E.Vironment is proud to provide The E.Vironment Benchmark,
a periodical focused on leading-edge thinking in the advancement
of Environmental, Health and Safety Management practices.
Do you know what your current compliance status is? It’s a condition specified in the EHS policy and company charters of every upstream energy company. But in today’s regulatory and political environment, compliance requires more than words on a page. Environmental regulators and the public are casting an ominous shadow over our respective industries. Given this expanding threat of increased public scrutiny and regulatory enforcement, all companies should confirm they have the necessary processes and procedures in place to be in compliance.
E.Vironment believes that today’s shifting regulatory environment makes it critical for upstream oil & gas companies to understand the importance of compliance – and the consequences that could stem from non-compliance. As a result, we are launching a series of Benchmarks on current topics related to federal and state regulatory compliance issues. This E.Vironment Benchmark edition focuses on the upstream oil & gas sector.
Over the past few years, E.Vironment has observed a rising tide of state and federal regulatory and enforcement actions. With the new administration and resulting philosophy shifts, state and federal regulatory agencies are feeling the pressure to step up their efforts at identifying, investigating and penalizing violators.
Of particular note was the February 2010 announcement from the US Environmental Protection Agency (EPA) that the oil and gas industry had been identified as a National Enforcement Initiative. The EPA stated that they believe oil and gas extraction and coal mining pose a risk of pollution to air, surface waters and ground waters if not properly controlled. For more on National Enforcement Initiatives, see sidebar on this page.
At the same time, the EPA is unleashing an unprecedented number of new regulatory initiatives. In the first 18 months of the new administration, there were 42 significant regulatory initiatives that would cost more than $100 million each. New regulatory initiatives – such as the Greenhouse Gas (GHG) Mandatory Reporting Rule (MRR), the lowered National Ambient Air Quality Standards (NAAQS) and the heater and boiler Maximum Achievable Control Technology (MACT) – could have major economic impacts.
Combined with such recent incidents as the Deepwater Horizon spill and subsequent media frenzy, these actions signal a transformed regulatory environment. In fact, they are uniting to form a perfect storm of regulatory risk for the upstream oil & gas sector. The dangers of non-compliance are weightier and the penalties are much more severe than they were just a few years ago.
“I have never seen a more uncertain time,” says Geoffrey Swett, Senior Consultant of E.Vironment’s Regulatory Compliance practice. “Recent industry incidents have forced us to re-examine and, in some instances, to throw out old paradigms when it comes to regulatory compliance.”
“Our industry is under siege,” agrees John Statzer, E.Vironment partner and Compliance Management Systems expert. “We are entering a ‘no tolerance’ era, with regulatory pressure leading to criminal enforcement in certain states. And it’s not just a few states that are changing their enforcement programs; it’s happening everywhere.”
What are the true costs of non-compliance? They’re escalating every day. Illegal storage and disposal of hazardous wastes and groundwater contamination cases have netted prison sentences as well as hefty fines for offenders in several states.
Early this year, an operator in Pennsylvania suffered an accident that prompted the state to shut down every oil and gas operation the company owned in that state for several months.
“When you shut down five rigs for even five days, the loss can top $500,000. But when you shut down those rigs for months at a time, the losses can be staggering,” explains Statzer.
In addition to the regulatory penalties associated with non-compliance, the unreported costs can be staggering, as noted in Figure A. “If you look at the lost opportunity cost – legal costs, fines and the required corrective action program as opposed to drilling new wells – these can amount to several million dollars. We call these costs ‘the indirect costs of compliance,’ which are typically two to five times the expense of the fine,” says Swett. “That makes people stand up and take notice.”
The damage to a company’s public perception and reputation can be even more punitive and long-lasting. Organizations such as the Oil and Gas Accountability Project and the NRDC Drilling Down Report have become more organized and vocal in their criticisms. Citizen activists are now engaged in nearly every region of the country. Far from being dismissed as “radicals,” these activists have developed a substantial power base in many communities.
Given the growing risks associated with upstream oil & gas regulatory enforcement, all companies should be taking steps today to protect themselves from potential enforcement actions. The bottom line is simple: compliance enforcement requires a strategic direction and approach, not a knee-jerk reaction to an imminent audit. Taking a strategic view toward managing the requirements for compliance will help ensure that enforcement – and the resulting penalties – won’t affect you.
Benefits of Compliance
Increasingly, oil & gas companies across the country are facing the hard facts – regulatory enforcement must be addressed or the resulting penalties will be severe.
No industry is safe and ignorance of the regulations is no excuse. Each industry and every company must be prepared to address changing regulations. Staying ahead of compliance issues is the only way to prevent punitive enforcement rulings – and their resulting costs.
“Protecting your company’s assets, reputation and public perception from regulatory enforcement costs is not an EHS issue,” states Statzer, “It’s a business issue. Environmental laws and regulations create the License to Operate for every company.