Locke Lord QuickStudy: EPA’s E&P New Owner Audit Program: Kind Of Interesting – Perhaps; Kind Of Practical – Perhaps Not

On March 29, 2019, EPA issued its Oil and Gas Exploration and Production Facilities New ‎Owner Audit Program (“Audit Program”). The Audit Program is voluntary and intended to ‎encourage new upstream facility owners to audit, disclose, and correct violations promptly after ‎an acquisition. In return, EPA grants penalty immunity for federal violations. Upstream facilities ‎intended to be covered by the program include wellsites, related tank systems, and vapor control ‎systems. EPA suggests that the Audit Program “has been tailored to address concerns regarding ‎excess emissions from tanks and vapor control systems related to operation, maintenance, and/or ‎design.”¹‎ ‎  ‎

The program is significant in several ways. First, it provides full penalty mitigation to ‎participants who identify, disclose, and correct air emissions violations at newly acquired ‎upstream facilities. This is a big step for EPA. Second, and importantly, it is an audit program ‎focused specifically on air emissions compliance and targeted at a specific industry sector. This ‎speaks directly to current and future enforcement initiatives and priorities. Finally, the Audit ‎Program integrates a required vapor control systems evaluation, which has the potential to result ‎in potentially unforeseen capital improvement costs for engineering, repair, and replacement of ‎system components, including potentially tankage. ‎

Participation in the Audit Program

Participation in the Audit Program is voluntary and documented through the execution of a ‎standard form Audit Agreement with EPA. EPA provided the Agreement’s template and key ‎terms of the Agreement include: ‎

• Notice of Audit: The regulated entity must notify EPA of its intent to audit within 9 ‎months of the acquisition.‎
• Audit Period: The time period to conduct the Audit is negotiated. ‎
• Facilities Covered: Facilities subject to the Audit are listed in an appendix to the ‎Agreement. Additional facilities may be included through formal notice, subject to ‎EPA’s approval. ‎
• Vapor Control System² ‎Audit: As part of the standard form Agreement, EPA requires a ‎detailed evaluation of existing facility vapor control systems. First, within 60 days of the ‎Agreement’s effective date, the regulated entity must develop a Modeling Guideline to ‎determine Potential Minimum and Potential Peak Instantaneous Vapor Flow Rates for ‎designing and sizing a vapor control system. The Modeling Guideline is intended to ‎consider “pressurized hydrocarbon liquid and natural gas samples, equipment inventories, ‎separation equipment, operating conditions, and well production rates.”^{3‎ ‎} Second and in ‎addition to the Modeling Guideline, the vapor systems evaluation requires regulated ‎entities to:‎
  
  • Complete one or more Engineering Design Standards to determine if controls are ‎adequately sized and functioning properly; ‎
  • Develop an SOP for EPA’s review and approval to establish how the entity will ‎conduct Vapor Control Field Surveys under the Audit Agreement, including ‎operating procedures, FLIR camera investigations, and an evaluation of all vapor ‎control components like valves, thief hatches, and gaskets, as well as a system ‎upgrade evaluation;‎
  • Implement at each facility audited system modifications, repairs, and upgrades to ‎address leakage identified by the FLIR camera review and/or deviation from ‎performance standards called for by the SOP and Design Standard review; and ‎
  • Verify that the vapor control system is not causing detectable emissions leakage ‎and that the control systems are designed and sized to handle the potential ‎minimum and peak instantaneous flow rates determined through the Engineering ‎Design Standards.‎

• Audit Instruments Identified: The regulated entity must provide to EPA within 60 days ‎after the Agreement’s effective date its audit protocol for EPA’s review and approval. ‎The protocol must include an outline of the planned audit, its schedule, and checklists. ‎
• Disclosure and Timing of Corrective Action: Regulated entities are required to disclose ‎deficiencies and violations identified by the results of the Vapor Control System Audit as ‎well as other violations identified outside of the Vapor Control System Audit.‎
  • Vapor Control Systems Evaluation. Violations/deficiencies discovered through ‎the Vapor Control Systems Audit must be addressed within 180 days of ‎discovery, subject to a formal extension request made to EPA. ‎
  • Violations Apart from the Vapor Control Evaluation. These violations are to be ‎corrected within 60 days of discovery, subject to a formal extension request made ‎to EPA. ‎
  • Conditions/Violations Representing Endangerment. Conditions discovered that ‎may present an immediate and substantial endangerment to public health or ‎welfare must be corrected as soon as possible and reported as required by ‎applicable law.‎

• Reporting: Semi-annual reports must be filed with EPA disclosing all violations ‎discovered and the status of corrective actions at specific facilities. A Final Report must ‎also be filed, which includes detailed facility identification information, specific ‎violations identified and related corrective actions, as well as measures undertaken to ‎prevent future recurrence. Typical of EPA CAFOs, EPA also requires the Final Report ‎contain a breakdown of costs to achieve compliance, and an estimate of pollutant ‎reduction achieved through the corrective actions, by specific pollutant. ‎

Analysis

The Audit Program presents a very detailed and regimented approach to facility auditing. In ‎addition to auditing for express regulatory compliance, the Audit protocol requires a detailed ‎evaluation of existing Vapor Control Systems. As pointed out above, EPA’s broad definition of ‎Vapor Control System appears to include a tank system regardless of whether emissions are ‎controlled through a combustion device. Arguably, the mandated Vapor Control System ‎evaluation exceeds current regulatory requirements, and in some ways will likely result in the ‎imposition of standards akin to new source performance standards on existing sources. Because ‎the Vapor Control System evaluation includes a review of relief valves, thief hatches and an ‎infrared camera investigation, regulated entities should contemplate the potential for equipment ‎repair and replacement to address VOC leakage. This could include tank replacement for older ‎units. These costs may far exceed those anticipated and those related to permitting and/or ‎related to obtaining and installing combustors/flares. Moreover, regulated entities should ‎contemplate the potential for additional capital costs for control devices and the imposition of ‎additional regulatory requirements should the evaluation lead to certain equipment and/or tank ‎replacement leading to NSPS Quad O/Oa applicability. In all events, regulated entities should ‎contemplate an increased administrative function to address reporting and recordkeeping that ‎will likely be triggered by bringing facilities into compliance with varying rules packages.

Regulated entities will also likely face challenges in seeking to adhere to the Audit Program’s ‎timetables. For example, completion of the above-described Modeling Guidelines, which will ‎likely require the integration of certain site-specific information, will be difficult within the ‎proposed 60-day window. This will especially be the case where an acquisition involves many ‎facilities, perhaps hundreds, which is not uncommon in the E&P industry.

Further challenges may be encountered in seeking to develop and adhere to checklists and ‎timetables called for in the Audit Instruments, especially where an acquisition involves a large ‎number of facilities that are largely unknown and may be located in remote locations. Given the ‎unknowns, it may prove difficult to provide well-defined guideposts at the beginning of an ‎audit, where little may be known about a significant number of facilities.‎

The deadlines for corrective action are also very aggressive given practical considerations, ‎including market conditions. Regulated entities will likely find corrective action deadlines to be ‎restrictive. In a vacuum, 180 days to correct vapor control deficiencies, and 60 days for other ‎corrective actions may seem achievable, but the practical logistics of conducting site-specific ‎sampling, repair, replacement, engineering, and procurement of vapor control devices at a ‎significant number of facilities within 180 days will pose challenges to the regulated community. ‎As a practical matter, the regulated community may even find it difficult within that time period ‎to secure tankage or even for manufacturers to keep up with demand for control devices. ‎Securing correctly sized EPA certified Quad O/Oa combustors for more than a handful of ‎facilities at a given time can be difficult. Moreover, the time to evaluate and engineer appropriate ‎controls for multiple existing facilities may take far longer when needing to take into account gas ‎composition and flow rate, back pressure on tanks, H2S control and other factors. Typically, ‎there is not a cookie-cutter solution that allows for resolution of these issues at the many facilities ‎that may be acquired in a large acquisition. ‎

In conclusion, the Audit Program is a step forward for EPA. The media-specific and industry-‎specific focus are interesting and signal EPA priorities. Based on the manner in which the ‎program is structured, auditing and securing compliance may be more time-intensive than ‎anticipated. The Audit Program may have its greatest utility for those facilities that are acquired ‎on federal or Native American lands, and where more streamlined state programs are not ‎available. The Audit Program provides a basis to avoid penalties, including where permitting ‎likely will be required, but, as stated previously, the program’s structure may present timely ‎completion challenges when dealing with a large acquisition. ‎

In the context of facility acquisition on non-federal lands, state programs may allow greater ‎flexibility to achieve compliance. EPA, however, notes in its Audit Program documents that ‎while the regulated community has the option to work under state programs, EPA retains the ‎right to independently seek penalties.‎

Finally, given the potential for significant costs associated with achieving compliance, buyers of ‎E&P assets should recognize that even with penalty immunity, significant capital expenditures ‎may be encountered. Further, E&P asset buyers should carefully negotiate acquisition ‎documents to ensure the greatest likelihood of indemnity coverage for air emissions compliance ‎costs. It is not unusual for standard “environmental defect” language to not encompass air ‎emissions compliance as an “environmental defect.”‎

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1. See Oil and Natural Gas Exploration and Production Facilities New Owner Audit Agreement Implementation ‎Considerations at 2. ‎
2. Under the Agreement, EPA defines Vapor Control System broadly, and the definition is somewhat circular. The ‎definition provides that it includes the tank system, piping to control devices, emission control devices, fittings, ‎connectors, knockouts, as well as pressure relief valves and thief hatches. Based on this broad language, it appears ‎EPA anticipates virtually any tank system subject to the audit will be evaluated for emissions control and leakage. ‎
3. The goal is to model “process flow rates, while incorporating the volume, frequency, and duration of individual ‎dump events or transfers to the atmospheric storage tanks.” The Modeling Guideline is no doubt intended to assist ‎facility owners with evaluating systems at multiple facilities, but in all likelihood will require at least some site-‎specific information to be developed, particularly regarding equipment, to ensure the model accurately represents ‎conditions evaluated. ‎