Legacy Issues Associated with Oil and Gas Development
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Presentation for 2013 MPA Annual Meeting in Billings, MT August 27, 2013. George Mathes, P.E., Vice President - Trihydro Corporation
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Legacy Issues Associated with Oil and Gas Development
- 1. Legacy Issues Associated with Oil and Gas Development George Mathes, P.E. Vice President – Trihydro Corporation August 27, 2013
- 2. Presentation Outline Types of Legacy Issues Associated with Oil & Gas Development Best Practices to Address Legacy Environmental Issues Emerging Issues Affecting Legacy Liability Case Studies – The Good, The Bad, and The Ugly Questions and Discussion
- 3. WHAT IS LEGACY LIABILITY?
- 4. WHY DO WE CARE?
- 5. Typical Sources of Legacy Impacts Historic drilling pits Historic releases and spills Improper materials management Waste disposal (NOD) Leaking tank batteries Junkyards / boneyard / landfills Abandoned pipelines Legacy compressor stations and gas plants Damaged well casing Non-compliant operations Air permits and reporting NPDES discharges Out of date SPCC plans OSHA
- 6. Typical Legacy Issues and Costs Soil and groundwater impacts NORM Landfills/Boneyards Compliance Safety/OSHA
- 7. Best Management Practices (BMPs) to Reduce Risk Know what you are buying, selling, shipping, or developing Negotiation of liability with buyer, seller, NOD, etc. Use of environmental pollution liability insurance
- 8. BMPs for Legacy Issues– Due Diligence DEFINE OBJECTIVES DATA ROOM SEARCH REGULATORY & RECORDS REVIEW SITE ASSESSMENTS AND INTERVIEWS INTRUSIVE ASSESSMENTS AND SAMPLING QUANTIFICATION OF LIABILITIES CONCLUSION AND PATH FORWARD
- 9. BMPs for Legacy Issues – Liability Transfer Liability Transfer and Management Mechanisms Baseline Water Quality Monitoring Reductions in Purchase Price Escrow of Environmental Liability Insurance – PPL, 3rd Party, Pre-Existing, NOD Institutional Controls & Legal Agreements Exclusions
- 10. Advantages of Knowing Legacy Risk Conditions Reduces risk by managing financial and business exposures Eliminates or reduces unknown legacy conditions Allows risk to be managed proactively Negotiated with seller as environment defect Environmental liability insurance bridges gap between buyer-seller Exclusions manage “high-risk” elements Manage liability reserves (Sarbanes-Oxley / Financial Accounting Standards)
- 11. Emerging Issues Affecting Legacy Liability
- 12. Key Emerging Issues Affecting Environmental Liability & Risk Regulatory Changes / Uncertainty Increasing Acquisition / Divestiture Development of Legacy Sites
- 13. USEPA Enforcement Initiatives 2014-2016 Reducing Air Pollution from the Largest Sources Cutting Hazardous Air Pollutants Keeping Raw Sewage and Contaminated Storm Water out of Our Nations Waters Preventing Animal Waste from Contaminating Surface and Ground Water Reducing Pollution from Mineral Processing Operations Assuring Energy Extraction Activities Comply with Environmental Laws
- 14. Department of Energy (DOE) Continuation of “all of the above” Supportive of Nuclear, including small reactors Shale gas the preferred “bridge” Anticipated fight over LNG exports
- 15. Department of Interior (DOI) Hydraulic Fracturing Rule • August 23, 2013 • Main provisions include disclosure of chemicals, well integrity, and management of drilling/flowback fluids • Includes provision to defer to states if regulations are more/equally restrictive Regional Framework for Water Resources Monitoring • 7 Step Process • Very, very extensive • Being adopted/incorporated by more offices
- 16. Acquisitions and Divestiture Trends 2011 Projections were high for 2011 698 transactions $300.6B 2012 Projections for steady growth 576 transactions $321.5B 2013 Projected to moderate to 2011 levels Sources: Deloitte Oil and Gas Mergers and Acquisitions Report, 2011 & 2012 and RR Donnelley, 2013 M&A Outlook.
- 17. Development of Historic Fields EOR Dismissed Zones Source Rock
- 18. CASE STUDIES – The Good, The Bad, and the Ugly
- 19. Case Study – The Good Acquisition details Specific scope of work Project completion/solutions
- 20. Case Study – The Bad Non-Owned Wastewater Treatment / Disposal Facility CERCLA Action
- 21. Case Study – The Ugly Legacy Field – Impacts to domestic wells noted in 2008 USEPA commenced investigation in 2009 USEPA deferred to WY for evaluation and assessment in June 2013
- 22. Contact Information: George Mathes, P.E. Vice President – Trihydro Corporation gmathes@trihydro.com 307/745-7474
Notas do Editor
- Determine Accurate Cashflows (acquisitions)Identify/Quantify LiabilitiesFinancialEnvironmentalPotential Third Party ClaimsAssess risk associated with disposal facilitiesTo make educated and responsible business decisions!
- Historical or pre-existing environmental conditions that increase risk Common Legacy Environmental Risks includePits—soil and GW impacts (HC and brine), remediation, BI/PD, damage to reputation, regulatory interaction, legal feesActive Tank batteries and separation– similar to pits but more visible—soil/GW, remediationInactive (Junk) batteries—soil and GW remediation, removal scrap of equipment, regrading and reclamation of locationJunkyards/Boneyards- NORM, soil and GW impacts, disposal of materials—scrap, disposal if NORM impacted, remediation of soil/GWImproperly abandoned gathering lines—may not have been purged, corrode and leak over time, out of sight, regulatory pain, remediation, PD, Damaged or corroded well casing, provides a direct conduit to aquifers and thereby receptors, hard to see until a claim/suite is brought, BI/PD, third party litigationNoncomplianceAir– Jay need for replacement/retrofitting of equipment, fines, possible shut in wells-loss of productionNPDES – fines, shut in-loss of production, remediation of surface water, sediments, BI/PD, third party, SPCC – big issue for EPA inspectors in past few years, fines, damage to reputation, potential for catastrophic release-soil, GW, surface water impactsOSHA- stairs, machine guarding, confined space signspossible lawsuits, workers comp, BI, third party,
- Soil and Groundwater most common sources Tanks and separation/ well head/pitsHighly conservative and variable cost rangesSoil impacts common sources pits, tank batteries, boneyards, landfillsrange from $7.5K to $45K for PCS $5K to $40K for salt/brine releasesGroundwater impacts—highly variable –depth to GW material released, age and duration of releaseShallow remediation $80-180KDeeper GW remediation $200 to 550K Does not include damage to reputation (big for publically traded firms), dimished property value, BI/PD, or third party /damages just to restore GW and deal with regulatory agencies NORM –Not present in all fields, reservoir dependent, found in boneyards, identification/screening and disposal, cost to remediate soil, cost for disposal $5K to 50K depends on volumeLandfills and BoneyardsHighly variable, depends on size and materials, and types of issuesRanges from $10K simple/small, minor soil impacts, to $50K for larger locations to this add the soil or GW remediation costsAbandoned tank batteries--$30 to 55K includes removal of the tanks and separator, no soil or GW remediation, and reclamation of locationCompliance – identification of one issue commonly triggers other inspections.Air Issues- highly variable and always evolving, cost include tangible equipment to retrofit for compliance, combustors, and other control devices, fines and fees--fines range from $10K to $Millions, highly variableNPDES – if applicable, not as many discharge permits issues today, routine sampling and reporting $5K to 15K/year to sample and report, if out of compliance– cost to retrofit or replace equipment to meet discharge requirements $15K to over $100K depending on equipment type and limitsSPCC plans– relatively low cost but very visible and of interest to EPA inspectors- cost to update a single location plan $3-$7K, field wide plans $20 to 75K depending on the size of the field, does not include cost to repair berms $5 to 10K/berm; cost to replace tanks $5 to 27K depending on size, type, foundation, etc.., separator replacement $14 to 27K to replaceSafetyOSHA Well head deficiencies—no covers on belts, pump jack not fenced, access attractive nuisance for children/livestock , does not include BI, third party damages or litigation costs, $3 to 12KTank Battery deficiencies stairways, access ports, not fenced, if in accessible areas $5 to 9 K H2S cost to install monitoring, warning equipment, monitor, and reporting $15 to 25K cost depends on the cost of the meters, number of meters, frequency of monitoring, and alarm frequency
- Due diligenceRegulatory records reviewOperator records reviewLocation inspectionsIdentifications of env issuesQuantification of env deficienciesNegotiate from a knowledgeable position- detailed, supported and quantified due diligenceUse of Insurance for large cap issues, greater than $1MM—GW, BI/PD, third party, legalBy reducing risk and liability allows for money to go directly to the EOR process and oil production
- No one wants a bad surprise or environmental headache that is expensive or affords bad press. Legacy conditions can be a significant capital outlay of > $1 MKnowing the Legacy Risks upfront can potentially eliminate operational interruptionsGreat negotiation toolBridge the gap allows a Win-Win to be achieved
- Interesting period of the economy: (INSERT GRAPHIC FOR EACH BULLET POINT – from BD)Recovering from the worst economic downfall since the great depressionEnvironmental regulations are rapidly evolving, vary dramatically from state to state, and can be quite confusingTechnology/science are changing – things that previously fell in to the “don’t worry about” category are now becoming risk and cost drivers (vapor intrusion, 1,4-dioxane)CERCLA laws (and lawyers) are around every corner – you think you doing everything right, ship waste to an approved facility, and it comes back to haunt youFinancing is becoming more difficult to obtain and banks, lending agencies are scrutinizing all aspectsFinancial account standards & sarbanesoxley have raised the bar with regard to estimates for liability – particularly for publicly traded companiesBusiness is highly competitive, and some businesses are looking to divest or sell in an increasingly consolidating marketSome companies have been hoarding cash – are looking to buy properties, assets, all or portions of companies3rd party liability can be a substantial concern; claims resulting in millions of dollars; - huge affects on reputation in a new world with a 24-hour news cycle
- Confirmed on July 18th – air major focus; long time adminstratorMcCarthy, 59, is a 25-year veteran of state and local government in New England, where she worked for Republicans including former Massachusetts Governor Mitt Romney. “She’s worked for four Republican governors and the last Republican candidate for president,” Republican Senator Lamar Alexander of Tennessee told reporters before the vote. “We’re not likely to get a Democratic head of the Environmental Protection Agency who’s got a record any better than that.” With a strong Boston accent, short shock of white hair and disarming sense of humor, McCarthy won the praise of environmentalists, who largely support the administration’s efforts, and industry groups, which have fought them. “What many in industry appreciate about her style is her directness and openness to engagement,” Scott Segal, a lawyer representing power producers and oil refiners at Bracewell & Giuliani LLP, said when she was nominated in March. While utilities or coal producers may object to the regulation, “McCarthy listens and allows for the possibility of midcourse corrections,” he said.
- Ernest Moniz; confirmed May 16thPrior to his appointment, Dr. Moniz was the Cecil and Ida Green Professor of Physics and Engineering Systems at the Massachusetts Institute of Technology (MIT), where he was a faculty member since 1973. At MIT, he headed the Department of Physics and the Bates Linear Accelerator Center. Most recently, Dr. Moniz served as the founding Director of the MIT Energy Initiative and of the MIT Laboratory for Energy and the Environment and was a leader of multidisciplinary technology and policy studies on the future of nuclear power, coal, nuclear fuel cycles, natural gas, and solar energy in a low-carbon world.
- Sally Jewell – Sworn in on April 12, 2013
- As EOR grows as a very viable operational model, we see an increase in acquisitions2011 projected increase in M&A, higher than 20102012 projected steady, not huge growth, Less deals than 2011 but bigger deals $2013 projected to moderate, after a big surge in 4thQtr 2012These are just projections, deals are driven by market forces
- Illinois Basin Asset Acquisition --Details of the Acquisition$100MM+89,000 acres of oil production in 3 states265 noncontiguous leases--Due Diligence Scope of WorkData room/File ReviewRegulatory Compliance review (3 states, Commissions and env regulatory agencies)Physical visits to each leaseEnvironmental defect Cost Estimates/Engineering supportPreparation of a Summary reportEnvironmental Insurance support--Project Completion/SolutionsIdentified and quantified cost for mitigation of risk (between $9 and 11MM)Presented to seller, above walk away, both sides wanted to move this forwardInvited 7 env insurance firms for a presentation of env DD findings and tour of representative assetsCompetitively bid insurance providers on pollution liability insurance coverage, Negotiated with seller to pay env insurance premiums, including existing conditions (!!)Bottom line value –focused Env DD saved operator ($9-11MM), -- allows buyer both financial and insurance liability protection, and allowed the buyer to focus on oil production