A New Path to Managing Risks from Upstream Oil and Gas Transactions

On May 4, 2018, EPA released its proposed “Oil and Natural Gas Exploration and Production Facilities New Owner Audit Program Agreement.” EPA’s Office of Enforcement and Compliance Assurance has indicated that the proposed agreement is based on its experience with the audit agreement between the Agency and Range Resources Corporation—an agreement the authors of this article helped negotiate. Under the proposed template, a company can notify EPA during the first six months of ownership that it wishes to enter into an audit agreement, which the company must finalize within a year from the transaction. The agreements require companies to review compliance with applicable air regulations in exchange for forgiveness of civil penalties that would otherwise attach to the violations. The proposed agreement for the oil and gas sector is simply a tailored version of an earlier policy—the “Interim Approach to Applying the Audit Policy to New Owners”—which allows new owners of facilities in any sector to self-disclose violations and receive penalty forgiveness. If the draft agreement is finalized for the oil and gas sector, the policy would still remain in effect for all other industrial sectors.

The proposed agreement contemplates two different timelines for correcting existing violations—one for engineering and/or design issues and another for issues unrelated to engineering and/or design. Engineering and/or design issues would be subject to a negotiated schedule, while all others would have to be corrected within 60 days of discovery.

The proposed agreement does not define what constitutes an engineering or design issue, but it appears that engineering and design issues are primarily those related to vapor control systems, in particular closed vent systems, flares, and vapor recovery units that manage emissions from storage tanks. EPA has focused on improper sizing and design of such systems and the resulting emissions of improperly functioning systems. Indeed, the Agency has brought a number of significant enforcement cases against companies that have had emissions at their storage tanks and vapor control equipment. The proposed agreement also includes detailed requirements for vapor control system emissions modeling and design, field surveys to detect leaks, and modifications to eliminate vapor emissions.

Although a company would be permitted to develop its own protocols for conducting the audit, EPA would have the right, but not the obligation, to approve the protocols. The company would then implement its protocols, provide EPA with semi-annual reports, and develop a final report detailing the violations discovered and corrective action undertaken. Once the final report is submitted, EPA would evaluate the self-disclosed violations, determine whether the violations were satisfactorily fixed, and determine whether any civil penalties are warranted for violations that might continue post-acquisition.

While the proposed agreement gives companies greater certainty in how a post-acquisition audit would function and how penalties will be addressed, there are a number of issues that EPA should address before finalizing the proposed agreement. For example, further definition of what constitutes engineering and/or design issues, for example, would be an important enhancement. EPA should also explain how EPA will determine what constitutes satisfactory corrective action, at least for the most common types of violations encountered at oil and gas production sites.

Audits remain a valuable method of managing environmental risk while demonstrating compliance. EPA’s proposal, if finalized, will enable companies to better manage those risks when considering whether to purchase additional facilities, and on what terms. Companies in the upstream oil and gas sector should strongly consider reviewing the proposed agreement and submitting comments to EPA to ensure that the final agreement is as useful as possible. Audits remain a valuable method of managing environmental risk while demonstrating compliance.