The Evironment Benchmark

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Upstream Oil & Gas Regulatory Enforcement — Are You Prepared?

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.

 

A Perfect Storm

National Enforcement Initiatives The energy extraction industry (oil and gas exploration and production and coal mining) has been selected as a National Enforcement Initiative. What does that mean? While we are awaiting the exact form and substance of this Initiative, the EPA has a long record of targeting industries it deems “enforcement priorities” or “enforcement initiatives.” Numerous industries have been affected by these enforcement initiatives including petroleum refining, vinyl chloride producers, electric utilities, cement, sulfuric acid production and glass manufacturing.  These prior enforcement initiatives have had profound effects on the targeted industries through major changes in operations, ability to be permitted, and environmental compliance costs.  As an example, the petroleum refining initiative resulted in the following: Twenty seven enforcement settlements or consent decrees with US companies that refine approximately 90 percent of the nation’s petroleum refining capacity. Negotiations are on-going with refiners that represent an additional 7 percent of domestic refining capacity.  The enforcement settlements resulted in  these costs for refiners: Investing more than $5 billion in control technologies;  Paying civil penalties of more than $75 million; and Performing supplemental environmental projects costing more than $67 million. The National Enforcement Initiative strategies that EPA uses date back to the early 1990s and have been successfully honed over the years. Key components of the strategy include: Selection of industry sector or source type — e.g., petroleum refining, coal-fired power generation, etc. – to concentrate resources on due to perceived complex pollution problems; Formation of a national enforcement team with industry- and regulatory-specific knowledge; Identification of suspected non-compliance areas. The EPA usually selects four or five key issues, also known as “marquee issues;” A targeting strategy designed to achieve maximum compliance impact at lowest governmental cost; Implementation of the strategy through inspections, document requests and enforcement actions, including litigation; and Development of a “settlement pattern”  or template for companies found in  non-compliance.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.”

Key Lessons Learned Finally, here are a few key lessons learned from other industries selected as National Enforcement Initiatives: Get all your operations in compliance. The EPA will target your weakest operations and leverage a few non-compliance events to mandate company-wide retrofits. Document your compliance. Those operations with good compliance documentation were often audited by the EPA as part of the initiative. However, the EPA quickly left these facilities when they realized that “there was no low-hanging fruit here.”  Focus on the big compliance issues. While there are literally tens of thousands of regulations, the EPA generally focuses on  bigger issues.  “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.”

 

 

 

 

 

 

 

 

 

 

 

Economic Costs

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.Typical Cost of Upstream Enforcement Pie Chart

 

Your compliance Strategy

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.

A thorough compliance strategy includes the following components:  Overall plan and strategy. Implementation of an EHS compliance management system helps align organizations to execute work according to the established compliance strategy. This system can play a critical role in optimizing your compliance procedures. When you build compliance into your processes, every member of your team stays up-to-speed on regulatory issues.  Regulatory registry. Because regulatory interpretations change from year-to-year and from state-to-state, it’s important to understand where your facility or business segment stands with the current interpretation of the regulations. Figure B is an abridged version of a portion of a typical regulatory registry for the upcoming GHG mandatory reporting rule. “A regulatory registry helps a company confirm they know what regulations apply to their operations,” explains Swett. “The challenge here is that there are literally hundreds of rules and regulations.”  Once a regulatory registry is established, one can develop a compliance calendar of individual tasks that can be assigned to different employees. A compliance calendar can help in organizing requirements and holding your team accountable for compliance activities. The compliance calendar can help you ensure you’re doing the right things at the right time. Compliance self-assessments, audits and inspections. If you are not verifying your compliance status on a regular basis, then you can be sure regulators will identify this for you. If you don’t have an audit program in place, be deliberate in how you proceed. Think through the ramifications of any potential audit findings. Formulate a legal and technical strategy to deal with the findings before you perform any compliance audits. Rigorous records management. If you can’t prove you’ve taken steps to address compliance issues, regulatory agencies will assume that you did not address them. Effective records management validates your compliance efforts – literally forestalling further investigation.  In one instance, E.Vironment staff alerted a global oil company to prepare for the multimedia enforcement team that was visiting many of their peers. The company organized a thorough records management program. When the EPA arrived for a two-week audit, the company immediately made their public files available – with a file index – and invited the team to make copies of everything they needed. By Thursday of that week, six days before they were scheduled to leave, the company was told that the audit was complete and the plant compliant. When a similar team arrived at another of this company’s plants that lacked an efficient and comprehensive records management system, the EPA identified numerous violations resulting in millions of dollars in fines. Training programs. Equipped with thorough training that addresses all compliance issues – as well as any gaps identified during audits – your staff can be prepared to recognize changes in operating conditions that may have a regulatory effect.  Corrective action close-out. It’s tempting to assume that corrective actions arising from assessments and inspections are brought to a verified closure. Don’t assume! Verify closure with confirmation by an individual independent of the business unit. This helps confirm that these issues won’t occur in the future and that the solution effectively solved the root problem.

Abridged Sample Regulatory Registry Table

 

Benefits of Compliance

No industry is safe and ignorance of the regulations is no excuse. 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.

“Protecting your company’s assets, reputation and public perception from regulatory enforcement costs is not an EHS issue. It’s a business issue.” — John H. Statzer Partner, E.Vironment, LP

“If you think strategically,  you can make an enormous difference in your company’s compliance status” — Geoffrey Swett Senior Consultant, E.Vironment, LP - E.Vironment’s role The E.Vironment team has addressed regulatory compliance issues on behalf of many clients. We help EHS professionals work with senior management to build compliance into every level of the company and every aspect of the business.  “If you think strategically, you can make an enormous difference in your company’s compliance status,” claims Swett. “Most companies achieve significant compliance improvement by employing the 80/20 rule – spending 20 percent to make 80 percent of the impact.”  We understand your business requirements and can ensure those requirements are addressed as we help you develop, implement and maintain a comprehensive and cost-effective compliance strategy.  For more information on regulatory enforcement and compliance issues, please contact Geoffrey Swett (ghswett@evironmentgroup.com) or John Statzer (jstatzer@evironmentgroup.com).

We understand your  business requirements and  can ensure those requirements are addressed as we help you develop, implement and maintain a comprehensive and cost-effective compliance strategy.



About the authors

Geoffery Swett

Mike BaldwinGeoffrey Swett brings a wealth of consulting and operating experience to his role as Senior Consultant of E.Vironment, having most recently served as an Assistant Vice President at ARCADIS and as a Vice President at Enviance and at RETEC. His background encompasses multi-media compliance for a wide variety of industries, including exploration and production, chemicals, refining, pharmaceutical, mid-stream processing and transportation, electrical power production, heavy manufacturing, steel and geothermal. Further, he provides E.Vironment with additional global experience, having managed global audit programs for Fortune 50 companies and supported numerous global transactions. Geoff is charged with expanding E.Vironment’s regulatory compliance practice, as well as supporting the firm’s transaction, auditing and management system teams.

 

John H. Statzer

Paul PizziJohn H. Statzer is a Partner with E.Vironment, LLC, and has more than 25 years of diversified experience in industrial operations and management. He routinely works with Boards of Directors, Executive Management Teams, Business Unit Leaders and Operating Site Managers on EHS performance improvement assignments. John earned a DrPH (Occupational Health) degree from the University of Texas, an MBA from the Keller Graduate School of Management, an MSPH Public Health (Occupational Health) from Tulane University and a BS Public Affairs (Environmental Health Management) from Indiana University. He is a Certified Safety Professional and a member of the American Society of Safety Engineers and the American Industrial Hygiene Association.