CHAPTER 14 DUE DILIGENCE FOR THE PURCHASE OF PIPELINE SYSTEMS
| Jurisdiction | United States |
(May 1998)
DUE DILIGENCE FOR THE PURCHASE OF PIPELINE SYSTEMS
Bjork, Lindley & Danielson, P.C.
1675 Broadway, Suite 2710
Denver, Colorado 80202
(303) 592-4700
TABLE OF CONTENTS
I. INTRODUCTION
II. SCOPE OF THE DUE DILIGENCE PROJECT
A. Pipeline System Characteristics
B. Limitation Strategies
1. Purchase and Sale Agreement
2. Value
3. Identify Strategic Areas
C. Expansion
III. TITLE
A. The Map
B. Pipeline Title
C. Right-of-Way Agreement
1. Grantor/Grantee
2. Description
3. Term
4. Scope of Grant
D. Gaps in the Pipeline System
E. Assignments
F. County Records
[Page 14-ii]
1. Organization of Records
2. Limiting the Scope
3. Liens and Encumbrances
4. Personal Property
5. Other County Records
G. Examination of Federal and State Records
H. BIA and Tribal Records
IV. CONTRACT AND ACCOUNTING REVIEW
A. Contracts
B. Accounting Matters
V. EQUIPMENT AND OPERATIONS
VI. ENVIRONMENTAL AND PERMITTING ISSUES
A. Applicable Statutes
1. Resource Conservation and Recovery Act
2. Comprehensive Environmental Response Compensation and Liability Act
3. Air Emissions Standards
4. Clean Water Act
5. Common Law and Contractual Issues
B. Environmental Due Diligence
VII. PERMIT COMPLIANCE
[Page 14-iii]
VIII. MISCELLANEOUS CONSIDERATIONS
A. Construction and Operation Regulations
B. Federal Energy Regulatory Commission
C. Bankruptcy Issues
IX. CONCLUSION
CHECK LIST FOR PIPELINE ACQUISITIONS
———————
[Page 14-1]
I. INTRODUCTION
Numerous papers have been written about organizing and executing a due diligence plan for a natural resources acquisition.1 These papers are an excellent resource for information related to organizing the project, defining the roles and responsibilities of the due diligence team and analyzing due diligence strategies under the purchase and sale agreement. Although many of the same issues arise in the acquisition of a pipeline system, the pipeline examination is unique because the buyer must verify the value of a system. The system may be composed of a burdensome number of right-of-way segments, yet each segment has relatively equal importance and value. This paper will therefore focus on the checklist of items that need to be examined in a pipeline due diligence project and discuss strategies for limiting the scope of the project.
This paper will discuss four areas which need to be addressed in any due diligence project for a pipeline acquisition:
1. Title
2. Contracts and Accounting
3. Equipment and operations
4. Environmental and permitting issues
To address each of these areas of concern, the due diligence team will examine the seller's records, examine the applicable public record repositories and conduct a surface inspection along the pipeline system. In the event you read no further, you should be aware that Attachment I is a checklist which is the primary reason anyone attends or reads a due diligence paper.
[Page 14-2]
II. SCOPE OF THE DUE DILIGENCE PROJECT
A. Pipeline System Characteristics
A myriad of problems combine to determine the scope of any due diligence project. Most relate to the terms of the purchase and sale agreement such as the price paid, representations, warranties, indemnifications and timing. The acquisition of a pipeline system also requires an analysis of some unique issues because of the burden of examining (for title or environmental purposes) a pipeline system covering anywhere from one to thousands of miles and possibly thousands of individual rights-of-way.2 It can also be very difficult to limit the scope of the examination based on some sort of evaluation formula such as the 80/20 formula used for oil and gas producing properties. The value of a pipeline system is greater than the sum of its parts. Although the system may be composed of a massive number of individual right-of-way agreements, each agreement is equally important in allowing the entire system to operate and therefore has relatively equal value.
The rising administrative costs of conducting a due diligence project and the burden of examining an extensive pipeline system, requires the buyer to carefully identify strategies for limiting the scope of the project. Identifying these strategies requires an understanding of the legal rights associated with the pipeline system which is essentially an accumulation of each of the papers which have been presented at this institute. With this information in hand, you can understand the risks that are inherent in the limitations placed upon the scope of the due diligence examination.
B. Limitation Strategies
There are a number of strategies to consider in limiting the scope of the due diligence project. A general summary is set forth below and some issues will be discussed in greater detail later in the paper as we review the title, environmental and operational issues.
1. Purchase and Sale Agreement
The representations, warranties and indemnities contained in the purchase and sale agreement may provide the buyer with some comfort in limiting the scope of the due diligence project. These issues have been thoroughly addressed in previous papers presented to the Foundation.3
2. Value
Simple economic considerations, can limit the scope of the project. Buyers frequently limit due diligence projects based upon the value of parts of the system. An 8" main line will receive far greater attention than the small gathering line systems leading up
[Page 14-3]
to the wellheads. Certain facilities, such as a gas processing plant, may constitute a significant part of the value.
3. Identify Strategic Areas
The scope of the examination may be limited by identifying strategically important areas. Facility sites, such as gas processing plants, compressor sites and pumping stations, should generally receive greater attention. These facilities may be located on lands which have been purchased by the seller and a more complete examination of title may be warranted. Facilities are generally associated with greater environmental liabilities and therefore an inspection of the premises should be made.
Certain areas on the pipeline system can be identified which are critical to the seller's future economic plans. For example, part of the valuation in the acquisition may depend on transporting oil or gas from a particular field which would be serviced by only part of the pipeline system. Due diligence would obviously focus on that particular system.
The political environment of the county or surface ownership may require you to place greater emphasis on certain parts of the pipeline system. Traditionally, there has been a prevailing attitude that even if there is some failure of title the pipeline company can still obtain a right-of-way with relative ease by either negotiating with the landowner and paying additional money or condemning a pipeline route across the property. Substantial increases in the value of the surface estate can destroy this assumption. If parts of the pipeline which you have identified as strategically important are located in areas which now contain a well developed subdivision or is part of a very popular hunting lease you may not be able to obtain a new right-of-way and you will need to consider carefully whether you have the right or the monetary incentive to obtain access through condemnation. A changing political environment is also important. The State of Colorado is seeing significant changes in the extent of county jurisdiction in regulating oil and gas operations including pipelines. The sighting of compressor stations, which can be absolutely critical to the operation of the pipeline, has become a very sensitive noise issue. If, through failure of title or the failure to properly follow regulatory procedures, a special use permit for the compressor station is cancelled, seller may not be able to obtain another permit.
C. Expansion
If the buyer is purchasing the pipeline system with the intent to expand the system into new areas then the scope of the due diligence must be expanded. The buyer will need to evaluate the surface ownership and uses in the expansion area to determine whether a pipeline expansion can be performed within buyer's economic parameters or whether the project can be constructed at all. For example, is the zoning in this area such that it would be impossible to obtain the necessary special use permits? Will the expansion be located on federal lands requiring an environmental impact statement or is the expansion area located in a wilderness area or a wilderness study area? Are the fee owners of the lands
[Page 14-4]
likely to grant a right-of-way for a pipeline or grant surface access for construction and operation of a pipeline? Do you have the rights of condemnation in this particular state? All of these are strategic questions which need to be considered where expansion of the pipeline is an important element of the acquisition value.
III. TITLE
A. The Map
In the beginning there was a map and the map was good. A good map provides the master document for organizing your entire due diligence project and it may be the only evidence the seller provides you of its pipeline system. The goal of the due diligence title team will be to confirm through examination of the seller's records and the public record repositories that the seller owns rights-of-way, licenses and permits which allow seller to construct, operate and maintain the pipeline system along the route designated on the map.
B. Pipeline Title
Companies generally do not place a great deal of emphasis on maintaining good and marketable title.4 Compared to oil and gas producing properties, companies place far less emphasis on maintaining good title records. There are a number of reasons to explain this fact of life. Each individual right-of-way in...
To continue reading
Request your trial