1 Initial Economic Impact Analysis

for Proposed State Implementation Plan Revisions to the Air Quality Control Commission’s

Regulation Number 3 and Regulation Number 7 Regulation 3, Parts A, B, and C Regulation 7, Sections I-XVIII

Per C.R.S. 25-7-110.5 September 18, 2008

I. REQUIREMENTS FOR ECONOMIC IMPACT ANALYSIS (EIA)

Section 25-7-110.5 (4)(a), C.R.S. sets forth the re quirements for initial and final Economic Impact Analysis, as stated below:
“Before any permanent rule is proposed pursuant to this section, an initial economic impact analysis shall be conducted in compliance wi th this subsection (4) of the proposed rule or alternative proposed rules. Such economic i mpact analysis shall be in writing, developed by the proponent, or the Division in coop eration with the proponent and made available to the public at the time any request for hearing on a proposed rule is heard by the commission. A final economic impact analysis shall be in writing and delivered to the technical secretary and to all parties of record fi ve working days prior to the prehearing conference. If no prehearing conference is schedule d, the economic impact analysis shall be submitted at least ten working days before the d ate of the rule-making hearing. The proponent of an alternative proposal will provide, in conjunction with the Division, a final economic impact analysis five working days prior to the prehearing conference. The economic impact analyses shall be based upon reason ably available data. Except where data is not reasonably available, or as otherwise p rovided in this section, the failure to provide an economic impact analysis of any noticed proposed rule or any alternative proposed rule will preclude such proposed rule or a lternative proposed rule from being considered by the Commission. Nothing in this secti on shall be construed to restrict the Commission's authority to consider alternative prop osals and alternative economic impact analyses that have not been submitted prior to the prehearing conference for good cause and so long as parties have adequate time to review them.”

The Air Pollution Control Division (Division) has s elected C.R.S. § 25-7-110.5(4)(c)(III), which

calls for an EIA that:

(A) Identifies the industrial and business sectors that will be impacted by the proposal;

and (B) Quantifies the direct cost to the primary affec ted business or industrial sector; and (C) Incorporates an estimate of the economic impact of the proposal on the supporting

business and industrial sectors associated with the primary affected business or industry sectors.

An EIA need only be based upon reasonably available data (§25-7-110.5(4)(a), C.R.S.).2

II. DISCUSSION

Analysis Background

This Economic Impact Analysis (EIA) considers impac ts from implementing proposed regulations that are aimed at reducing ground level ozone within the nonattainment area (NAA) by reducing emissions of ozone precursors, volatile organic compound (VOC) from the following sources:

• Oil and gas industry condensate tanks in the ozone non-attainment area,

• Oil and gas industry pneumatic controllers in the o zone non-attainment area,

• Multiple industries through expansion of Regulation 7 Reasonably Available Control Technology (RACT) applicability in the ozone non-at tainment area, and

• Multiple industries through revising Regulation 3 A ir Pollution Emission Notice (APEN) reporting and permitting exemptions state-wide (thi s strategy alone will not reduce VOC emissions; it is intended to provide information an d increase equity).

These proposed revisions are necessary to ensure at tainment with the current 8-Hour Ozone National Ambient Air Quality Standard (NAAQS) set a t 0.08 parts per million (ppm), and to otherwise achieve ozone reductions in light of both the new 8-Hour Ozone NAAQS set at 0.075 ppm and the Governor’s July 27, 2007 directive to p roactively and pragmatically reduce ozone

levels.

Proposed Rules

These proposed revisions accomplish five objectives : A) reduce volatile organic compound (VOC) emissions from oil and gas operations in the ozone non-attainment area, B) revise the control requirements for condensate tanks by transi tioning from a system-wide to an emissions threshold control strategy in the ozone non-attainm ent area, C) expand VOC RACT requirements such that all ozone non-attainment areas are subjec t to Regulation 7’s RACT requirements, D) clarify how the RACT requirements in Regulations 3 and 7 interact in the ozone non-attainment area, E) improve the Division’s inventory of specif ic source category emissions state-wide; and F) make typographical, grammatical and formatting c hanges for greater clarity and readability.

Condensate Tank Proposed Rules in the Ozone Non-att ainment Area Proposed rules further reduce VOC emissions by: 1) requiring control device and monitoring equipment installation and operation during the fir st 90 days of operation beginning February 1, 2009; 2) redefining modification activities that tr igger additional control and monitoring equipment installation and operation beginning Febr uary 1, 2009; 3) lowering the applicability

thresholds for new and modified tanks from five dow n to two tons per year of VOCs beginning February 1, 2009 and for existing tanks from 20 dow n to 10 tons per year of VOCs ; and 4) increasing control requirement by initially increas ing system-wide control requirements in May 1, 2009, ultimately transitioning to a emissions th reshold control strategy beginning in May 1, 2010. Affected tanks are required to control emiss ions by 95% and to monitor associated air pollution control equipment to ensure compliance.3

Tanks serving newly drilled, recompleted or stimula ted wells be required to employ air pollution control equipment during the first 90 days of produ ction. Air pollution control equipment can include combustion devices, vapor recovery units, o r Division approved alternative controls or pollution prevention activities that meet the contr ol efficiency requirement. If after the first 90 calendar days, the data shows that annual emissions from the tank will not exceed the control requirement threshold, the control may be removed.

Enhanced monitoring provisions are proposed for con densate tanks as an indicator of compliance

to ensure actual emissions reductions occur. In ma ny cases, condensate tanks are remotely

located and un-manned. For combustion control devi ces (flares), auto-igniters and electronic surveillance systems are required to identify when the pilot is not lit and attempt to relight it, document the duration of time when the pilot is not lit, and notify an operator that repairs are necessary to ensure proper control operation and en sure control operation.

Proposed recordkeeping and reporting requirements a re minimized to offset the added control assurance gained through enhanced monitoring. This revision reduces the frequency and reporting of emissions estimation calculations, fro m a weekly to a rolling-12 month basis and from annual company-wide reporting to reporting upo n request of the Division (normally during routine inspections or via APEN updates for signifi cant increases in annual emissions).

Pneumatic Controller Proposed Rules in the Ozone No n-attainment Area Proposed rules require new pneumatic controllers be at least low-bleed devices beginning February 1, 2009, and existing high-bleed pneumatic devices be retrofit or replaced with lowbleed devices, or devices with equivalent or lower VOC emissions, by May 1, 2009. An exception will allow high-bleed devices to be used if the Division determines that a safety or process reason makes it technically infeasible to u se a low-bleed device. Operators will be required to inspect high-bleed devices on a monthly basis and perform maintenance as needed. Operators will be required to keep logs of the numb er of devices, device type, and inspection and maintenance that is performed. Operators will be r equired to tag the devices, which will help enable the Division to track compliance.

Regulation 7 Expansion of RACT Proposed Rules in th e Ozone Non-attainment Area Proposed rules will require that Regulation 7 expan d the applicability of Reasonably Available Control Technology (RACT) requirements to existing, new, and modified sources outside of the

historic 1-hour Ozone Non-attainment or Attainment/ Maintenance Area, beginning February 1,

2009.

This proposed regulation change is based on equity - sources in the 1-hour Ozone Nonattainment or Attainment/Maintenance Area already c omply with Regulation 7. The Division believes all ozone non-attainment areas (existing a nd future designations) should comply with Regulation 7.

Regulation 3 Exemptions Proposed Rules State-wide Proposed rules will revise APEN reporting exemption s for specific source categories, beginning February 1, 2009. This regulation change is based on equity. Most sources of VOC emitting one or more ton per year file an APEN and obtain a permit if they emit two or more tons per year in the ozone non-attainment area (or two or more to n per year file an APEN and obtain a permit4

if they emit five or more tons per year in all othe r areas). This proposal requires source categories currently exempt from these thresholds t o obtain APENs and permits at those same thresholds as other sources in the respective areas

.

Edits to Regulation 7 Proposed Rules Proposed rules will be revised to correct typograph ical, grammatical and formatting changes, as necessary, beginning February 1, 2009.

Data Used in EIA

To perform the EIA, the following information must be obtained to calculate industry’s costs to implement the proposed regulation: 1) number of co ntrol and monitoring devices required, 2) associated costs, and 3) emission reductions that c an be achieved.

For those proposals specific to Regulation 7 expans ion of RACT, Regulation 3 Exemptions and edits to Regulation 7, detailed data is not reasona bly available. There are innumerable types of facilities that would be subject to these Regulatio n 3 and 7 proposed rules. For example, any

emission source in an ozone non-attainment area tha t emits VOC emissions would be subject to the expansion of RACT, and since not previously sub ject to RACT, these sources may have never been required to report emissions to the Divi sion. Such facilities include, without limitation, oil and gas facilities, food processing and packaging facilities, refineries, dry cleaners

, printers and other surface coating operations. Wit hin each of these categories, there are many different facilities of varying sizes and configura tions, which compounds the difficulty in estimating costs of VOC emissions control. While p otential costs associated with undertaking an analysis of control technology may be capable of ge neral estimation and quantification, the potential costs associated with installing control technologies do not lend themselves to the same analysis. Such information is not reasonably avail able, in that it is so fact-specific as to preclude meaningful, generalized analysis. Such costs would be dependent upon numerous site-specific factors, including the type of facility, the amount s and types and constituents emitted by the facility, the concentrations of odors, the configur ation of the facility (for example, whether there is space available to install certain types of equi pment). Thus, the Division has an inaccurate inventory of these sources and associated emissions at this time and limits any cost analysis which may be performed. This is also true for sour ces affected by Regulation 3 reporting and permitting exemption changes. Clarifying edits to Regulation 7, edits are minimal and impacts are believed to be negligible

Thus the Division focused efforts on this economic impact analysis on impacts to the oil and gas industry in controlling emissions from condensate t anks and pneumatic controllers.

Condensate Tank EIA Data The number of units (tanks or tank batteries) that will need to install control devices and conduct monitoring under the proposed rule and the controll ed and uncontrolled emissions from large

units were based on the Division’s emissions invent ory (data reported to the Division by industry via APENs) for the 2007 inventory year.

The number of small tanks or tank batteries (those having actual uncontrolled emissions of equal to or more than 10 tpy uncontrolled VOC emissions) that will need to install control devices5

under the proposed rule was based on the Division’s emissions inventory for the 2007 inventory year. Because the current reporting threshold is h igher than five tons per year, and therefore the Division’s emissions inventory is limited, the cont rolled and uncontrolled emissions from small units were based on data gathered within the ozone non-attainment area by Independent Petroleum Association of Mountain States (IPAMS).

The cost of controlling emissions was based on data collected from the oil and gas industry.

Pneumatic Controller EIA Data The number of high-bleed pneumatic controllers in p lace and associated emission reductions that could be obtained by retrofitting or replacing some of them were estimated based on data gathered within the ozone non-attainment area by IP AMS. The percentage of high-bleed pneumatic controllers that will be replaced or retr ofit is based on data gathered by the Division from industry.

Controller capital, installation, and maintenance c ost data was obtained from vendors. Because this strategy increases the amount of natural gas t hat companies can sell, the strategy pays for itself. The U.S. natural gas wellhead price used i n this analysis, $10.82 per thousand standard
cubic foot, was current as of June 2008.

Regulation 7 Expansion of RACT EIA Data Cost data is not readily available for this propose d regulation change. Industry has not indicated that this proposed regulation change will have a si gnificant impact.

Regulation 3 Exemptions EIA Data Cost data is not readily available for this propose d regulation change. The cost of filing an APEN is $152.90. Annual fees and permit fees vary by source type.

Edits to Regulation 7 EIA Data Cost data is not available to this proposed regulat ion change. Industry has not indicated that this proposed regulation change will have a significant impact.

Impact to Public

The public will be indirectly affected by the propo sed rule. Reductions in VOC emissions will

reduce the incidence of ozone induced human health impacts caused by pulmonary, cardiovascular, respiratory, and nervous system dis ease. Ozone damages crops, forests, and other natural plant life, so these will benefit if VOC emissions are reduced. Reducing emissions from pneumatic controllers will also reduce methane , which is a greenhouse gas and contributes to climate change. It is not within the scope of t his analysis to determine if the public will face increased costs associated with the proposed regula tion.

The associated benefit of improved public and envir onmental health from this proposal is

difficult to assess.

Impact to Administration6

Implementing the proposed rule has the potential to significantly increase the number of regulated sources, and has reporting, permitting, a nd/or compliance assurance impacts to the Division. It is beyond the scope of this analysis to determine costs to the Division associated with rule implementation.

III. ECONOMIC IMPACT ANALYSIS

Various industrial and business sectors will be imp acted by this proposal:

• Oil and gas (controls for condensate tanks, reducin g use of high-bleed pneumatic controllers), and

• Other stationary sources of VOC.

Supporting business and industrial sectors associat ed with the primary affected business and industry sectors will benefit by selling equipment to the primary affected business and industrial sectors. For example, as a result of the proposed regulation, more flares will be sold and, in the short term, more low-bleed pneumatic controllers wi ll be sold to replace the high-bleed controllers currently in the field. Calculating su pporting economic impacts is beyond the scope

of this document.

As directed by CRS 25-7-110.5, this EIA does not in clude an analysis of any nonmarket costs or external costs asserted to occur notwithstanding co mpliance by a source with applicable environmental regulations.

Direct costs to the primary affected business and i ndustrial sectors are shown in the remainder of

this section.

Condensate Tank EIA for 8-hour Ozone Non-Attainment Area (NAA)

Table 1: 8-hour Ozone NAA Retrofit of Condensate T anks with Flare Control Device and Surveillance System

Tanks Cost Analysis:

Flares @ 95% CE >10 and <20 tpy

uncontrolled

Controlled VOC Emissions (tpd) (tpy) 27.2 9,936
Annualized Cost Per Unit $8,419

Number of Units Controlled 773

Cost Per Ton $6557

Table 2: Condensate Tank Annualized Costs for Flare Control Device and Surveillance System

Condensate Tank: Flare Control Device w/Surveillanc e System

Item Capital

Costs (one time) Non Recurring

(one time) O&M

(recurring) Annualized Total

Cost (15 yrs) Flare $16,540 - - Freight & Design - $1,500 - Flare Installation - $6,354 - Auto Igniter $1,500 - - Surveillance System $3,600 - - Pilot Fuel - - $1,897 Maintenance - - $2,000 Data Management - - $1,000
Subtotal Costs $21,640 $7,854 $4,897
Annualized Costs $2,999 $524 $4,897 $8,419

Table 3: 8-hour Ozone NAA Retrofit of Condensate T anks with Vapor Recovery Unit (VRU)

Control Device

Tanks Cost Analysis:

VRU @ 95% Control >10 a nd <20 tpy

uncontrolled

Controlled VOC Emissions (tpd) (tpy) 27.2 9,936
Annualized Cost Per Unit $19,078

Number of Units Controlled 773
Cost Per Ton $1,484

Table 4: Condensate Tank Annualized Costs for Vapo r Recovery Unit Control Device

Condensate Tank: Vapor Recovery Unit (VRU) Cost An alysis

Item Capital

Costs (one time) Non

Recurring (one time) O&M

(recurring) Fuel Sales

(recurring) Annualized

Total Cost (15 yrs) VRU $78,000 - - - Freight & Design - $1,500 - - VRU Installation - $10,154 - - Maintenance - - $8,553 -

Recovered Natural Gas - - - ($1,063) Subtotal Costs $78,000 $11,654 $8,553 ($1,063)
Annualized Costs $10,810 $777 $8,553 ($1,063) $19,0788

Pneumatic Controller EIA for 8-hour Ozone NAA

Pneumatic Controller: Converting to Low-Bleed Contr ollers and Performing Enhanced Maintenance on Remaining High-Bleed Cost A nalysis Number of High-Bleed Controllers 5,524

Number of Converted Controllers 1 5,248 Number of Remaining High-Bleed Controllers 276 Controlled Emissions (tons per day/year) 23.3 / 8,4 96 Annualized Cost per Controller ($1,505) Cost per Ton ($747)

1 Number of high-bleed controllers that can be ret rofit or replaced with low-bleed controllers is cal culated by assuming a 95% conversion rate