The evolution of new technologies has brought about types of development not previ-ously used in the oil and gas industry and has allowed development in areas never be-fore involved. This has resulted in a heightened awareness of environmental issues andhigher standards to which companies are held. Because so much is happening belowground, companies cannot rely on contractual indemnities or tradition insurance solu-tions. This session will look at the nuances of these emerging exposures and standardsand why the traditional approach of having time element coverage is no longer ade-quate. It will then discuss gradual pollution coverage, which is the only way to properlyprotect interests.
This file is set up for duplexed printing. Therefore, there are pages that are intentionally leftblank. If you print this file, we suggest that you set your printer to duplex.
2
Shawn TateManaging Director
Wortham Insurance and Risk Management
Shawn Tate has been a member of Wortham’s Houston practice since 2008. She primarily servesclients in oil and gas as well as related service industries. Her areas of expertise are workers com-pensation, domestic and international primary casualty, and environmental liability. Prior to join-ing Wortham, she spent 20 years in underwriting and management roles with two major insur-ance companies.
Ms. Tate received her B.B.A. in finance and economics from Stephen F. Austin State University.
Bruce BricarellManaging Director
Wortham Insurance and Risk Management
Mr. Bricarell has been a member of Wortham’s Houston practice since 1984, and he specializes inthe placement and management of the firm’s environmental risks. He has been actively involvedin the development of the pollution/environmental markets, as well as being involved with anumber of large risk placements involving the use of captives and other financial plans.
Along with the traditional chemical and energy placements, the environmental practice also hasinvolved real estate sales property redevelopment and acquisition. Working with consultants,regulators, and attorneys, Mr. Bricarell has been able to bring the various environmental marketsto provide solutions to Wortham clients. Another important development for this line of cover-age has been the placement and management of municipal entities and their environmentalcompliance concerns.
Prior to joining Wortham, Mr. Bricarell was an underwriter and supervisor with two major insur-ers.
He received his B.S. in economics from the University of Delaware.
Ken Cornell Executive Vice President, Chief Environmental Officer
Aspen Insurance
Ken Cornell joined Aspen in June 2011 and serves as executive vice president and head of the En-vironmental Division based in New York. Mr. Cornell has over 29 years of experience within theenvironmental insurance industry. His experience includes work in both the broking and under-writing sectors. He was with AIG Environmental from 1985 to 2006. He served in various execu-tive positions while there, including serving as chief underwriting officer of AIG Environmental
3
from 1999 to 2006. Prior to joining Aspen, Mr. Cornell spent time as an environmental insurancebroker and started a new environmental division at a major insurer.
Mr. Cornell has a bachelor’s degree in biology from Gettysburg College and a master’s degree inenvironmental management from Duke University.
3. Emissions standards for hazardous air pollutants (NESHAPS)
1
Air Quality Permitting:The Basics
Regulation at inception
• Type of activity
• Potential for emissions
• Available controls
2
19
Air Quality Permitting:The Basics
Hierarchy of air authorizations
• De minimis sources
• Insignificant sources (PBR)
• Standard permits
• New source review (NSR) permits
3
New Source Review
AGGREGATION
Allowed regulators to treat separate facilities or operations as one “source” for purposes of permitting emissions.
In EPA’s view, a single “source” could be anything, when aggregated, which (1) was reasonably consistent with the purposes of the regulations; (2) approximated the common sense notion of “plant”; and (3) fit within the ordinary meaning of “building,” “structure,” “facility,” or “installation.”
4
20
30 Years of Aggregation
Separate units or facilities could be aggregated where they:
1. belonged to the same industrial grouping;
2. were under control of the same person or company; and
3. were located on one or more contiguous or adjacent properties.
40 C.F.R. § 51.166(b)(6).
5
EPA Loses Its Way
For more than 30 years, EPA has utilized a case-by-case analysis, looking at whethernoncontiguous units could be “adjacent” byexamining:
• Proximity
• Exclusive interdependency
These concepts receive no expression in the CleanAir Act.
6
21
“The simple fact that a pipe connects two physicallyseparate oil and gas facilities or emission units doesnot, by itself, imply that these two facilities or unitsshould be considered to be a part of the sameemission source.”
In re Anadarko Petroleum Corp., Frederick Compressor Station, Pet. No.VIII–2010–4 (Resp. of Colo. Dep’t of Pub. Health and Env’t, Air PollutionControl Div. to Order Granting Pet. for Objection to Permit) at 5 (July 14,2010).
7
Just When Things Started To Seem Normal ...
In 2007, EPA issued guidance on aggregation of OGS, which emphasized the importance of proximity, noting several states used a presumption that units located outside a quarter-mile radius were not adjacent. See William L. Wehrum, “Source Determinations for Oil and Gas Industries” (Jan. 12, 2007) (“Wehrum Memo”).
In 2009, EPA backtracked and disavowed the Wehrum Memo. EPA’s position was that proximity alone could not be a “sufficient endpoint.” See “Withdrawal of Source Determinations for Oil and Gas Industries” at 1–2 (Sept. 22, 2009) (“McCarthy Memo”).
8
22
Summit Petroleum Corp. v. EPA
Summit Petroleum Corporation owns and operates a natural gas sweetening plant located in Rosebush, Michigan.
Plant receives natural gas from over 100 production wells located across a 43-square-mile area.
Wells ranging from 500 feet to 8 miles away from the plant.
The Rosebush plant emits slightly less than 100 tons per year of sulfur dioxides (SO2) and nitrous oxides (NOx).
Facility would not need a Title V operating permit unless the emissions from some or all of the wells were aggregated with the emissions from the plant. See 42 U.S.C. § 7602(j).
9
Summit Petroleum Corp. v. EPA
January 2005: Summit submits a request to EPA to determine whether the Rosebush plant was a major source that required a Title V permit.
During the next four (4) years, Summit continues to provide EPA with additional information about its operations.
In September 2009, EPA concludes the plant along with all its associated production wells constitute a single stationary source and therefore need a Title V operating permit as a major source.
10
23
Summit Petroleum Corp. v. EPA
Summit and EPA agreed the plant and production wells
1. were under common control and2. belonged in the same major industrial grouping.
Only issue was whether the plant and production wells were contiguous or adjacent.
EPA argued every case it considered required an analysis of the functional relationship between the connected facilities.
11
Summit Petroleum Corp. v. EPA
Summit’s position: “Adjacent” means adjacent.
The Sixth Circuit agreed.
The meaning of “adjacent” is unambiguous, and the use of theterm did not require any analysis of the functional relationshipbetween the two plants.
EPA was engaging in an “impermissible and illogical stretch”by asking about the purpose of an activity at a plant.
12
24
Just Because You Have Always Done It That Way ...
“An agency may not insulate itself fromcorrection merely because it has not beencorrected soon enough, for a longstanding erroris still an error.”
13
Summit Aftershocks
• Clarified what had become increasinglycomplicated and unpredictable
• Could chill efforts by regulators to overreachin their regulations
• Generated increased compliance scrutiny
14
25
Crude oil and natural gas production
40 C.F.R. Part 63 Subpart OOOO regulates VOCs andapplies to affected facilities.
It regulates hydraulically fractured natural gas wells,compressors, storage vessels, and fugitive equipmentcomponents.
Compliance dates feature a phased timeline for theimplementation of control measures.
II. New Source Performance Standards (NSPS)
15
Crude oil and natural gas production
Goal is to reduce VOC emissions from well completions.
Applies to new facilities constructed or modified afterAugust 23, 2011.
For fractured and refractured gas wells, requires operators touse reduced emissions completions, also known as “RECs”or “green completions.”
II. New Source Performance Standards (NSPS)
16
26
Crude oil and natural gas production
Owners and/or operators may use RECs or completioncombustion devices, such as flaring, until January 1, 2015.
As of January 1, 2015, owners and/or operators of gas wellsmust use RECs and a completion combustion device.
Documentation of compliance with a photograph of therecovery and completion combustion equipment that containsthe location of the wellhead and date of completionoperations.
II. New Source Performance Standards (NSPS)
17
Crude oil and natural gas production
Notable points from new rule:
Imposes general duty requiring owners/operators to“safely maximize resource recovery and minimizereleases to the atmosphere during flow back andsubsequent recovery.”
Elimination of the maintenance, startup, shutdown(MSS) exemptions. Compliance required from outset.
II. New Source Performance Standards (NSPS)
18
27
II. Additional NSPS Changes
OGS transmission and distribution
• Compressor standards
• Storage tanks
• Registration, notification, and record-keeping requirements
19
40 C.F.R. part 63
Subpart HH regulates hazardous air pollutants from oil and natural gas production facilities.
Subpart HHH regulates hazardous air pollutants from oil and natural gas storage and transmission facilities.
III. New Emissions Standards for Hazardous Air Pollutants (NESHAP)
20
28
Notable changes:
• Imposition of new emission limits for small glycol dehydration units
• Lowering of leak detection limits for valves to 500 ppm
• Elimination of malfunction, startup, and shutdown (MSS) exemption
III. New Emissions Standards for Hazardous Air Pollutants (NESHAP)
21
Affected Source Nature of Change Standard
Small glycol dehydrators
Established MACT standards for previously unregulated source
BTEX emission limit: New sources—4.66x10-6 g/scm-
ppmv
Existing sources—3.28x10-4 g/scm-ppmv
“Associated equipment”
Revised definition to exclude all storage vessels N/A
Valves: equipment leaks Revised definition of leak LDAR for valves must be
applied at 500 ppm
All affected sources
Eliminated exemption from compliance during periods of
startup, shutdown, and malfunction
Standards apply at all times
Summary of Changes to 40 CFR Part 63, Subpart HH
22
29
Record-keeping, reporting, and notifications
• Facilities using carbon adsorbers as control devices are required to keep records of their carbon replacement schedule and records for each carbon replacement.
• Record occurrence and duration of each malfunction of process equipment, air pollution control equipment, and monitoring equipment.
• Submit an initial notification within 1 year after existing glycol dehydration units become subject to the provisions of this subpart.
III. New Emissions Standards for Hazardous Air Pollutants (NESHAP)
23
Record-keeping, reporting, and notifications (cont’d)
Periodic reporting will include:
• Test results and information regarding any carbon replacement events during the reporting period
• Number, duration, and a brief description for each type of malfunction that occurred during the reporting period and that caused or may have caused any applicable emission limitation to be exceeded
• A description of actions taken during a malfunction of an affected source to minimize emissions, including actions taken to correct a malfunction
III. New Emissions Standards for Hazardous Air Pollutants (NESHAP)
24
30
What It All Means
EPA has moved toward addressing oil and gas sites, as opposed to specific operations.
Oil and gas owners and operators face greater scrutiny and more administrative requirements in production, transmission, and storage operations.
EPA’s 2011–2013 National Enforcement Initiatives include “Assuring Energy Extraction Sector Compliance with Environmental Laws.”
25
Fracking Litigation Update
What is a carrier to do?
26
31
Recent DecisionsRobinson Township v. PennsylvaniaPennsylvania Supreme Court invalidated a recent oil and gas Act, which purported to restrict local government regulation of hydraulic fracturing in their jurisdictions. The plurality of the court found that the Environmental Rights Amendment precluded such an act because the Act impermissibly commanded municipalities to ignore their obligations under the ERA and to take affirmative actions to undo existing local protections of the environment. The court likened hydraulic fracturing and its environmental impacts to “industrial exploitation of Pennsylvania’s coalfields.”
27
Recent DecisionsReece v. AES Corp.Plaintiffs alleged they sustained personal injuries and property damage from defendants’ improper handling, transporting, storage, or disposal of waste fluids from oil and gas drilling operations. The Federal District Court dismissed the liability claims against all but the owners/operators of a commercial disposal pit and dismissed trucking companies entirely. Although the court allowed trespass, nuisance, and unjust enrichment claims to proceed against the oil producer, the court ordered the plaintiffs to plead sufficient damages—damages personally sustained by plaintiffs caused by the conduct.
28
32
Recent DecisionsHagy v. Equitable Prod. Co.Plaintiffs asserted claims for property damage and personal injury as the result of defendants’ drilling operations. The court affirmed the granting of summary judgment as to trespass and negligence claims because the plaintiffs had effectively released the claims and plaintiffs had no evidence of negligence or trespass on the part of the defendant that had performed cementing services on wells.
29
Recent DecisionsHiser v. XTO Energy, Inc.Plaintiff alleged her home was damaged by vibrations resulting from nearby drilling activity. Jury verdict in plaintiff’s favor ($100,000 in compensatory and $200,000 in punitive) was upheld despite jury’s extra-record discussion of fracking, including sending a note to the court asking, “Were they drilling only or were they also fracking?”
30
33
Recent DecisionsHill v. Southwestern Energy Co.Group of plaintiffs sued lessees of mineral rights because the company injected waste fluids from hydraulic fracturing in wells owned by third parties that migrated to the plaintiffs’ properties. The court ruled the plaintiffs had standing but dismissed most of the claims, including RICO, DTPA, fraud, civil conspiracy, strict liability, conversion, breach of contract, and bad faith but allowed the claims of trespass and unjust enrichment to proceed.
31
Recent DecisionsWhiteman v. Chesapeake Appalachia, LLCCourt upheld the granting of summary judgment to defendant on plaintiff’s common law trespass claim. Plaintiff was surface owner of 101 acres of farmland. Defendant owned mineral rights and operated 3 natural gas wells and installed permanent waste disposal pits on 10 acres. Court held the intrusion onto the surface area did not impose a “substantial burden” on the surface estate where expert opined the pits had not impacted the property value. Court also held plaintiff did not prove the pits were not “reasonably necessary,” as the open pit system was common and ordinary method in West Virginia at the time.
32
34
Recent DecisionsMagers v. Chesapeake Appalachia, LLCPlaintiffs alleged methane pollution to well resulting from gas drilling and storage activities on adjacent property. Court granted defendant’s motion for failure to state a claim. The court held that the statute cited by plaintiffs as the basis for their action did not provide a private right of action to adjacent landowners. The court also held that plaintiffs had not adequately plead the duty and breach elements of a negligence claim. In December 2013, the court did allow plaintiffs to amend to recouch their negligence claims.
33
Challenges to Municipal ActionBeezley v. BroomfieldCourt enjoined the City of Broomfield from certifying the results of a recount for an election in which city voters approved a measure to amend the city’s home rule charger to impose a 5-year moratorium on hydraulic fracturing and the disposal of hydraulic fracturing waste. The parties agreed to place the action on hold pending the Colorado Supreme Court’s determination of Halen v. Gessler, another lawsuit that concerns the election process.
34
35
Challenges to Municipal ActionMatter of Norse Energy Corp. USA v. Town of DrydenThe court granted leave to appeal the decision of the intermediate appellate court that held that state law did not explicitly or impliedly preempt local laws restricting hydraulic fracturing and other drilling activities.
35
Challenges to Agency ActionCenter for Biological Diversity v. California Dept. of ConservationCourt dismissed an action by four environmental groups alleging the California Division of Oil, Gas and Geothermal Resources had violated the California Environmental Quality Act by issuing permits for oil and gas drilling without analyzing the risks posed by fracking. Case was found to be moot due to new legislation.
36
36
Challenges to Agency ActionHilcorp Energy Corp. v. PennsylvaniaHilcorp applied for an order to establish well spacing and drilling units for more than 3,000 acres, first to Department of Environmental Protection (DEP), then to Environmental Hearing Board (EHB). EHB found that such orders should be submitted to DEP with appeals to EHB. The court noted that if the DEP granted the application, it would be the first use of force pooling in Pennsylvania in the context of horizontal hydraulic fracturing.
37
Challenges to Agency ActionImpact Energy Resources, LLC v. JewellUS Supreme Court denied writs of certiorari that sought review of the 10th Circuit’s decision that dismissed as time barred lawsuits brought by energy companies to challenge the Bureau of Land Management’s decision not to lease oil and gas rights for certain parcels in Utah for which the companies had submitted the highest bid. Court found 90-day statute after notification that the leases would not be issued.
38
37
Challenges to Agency ActionMinard Run Oil Co. v. US Forest ServiceThe court affirmed an order of summary judgment as to plaintiffs, who had challenged a 2009 settlement agreement between the US Forest Service (USFS) and environmental groups that required USFS to conduct environmental reviews prior to authorizing new oil and gas drilling in connection with privately owned mineral rights in the Allegheny National Forest.
39
Challenges to State and Federal Laws and Regulations
Rodriguez v. KrancerPlaintiff, a nephrologist, challenged the provision of a Pennsylvania law that placed restrictions on health professionals’ ability to disclose information released to them about the chemical content of hydraulic fracturing fluids and waste products. Court dismissed for lack of standing.
40
38
Government Enforcement Actions
United States v. StinsonThe court sentenced two men and an oil well operating company for criminal violations of the Safe Drinking Water Act. The two men had pleaded guilty to conspiracy to commit violations of an underground injection control (UIC) program, and the company had pleaded guilty to violation of a UIC program. Defendants had configured piping to inject fluids brought to the surface in connection with oil production into sinkholes and had ignored orders to stop discharging the waste into the sinkholes. The individuals were sentenced to 2 years of probation, and one of the individuals must personally pay a $45,000 fine and provide documentation that the well used for the illegal injections has been plugged and abandoned in a way that is protective of groundwater.
41
Government Enforcement Actions
United States v. Chesapeake Appalachia, LLCChesapeake reached an agreement with the United States and West Virginia over alleged violations of the Clean Water Act (CWA) and the West Virginia Water Pollution Control Act related to its natural gas extraction activities. The company discharged dredged or fill material without a permit in connection with these activities. Under the terms of the agreement, Chesapeake will pay a $3.2 million civil penalty, half to the United States and half to the state. The court did not impose a civil penalty in connection with Chesapeake’s activities at the Blake Fork, which resulted in a December 2012 guilty plea in a federal criminal proceeding involving CWA violations. The court also required Chesapeake to purchase stream and wetland mitigation credits from mitigation banks and to undertake mitigation and restoration activities at sites that have not already been restored.
42
39
Government Enforcement Actions
Wisconsin v. Preferred Sands of Wis., LLCThe State of Wisconsin and the operator of a sand mining operation that produced sand for hydraulic fracturing resolved the state’s claims that the sand mine operator had violated storm water and air pollution control requirements. The stipulation and judgment entered by a Wisconsin Circuit Court require the company to pay $195,000 in five installments through 2017 as well as $5,000 in attorney fees. This was reportedly Wisconsin’s first environmental enforcement action against a sand mine.
43
Government Enforcement Actions
United States v. XTO Energy, Inc.The federal district court for the Middle District of Pennsylvania entered a consent decree that resolved a federal Clean Water Act enforcement action against XTO Energy, Inc. (XTO). The consent decree required payment of a civil penalty of $100,000. It also required XTO to undertake what the government estimated would be a $20 million plan to improve wastewater management practices, including by recycling flowback and produced fluid to the maximum extent practicable and restricting the waste treatment facilities at which XTO could dispose of such fluid. The settlement required XTO to implement a spill prevention plan under the oversight of EPA.
44
40
Government Enforcement Actions
United States v. GuesmanOn August 29, 2013, defendant Michael Guesman pleaded guilty to violating section 309(c)(2)(A) of the Clean Water Act. The indictment charged that Guesman discharged fracking waste liquids into a storm drain that flowed into a tributary of the Mahoning River in Ohio.
45
Constitutional ClaimsTrail Enters., Inc. v. City of HoustonThe Texas Supreme Court denied the petition of review filed by Trail Enterprises, Inc., d/b/a Wilson Oil Co. in this inverse condemnation action. A jury had awarded Trail and other parties $17 million after the trial court found that the City of Houston’s restrictions on oil and gas drilling in the vicinity of Lake Houston constituted a compensable taking. In reversing this judgment, the appellate court found that two of the three Penn Central factors weighed heavily in the city’s favor because protection of water sources was a primary governmental function and Trail and the other mineral lessees demonstrated minimal reasonable and distinct investment-backed expectations.
46
41
Notes
This file is set up for duplexed printing. Therefore, there are pages that are intentionally leftblank. If you print this file, we suggest that you set your printer to duplex.
