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Oil and Gas NEI In a recent enforcement case, the U.S. EPA fined an oil and gas company $210,000 and required upgrades to its oil spill response program nationally due to a spill into navigable waters. In another recent enforcement case, EPA fined two gas production companies for Clean Air Act violations on an Indian reservation. The consent agreements for the companies also required air emission reductions from a gas plant and compressor stations.

These are recent examples of recent EPA enforcement actions against companies within the energy extraction sector, one of the currently listed national enforcement initiatives (NEIs) for the agency. Upstream and midstream oil and gas companies may wonder how concerned they should be about the NEI, recent related cases, and other recent enforcement actions under the NEI, and exactly what they can do to prepare for potential enforcement under the NEI.

NEI Regulatory Background

EPA sets NEIs every three years to address what it perceives to be the most serious pollution risks affecting communities nationwide. The focus is on industry sectors or sources of pollution that EPA believes can best be affected by a national enforcement team and process. EPA establishes teams to work toward the goals set under each initiative. Progress toward achieving the goals is available on each of the initiative websites.1 For the 2011-2013 fiscal years, EPA set the following NEIs:

  • Keeping raw sewage and contaminated stormwater out of the nation’s waters
  • Preventing animal waste from contaminating surface and ground waters
  • Cutting toxic pollution that affects communities’ health (with an emphasis on flares)
  • Reducing widespread air pollution from the largest sources, especially the coal-fired utility, cement, glass, and acid sectors
  • Reducing pollution from mineral processing operations
  • Assuring energy extraction sector compliance with environmental laws (which includes the upstream and midstream oil and gas industry)

EPA has proposed to continue these initiatives in the 2014-2016 fiscal years.

This approach to targeted enforcement action began in 1991 when EPA initially focused on the pulp and paper industry. Under this initiative, EPA filed multiple enforcement actions against pulp and paper facilities. Due to the increased scrutiny of the industry as a result of those actions, some companies voluntarily worked to identify and disclose potential compliance issues to state regulatory agencies as a way of preventing an EPA enforcement action. Those voluntary disclosers believed they stood to save a significant amount of money with this approach compared to waiting for EPA to show up, inspect, and begin an enforcement action for potentially multiple facilities. Since then, other industry sectors have been under the scrutiny of an NEI, including the petroleum refining and utilities industries, and now the energy extraction sector, including upstream and midstream operations.

Oil & Gas NEI Activity

EPA reports on its enforcement website that from fiscal year 2011 through fiscal year 2012, it conducted 1,231 energy extraction inspections and compliance evaluations and concluded 96 enforcement actions.2 The enforcement actions have included companies operating gas plants, compressor stations, and oil and gas production facilities in several of the most active U.S. onshore oil and gas plays. Figures 1-4 are available on EPA’s energy extraction NEI website.

Oil and Gas NEI_Figure 1 Oil and Gas NEI_Figure 2

While the number of concluded enforcement actions remain small in comparison to the total number of inspections completed during FY 2011 and 2012, it is important to note that the number of inspections increased significantly from 2011 to 2012; and enforcement actions are rarely concluded within the same year in which they are discovered.

Considering the very large number of upstream and midstream facilities operating in the U.S. from well site facilities, central battery facilities, compressor stations, gathering systems, and gas plants, this may not seem like a lot of enforcement activity. A few observations and further research help temper this initial perception:

  • The map is only for the 2011 fiscal year (EPA has not yet made the 2012 fiscal year map available online)
  • The number of inspections and evaluations, and concluded enforcement actions more than doubled from the first year of the NEI to the second year
  • EPA did not really begin internal training for inspectors until its May 5-7, 2012 workshop hosted by Region 65

Since EPA just began gearing up for energy extraction inspections with training in mid-2012, it seems reasonable to assume that the number of cases will significantly increase in 2013 and throughout the new NEI fiscal years of 2014-2016.

Based on a review of recent EPA upstream and midstream company enforcement actions on its website, the following general trends can be identified as areas of enforcement concern:

  • Spills into navigable waters or tributaries
  • Failure to implement a Spill Prevention Control and Countermeasure (SPCC) plan or an inadequate SPCC plan
  • Failure to apply for air quality permits for new construction or modifications to existing facilities
  • Failure to properly control air emissions
  • Failure to perform required inspections or monitoring and keep proper records
  • Visible items that the public can see (e.g., flares and spills)
  • Unpermitted or improperly permitted operations on Indian lands

In its May 5-7, 2012 inspection training slides, EPA focused on flare destruction efficiency as a point of concern. For steam or air-assisted flares, too much steam or air can dilute and cool the flame, resulting in lower destruction efficiencies. Too little steam or air can result in poor mixing and too little oxygen, resulting in lower destruction efficiencies and visible opacity or smoke from a flare. Generally, a specific destruction efficiency is utilized for permit applications, to set permit limits, to report emissions for annual emission inventories, and to monitor compliance. Utilizing a relatively high efficiency, and then not operating a flare optimally could result in permit non-compliance, excess emissions, inadequate permit type or level for the operation, and regulatory non-compliance.

Another area of focus appears to be spills from facilities. Any spill to a U.S. waterway that causes a visible sheen must be reported to the National Response Center (NRC). Typically, these spills result in further investigation and enforcement by EPA, including a review of the facility’s SPCC plan. Many times, these SPCC reviews uncover concerns that EPA could have about potential company-wide issues around SPCC applicability and spill containment design and maintenance. Section 8 of the Clean Water Act gives EPA broad authority to request information to determine a violation.

Air quality permitting and regulatory compliance issues are another main area of concern identified in the review of recent EPA enforcement cases. These concerns range from potential aggregation issues related to Title V and Prevention of Significant Deterioration (PSD) permitting, to failure to control air emissions, and failure to permit air emissions considering potential to emit. The recently promulgated New Source Performance Standard (NSPS) Subpart OOOO gives EPA even more compliance items to check during an inspection, potentially opening the door for additional enforcement concerns. Like all NSPS, the applicability date for the rule goes back to its original proposal date of August 23, 2011. Thus, there is significant risk that upstream and downstream companies constructed potentially subject emission sources after the rule was proposed and did not consider the need for emission controls under the proposed rule.

Finally, there appear to be a number of cases that involve upstream or midstream operations on Indian Reservations, due to EPA jurisdiction for PSD and Title V permitting in those areas (absent an approved Tribal Implementation Plan and delegation to a tribe). The new minor source Indian Lands permitting rules in 40 Code of Federal Regulations (CFR) Part 49, promulgated July 1, 2011, give EPA additional hooks into upstream and midstream facilities. These rules required existing minor sources to be registered by March 1, 2013. Additionally, minor source permit applications for existing synthetic minor sources were due by September 4, 2012 as a result of this new rule terminating EPA’s 1999 Potential to Emit (PTE) Transition Policy. Finally, any new synthetic minor sources constructed after August 30, 2011 must apply for and receive a permit prior to beginning construction. New true minor sources constructed after August 30, 2011 must be registered within 90 days of beginning operations.

After September 2, 2014, new minor sources must be permitted prior to beginning construction. Due to these new minor source permitting requirements on Indian Lands, enforcement activities will likely increase in 2013 and as a part of the 2014-2016 fiscal year NEI.

The Cost

One of the first questions asked after areas of concern are identified is, “how much will it cost to resolve”? Of course, this varies widely based on multiple factors such as the operator’s willingness to cooperate with EPA by providing additional information, whether information was discovered by EPA or voluntarily disclosed by the operator, the severity of the infraction (e.g., recordkeeping errors versus actual excess emissions), and many others.

According to EPA’s annual trends analysis for FY 2012,6 EPA assessed $208M in administrative and civil penalties, and $44M in criminal fines and restitution. As demonstrated in Figure 3 below, FY 2012 fines represented the largest amount of fines levied in recent history.

Oil and Gas NEI_Figure 3 Oil and Gas NEI_Figure 4

Of the total $252M in fines, nearly half of those fines were related to violations of the Clean Air Act, even surpassing Clean Water Act violations.

While CAA violations accounted for nearly 50% of all fines issued during FY 2012, only approximately 20% of all enforcement inspections were related to CAA issues, indicating that CAA violations have costly consequences when discovered.

Enforcement Reach

As EPA discovers concerns with a company’s operations as a result of a single or multiple facility inspection, broad authority under the Clean Air Act in Section 114 allows EPA to reach deep into a company’s records for information that could uncover additional concerns. This broad authority has historically been used under other NEIs. EPA can request financial, capital expenditure, and maintenance expense records to help determine if projects should have been permitted or should have been considered subject to NSPS.

It is clear that upstream and midstream oil and gas companies should be concerned about EPA extending the current NEI to the upcoming 2014-2016 fiscal year cycle. EPA data indicate that inspections and resulting enforcement actions are trending upwards. Fines and penalties are expected to continue to grow in number and amount. And, potentially applicable regulations have continued to expand, creating even more targets for EPA. Oil and gas operators are also likely targets of NEI enforcement actions that can impact wide-spread operations. So, what can a company do?

Taking a Position

One option for an upstream or midstream oil and gas company is to “wait-and-see” if an inspector shows up. If a company takes this passive approach, it should, at a minimum, consider training its field personnel about the inspection process, including what to expect and how to react to the inspector (see article in Winter 2013 EQ on Preparing for an Inspection). The inspector has the right to inspect the facility as long as it is safe to do so. How a company’s representative manages the inspection is critical to being able to minimize what happens as a result of the inspection.

After an inspection occurs, there will generally be some time until the next action by EPA, which may be a request for additional information as discussed earlier. Generally, these requests have a relatively short due date. So, as soon as the inspection occurs, internal company legal counsel should be engaged in anticipating of potential enforcement action. Under the direction of legal counsel and as an attorney-client work product, the company should assess potential exposure. The initial focus should be the facility or facilities of interest. Additionally, enterprise-wide exposure should be evaluated.

Alternatively, a company may elect to take a more proactive approach. For enforcement cases, both under historical NEIs and more traditional enforcement activity, voluntary disclosure is often a less onerous path as long as both the company and the appropriate agency come to the table with the intent of resolution. Negotiations seem to take less time, and generally, fines and penalties are less. Some states, like Texas, offer an audit privilege that could result in no civil fine or penalty at all. For example, the Texas Environmental, Health, and Safety Audit Privilege Act offers a company the opportunity to notify the Texas Commission on Environmental Quality of an audit, identify the specific facilities to be involved, and identify the nature of the audit. As long as certain provisions of the law are met, concerns can be voluntarily disclosed and resolved without civil fines or penalties. Prior to embarking on a voluntary audit and disclosure, legal counsel should be consulted.

Regardless of whether a company decides to wait for a possible EPA inspection under the NEI or get ahead by auditing and disclosing potential concerns, upstream and midstream companies should understand that the risk of an inspection is much higher today than it was in the past. Therefore, it is advisable that companies communicate to field personnel about this risk and communicate the need to take care of potential concerns that are easily identifiable by the public or from roads or highways by an inspector. These include conditions such as the following:

  • A smoking flare
  • A large spill that has not been remediated
  • Stained oil tanks that could be considered evidence of a spill
  • Open thief hatches that are easily noticed by inspectors

During the May 2012 training by EPA for energy extraction and the NEI, one particular session focused on items of concern such as these that are easy to spot.9

In conclusion, energy extraction is on EPA’s radar screen as a part of its NEI programs, likely through at least the 2016 fiscal year. EPA inspections and enforcement activities associated with the energy extraction sector and flares may increase over the next few years as suggested by the growth in numbers from fiscal year 2011 to fiscal year 2012 and since inspector training was held recently in mid-2012. Companies should either prepare for a possible inspection and enforcement action, or get ahead of EPA through voluntary audits and disclosure of potential concerns. The potential impact for oil and natural gas operators can be significant in that enforcement could affect multiple basins or facility; it should not be underestimated.