CHAPTER 11 ASSESSMENT OF ENVIRONMENTAL CONDITIONS IN OIL & GAS TRANSACTIONS

• Jurisdiction: United States

Due Diligence in Oil and Gas Transactions
(May 2011)
CHAPTER 11
ASSESSMENT OF ENVIRONMENTAL CONDITIONS IN OIL & GAS TRANSACTIONS
Mark P. Hemingway
AMEC Geomatrix, Inc.
Austin, Texas

MARK P. HEMINGWAY is a principal hydrogeologist with AMEC Geomatrix, Inc., based in Austin, Texas. He has 24 years experience in site investigation and remediation at environmental sites across the U.S., and has served as an expert witness in hearings, mediation, trials, and arbitration. He is registered as a professional geologist in Texas, Florida, and Arkansas. He has degrees from the University of Texas at Austin and the New Mexico School of Mines.

Introduction

Upstream oil and gas assets commonly include production wells, disposal and injection wells, gathering systems, field processing and treatment facilities (e.g., gas plants, tank batteries, heater treaters), and compressors. Environmental due diligence of such assets may be prompted by their purchase, sale, or financing. The usual objective of environmental due diligence is to identify and (to the extent practicable) quantify suspected or known environmental liabilities in a manner that allows them to be addressed within the transaction. Environmental due diligence of upstream oil and gas assets do not typically include sampling and analysis of environmental media (soils, surface water, groundwater, and sediment), but would consider any sampling data that already exists.

The Standard Commercial/Industrial Due Diligence Process is Not Applicable

Outside the oilfield, transactions of commercial and industrial assets generally utilize a standardized approach to due diligence; perhaps the commonly applied is the approach described in ASTM E1527-05. The stated objective of the ASTM standard is to allow a purchaser or other party to demonstrate that they have performed all appropriate inquiry into a property's condition, in order to qualify for landowner protections (such as innocent landowner) under CERCLA.

This approach uses a number of evaluation methods, including regulatory database searches, aerial photograph review, interviews with property owners and users, a detailed and comprehensive site walk, and title searches, to identify known or suspected releases of hazardous substances or petroleum products to soils, groundwater, or surface water (i.e., "recognized environmental conditions, or RECs, under the ASTM standard). Evidence used to identify potential releases can be as simple as stained soils and stressed vegetation.

The standard commercial-industrial approach to environmental due diligence fails to meet the needs of most upstream oil and gas transactions, for a number of reasons:

1. The focus on protection from CERCLA liability is generally not useful, since most upstream oil and gas activities are not subject to CERCLA.

2. Crude oil, condensate, and brine are neither hazardous substances nor petroleum products, as those terms are typically defined. As discussed below, releases of these materials are the most common sources of potential liability at oil and gas properties.

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3. Oil and gas, particularly wellfields, tend to include large...