Evaluating Your E&P Assets: Self Auditing, Disclosure, and Saving Money



New air quality regulations focused on the oil and gas industry have challenged affected facilities to comply with the rigid regulatory framework of the Clean Air Act (CAA). Simply put, the CAA was not wired to address operations over wide geographical areas, ever-changing equipment, variable throughputs, and varied gas or oil compositions. Nonetheless, oil and gas operators must comply.

One particular challenge is found in upstream operations where individual sources are often small, and were historically believed to be below most air quality authorization or permitting thresholds. From a federal level, EPA has identified the exploration and production segment as an ongoing target for its National Enforcement Initiative for both the past and the next three years. State and local agencies are also focusing more than ever on Volatile Organic Compound (VOC), methane, and Hazardous Air Pollutant (HAP) air emission sources as they relate to the upstream and midstream oil and natural gas segment - and they are taking action. The Texas Commission on Environmental Quality (TCEQ), for example, recently performed a helicopter flyover of production sites in southwest Texas with a FLIR camera to evaluate VOC emissions. The North Dakota Department of Environmental Quality (DEQ) recently issued an industry-wide consent decree for facilities that may have under-estimated VOC emissions from storage vessels. The state of Colorado recently passed a suite of sweeping requirements that apply to all hydrocarbon emissions from production sites – not just VOC. Wyoming and Ohio have since followed suit to regulate all hydrocarbon emissions. And, the New Mexico Environment Department (NMED) has been providing oil and gas operators with copies of its current Civil Penalty Policy to encourage operators to step forward with their issues, and address compliance issues quickly.

How Audits can Potentially Reduce Penalties

Typical business objectives and benefits of conducting an environmental audit include the following:

  • Discovering problems early and proactively
  • Mitigating penalties due to proper self-disclosure and issue resolution
  • Reducing risk and liabilities from non-compliance, such as fines and citizen’s or agency lawsuits
  • Proper disclosure of liabilities for shareholder communications
  • Fewer surprises

Some states offer some degree of protection (i.e., reduced or eliminated fines) for operators that voluntarily undergo an internal audit and disclose findings. Many states will recognize good-faith efforts on the part of operators that may have acquired assets not in compliance, or may have not correctly represented the characteristics of sites if the operator voluntarily discloses those findings when discovered. By voluntarily reviewing sites’ compliance status and opening the appropriate line of communication with enforcement representatives, the tone for the engagement is set as one of cooperation and proactivity.

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Before considering an audit of any kind, it is important to know the specific audit requirements in that state. The owner/operator should be fully aware of exactly what is (and what is not) an official “audit.” Each state is different, and some states (Texas, for example) have very prescriptive procedures and timelines that must be followed to receive “enforcement discretion” for self-disclosure. Working with legal counsel can be useful to ensure maximum protection in efforts to mitigate potential penalties.

If you are reading this article, perhaps you already suspect that a gap exists in the air quality permitting and compliance area. But, where should you start? This article provides recommendations on how to proceed when reviewing your air quality compliance status; however, it is imperative to follow any state or local regulatory requirements when proceeding! There are three phases to consider when implementing an air quality compliance and permitting audit for upstream and/or midstream sources.

Phase 1: Records Review. When evaluating compliance for a large number of sites, often the best place to start is in the file room or with the company’s electronic records. A paperwork review can be a good way to begin evaluating the overall scope of the potentially missing permitting or compliance information, and can help guide decisions on the need for a limited scope or a full field audit. In some cases, complete lack of documentation makes this phase irrelevant. However, a thorough review of all permits, emission calculations, emissions inventories, control devices (such as vapor recovery units or combustors), and regulatory applicability determinations can identify potentially systematic or enterprise-wide issues. Additionally, a review of capital project construction records against the air permit records can reveal systemic communication issues between those responsible for building facilities and those responsible for acquiring air quality construction authorizations. Most commonly found issues are no air permits for some construction activities, over-representation of control devices (which often must be confirmed by a site visit), over-representation of emission capture and reduction efficiencies (particularly if the emission control device represented is not currently on site), and incorrect assumptions and inputs into emission calculations. A review of applicable emission inventories (including greenhouse gas reporting) can also assist in the identification of potential permitting and/or compliance issues, and can help shape the scope for a more detailed field audit or verification.

Phase 2: Limited scope field audit. For upstream operations, the execution of a full audit of all sites can be daunting; it requires that dedicated staff visit and/or escort consultants across large geographical areas, remote areas, areas that are seasonally unavailable, and other challenges. Based on findings in the records review phase, it may make sense to apply a limited scope audit based on a sampling of facilities that can be easily visited within the course of a week or two, for instance. The findings from the first phase can help operators limit the scope and size of the field audit to manage costs and timelines. A limited scope field audit can act as a sample that provides insight into the accuracy of equipment lists and information represented in the previously reviewed authorizations.

Phase 3: Full field audit. The full field audit is deployed by a team of knowledgeable staff and/or consultants managing various personnel and field schedules. Sites are often grouped by geographic region, and audit teams are deployed throughout the course of the audit. A significant level of effort will be required to organize the large amounts of field data collected, manage personnel conducting the audits, and analyze the results. A full field audit can take several months to complete, and will require an intense schedule of representative site visits, audit reports, conference calls, project team meetings, and more. Some operations may be so segmented that the only way to gain a full understanding of the air quality compliance picture is through this full-scale, “boots on the ground” audit approach. If selecting this method, it is critical to have knowledgeable personnel involved in visiting the sites in the field and analyzing the results.

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Ensuring Ongoing Compliance

Whether implementing only a paperwork review, or deploying a full-scale enterprise-wide audit, there will be follow on items that will need to be executed to bridge any compliance gaps. Depending on state-specific requirements, it may be appropriate to alert the agency of findings during the course of the audit or within a certain timeframe of completion. In any case, it will be critical to prioritize identified air quality compliance issues based on severity - the greater the potential compliance risk, the higher the priority. Some issues may be easier than others to resolve; those “easy to resolve” items can also be prioritized towards the top of the list. Part of any agency negotiation may include how sites will be prioritized for compliance purposes.

Once issues are identified and a schedule is set to resolve them, the next step is implementing programs to ensure ongoing compliance. Agencies will often ask for an outline of what an operator plans to do to stay in compliance: what systems, tools or other mechanisms are expected to be deployed. For some, this could entail hiring more staff, purchasing (or developing) internal environmental management software for compliance tracking, or both. Of course, these tasks cannot be done in a day – ongoing compliance is a bigger challenge than conducting the audit. In many cases, commitments to these types of actions can help mitigate the fines and penalties associated with the discovered issues.

Of course, audits can be an expensive undertaking, but are almost always less expensive than the fines and penalties associated with enforcement when the state agency or EPA discovers noncompliance. For many in the upstream industry who are becoming regulated for air emissions for the first time, the need for (and associated costs of) conducting environmental audits is just beginning. However, now is a critical time to start; waiting for EPA, state, and/or local authorities to identify noncompliance issues can be very costly (Clean Air Act violations are calculated on a per violation, per day basis) – and can result in substantial fines, lengthy legal troubles, and possibly even a disruption of operations.