Initial Economic Impact Analysis for Proposed State-only Revisions

to the Air Quality Control Commission’s Regulation Number

7, “Emissions

of Volatile Organic Compounds,” Sections

I, XII and XVIII Per C.R.S. 25-7-1 10.5 September

18, 2008 I. REQUIREMENTS

FOR ECONOMIC IMPACT ANALYSIS (EIA) Section 25-7-110.5 (4)(a), C.R.S. sets forth the requirements

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 with this subsection

(4) of the proposed rule or alternative proposed rules. Such economic impact analysis shall be in writing, developed

by the proponent,

or the Division

in cooperation 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 five working days prior
to the prehearing conference.

If no prehearing conference

is scheduled,

the economic impact analysis shall be submitted

at least ten working days before the date 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 reasonably available data. Except where data
is not reasonably available,

or as otherwise provided

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 alternative proposed rule from being considered

by the Commission. Nothing

in this section shall be construed

to restrict the Commission’s authority

to consider alternative proposals 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 selected C.R.S.

§ 25-7-1 l0.5(4)(c)(1II), 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 affected 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-l 10.5(4)(a), C.R.S.).

# II. DISCUSSION Analysis Background This Economic Impact Analysis (ETA) considers impacts from implementing proposed regulations
that are aimed

at reducing ground level ozone within Colorado (statewide)

by reducing emissions

of ozone precursors, volatile organic compound (VOC) and nitrogen oxides (NO), mainly from the following sources: • Oil and gas industry condensate tanks
in the ozone non-attainment
area, and • Oil and gas industry Reciprocating Internal Combustion Engines (RICE) state-wide. These proposed revisions
are necessary

to ensure attainment with the current 8-Hour Ozone National Ambient Air Quality Standard (NAAQS)

set at 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 proactively
and pragmatically

reduce ozone levels. Proposed Rules Condensate Tank Proposed Rules
in the Ozone Non-attainment
Area Proposed rule will lower the applicability thresholds

for existing tanks from
10 down
to five tons per year of actual uncontrolled VOC emissions, beginning May

1, 2011, and then down
to 2 tons per year, beginning

in May

1, 2012. The control technology must reduce uncontrolled emissions by at least 95%. Affected tanks are required

to control emissions

by 95% and to monitor associated

air pollution control equipment

to ensure compliance. RICE Proposed Rules State-wide Proposed rules will require any existing natural gas-fired RICE equal
to or exceeding 500 horsepower (HP) to install emission controls. For natural gas-fired, rich burn (exhaust oxygen (02)

is greater than 0.5%) RICE (either 2-cycle and 4-cycle



# ), NOx, VOC and carbon monoxide (CO) emissions will be controlled using 3-way Non-Selective Catalyst Reduction (NSCR) technology along with air fuel ratio (AFR) controller. Source operators that demonstrate

to the satisfaction

of the Division

a retrofit control cost exceeding

a total of $5,000 per the sum total tons of VOC and NOx of combined emissions reductions will be allowed

an off-ramp from the retrofit control requirement. For natural gas-fired, lean burn (exhaust
02 is greater than 4.0%) RICE (either 2-cycle and 4- cycle), VOC and CO emissions will be controlled using oxidation catalyst technology. Source operators that demonstrate

to the satisfaction

of the Division

a retrofit control cost exceeding $5,000 per ton of VOC emissions will be allowed

an off-ramp from the retrofit control requirement. Data Used in EIA

2Costs associated with control devices that industry will need
to purchase

in order
to comply with proposed regulation were determined,

as described

in the following sections. 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 controlled
and uncontrolled emissions from large units were based on the Division’s emissions inventory (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

5 tpy uncontrolled VOC emissions) that will need
to install control devices under the proposed rule was based on the Division’s emissions inventory
for the 2007 inventory year. Because the current reporting threshold

is higher than five tons per year, and therefore
the Division’s emissions inventory

is limited, the controlled
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. RICE EtA Data The number
of affected RICE was based on the Division’s emissions inventory (data reported

to the Division
by industry via APENs)
for the 2007 inventory year. Only recently were the types of RICE identified

in the inventory

as being rich-burn and lean-bum engines. Thus, for those RICE not identified

as rich or lean burn
in the APEN inventory,
the Division assumed
the same ratio of rich-burn

to lean-bum engines

in the ozone non-attainment

area (67:33, respectively) applies

to RICE state-wide. Natural Gas-fired RICE (both lean and rich burn) control cost information (both capital and operating) was based on the Denver Ozone Early Action Compact (EAC) Analysis (dated November

3, 2003) that was part of the 2004 EAC Technical Support Document. Annualized costs were based on
a 15 year amortization

and 5% rate of return on capital. However,
the Division can not anticipate
the number
of additional control devices that will be required

to comply with proposed regulation

or associated emission reductions that can be achieved, due to the availability

of the off-ramp. Impact

to Public The public will be indirectly affected
by the proposed rule. Reductions

in VOC and NO emissions will reduce the incidence

of fine particulate,

air toxics, and ozone induced human health impacts caused by pulmonary, cardiovascular, respiratory,
and nervous system disease. Ozone damages crops, forests, and other natural plant life, so these will benefit

if VOC and NO emissions
are reduced. Additionally, visibility

in Colorado’s Class

I areas will likely be improved due to the VOC and NOx reductions.

It is not within the scope of this analysis

to determine

if the public will face increased costs associated with the proposed regulation.

3Impact

to Administration Implementing

the proposed rule has the potential

to significantly increase the number
of regulated sources, and has reporting, permitting, and/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. Economic Impact Analysis The Oil and Gas industry will be impacted

by this proposal. Supporting business and industrial sectors associated with the Oil and Gas industry will benefit
by selling equipment

to them. For example,

as a result of the proposed regulation, more flares will be sold. Calculating supporting economic impacts

is beyond the scope of this document. As directed
by CRS 25-7-110.5,
this ETA does not include

an analysis
of any nonmarket costs or external costs asserted

to occur notwithstanding compliance

by
a source with applicable environmental regulations. Direct costs
to the Oil and Gas industry
are shown

in the following table: Condensate Tank ETA for NAA Table

1: Statewide Retrofit
of Condensate Tanks with Flare Device Controls See Table

2 below Tanks Cost Analysis:

>2 and <5 tpy

>5 and <10 tpy
>2 and <10 tpy Flares

@ 95% CE uncontrolled uncontrolled uncontrolled Controlled VOC Emissions (tpd)

14.9

29.4

44.3 (tpy)
5,441
10,736
16,177 Annualized Cost Per Unit* $8,419
$8,419
$8,419 Number

of Units Controlled

1,128

1,595

2,723 CostPerTon

$1,745
$1,251
$1,417

4Table2:CondensateTankAnnualizedCostsforFlareDeviceControlsCondensateTank:FlareControlDevicew/SurveillanceSystemCapital4nnualizedTota4CostsNonRecurringO&MCostItem(onetime)(onetime)(recurring)(15yrs)Flare$16,540--Freight&Design-$1,500-FlareInstallation-$6,354-AutoIgniter$1,500--SurveillanceSystem$3,600--PilotFuel--$1,897Maintenance--$2,000DataManagement--$1,000SubtotalCosts$21,640$7,854$4,897AnnualizedCosts$2,999$524$4,897$8,419Table3:StatewideRetrofitofCondensateTankswithVaporRecoveryUnit(VRU)ControlsTanksCostAnalysis:>2and<5tpy>5and<10tpy>2and<10tpyVRU95%ControluncontrolleduncontrolleduncontrolledControlledVOCEmissions(tpd)14.929.444.3(tpy)5,44110,73616,177AnnualizedCostPerUnit*$19,078$19,078$19,078NumberofUnitsControlled1,1281,5952,723CostPerTon$3,957$2,834$3,211*SeeTable4belowTable4:CondensateTankAnnualizedCostsforVaporRecoveryUnitControlsCondensateTank:VaporRecoveryUnit(VRU)CostAnalysisCapital-Non-AnnualizedCostsRecurringO&MFuelSalesTotalCostItem(onetime)(onetime)(recurring)(recurring)(15yrs)VRU$78,000---Freight&Design-$1,500--VRUInstallation-$10,154--Maintenance--$8,553-RecoveredNaturalGas---($1,063)SubtotalCosts$78,000$11,654$8,553($1,063)AnnualizedCosts$10,810$777$8,553($1,063)$19,0785Table5:StatewideRetrofitofNaturalGas-firedReciprocatingInternalCombustionEngines1,2CoVOCNOxCategoryCountReductionReductionReduction(apy4pd)(tpy/tpd)(ipy4pd)NotLeanBurn500HP2883,188/8.71,261/applicableRichBurn500HP3053,773/10.31,175/3.25,800/15.9TotalNaturalGas5936,961/19.12,436/6.75,800/15.9Fired_RICE__500_HPNotes:1StatewideexcludesDenverMetroArea/NorthFrontRange9-CountyOzoneNon-AttainmentArea2Dataobtainedfrom2008APENsTable6:CostsAssociatedwithStatewideRetrofitofNaturalGas-firedRICE?500HPControlCombinedNumberAnnualizedTotalPollutantCategoryEfficiencyofCostperDeviceCostReduction$/tonforDevicesDeviceCO/VOC/NO1fipy]LeanBurn-Oxidizing952288$8,772$2,529,1531,198$2,111CatalystRichBurn-NSCR&95305$10,851$3,305,6736,626$499AFRControllerRich&Lean593$5,834,8267,824$746CombinedIControlEfficiencydoesnotinclude83%REthatadjustsfortheuncertaintyassociatedwiththeoff-rampforsourcesthatcandemonstratecontrolcostsinexcessof$5000/ton.2ControlEfficiencydoesnotapplyforNOonLeanBurnRICEsinceNOcontrolsareinherentintheenginedesign.6