CHAPTER 8 ENVIRONMENTAL ISSUES INVOLVED IN OIL & GAS ACQUISITIONS AND DIVESTITURES

• Jurisdiction: United States

Oil and Gas Acquisitions
(Nov 1995)
CHAPTER 8
ENVIRONMENTAL ISSUES INVOLVED IN OIL & GAS ACQUISITIONS AND DIVESTITURES
Joseph R. Dancy
John C. Harrison ^*
ENSERCH Corporation
Dallas, Texas

Table of Contents

SYNOPSIS Page

Introduction

I. Potential Environmental Liabilities in an Oil & Gas Transaction

A. CERCLA or Superfund

B. Resource Conservation and Recovery Act (RCRA)

C. Clean Air Act (CAA)

D. Clean Water Act (CWA)

E. Safe Drinking Water Act (SDWA)

F. Toxic Substance Control Act (TSCA)

G. Common Law

II. Due Diligence Issues

A. CERCLA

1. Degree of inquiry needed to assert the innocent purchaser defense

2. Who is an "owner" for liability purposes

3. CERCLA liability from RCRA exempt wastes

4. Potential liability for passive releases

5. Retroactive liability issues

B. Resource Conservation and Recovery Act

1. Waste management

2. Waste classification

C. Clean Water Act

1. NPDES point source permits

2. SPCC plans

3. Reportable spills

4. NPDES construction permits

D. Safe Drinking Water Act

1. Produced water management

2. MIT tests

E. Clean Air Act

1. Title I non-attainment areas

2. Title V operating permits

3. Title III hazardous air pollutants

F. Toxic Substance Control Act

1. PCB's issues

2. Inventory reporting rule issues

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G. Common Law

1. Surface damage by produced water

2. Groundwater damage

3. Unplugged wells

4. Releases for environmental damage

5. Is there a duty to disclose?

III. Managing Environmental Risk by Structural and Contractual Methods

A. Transactional Strategies

1. Asset Purchase Transaction

2. Statutory Mergers and Consolidations

3. Stock Acquisition

B. Contractual Provisions

1. Representations and Warranties

2. Conditions and Covenants to Closing

3. Indemnification and Release Provisions

Appendix - E & P Acquisition Wellsite Audit Checklist

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INTRODUCTION

Several decades of environmental legislation has produced an extremely complex and costly matrix of obligations and responsibilities.¹ An understanding of the applicability and impact of environmental regulations on oil and gas facilities is necessary for informed corporate decision making and planning with regard to acquisition and divestiture analysis. Once the potential liabilities are identified, the transaction can be structured in a manner that attempts to avoid these environmental risks, or contract provisions can be drafted to allocate potential liability and risks.

This analysis is divided into three sections, each addressing a specific concern in the oil and gas transaction:

Section I — Potential environmental liabilities in an oil and gas acquisition

Section II — Due diligence issues, and

Section III — Managing environmental risk by structural and contractual methods

Section I. POTENTIAL ENVIRONMENTAL LIABILITIES IN AN OIL & GAS TRANSACTION

On the federal level oil and gas production facilities, processing plants, gathering systems, and pipelines can be subject to provisions of the Clean Water Act ("CWA"), the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA" or "Superfund"), the Resource Conservation and Recovery Act ("RCRA"), the Safe Drinking Water Act ("SDWA"), the Clean Air Act ("CAA"), the Toxic Substance Control

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Act ("TSCA"), as well as numerous other statutes. Many states have statutes that supplement the federal statutory provisions. Potential liability can accrue to the purchaser of assets or the successor entity under each of the above named statues. Common environmental issues include the following:

A. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund)

For industry in general, the most expensive environmental statute enacted to date has been the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). The purpose of CERCLA was to make those parties responsible for releasing hazardous substances into the environment clean up the contamination, or financially contribute to the clean up effort.

The average expenditures per Superfund site estimated at between $20 and $30 million and each site averages ten years to remediate; involvement in a Superfund project can quickly become a quagmire for those entities involved.² One court has described CERCLA as "a black hole that indiscriminately devours all who come near it."³ Even President Clinton has observed that "we all know it doesn't work", and further noted that "the Superfund has been a disaster".⁴

CERCLA seeks to establish liability of facility owners or operators, generators, and transporters of hazardous substances for the remediation of property on which a release or threatened release has occurred. In order to establish a prima facie case under CERCLA the plaintiff must prove that: (1) a "release" or "threatened release" of (2) a "hazardous substance" occurred by an (3) owner, operator, generator, or transporter of the hazardous substance that (4) will require the expenditure of response costs.⁵

CERCLA has broadly defined a "release" to include virtually any conceivable contact with the environment, including any spilling, leaking, pumping, pouring, emitting, discharging, injecting, escaping, leaching, dumping, or disposing into the environment.⁶ A release also includes the abandonment of closed barrels or other receptacles containing hazardous substances, whether leaking or not.

A CERCLA "hazardous substance" has been broadly defined with reference to existing statues, and includes any substance designated under the following statutes:

a. CERCLA §102 listed hazardous substances (40 C.F.R. § 302.4, table 302.4)(a list of hazardous substances prepared by the EPA)

b. Clean Water Act "toxic pollutants" or "hazardous substances" (CWA §§307(a) and 311(b)(2)(A)), (40 C.F.R. § 401.15))

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c. Resource Conservation and Recovery Act "hazardous wastes" (RCRA §3001)

d. §112 Clean Air Act "hazardous air pollutants" or "air toxics" (40 C.F.R. § 61.01(a))

e. Toxic Substance Control Act "imminently hazardous" chemical substances (TSCA §7)

A number of different parties can be considered potentially responsible parties ("PRP's") who are responsible for remediation costs under CERCLA.⁷ PRP's are financially liable for remediation, testing, and other costs, and can include the following parties:

Current Owner and Operator of the Facility. A party, just by owning property which has been previously contaminated, can be liable for remediation costs if such property had been acquired without knowledge or without reason to know of the contamination.⁸ In addition, if an party participates or influences the facility's management it could be considered an "operator".⁹ Further, an absentee owner who leases their property to a third party could be liable for the actions of the lessee disposing of hazardous substances.¹⁰

Owner and Operator at the time of Disposal. A party who owned or operated the facility at the time of the disposal or release of the hazardous substance is responsible for remediation costs. Subsequent owners who acquire title may also be liable if the "disposal" of any hazardous substance occurred during the time period during which they owned the land.

Any Party Who Arranged Disposal or Treatment. Any party who arranges to have a hazardous substance disposed of or treated at another's facilities can be a PRP under CERCLA.¹¹

Any Party Who Accepted a Hazardous Substance for Transport to a Disposal Facility. A transporter who accepts hazardous waste for transport to a treatment, storage, and disposal facility they select can also be responsible as a PRP.¹²

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CERCLA establishes strict as well as joint and several liability where the damage cannot be apportioned for any PRP meeting the prima facie elements set out above.¹³

Defenses to CERCLA liability are limited, and the most often asserted is the "innocent purchaser" defense.¹⁴ The "innocent purchaser" defense provides that a party is not liable for hazardous substances placed on a site before it acquired title, if at the time the party acquired the site it did not know or have reason to know that any hazardous substance was disposed of or released on the property.¹⁵ The purchaser must show that it did not have reason to know by undertaking "all appropriate inquiry" into the previous ownership and use of the property.¹⁶

B. Resource Conservation and Recovery Act of 1976 (RCRA)

RCRA is a waste management statute regulating "solid wastes". Liability can accrue to a purchaser of a facility or a successor in interest due to past waste mismanagement practices or continuing violations present at the time of sale.

"Solid waste" by RCRA definition can consist of solid, liquid, or gaseous materials,¹⁷ and includes "any...discarded material, including...material resulting from industrial, commercial, mining, and agricultural operations, and from community activities...."¹⁸ RCRA regulations further define "discarded material" to include materials which are "abandoned", "disposed" of, or "recycled."¹⁹ The term "disposal" has been defined in RCRA as the discharge, deposit, injection, dumping, spilling, leaking or placing of any solid or hazardous waste into any land or water so that the material enters the environment.²⁰

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Waste Classification Under RCRA

RCRA solid wastes may or may not be classified as a RCRA "hazardous" waste.²¹ One of the most important tasks an oil and gas facility must accomplish is to classify its solid wastes as hazardous or non-hazardous.

(a) RCRA Subtitle "C" "Hazardous wastes"

Under RCRA a solid waste can be considered a "hazardous waste" if: (1) the material is "listed" by the EPA as hazardous, or (2) it exhibits one of four "characteristic" attributes identified by the EPA which make it hazardous. Such hazardous materials are regulated under "Subtitle 'C'" of RCRA.

(i). Listed Wastes. Three separate lists exist to define...