There is some uncertainty around which facilities will ultimately have to pay the fee, which is based on emissions that exceed certain thresholds of methane vented versus shipped to market.

EPA will make that calculation using the greenhouse gas data that many operators already report each year to feed the agency’s annual emissions inventories.

EPA estimates that 484 facilities would have had to pay the fee if it existed for 2021 emissions, based on a dual criteria of overall annual greenhouse gas emissions and methane intensity. That's 22 percent of oil and gas operations that release at least 25,000 tons a year of carbon dioxide equivalent and thus are required to report their emissions.

But the number of facilities that meet or exceed that threshold could grow substantially next year.

EPA recently finalized revised reporting rules that could lead to 567 more facilities topping the 25,000-ton mark, requiring them to report emissions and pay fees on methane leaks above the climate law’s thresholds.

The revised guidelines won't affect methane fees paid next year. They will first be used to tally emissions in 2025, for the methane charges paid in 2026. EPA’s regulatory documents suggested the increase in facilities that need to pay the fee may not be "significant."

But Lee Fuller, vice president of government affairs at the Independent Petroleum Association of America, disagrees. The group has asked EPA to provide a screening application to help companies assess whether they will owe methane fees next year and in 2026, when the new reporting rules kick in.

“You've got 8,000 producers out there sitting around going, ‘Is this going to hit me or not?’” he said. “We don't know, because that pool that you're trying to estimate has never reported."

EPA said it is updating resources to reflect the new reporting guidelines.

“EPA plans to continue engaging with industry after release of the final WEC rule, including providing technical support and resources to help companies understand rule applicability and requirements,” said spokesperson Angela Hackel. But she added that “regulated entities are ultimately responsible for determining if they are subject to either regulation.”

Some companies are beefing up monitoring

Those who work with and consult for oil and gas companies say the fee is motivating some new investments. But it’s frequently proactive companies that were already tracking and curbing emissions that are doubling down on those programs.

Erin Tullos, a senior research fellow at the University of Texas, Austin, who also consults with oil companies, said she is urging clients to prioritize upgrades that reduce methane under the new greenhouse gas reporting rules that take effect next year. Flares and engines that leak methane are particular opportunities, she said, because they come with much higher default emissions assumptions under the new reporting guidelines.

Tessa Wuertz, marketing manager at Bridger Photonics, a company based in Bozeman, Montana, that provides flyover methane sensing, said she was fielding calls from existing clients who wanted to know whether to update their monitoring to prepare for the fee and other EPA methane rules.

“We're having a lot of folks come to us and ask, 'How do I adjust what I'm currently doing? Do I need to scan more? Do I need to increase frequency?’” she said.

Daniel Zimmerle, director of the methane program at Colorado State University, said he has partnered with a “biased sample” of forward-looking companies that had been preparing for regulatory changes for years. But he said these early actors are pausing now to “game out” how the fee intersects with EPA’s methane rule and the third-party monitoring program.

It’s not a simple equation, he said.

Increased monitoring can help a company know when a leak began, limiting risk if a leak is reported. But a company that finds a leak itself must also add that methane to its annual emissions accounting.

“So, there's kind of like a you're damned if you do, damned if you don't situation,” he said.

It's a numbers game

Fuller of the Independent Petroleum Association said larger companies that exceeded the 25,000-ton emissions reporting threshold under existing rules may be looking to see if they were overreporting methane, since that might soon cost them money. Smaller operators will be trying to gauge how the new reporting guidelines and fee would affect them.

John Gutentag, an analyst with energy intelligence firm Enverus, said operators are “running scenario analyses” to determine whether they’re likely to incur fees and how best to mitigate them.

That could mean stepping up monitoring so companies can base greenhouse gas reporting on empirical data, which in some cases might show lower methane than EPA’s default emissions estimates.

“The waste emissions charge is really meant to incentivize earlier adoption of methane reductions that would be required under [EPA’s methane rule] when it comes into play for the existing sites, potentially at the end of the decade,” said Gutentag.

Brown of Kathairos Solutions said operators that wait to address methane until closer to the deadlines for EPA's methane rule will have to compete for engineers and equipment with other late adopters.

"The more sophisticated companies are going to start addressing it sooner," he said. "I think they're not going to wait to see if there's going to be a change in legislation."

Watchdog groups have a big role

Experts who work with petroleum companies say they worry that EPA’s new third-party monitoring program might be a wild card.

EPA established the Super-Emitter Response Program as part of last year’s methane rule to give qualified outside monitors like environmental groups and universities a role in identifying major emissions leaks. The revised greenhouse gas reporting rules require companies to include those emissions in their annual reports.

Super-emitting events are defined as those that release 100 kilograms of methane per hour or more. If a company is notified by EPA that an approved third-party monitor has detected one of those events at its operations, it must assume that the leak started 91 days earlier — unless the company can pinpoint the start of the leak in its own emissions monitoring.

Tullos, the oil company consultant and University of Texas research fellow, said that when the new reporting rules take effect next year, “one large emission source can tip you from no WEC fee to big WEC fee.” A single event, she said, could cost a company millions of dollars in methane charges.

“That’s why operators have been putting in continuous monitoring systems long before there was any regulatory motivation to do so," she said. "What those systems are good at is finding big things and letting you know about them fast."

EPA hasn’t approved any third-party monitors yet. And forthcoming methane satellites — which Wuertz said some of her Bridger Photonics clients view as the all-seeing “eye of Sauron” on their operations — have yet to launch.

But Wuertz said she expects that when EPA begins approving third-party monitors, industry interest in aerial surveys will increase.

Some low-producing wells may have to pay up

But some operators say advanced monitoring may never be cost-effective for them.

Laura Dyke, vice president of compliance and regulation for Miller Energy, which operates hundreds of marginal wells in Michigan, said she had done some monitoring of her company's assets. But she said she didn’t anticipate that Miller would have to pay methane fees, because its emissions have been below EPA's cutoff for greenhouse gas reporting for several years.

“We fall into the category of not necessarily preparing for an unknown dollar amount to hit our bucket but preparing for how do we make sure that we are protected enough in case we were to be audited,” she said.

Dyke said she was primarily focused on working with Michigan's regulators to ensure that they write a workable state implementation plan for EPA's methane rule on leak detection and repair.

But Tullos said companies that operate many low-producing wells are in line to pay some of the highest methane fees.

“The reason for that is the waste emission charge is based on the efficiency by which you contribute natural gas into the system relative to the emissions you create in your operations,” she said.

Oil and gas wells become depleted over time and are less productive. So even relatively modest emissions can cause a facility to exceed the climate law’s methane intensity thresholds if it also isn't producing much gas for sale.

“Intensity is the name of the game,” Tullos said.

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Reach out for help with methane fees today.