Welcome back to our blog series where Cority, in collaboration with our partner, Trinity Consultants (Trinity), digs into the intricacies of the Inflation Reduction Act (IRA) and its implications, specifically within the oil and gas industry. As an environmental consulting firm, Trinity provides guidance and solutions to organizations seeking to navigate complex regulatory frameworks and achieve environmental compliance and sustainability goals.
In previous blogs, we explored how the IRA impacts the oil and gas sector and provided actionable suggestions for methane reduction. Today, we roll out the third installment, guiding you through the IRA program timeline, empowering you to effectively collect and use your organization’s data to enhance environmental performance. Additionally, we will highlight notable exemptions within the Act that may apply to your operations.
Missed the earlier blogs in the series? Find all of them here.
As we continue the deeply informative discussion with Christi Wilson, Manager of Sustainability Services & Principal Consultant at Trinity, readers will gain a comprehensive understanding of the IRA’s implementation, enabling proactive navigation of this new regulatory landscape while optimizing their sustainability efforts.
Let’s pick up where we left off…
(Note: This conversation has been edited for clarity.)
The Inflation Reduction Act – Part 3:
Cority: We’ve talked about the opportunity that software might offer to help firms overcome obstacles in meeting these new regulations. Can you expand on some of these solutions and how they can help organizations reach their goals?
Christi Wilson (CW): One of the biggest challenges in reducing emissions is improving the quantity and quality of data before making important decisions with significant financial impact. Improving measurement techniques and collecting site-specific data are essential to increased understanding of emissions risks and opportunities. This includes integrating measurement systems with software to access the best available data in real time, which helps organizations calculate their emissions with more granularity and frequency.
Also, maintaining a large library of emissions factors and formulas to address each of the different source types can be daunting. In particular, managing fugitive leak data* is a challenge, but third-party software can help collect and manipulate it into a format that is easy to work with. Overall, there has been a significant push to improve efficiency in the emissions reporting process, so that time can be better spent analyzing data to identify areas for potential emission reductions. Software can help with that.
*Fugitive leak data refers to measuring and tracking emissions that are unintentionally released into the environment from equipment and processes in the oil and gas industry, such as leaks from pipelines, pumps, valves, etc.
Cority: Where do you see software coming into play as organizations look to improve environmental performance in regard to the methane tracking process, reduction efforts and/or data-driven decision-making models?
CW: We see our clients benefiting from environmental software in a couple of different ways. With respect to the IRA, we have a lot of clients who are looking at what their liabilities will be under the methane waste emissions charge structure using the historical emissions they’ve been reporting to U.S. Environmental Protection Agency (EPA) because that’s the data they have readily available. But they are also recalculating some portions of their emissions using the proposed Subpart W changes to understand what their liabilities might be if those changes get finalized as proposed.
For example, the proposed changes in the Greenhouse Gas Reporting Program (GHGRP) for certain source categories are significant. In some cases, the emission factors that the EPA requires organizations to use could be increasing by 3X or more, and in other cases, they’re decreasing. This means the impacts are company-specific and can vary depending on where your company operates, which segment of the industry they’re in, what types of facilities they have, and what calculation methods they have traditionally used to report under the rule. These changes are impactful in two ways:
- It could mean that they haven’t had to report in the past because their actual emissions have been below 25,000 metric tons of CO2e and now suddenly, just due to emission factor changes, they’re calculated emissions are going to be over the reporting threshold, and they don’t have any of the mechanisms in place to gather the data, validate the data, calculate emissions, and report. These facilities are essentially starting from scratch.
- Or, maybe they have been reporting all along, but now need to go in and do a wholesale update to the input data they are collecting, the emission factors they’re using, or the calculation methods they are following.
Both of those scenarios are heavy lifts for companies. Both of those require some work, but more in terms of decision-making, I think really understanding what the overall footprint looks like with those proposed changes in mind is one of the things that companies are wrestling with right now in the short-term.
With respect to longer-term more comprehensive GHG reduction efforts, we’ve been spending a lot of time with our clients performing scenario analyses.
We take a bottom-up approach to help them identify what their top sources of emissions are and we go through this methodical process of identifying all the types of mitigation strategies they could implement, how much each will cost, and quantifying the emissions reduction they could get from each of them. Then we can rank each strategy, on a dollar per ton of emissions removed basis, to identify the most cost-effective options.
Companies need the ability to do some analysis on those mitigation scenarios – what if we do options one and two in the first five years, and then we do options three and four in year seven? What does that reduction roadmap look like for them? Technology helps them play out those scenarios and make more informed decisions.
This forecasting and scenario analysis piece is something that is really challenging to do with Excel. Sure, it can be done, but it’s very tedious, time-consuming, and ripe for errors. Having a software system technology tool, such as an air emissions management solution that’s robust enough to help with this is extremely critical, particularly as we add this fiscal component to it.
As companies are trying to budget, asking what their future liability will be, laying out possible scenarios if they make XYZ changes, what will be the outcome? Technology helps us perform that kind of complex analysis.
Cority: It sounds like scenario forecasting and some of the predictive analytics haven’t caught up on the sustainability side. Do you find there’s a shift where organizations are using their data more efficiently to make improvements to their operations or drive performance?
CW: We’re seeing a lot of traditional oil and gas companies strategically working to look at their future in a low-carbon economy and figure out where they fit. It’s a more forward-thinking approach, acting as energy companies and not just natural gas or oil and gas companies.
Specifically, they are looking strategically to where they can make changes today that will benefit them two, five, 10 years down the road. Many of them are setting science-based targets and taking a bottom-up approach to understand what’s practical and achievable, and not just offering lip service when executives commit to aspirational goals like reducing their emissions 50% by 2030 with no tangible plan on how to get there.
These are hard challenges for an energy-intensive, hard-to-abate sector like the oil and gas industry. There’s a lot of innovation happening on the technical side to help make progress toward meeting climate objectives. But this requires a deep understanding of the sector and where the emissions come from in order to figure out what’s going to be viable for them long term.
Cority: We’re hearing organizations have a couple of different approaches towards those emission reduction goals, and with that, comes some challenges. What strategies can oil and gas organizations implement to minimize their methane emissions and reduce the financial burden of the IRA’s Emissions Charge?
CW: The first thing we recommend operators do is take a close look at the source data and calculation methodologies they are using to estimate their methane emissions.
Here are a few questions to consider:
- Are they using the most accurate data and calculation approaches for their specific operations?
- Are they using real-world empirical data wherever available? And what we mean by that, is if a company has site-specific engine stack test data or fugitive leak survey data, are they using that data to calculate their methane emissions, or are they relying on or defaulting to industry average emission factors? If they are doing the latter, there may be valid reasons for having done this historically, but it may be time to reevaluate that approach.
- If they have it, how does their actual measured/site-specific data compare to default factors?
- If they don’t have it, can they get actual or measured site-specific data to better inform their emissions calculations going forward?
- Have they evaluated sources that are not currently covered under GHGRP reportable categories that they might be disclosing under sustainability reporting frameworks or CSR, and may have to include in GHGRP submittals based on the proposed changes to Subpart W?
The second thing operators can do is evaluate their applicability and compliance with New Source Performance Standards (NSPS) requirements. For any affected facilities, companies need to ensure they are in compliance with applicable requirements so that the Methane Emissions Reduction Program (MERP) exemption can be claimed.
The third thing operators should do is evaluate any assets they operate that pre-date these NSPS rules. Are there opportunities to retrofit equipment or implement work practices at those sites to reduce their methane emissions below the corresponding MERP thresholds?
Technology can help to integrate monitoring systems with environmental software to provide the best possible available data. This not only helps accuracy, but also efficiency. We’re getting requests from almost every client to do their calculations more than once a year, some as often as quarterly or monthly, to satisfy investor or Board requests. This can be a pretty big lift; most companies don’t have the resources internally to be able to do that using spreadsheets or their traditional methods. Therefore, finding ways to get more efficient in that process has been a big push. Improving measurement techniques and collection of that data is step one and then step two is the analysis and calculation piece.
Cority: You briefly talked about some of the exemptions. How can organizations determine if they qualify to avoid the methane Waste Emissions Charge (WEC)?
CW: The exemption part, outlined in Section 136 of the IRA, will be interesting to see how it plays out in regulatory language.
There are two key criteria that can result in exemption from the methane charge under the IRA: the first is the GHGRP applicability threshold where facilities with emissions less than 25,000 metric tons CO2e are exempt from the methane charge. This of course is impacted by the way companies will have to calculate their emissions given the proposed changes to Subpart W. Many companies will be looking for ways to reduce their emissions to get below the designated threshold, and how to comfortably stay there.
The second exemption criterion is the one related to being in compliance with the NSPS rules. This second one is a bit uncertain as it is not clear yet how “in compliance” will be established and to what extent this can be jeopardized.
For example, if a company has a deviation from a monitoring requirement, does that mean they trigger the methane charge due to non-compliance? And if so, for what time period?
One other very important aspect of the MERP is that it includes a netting provision, whereby companies can look at all facilities under their ownership/control when evaluating their methane charge. So, if some facilities are over the threshold and others are under, it is possible to reduce their obligation by calculating the net methane.
Cority: It appears there are a lot of gray areas still with the IRA and the methane waste emissions charge, and a lot has to be figured out from a regulatory perspective. Do we have any information about the implementation timeline and what that landscape looks like?
CW: We don’t know all of those details yet. However, what we do know is this is supposed to be administered through the GHGRP. GHGRP operates on an annual reporting cycle and those reports are due to EPA by March 31st each year. The proposed changes to Subpart W that were just published have a proposed effective date of January 1, 2025, with the first report due by March 31, 2026.
However, the MERP structure is such that the first waste emissions charge would start in 2024 (a year before the proposed Subpart W changes would go into effect). This misalignment means that companies will be calculating and reporting their emissions using the current Subpart W framework for the first year of the MERP, and then will have to overhaul their approach in subsequent years. Based on the nature and extent of changes being proposed, we anticipate that the vast majority of companies will see an increase in their reported emissions (and their waste emissions fees if they are not otherwise exempt) in subsequent years.
There are similar timing concerns on the NSPS front. The public comment period has closed on the latest round of proposed revisions to that rulemaking, but it’s not final yet. The latest information indicates this likely won’t happen until early 2024.
It’s an onerous set of rulemaking. There are a lot of interdependent requirements. There are going to be challenges for this industry.
What’s next?
By implementing robust data management systems and leveraging advanced analytics, oil and gas organizations can not only ensure compliance, but also identify areas for improvement and implement targeted strategies to reduce their environmental footprint.
This is where Trinity Consultants and Cority can help.
Trinity Consultants, in collaboration with Cority, can assist companies in the U.S. oil and gas industry in effectively addressing the challenges posed by the IRA.
From comprehensive expertise to digital solutions, we can offer help in navigating the rapidly changing regulatory landscape, ensuring compliance with key provisions while optimizing environmental performance. Through data collection and analysis, we can help companies identify areas for improvement and develop the actionable strategies we shared today to reduce methane emissions. Additionally, we can provide guidance on leveraging exemptions within the Act, enabling companies to streamline their operations while meeting regulatory requirements and sustainability goals.
Keep your eyes open for the final part of our IRA blog series, “The Inflation Reduction Act – Part 4: How to prepare, what other organizations are already doing, the financial impact, and the future” coming next month.
