EPA Offers New Owners A New Hope

EPA is taking steps to further compliance and reduce emissions in the upstream oil and gas sector. It announced it is developing, and seeking comments on, a New Owner Clean Air Act Audit Policy (CAA Policy). Once implemented, new owners may conduct an in-depth audit of newly acquired facilities, correct identified violations or issues, and obtain a full civil penalty waiver for violations existing prior to the acquisition of the facility.

EPA already has a general audit and self-disclosure policy, announced in April, 2000. The 2000 policy requires prompt disclosure after discovery of a violation and allows EPA to waive or reduce gravity-based civil penalties, but not the economic benefit component of the penalty. Additionally, EPA has a general New Owner Audit Policy, announced in August, 2008. The 2008 policy offers incentives to new owners who want to make a ‘clean start’ at their newly acquired facilities by addressing environmental noncompliance that began prior to acquisition. The 2008 policy also offered penalty mitigation beyond what was allowed under the 2000 policy by agreeing to not seek the economic benefit component in certain circumstances.

The CAA Policy builds on these two older policies. It is tailored, at least at this time, to upstream oil and gas exploration and production facilities, i.e., well sites with associated storage tanks and pollution control equipment. In the past, EPA had observed significant emissions and noncompliance at these facilities, issuing a Compliance Alert in September, 2015 in which it described emissions from tank batteries due to undersized and poorly maintained vapor control systems. The CAA Policy is mainly aimed at addressing these concerns.

The key component of the new policy is the Draft Agreement. The basic premise of the CAA Policy is that new owners will enter into an agreement with EPA, using the Draft Agreement as the template, and agree to conduct an audit of the newly acquired facilities within a certain period of time, correct deficiencies that are found, and provide a full report of the findings to EPA.

The Draft Agreement sets out three requirements for eligibility as a new owner. The new owner cannot be responsible for environmental compliance prior to the date of acquisition, the new owner and the seller cannot have the largest ownership share of each other or a common corporate parent, and the new company must notify EPA within six months of the date of acquisition.

The Draft Agreement also defines the scope of the audit. At a minimum, the new owner must assess the engineering and design of the vapor control system for all of the facilities included in the audit. The Draft Agreement contains detailed instructions and guidelines for reviewing these systems, including an engineering review to assess whether the vapor control systems are adequately sized and properly functioning. However, the scope of the audit can be broader and include any and all equipment and operations at the facility.

The Draft Agreement requires corrective action for all violations or deficiencies noted and provides a schedule for correction based on the type of violation. For situations creating an immediate and substantial endangerment to public health or welfare, the issue must be addressed as expeditiously as possible and the new owner must promptly take action to protect public health and welfare. For violations unrelated to engineering or design, each violation must be corrected within sixty days of discovery. For violation related to engineering or design, all identified issues must be resolved through modifications, and those modifications must be verified, before the audit program can end.

The Draft Agreement requires a semi-annual and final report. The final report should include all measures taken to address any and all noncompliance and issues discovered during the audit. EPA will then issue a final determination as to whether the noncompliance and issues were satisfactorily resolved.

The major benefit of the audit is that, for all the corrected violations as reported to EPA, EPA will resolve the new owner’s civil penalty liability by not imposing a civil penalty for those disclosed and satisfactorily corrected items. This includes the gravity and economic incentive portions of the civil penalty. The Draft Agreement makes clear that for any violations not found or reported, EPA reserves the right to seek civil penalties.

In all, the CAA Policy is a ‘win-win.’  By correcting engineering and design problems and any identified non-compliance, emissions are reduced. For this effort, a new owner is rewarded with a ‘clean slate’ and a waiver of all civil penalties.  Hopefully, EPA will finalize the CAA Policy as soon as possible.

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