As a part of its renewed emphasis on encouraging companies to audit and correct environmental violations, the U.S. Environmental Protection Agency (EPA) ihas prepared a draft version of a New Owner Clean Air Act Audit Program (Audit Program or draft Audit Program) tailored for the Oil and Gas Exploration and Production (E&P) sector. According to EPA, this program is focused on the E&P segment due to significant excess emissions and noncompliance that has been observed at these facilities. In addition, there are also frequent transfers of ownership through sales, mergers, divestitures, and acquisitions. With increased activity in the Permian Basin, changes in the properties of materials stored in storage vessels, and economic and market challenges that impact equipment maintenance and operation, purchasing companies may run the risk of acquiring facilities that have not always complied with their permit requirements, state regulations, or Clean Air Act (CAA) regulations-in particular, the requirements associated with storage tank control devices.

EPA is proposing the New Owner Audit Program in an effort to incentivize new owners to view acquisitions as an opportunity for a “fresh start” with these types of facilities. All new owners who initiate the Audit Program and satisfactorily meet all applicable requirements will receive clearly defined civil penalty mitigation measures that exceed EPA's Audit Policy (April 2000)1 and EPA's New Owners Policy (August 2008).2

Audit Policy Evolution

In April 2000, EPA published an Audit Policy offering several major incentives to voluntarily discover and fix violations of federal regulations, including 100% reduction of gravity-based penalties if all nine Audit Policy requirements are met, and 75% reduction of those penalties if all Audit Policy requirements are met except for detection of the violation through a systematic discovery process (e.g., an environmental audit). That Audit Policy also discourages criminal prosecution if proper disclosure is provided and steps to safeguard routine requests of audit reports trigger enforcement investigations. In August 2008, EPA announced an Interim Approach to applying the Audit Policy specifically to new owners of regulated facilities (New Owners Policy) by offering tailored incentives to encourage self-disclosure. The tailored incentives offered under the New Owners Policy include no penalties for the new owner prior to the date of the acquisition, waiver of economic benefit penalties that otherwise might apply to delayed expenditures, and eligibility of more violations for Audit Policy mitigation. However, the policy relies on the “prompt disclosure” of potential violations after each discovery; since E&P facilities are numerous and often scattered throughout a large geographical area, this concept of “prompt disclosure” may be difficult, if not impossible, to meet. Indeed, one of the biggest changes between EPA's 2000 and 2008 policies and the proposed policy for the E&P sector is that the proposed policy allows E&P operators to group together discovered violations and report them on a routine semi-annual schedule rather than upon discovery of each individual violation.

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New Owner Audit Program

An overview of the key features of the draft New Owner Audit Program is provided below. It should be noted that EPA has clarified that although it has elements similar to the Audit Policy (April 2000) and New Owners Policy (August 2008), this Audit Program will be treated separately and does not alter either of the previous policies. EPA expects, however, that implementation of the Audit Program through a standard template format will help reduce costs and increase efficiencies.

Why Participate?

By participating in the New Owner Audit Program, new facility owners may be able to avoid financial penalty associated with compliance issues that occurred prior to acquiring a facility, even if those compliance issues are not immediately discovered. Specifically, storage tank control non-compliance has been a a challenge in the past, and there have been significant enforcement actions from EPA that have resulted in civil penalties, consent decrees, and settlement agreements (e.g., USA and State of Colorado v Noble Energy Inc., USA v Slawson Exploration Company, and USA and State of Colorado v PDC Energy, Inc.). This is why a key component of the Audit Program is the requirement to assess storage tank battery vapor control system design. The Audit Program details ways for new owners to voluntarily come into compliance, thereby avoiding the type of consent decrees and settlements experienced by other upstream operators with similar noncompliance issues.

In short, conducting an audit will give new owners the opportunity to verify compliance and correct non-compliance with agreed-upon provisions of the CAA and appropriate regulations and state-level SIP requirements that are federally approved and enforceable, while protecting operators from significant financial penalties - as long as they adhere to the audit policy.

Criteria for Participation

A new facility owner is eligible for the Audit Program if the following criteria are met:

  • The purchaser was not responsible for environmental compliance at the covered facilities prior to the date of acquisition; and
  • Prior to transaction, neither the purchaser nor the seller had the largest ownership share of the other entity, and they did not have a common corporate parent; and
  • The purchaser fulfilled the notification requirements by informing EPA within six months from the date of acquisition3 that it plans to participate.

Only facilities acquired as part of the transaction can be covered within the scope of the audit (i.e., no other “existing” facilities can be included). However, if the purchaser acquires additional facilities after commencement of the Audit that it wishes to include in the Audit Program, it may request the additional sites to be added to the audit. EPA will use its discretion in granting or denying this request.

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Audit Requirements

The duration of the audit will be determined between the buyer and EPA based on the number of facilities involved and the precise scope of items being covered under the audit. Audit Program participants must enter into a New Owner Audit Program Agreement with EPA that spells out several guideline and reporting requirements and related timelines, as listed below.

  • Audit Program participants must provide EPA with audit protocols and checklists within 60 days from the start of the Audit Program; EPA has 45 days to provide feedback.
  • A written Modeling Guideline4 must be provided to EPA within 60 days of the start of the Audit Program. The Modeling Guideline should clearly spell out how the participating company intends to calculate peak and minimum vapor flow rates to the control devices or closed vent systems. EPA will determine completeness and convey any concerns within 45 days from the submission of the Modeling Guideline. The company must complete one or more Engineering Design Standards5 evaluations to assess whether the vapor control systems are appropriately sized for the tanks in question.
  • Within 60 days of the start of the Audit Program, participants must submit a written Standard Operating Procedure (SOP) to EPA, establishing the procedure to conduct vapor control system surveys. The SOP should include equipment verification, IR camera inspections, and procedures for evaluating all vapor control system components. EPA will determine completeness and raise any concerns within 45 days after submission of the SOP.
  • Purchasers must also conduct a Field Survey and Engineering Evaluation to ensure that each vapor control system at each tank system is appropriately designed and sized and is not emitting VOCs as detected by an IR camera when the tank system is in operation. Semi-annual reports are required during the audit period listing all sites evaluated, violations, and corrective actions.
  • The new owner must provide EPA with a final audit report within 60 days of completing the audit. The final report should include all information related to the facilities evaluated, and all corrected violations covered under the Audit Program in a tabular format.

All reports, notices, certifications, data presentations, and any document pursuant to the Audit program must be certified by a responsible official from the company. The only exception to this requirement is for documents submitted to EPA or the state for corrective actions pursuant to the Audit Program.

Timeframe for Resolving Violations

For violations unrelated to Engineering and/or Design Issues, the new facility owner must correct each violation within 60 days from date of discovery. If that deadline cannot be met, the company can request an extension from EPA but must provide suitable justification. This request should be made before the 60-day period expires.

For violations related to Engineering and/or Design Issues, the buyer should follow the requirements outlined in Appendix B of the Agreement and correct each violation in accordance with Appendix B prior to completion of the Audit Program. Specifically, the company should make all necessary modifications to vapor control systems that are determined to be inadequately sized/designed based either on the results of the Engineering Evaluation or on the presence of VOC emissions detected with an IR camera. The modifications must be confirmed by conducting a verifying IR camera inspection.

For conditions creating immediate and substantial endangerment to Public Health and Welfare, the buyer should address the condition as expeditiously as possible and promptly take action to protect public health and welfare. Both the state and EPA must be notified within 24 hours of discovery.

Final Determination

After the Audit Program is completed, EPA will issue a Final Determination which will describe the complete resolution of all civil claims and causes of action related to violations of the CAA, its regulations, and all state-level SIP requirements that are federally approved and enforceable. These violations (disclosed and corrected) must be described in the company's final report to EPA.

The Final Determination will also include disclosed and satisfactorily corrected violations that satisfy the terms of the Audit Program. For all such violations, EPA will not impose a civil penalty. EPA reserves the right to nullify the agreement if information presented in the final report is found to be inaccurate or misleading.

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Risks of Voluntary Disclosure

This policy and others relating to self-disclosure programs, affirm EPA's position that a clear plan to address the failings that led to initial non-compliance must be addressed. In short, it's not enough to find the problem and fix it temporarily-a company must be prepared to show ongoing compliance moving forward. By self-disclosing, operators will be identifying to EPA (as well as state and local agencies, whom EPA will copy on the Final Report and other submittals) individual facilities that have a history of noncompliance; those sites could potentially be re-visited by state or local agencies to re-evaluate the commitment to the reductions represented in the Final Report.

Industry Feedback on the Proposed Audit Policy

The American Petroleum Institute (API) and the Independent Petroleum Association of America (IPAA) provided comments to EPA on the proposed policy. Generally, both trade groups agreed that while the intent of a separate audit program for new E&P facility owners is good, the content and complexity of this program may create apprehension and raise barriers to implementation. Both groups agree that the vapor control system engineering and design analysis and corrective action guidelines specified in Appendix B of the Audit Program Agreement are more stringent than any regulation promulgated by the EPA under the CAA and would likely discourage participation in the program.

Another issue noted by API and IPAA is that under the Audit Policy (April 2000) and New Owners Policy (August 2008), owners are required to audit their facilities and disclose and correct any violations that are found, whereas the draft Audit Program includes additional elements, such as operational changes and potential equipment installations, that go beyond auditing, disclosure, and correction. This raises the concern that Appendix B in the draft Audit Program Agreement may create a new framework for determining compliance that exceeds the CAA and its associated regulations that apply to oil and gas E&P facilities. Industry groups have strongly recommended that EPA either omit Appendix B or modify it to rely exclusively on federal CAA regulations promulgated for E&P operations.

The two trade groups also expressed concern that this draft Audit Program could conflict with state audit programs and require duplication of efforts. Their comments recommend that EPA consider compliance with state audit programs as compliance with the proposed federal Audit Program and offer the same level of protections. State programs are designed to ensure that local air quality needs are met, and this would prevent new facility owners from having to deal with federal audit program requirements that may not even apply to them. Industry groups have commented that the language used in Appendix B is a mix of elements from state regulations (Most notably, Colorado which is dealing with an ozone non-attainment problem) and therefore has stringent requirements for leak detection and tank design/vapor capture.

Applying the same stringent regulations nationally scale fails to recognize that each state has unique requirements which mandate certain regulations.

The commenters argue that such a direction where EPA yields to state-level audit programs would build on EPA's recent spirit of co-operative federalism in working with state and local governments.

Conclusion

EPA's proposed New Owner Audit Program hits at the heart of a primary compliance issue for the E&P sector: non-compliance of storage tank control systems. A potential buyer conducting a pre-acquisition site visit may see issues such as unlit flares or combustors associated with storage tanks, but it is nearly impossible to know the underlying root cause of why those units are not lit or if the vapor control systems/tanks were designed appropriately without knowing the precise operating details and conditions of each site. This information is often not available to potential new owners until after the acquisition has been finalized, and once discovered, it takes time to evaluate and correct the issue. The proposed New Owner Audit Program gives new owners time to develop a methodical procedure to evaluate, calculate, and correct issues related to non-functioning control devices. While the protections from the program can be beneficial, the program is also very prescriptive. Operators will have to weigh carefully the level of transparency associated with the program, including the fact that many operational details that go into developing the required engineering studies could be made available publicly through Freedom of Information Act (FOIA) requests or other channels.

1 Incentives for Self- Policing: Discovery, Disclosure, Correction and Prevention of Violations- https://www.gpo.gov/fdsys/pkg/FR-2000-04-11/pdf/00-8954.pdf
2 Interim Approach to Applying the Audit Policy to New Owners https://www.gpo.gov/fdsys/pkg/FR-2008-08-01/pdf/E8-17715.pdf
3 or “of the date EPA finalizes the Audit Program, whichever is later, but in no event can the Date of Acquisition…be earlier than 12 months before EPA finalizes the new Audit Program.”
4 Modeling Guideline means the engineering model used to estimate the minimum and maximum vapor flow rates as specified in Appendix B, Paragraph 1, of the Audit Program Agreement. The guideline should consider pressurized hydrocarbon liquid and natural gas samples, equipment inventories, separation equipment operating conditions, and well production rates to model the process flow rates, while incorporating the volume, frequency, and duration of individual dump events or transfers to the atmospheric storage tanks.
5 Engineering Design Standard means engineering design methods, equations, and information used to evaluate the capacity and performance of each vapor control system and control device, consistent with the control device's operational parameters (e.g., manufacturer specifications) and the size and design of the vapor control system, including piping, pressure relief valves, and available tank headspace.