If you are in the oil and gas industry and you’ve experienced the recent onslaught of enforcement actions, particularly in the Appalachian basin, by the U. S. Environmental Protection Agency (“EPA”) you may take comfort in the aphorism: “You’re not paranoid if they really are out to get you!” A simple Google search of “EPA III Enforcement” and a click on the “Natural Gas Extraction/Marcellus Shale” link at the EPA Region III website should cause any company concern. The site lists 27 administrative orders issued for alleged violations of Section 404 of the Clean Water Act (all in West Virginia), 16 Section 308 requests to natural gas drillers and publicly owned treatment works that were accepting “oil and gas wastewater”, 13 additional administrative orders and information requests under § 309 of the CWA to facilities accepting wastewater from Marcellus Shale drilling operations, and extensive effluent sampling data provided by POTWs as a result of EPA’s information requests. Outside EPA Region III, the United States Department of Justice recently announced a major settlement with a midstream natural gas company requiring payment of a $4 million penalty, removal of certain equipment and installation of additional pollution control devices related to alleged violations of the Clean Air Act (“CAA”). EPA’s enforcement initiative is certainly a multifaceted attack by land, water and air.
On May 16, 2012, the Department of Justice (“DOJ”) announced a settlement with midstream company QEP Field Services Co. (“QEPFS”), formerly Questar Gas Management Co., for alleged violations of the CAA’s National Emissions Standards for Hazardous Air Pollutants (“NESHAPS”), Prevention of Significant Deterioration (“PSD”), and Title V provisions at five of their compressor stations. The complaint alleged violation of the notification, record keeping and emissions standards established by the NESHAP provisions contained in subpart HH – Oil and Natural Gas Production Facilities and subpart ZZZZ – Stationary Source Reciprocating engines. The complaint also alleged that QEPFS failed to get the necessary PSD permits and Title V operating permits when they added additional compressor engines or changed out engines that increased emissions above the PSD thresholds. In the consent decree, QEPFS agreed to pay a $3.65 million civil penalty; pay $350,000 into a Tribal Clean Air Trust Fund (the stations are located on the Uintah and Ouray Reservations in Northeastern Utah); remove certain equipment; install additional pollution controls devices; and replace natural gas powered instrument controls systems with compressed air control systems.
Although DOJ’s settlement involved five compressor stations with significant brake horsepower – ranging from installed horsepower of 3000 bhp to 22,000 bhp – West Virginia’s Department of Environmental (“DEP”) is keenly aware of similar issues at the state level. In a recent consent order, the DEP’s Division of Air Quality imposed a significant penalty against a company, operating numerous relatively small compressor stations, that voluntarily disclosed they had switched out engines that decreased horsepower but increased emissions. The consent order alleged violations of New Source Performance Standards and NESHAP regulations related to the newer vintage engines. The lesson to be learned is that smaller engines do not necessarily mean fewer emissions and more recently manufactured engines – almost regardless of size – can subject companies to potential CAA liability.
On the land/water front, EPA Region III has been particularly aggressive against production companies in West Virginia constructing well pads – alleging violations of “discharge of fill material to waters of the United States” without the necessary Section 404 “dredge and fill” permits. As indicated above, EPA Region III issued 27 administrative orders for alleged 404 violations between October 2010 and February 2012. The administrative orders are short on facts and long on requirements to achieve compliance. The substantive allegation in the administrative order is nothing more than an allegation “on information and belief” that the company “operated heavy equipment which discharged dredged and/or fill material to waters of the United States located at the Site.” The activities that resulted in the alleged discharge are included but not limited to “construction of pads for a compressor station, natural gas drilling pads, road improvements associated with the pads, and other associated facilities, including but not limited to all pipelines, tanks, equipment, and other appurtenances.” The “Order For Compliance” generally consists of a “cease and desist [of] all discharges without a permit to waters of the United States,” a preconstruction wetland and stream delineation which shows the extent of the regulated waters prior to construction within 30 days of the Order; and a detailed restoration and mitigation plan to EPA within 30 days. The administrative order clearly states that violation of or failure to comply with the order could result in administrative penalties pursuant to 33 U.S.C. § 1309 (g) resulting in fines up to $37,500 per day, per violation and possible imposition of the criminal sanctions of imprisonment and fines up to $50,000 per day.
While the threat of criminal enforcement has always been present, EPA has recently secured a few criminal convictions related to unconventional drilling operations and seems poised to increase the use of criminal enforcement in this area – despite recent criticism for overzealous enforcement tactics by EPA Region VI Regional Administrator Al Armendariz. In May 2012, Regional Administrator Armendariz likened his enforcement philosophy to that of Roman crucifixion practices – wanting to “make examples out of” and “put some financial pressure on a company.” As a result of public outcry, in part, Armendariz resigned on April 29, 2012. Although EPA has taken some heat for Armendariz’s comments, including a congressional investigation by Senator James Inhofe and a request by West Virginia Representative David McKinley for an investigation by the EPA Inspector General of EPA’s enforcement strategies, EPA is still pursuing criminal enforcement of oil and gas operations and considering intensifying those efforts.
On April 26, 2012, an oil and natural gas contractor was sentenced for criminal violations of the CWA, resulting in the company, Integrated Production Services Inc. (“IPS”), paying a fine of $140,000. In addition to the conviction/fine of the company, an individual crew supervisor was fined an additional $2,500 and sentenced to two years of probation. The case stems from an estimated leak of 400-700 gallons of hydrochloric acid on to an earthen well pad site which was flooded by heavy rainfall. To remove the backed up water from the well pad, the crew supervisor drove a company truck through an earthen berm, causing the contaminated water to flow into a “water of the United States.” In addition to paying the fine, IPS was sentenced to a community service payment of $22,000, two years of probation, and was required to implement an Environmental Compliance Program to train IPS employees regarding proper spill response procedures and proper handling of hazardous wastes.
Recent comments by two of the top environmental crimes “enforcers” at the American Law Institute and American Bar Association seminar on “Criminal Enforcement of Environmental Laws” should give all operators pause. Because of the remoteness of oil and gas plays, Stacey Mitchell, chief of the environmental crimes division of the Department of Justice (DOJ), indicated that EPA and DOJ are concerned operators are “midnight dumping” production and flowback water in violation of the CWA – Mitchell stated that the DOJ is going “back to the basics of environmental crimes.” Her comments did not paint oil and gas operators in a favorable light. Perhaps more disconcerting are comments by EPA’s Office and Enforcement & Compliance Assurance Assistant Administrator Cynthia Giles who stated at the seminar that EPA’s enforcement strategy for 2013 would include closer collaboration and cooperation between EPA’s civil and criminal enforcement offices. Although EPA’s position is there is no legal bar to using information gained through administrative procedures, such as a § 308 “Demand for Information” under the CWA, in a criminal investigation, EPA must not mislead a person in what the information may be used for, i.e., in a criminal investigation, so as to deprive an individual of their Fifth Amendment due process/privilege against self-incrimination. Additionally, while EPA’s stated position is that they should never use the threat of criminal prosecution to obtain a civil settlement, former Regional Administrator Armendariz’s “crucifixion practices” and Assistant Administrator Giles’s comments of “closer collaboration” does leave one wondering whether Armendariz’s philosophy is not that of a rogue actor, but rather is indicative of EPA’s current mindset toward the oil and gas industry.
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