Regulatory Bulletin. » Greenhouse Gas Developments Affecting the Upstream Oil & Gas Sector. » Greenhouse Gas Reporting Rule

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1 Regulatory Bulletin» Greenhouse Gas Developments Affecting the Upstream Oil & Gas Sector» Greenhouse Gas Reporting Rule» Securities and Exchange Commission Climate Change Guidance Greenhouse Gas Regulatory Developments Affecting the Upstream Oil & Gas Sector 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. 1

2 Greenhouse Gas Reporting Rule BACKGROUND 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, The actual proposed regulation was published in the Federal Register on April 12, Comments on the proposed regulation will be accepted until June 11, Issuance of the final rule is expected in the 3rd or early 4th quarter of 2010 with data gathering requirements effective January 1, 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 GHG Reporting Rule Executive Summary WHY IS THIS IMPORTANT? The proposed regulation will require data collection efforts to determine if you must report. Further, if your emissions are of sufficient size, you must put in place a data collection system to estimate emissions in future years. WHO DOES IT APPLY TO? All on and offshore oil & gas producers. Natural gas processing, transmission, storage and distribution facilities. LNG storage, export and/or import facilities. WHAT SHOULD BE DONE NOW? Make sure you don t have any NGL fractionators or heaters larger than 30 MMBtu/hr that should already have data collection programs in place under the first phase of the GHG reporting initiative. In the event you do have this equipment and don t have a data collection program in place, we suggest you seek legal and regulatory expertise to determine how best to bring you into compliance. Identify what facilities, if any, will require the development and implementation of long-term data collection systems. Evaluate your GHG strategy given recent political and scientific developments. 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 1 2

3 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: 1. 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 2. Identify sources and define facilities that may need to be included in the 2011 data gathering and reporting. 3. 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. 4. Perform preliminary actual measurements. 5. Strategize benefits of controlling Greenhouse Gas Emissions below the 25,000 metric tons threshold. 3

4 SEC Climate Change Guidance INTRODUCTION AND OVERVIEW In the February 8, 2010 Federal Register 2, 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. SEC Climate Change Guidance Executive Summary WHY IS THIS IMPORTANT? An integrated financial, business, legal and environmental team must evaluate if current SEC disclosures, e.g., Form 10-K, concerning GHG business implications is sufficient. WHO DOES IT APPLY TO? Any firm that could directly or indirectly be impacted financially by GHG legislation, regulations or physical impacts would be affected by this guidance. Since energy and GHGs are inextricably linked, in essence almost any industrial firm could be impacted by this requirement, albeit it is a management decision to determine if the impact is material and must be reported. WHAT SHOULD BE DONE NOW? An integrated financial, business, legal and environmental team should evaluate if this guidance changes any SEC disclosures. Many will find that no change is required. 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

5 Most environmental departments should work with their business, fi nancial and legal teams to determine what information, if any, will be required from them for complying with the SEC requirements. What are the strategic implications of these governmental actions? These two actions coupled with other governmental initiatives increasingly point to the following implications: Firms should be incorporating GHG factors into their strategic plans. The development of GHG inventories is a key initial step in the strategic planning process. The development of a GHG inventory should incorporate regulatory and business factors that will cost-effectively provide management with the information needed to achieve their business goals. 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

6 Was the SEC Action Politically Motivated? The answer to this question is left to the reader. Here are a few divergent views: U.S. Representative Joe Barton, a Texas Republican who has said he rejects the idea that humans are contributing to global warming, said the SEC has more important matters to deal with. Barton said in a statement yesterday (January 26, 2010) that he is troubled by an undertaking which seems so transparently political and such a breathtaking waste of the commission s resources. When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. The SEC took a significant step in clarifying the issue for corporate officers, Nancy Kopp, Maryland s treasurer, told reporters today (January 27, 2010). All I know as an investor is that it is impacting my ability to make investment decisions and that we need information on material impacts and material opportunities, Kopp said. Mindy Lubber, president of Boston-based CERES 4, a coalition of investors with $8 trillion under management that led the petition for greater disclosure, agreed. The business risks of climate change cannot be ignored, Lubber said in a statement today (January 27, 2010). With this guidance investors can make more sound decisions based on better information. Source: Jim Efstathiou Jr., SEC Sets Corporate Climate-Change Disclosure Standard, January 27, 2010, Bloomberg. 4 CERES web page describes itself as: Ceres is the largest coalition of investors, environmental and public interest organizations in North America. 6

7 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 Disclosure 5 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 (ghswett@evironmentgroup.com, ) 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. 7

8 About E.Vironment WHO WE ARE E.VIRONMENT, LP is a management consulting firm that specializes in advising clients on those EHS issues that are an integral part of their domestic or global strategies. We have worked with virtually all of the major energy and chemical companies since the early 1980s on M&A transactions; business risk management; management systems; compliance assurance; and auditing. As a firm, and as individuals, we have a laser focus on fit-for-purpose implementation. Our operating and business backgrounds afford us unique understanding of the EHS needs, business imperatives and economic realities that our clients face daily. WHAT SETS US APART THE PATHFINDER MATRIX is a process that E.Vironment has developed and successfully demonstrated as a proprietary approach to ensure that a company s entire senior management team is committed to common EHS philosophies and objectives. OUR TEAM Our staff consists of senior professionals with an average experience of over 25 years. The vast majority of us have hands-on operating and business experience in our previous careers with operating companies. This experience prepared us to understand the economic realities of meeting financial goals and challenges that our clients face daily, and enables us to provide experiencedbased opinions. All of our consultants, including the four principals of the firm, actively work with clients on assignments. Our clients view us as trusted advisors and integral to their strategic decision-making process. Our consultants have lived and worked extensively around the globe. They have had careers with, and consulted for, many industries including chemicals, downstream and upstream petroleum, metals and mining, paper and packaging, heavy manufacturing, etc. We have worked on transactions with virtually all of the major banks around the world, numerous law firms, and equity funds. We have successfully managed projects involving the smallest single facility, global auditing assignments, and multi-billion dollar mergers & acquisitions with sites scattered throughout the world. We are proud of the trust that our clients place in us to handle sensitive assignments for them. Our consultants have had ongoing relationships with many companies for over 20 years - and several extend back to the early 1980s: BASF Celanese Chesapeake Chevron/Texaco ConocoPhillips Devon Dow Exxon/Mobil Marathon Shell Sunoco XTO Geoffrey Swett Sandra Y. Heintz Sandra works with E.Vironment clients on issues regarding due diligence, regulatory compliance, and environmental permitting. In particular, she has provided solid and hazardous waste, wastewater and air emissions analyses on projects in the refining and petrochemical industry. Leah C. Pullin ABOUT THE AUTHORS Geoffrey Swett has over 30 years of EHS&S, management consulting and operating experience in solving industrial clients difficult problems. Geoff s broad EHS&S expertise includes areas such as CAA, CWA, RCRA, SARA, OPA, climate change, safety, PSM, security and product stewardship. His GHG experience dates back to 2004 when Geoff evaluated the anticipated GHG legislative, regulatory and economic impacts on a proposed domestic coal-fired utility transaction and a global glass manufacturing acquisition. Since, then he has been involved in numerous GHG emission assignments, including a GHG benchmarking study of the US refining industry. Swett couples his deep regulatory background, with more than 30 years of exploration and drilling experience. Leah has over 15 years of permitting, auditing, and environmental compliance experience, primarily for domestic and international chemical, petrochemical, and refining facilities. Her management experience includes serving as a senior project manager and a national client service manager for a large consulting firm. As an Environmental Compliance Manager at Southdown Environmental Systems, Sandra was responsible for maintaining compliance with all applicable federal, state, and local permits and regulations. She has worked extensively with clients on the implementation of the Boiler & Industrial Furnace Regulations. Sandra has developed compliance test burn plans as well as submitting all documentation necessary for compliance. She has written air permit amendment applications to meet the requirements of the BIF rule. She has also been called upon to help negotiate and respond to Texas Natural Resource Conservation Commission (TNRCC) questions and/or concerns on air permits. Leah s technical work experience includes multimedia permit activities, air quality permitting, Title V air permitting, compliance audits and program development, health effects/screening modeling, environmental risk assessments, process design environmental review, and post-disaster environmental evaluations. Leah s understanding of process units and environmental regulations makes her an invaluable asset in formulating overall strategies for addressing environmental issues. She has performed air, wastewater, and solid waste regulatory compliance reviews for numerous oil and chemical facilities.