SHOULD NONOPERATORS CONDUCT ENVIRONMENTAL AUDITS IN THE WAKE OF DEEPWATER HORIZON?
| Jurisdiction | United States |
Attorney at Law
Houston, Texas
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ABSTRACT
The blow-out of the BP-operated Macondo well in the Gulf of Mexico unleashed millions of barrels of crude in the Gulf of Mexico and degraded not only the environment and the economic prospects of the Gulf Coast but also corroded BP's relationship with its nonoperating working interesting owners, Anadarko and Mitsui. Like BP, they have witnessed precipitous stock drops, been dragged alongside BP to face congressional ire, and will share liability for billions of dollars in clean-up and litigation costs.
As investigations continue into the cause of the disaster, nonoperators must grapple with how to mitigate their risks. A strategy that some have adopted -- and others may contemplate -- is to conduct compliance audits, including environmental audits of joint operations.
This paper observes that incentives for self-audits don't apply in joint operations; audit reports could be discoverable because self-audit and attorney-client privileges are inapplicable; nonoperators have no control over operations and cannot assure prompt remedial actions short of operator removal; nonoperators could be liable statutorily and for third party claims arising from the audit. It suggests contract alternatives to ensure operator's compliance and mitigate nonoperators' risk while avoiding the risks of operator audit. It also recommends a prophylactic measure to protect such audit reports.
I. Introduction
The April 20, 2010 blow-out of the Macondo well, located in Mississippi Canyon Block 252, operated by BP Exploration and Production Inc. ("BP"), resulting in explosions and fire on Transocean's Deepwater Horizon rig, an unprecedented oil spill into the Gulf of Mexico, and significant ecological degradation riveted the nation's attention for 87 days until the well was capped.1 Besides the tragic loss of life and injuries, the blow-out spewed nearly 5 million barrels of oil into the Gulf of
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Mexico, with oil streaming into marshes, washing into coastal communities, disrupting fishing and tourism, and sending tar balls onto the shores of Louisiana, Florida, Mississippi and Alabama.2 The oil spill is the worst in the nation's history and competes for the dubious distinction of being among the worst ecological disasters the nation has known.
In its wake, the Obama administration imposed a moratorium on, and pledged to impose tougher review for, deepwater drilling; additional regulation could be underway; BP's CEO has been ousted and its reputation in tatters; BP's stock has taken a perilous tumble and its survival questioned; a motley of investigations are underway by the U.S. Coast Guard, the President's National Commission, and the Bureau of Ocean Energy Management, Regulation and Enforcement Joint Investigation in addition to criminal investigation by the Dept. of Justice. That does not include BP's own independent investigation and those promised by Gulf Coast states affected by the disaster.
Pending these ongoing investigations and ultimate allocation of liability, the incident re-ignites debate on potential risk exposure and liability of non-operators as the U.S. government has designated all three working interest owners in the well, BP (65%), Anadarko (25%), and Mitsui (10%), as well as the rig owner Transocean Ltd., as liable parties under the Oil Pollution Act ("OPA"). Even before the well was capped, investigations completed, and liability apportioned, Anadarko, which joined the well in Dec. 2009 after drilling had already started, has lost approximately $13 billion in value; its stock has been downgraded,3 leaving it with a market capitalization of $22 billion even as it could be potentially liable for $15 billion or more in clean-up and litigation costs.4 Mitsui has similarly seen its stock plunge by 25% and had to face questions about the spill in its 2010 shareholder's meeting.5
The U.S. Congress invited not only BP, but also the heads of Anadarko and Mitsui to testify before a Senate subcommittee on their liability in the
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spill.6 Amidst public anger, media frenzy, competing investigations, and congressional rage, Anadarko and Mitsui were pressured to match BP's offer to give up their rights to revenue from oil recovered from the cleanup efforts.7 Their fortunes seem to rise and fall with BP's.
Thus, while neither Anadarko nor Mitsui exercised any control over operations, and might even had been unaware of the challenges BP faced, they were held jointly liable even before any allocation of liability or determination of operator's negligence. Media reports referred to them as BP's "partners", the federal government named them among the "responsible parties" for the spill under the OPA, and long before any dust settled, Congress expected them to create escrow funds to prove their readiness to pay.8
Regardless of who is found to be ultimately liable, non-operators who exercise no control whatsoever and may have been unaware of the issues that caused the explosion have nonetheless witnessed a steep erosion of value, dragged before an understandably angry congress, face significant liability for clean-up costs and litigation as their reputation is tarred alongside BP's. All this before a comprehensive root-cause analysis is concluded.
Non-operators expectedly may resume debate regarding their exposure for compliance issues attributable to the operator's acts or omissions and how to insulate themselves from attendant litigation and reputational risk. While non-operators cannot supervise and manage the operator, nonetheless they may adopt, and others may contemplate, limited risk mitigation measures such as periodic environmental audit of the operator's operations to ensure environmental compliance. An audit report is thereafter either furnished to the operator with a request promptly to remediate instances of non-compliance or forms the basis of such notice to the operator.
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Non-operators may liken such operator audits to self-audit of owned facilities and operations, and as part of their compliance program. Such self-audits are encouraged by federal and state regulatory agencies, create goodwill, mitigate litigation and reputational risk, including significantly reducing penalties for self-identified and diligently corrected instances of noncompliance, as discussed further below.
II. Self-Audit Incentives
A. Environmental Protection Agency (EPA)
A key reason for self-audit is risk mitigation and effective environmental compliance management. Self-audit and voluntary disclosure is encouraged by regulatory agencies. For example, the Environmental Protection Agency (EPA) issued its "Incentives for Self-Policing: Disclosure, Correction, and Prevention of Violations" on Dec. 22, 1995, which it revised on April 11, 2000.9
The stated goal of the EPA Policy is "encourage greater compliance with Federal laws and regulations that protect human health and the environment" and to promote a "higher standard of self-policing by waiving gravity-based penalties for violations that are promptly disclosed and corrected, and which were discovered systematically -- that is, through voluntary audits or compliance management systems."10 Cognizant of the government's resource limitations in monitoring compliance, the Policy seeks to encourage self-monitoring in 4 principal ways: (1) eliminate "gravity-based penalties" -- which it defines as "that portion of penalty over and above economic benefit,"11 -- for violations discovered systematically, through an environmental audit, and promptly remediated; (2) 75% reduction of gravity-based penalties for violations discovered voluntarily, albeit through not a formal audit process but nonetheless timely discovered and remediated; (3) no referral to the Dept. of Justice for criminal prosecution; and (4) no routine requests for audit reports.12
Significantly, the EPA defines an audit as a "systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements."13 It is insufficient that an entity voluntarily discovers non-compliance; it must
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promptly disclose and remediate, in consonant with the EPA's expressed purpose to "enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, disclose, correct and prevent violations of Federal environmental requirements."14 Prompt disclosure requires written notification to the EPA within 21 days ("or within such shorter time as may be required by law"); the violation must be corrected within 60 days of discovery.15
The EPA Policy, however, hardly augurs for an evidentiary privilege beyond the four-mentioned incentives: "The Agency remains firmly opposed to statutory and regulatory audit privileges and immunity. Privilege laws shield evidence of wrongdoing and prevent States from investigating even the most serious environmental violations. Immunity laws prevent States from obtaining penalties that are appropriate to the seriousness of the violation, as they are required to do under Federal law. Audit privilege and immunity laws are unnecessary, undermine law enforcement, impair protection of human health and the environment, and interfere with the public's right to know of potential and existing environmental hazards."16
b. The Dept. of Justice
The Environment and Natural Resources Division of the U.S. Dept. of Justice (DOJ) similarly published its voluntary disclosure policy on July 1, 1991 to "encourage self-auditing, self-policing and voluntary disclosure of environmental violations by the regulated community by indicating that these activities are viewed as...
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