Energy Sector Alert Series: Five Essentials for Managing Deal Risk

by WilmerHale
Contact

In this eight-week alert series, we are providing a broad look at current and emerging issues facing the energy sector. Attorneys from across the firm will discuss issues ranging from environmental disclosures and risk management in business transactions to insolvency, compliance programs and intellectual property. Please click here to read all of our recent publications.

Oil prices have fallen below $30 per barrel for the first time in more than a decade. This trend, along with the shale gas boom, evolving regulatory constraints, and a growing focus on renewables, have made one thing clear: the oil and gas industry is getting a makeover.

While these developments are subjecting many companies to financial distress, the current market is creating opportunity for others—including investors who are new to the space. Crucial to each forthcoming transaction is a thoughtfully crafted, well-implemented diligence program. From the real estate and environmental perspectives, such a program should confirm asset valuation, identify risks, and provide a basis for estimating contingent or future financial obligations.

Based on recent developments, here are five things to consider in shaping a diligence program at the front end of a transaction. 

1. Assets

In oil and gas deals, assets may include real estate; property rights; production, extraction, processing, and distribution facilities and equipment; and operations (and rights to future operations) at multiple locations.

Sellers should precisely identify the assets that are included in (and excluded from) the transaction, and buyers should confirm their understanding. This is especially important for deals involving innovative energy technologies. For example, the Federal Court of Claims recently decided a case centered on whether gas conditioning equipment is an integral component of a fuel cell power plant, and therefore part of specified “energy property.” (The court held that it was. RP1 Fuel Cell, LLC v. United States, 120 Fed. Cl. 288 (2015).)

Buyers should confirm the seller's rights, title, and interest in the target assets and identify any limitations on the transferability of assets, such as required third-party consents or approvals. This process may include a review of deeds, leases, licenses, contracts, and joint venture agreements, and an analysis of land title records.

While the universe of assets can change after a letter of intent is signed, last-minute surprises can sink a deal, and litigation can result if the parties do not have a meeting of the minds. Careful drafting helps to avoid potential gaps, overlaps, or conflicts between included and excluded assets.

2. Contingent Assets

Target assets may include future development, production, or extraction rights. Respecting the size of the deal, buyers generally should do a “deep dive” on the estimated costs to exercise future rights and sellers should be prepared to share information about those rights. This may involve a high level of technical expertise, so buyers and sellers often benefit from engaging experts to help evaluate those assets.

Underlying agreements and transactional documents sometimes tie future development rights to project-related milestones or timely development. Buyers should confirm that no such future development rights have lapsed. And buyers should consider whether hedging or other arrangements, which may have been used to reduce exposure to decreases in oil prices, have expired or will expire, involve a risk of default by counterparties, or contain terms that may limit coverage due to market conditions.

Buyers also should assess whether the exercise of contingent future rights will be met with public support or face opposition. Opposition can be a forerunner of litigation, which may delay or prevent the realization of contingent benefits. 

3. Regulatory Review

On February 18, 2016, the US Environmental Protection Agency (EPA) announced its national enforcement initiatives for the next three years. EPA reaffirmed its focus on ensuring that energy extraction activities comply with environmental laws. The highly regulated nature of the energy sector complicates the diligence process. Parties should be mindful of looming regulatory changes—such as endangered species listings or revisions to pipeline safety rules—that could create new liabilities and obligations or affect development rights.

Oil and gas projects often require federal, state, and local permits. Asset location is key to determining the applicable legal framework. For example:

  • projects on federal land or requiring federal permits may be subject to the National Environmental Policy Act (NEPA) and certain requirements of the Endangered Species Act;  
  • projects on the Outer Continental Shelf are regulated by the Bureau of Ocean Energy Management and Bureau of Safety and Environmental Enforcement;
  • projects on Alaska's North Slope may require tundra travel permits;2 and
  • international projects may be subject to production sharing agreements with a wide array of environmental provisions.3

Regulatory review is a critical part of the diligence process and is necessary to identify government approvals or consents that may be required to close the deal or to enable the buyer to operate post-closing. Responsibility for permit transfers incident to the transaction should be expressly allocated between buyers and sellers. For example, in a recent transaction involving the sale of petroleum assets, the buyer assumed responsibility for perfecting all required permit transfers with the seller's cooperation. Buyers should be especially vigilant about permit transfers requiring formal administrative action, particularly where operations may be controversial. Formal administrative action often creates openings for opposition. 

4. Liabilities and Obligations

Upstream, midstream, and downstream oil and gas assets present different environmental risks, some of which cut across sectors. For example:

  • within the upstream sector, potential environmental liabilities may result from spills, leaks, ruptures, and discharges;
  • midstream assets also may raise such risks, as well as unique issues under the jurisdiction of the US Department of Transportation Pipeline and Hazardous Materials Safety Administration (which regulates the transportation of oil and hazardous materials) and the Federal Energy Regulatory Commission (which regulates the operation and must approve the sale of certain transmission facilities); and
  • downstream assets can pose other environmental issues, such as claims related to releases from underground storage tanks (USTs), air emissions mandates and control requirements, or the use of methyl tertiary butyl ether (MTBE).

Buyers should evaluate the environmental status of former and existing assets to assess cleanup obligations, restoration commitments, retirement obligations (including well plugging and abandonment and tank removals), and potential exposure to natural resource damages claims. Restoration and retirement obligations may be found in permits, joint venture agreements, and related contract documents. Buyers also should evaluate permits and regulatory obligations to identify unsatisfied permit criteria and confirm compliance status.

Sellers should anticipate buyers' desire to evaluate environmental risk and regulatory compliance and to identify unsatisfied obligations, and should be prepared to share key documents with buyers. A proactive approach can save time and add efficiency. For example, in deals involving sites with ongoing remediation, sellers successfully have facilitated price negotiations with prospective purchasers by retaining an environmental contractor to estimate the cost to close those sites, and sharing that information with prospective purchasers early on. 

5. Diligence Output

Information collected during the diligence process should be measured against business expectations. When diligence reveals new information, buyers should assess the materiality of the information and consider shaping a plan to factor it into the deal. Experienced consultants and legal advisors can help place information into context. 

There are a range of legal tools and contractual provisions (e.g., covenants, guarantees, indemnities, and releases) that can be used to manage risks identified in the diligence process. For example, if new information relates to an unanticipated remedial obligation, the buyer and seller can negotiate a cost to complete the remediation, and adjust the purchase price with the buyer performing the work post-closing. If, on the other hand, the seller prefers to or must retain responsibility to complete the remediation, then a portion of the sales proceeds can be placed in escrow as security for future performance, and the seller can perform the work pursuant to an access agreement that defines cleanup levels. If the parties cannot agree on who will bear certain risks, environmental insurance may be available to bridge the gap. 

Conclusion

A variety of factors are increasing the pressure on the oil and gas industry. As companies innovate and reposition themselves, the deal environment may present some eye-opening opportunities. A tailored diligence strategy is crucial, and parties should identify key consultants and advisors as early in the transactional process as possible. Such an approach will help buyers and sellers realize business goals and avoid dashed expectations.


1 This alert focuses on asset-based deals. Other deal structures, like stock purchases, may raise additional issues warranting further strategic consideration.

2 Alaska Stat. § 38.05.850

See Investment Treaty News, Foreign investment contracts in the oil & gas sector: A survey of environmentally relevant clauses (2011).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© WilmerHale | Attorney Advertising

Written by:

WilmerHale
Contact
more
less

WilmerHale on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.