August 30, 2022

Methane Emissions: New Developments in the Inflation Reduction Act

Holland & Knight Alert
Elizabeth Leoty Craddock

The recently enacted Inflation Reduction Act (IRA) contains several new provisions related to methane emissions impacting oil and gas companies, including upstream and midstream. Companies who already report emissions to the U.S. Environmental Protection Agency's (EPA) Greenhouse Gas Emissions Reporting Program under Subpart W of the Clean Air Act are likely to face stiff new charges starting in 2025, unless they reduce their emissions below the 25,000 metric tons of carbon dioxide equivalent threshold. Here's a summary of the main provisions that oil and gas companies should be focused on in the months ahead.

New Methane Charge

The IRA puts a price on methane for oil and gas companies who report their emissions under Subpart W of the Clean Air Act. This includes both offshore and onshore producers, natural gas processing, transmission and compression, underground gas storage, LNG facilities, gas gathering, and boosting stations. The charge starts at $900 per metric ton of methane, increasing to $1,500 within two years. It will be based on the prior year's emissions, and the charge starts in 2025 based on 2024 data. Charges will not apply to any emissions from a well that was permanently shut in and plugged the previous year. There is also an exemption from the charge if emissions are caused by unreasonable delay in environmental permitting of pipelines needed to transport the increased gas volume (gathering or transmission pipelines).

Once the 25,000 metric tons threshold is met, the amount charged is based on the activity and amount of methane emitted above the threshold amounts:

  • Petroleum and Natural Gas Production: 0.2 percent of the natural gas sent to sale from such a facility
  • Nonproduction Petroleum and Natural Gas Systems: 0.05 percent of the natural gas sent to sale from or through such a facility
  • Natural Gas Transmission: 0.11 percent of the natural gas sent to sale from or through such a facility

The enacted legislation does offer a few "carrots" to help these companies reduce their methane emissions in advance of the imposed charge. It provides $850 million for methane mitigation and monitoring in the form of grants, rebates, loans and other financial assistance from the EPA. In addition, it provides $700 million for marginal conventional wells.

Royalties for Produced Methane on Federal Lands and Waters

The IRA also imposes a new royalty on all methane produced on federal lands and waters. This includes all gas that is consumed or lost by venting, flaring or negligent releases through any equipment during upstream operations. Exceptions exist for gas vented or flared for not longer than 48 hours in an emergency situation that poses a danger to human health, safety or the environment; gas used or consumed within the area of the lease; or gas that is unavoidably lost.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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