This Regulatory Bulletin addresses the recent Greenhouse Gas (GHG) regulatory developments that will impact the upstream oil & gas industry and provides the US Securities and Exchange Commission's (SEC) guidance regarding disclosure related to climate change.
Over the past few months, two Greenhouse Gas (GHG) regulatory developments have occurred that will impact the upstream oil & gas industry. The first of those was the February 8, 2010 Securities and Exchange Commission (SEC) interpretative release concerning the need to provide information related to the impact of Climate Change on your business. The second was the proposed regulations to include the oil & gas sector in the mandatory GHG reporting program established by the Environmental Protection Agency (EPA).
While it is clear that the proposed EPA regulations will have a direct impact on the industry by requiring firms to determine if they exceed the reporting threshold, the impact of the SEC guidance is less clear. Therefore, we address first the GHG reporting rule and then the SEC guidance in this client bulletin.
In December 2009, the EPA promulgated the Greenhouse Gas Emissions Mandatory Reporting Rule.
The Oil & Gas Sector (referred to as Subpart W) was temporarily “removed” from the rule, and therefore not required to comply, unless:
- The site included a fractionator (applicable under Subpart NN—Suppliers of Natural Gas and Natural Gas Liquids)
- The site included a combustion device greater than 30 MMBtu/hr (applicable to Subpart C)
WHO IS NOW AFFECTED?
The proposed Subpart W (Oil & Gas Sector) regulation was signed by the EPA Administrator to be included in the Mandatory Greenhouse Gas Emissions Rule on March 13, 2010. The actual proposed regulation was published in the Federal Register on April 12, 20101.
Comments on the proposed regulation will be accepted until June 11, 2010. Issuance of the final rule is expected in the 3rd or early 4th quarter of 2010 with data gathering requirements effective January 1, 2011.
Subpart W includes the following source types:
- Onshore petroleum and natural gas production
- Offshore petroleum and natural gas production
- Onshore natural gas processing
- Natural gas transmission
- Underground natural gas storage
- Liquefied natural gas (LNG) storage
- LNG import and export facilities
- Natural gas distribution facilities
Greenhouse Gas Emissions must be estimated/measured from the following emission sources:
- Fugitive and vented methane (CH4) and carbon dioxide (CO2) emissions
- Includes CO2, CH4, and nitrous oxide (N2O) combustion emissions from all sources, including flares, heaters, boilers and engines
WHAT DOES THIS MEAN FOR THE ABOVE SOURCES?
- Collect data on GHG emissions beginning January 1, 2011 to determine whether the 25,000 metric ton CO2e (CO2 equivalent) threshold is exceeded
- Report the data collected for calendar year 2011 by March 31, 2012, if you exceed the threshold
WHAT SHOULD BE DONE NOW?
It is expected that the proposed rule will be promulgated by the 3rd or early 4th quarter of 2010
with few changes. The Oil & Gas Sector should:
- Evaluate existing facilities and confirm that the following emission sources are in compliance with the on-going data gathering and reporting requirements of the December 29, 2009 promulgated rule:
- Natural gas liquids fractionators
- Facility that has a combustion device greater than 30 MMBtu/hr and that emits >25,000 metric tons of GHG
- Natural gas liquids fractionators
- Identify sources and define facilities that may need to be included in the 2011 data gathering and reporting.
- Define data gathering procedures: actual measurement vs. calculation. Note that in late 2009 the refining industry determined that it had to improve many of its meters and calibration procedures to comply with the GHG reporting regulations that went into effect on January 1, 2010 for that industry. Capital budgets then had to be adjusted to accommodate the new rules. Proper planning can avoid these last minute surprises in the capital-budget planning cycle.
- Perform preliminary actual measurements.
- Strategize benefits of controlling Greenhouse Gas Emissions below the 25,000 metric tons threshold.
INTRODUCTION AND OVERVIEW
In the February 8, 2010 Federal Register2, the US Securities and Exchange Commission (SEC) issued guidance regarding disclosure related to climate change. The guidance essentially provides an overview of existing standards for determining “material” impacts and the associated disclosure required in a firm’s quarterly Form 10-Q, annual Form 10-K reports and Registration Statements associated with securities law.
While the primary impact of this guidance falls on the business, financial and legal officers of a firm, it is also likely that the environmental department will be asked to provide input on these disclosures.
WHAT IS THE SEC REQUESTING?
Our research found this nice summary of the guidance “Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:
- “Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding
climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
- “Impact of International Accords: A company should consider, and disclose when material, the
risks or effects on its business of international accords and treaties relating to climate change.
- “Indirect Consequences of Regulation or Business Trends: Legal, technological, political
and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
- “Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.3”
THE DILEMMA FOR THE UPSTREAM OIL & GAS INDUSTRY
Many, including a number of US Congressmen and Senators, believe that the SEC action was primarily politically motivated and had little to do with informing and protecting investors as the SEC claims. Further, many indicated that the guidance would do nothing but further confuse investors since it would require the inclusion of information, e.g., the impact of pending legislation and unclear science, that has a great deal of uncertainty associated with it.
Others, including large investor organizations such as the California Public Employees’ Retirement System (CALPERS), Connecticut State Treasurer’s Office and groups of “socially responsible investors,” hailed the decision.
Finally, others observed that in reality this was nothing new and there has been a long-standing obligation to disclose this type of information under existing SEC regulations.
PRACTICAL IMPACT OF THE SEC GUIDANCE
This is an issue that will be driven by the business, financial and legal teams at your firm. They will look at questions such as:
What type of investor base are we looking to recruit? If they are pursuing such organizations as public employee retirement systems and socially responsible investors, then the disclosures should be carefully aligned with their desires, e.g., if they are buying your stock you give the stock buyer what they ask for. The type of disclosure these groups are requesting is summarized in the Global Framework for Climate Risk Disclosure5 which was developed by these investors.
How much do we want to speculate in a legal document on the uncertain nature of the science, regulatory and legislative path forward related to climate change? As one attorney was quoted as saying, “companies will try to satisfy the SEC’s demands with boilerplate language and few details”6 as a means to avoid speculating about large future unknowns.
In conclusion, most environmental departments should work with their business, financial and legal teams to determine what information, if any, will be required from them for complying with the SEC requirements. In many cases we anticipate that it will remain about the same as it currently is, e.g.:
- Periodic updates of legislative action, i.e., Waxman-Markey and Kerry-Lieberman climate change legislation.
- Periodic updates of regulatory action, i.e., GHG Endangerment Finding, GHG Mandatory reporting rule, etc.
- Significant scientific updates, assuming they add clarity to the debate.
E.Vironment’s experts are available to help you manage these issues in a cost-effective manner. Please contact any of our principals or Geoffrey Swett, Senior Consultant, Regulatory Affairs (firstname.lastname@example.org, 281-253-1866).
4 CERES web page describes itself as: ”Ceres is the largest coalition of investors, environmental and public interest organizations in North America.”
6 Gregory Bibler, Chain of Goodwin Procter’s environmental practice, in “Hot Topic: Climate-Change Disclosure by Sarah Johnson and Marie Leone, February 19, 2010 Edition of CFO magazine.
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