‘Here We Go Again’: Oil and Gas Sector to Face New Regs in 2015

by LeClairRyan

Tracking regulatory changes in the oil and gas industry is no minor undertaking. After all, when someone speaks of “the oil and gas industry,” that person isn’t simply referencing some narrowly defined zone of activity; instead, the term points to a wide and multi-faceted collection of distinct operations that make up the total process of delivering natural resources from ground to market. These activities—all of which are covered by distinct and ever-evolving regulatory frameworks of their own—include manufacturing, geological services and oil-field services, to name just a few. Consequently, at any given time, the collection of different laws and regulations that could potentially affect this broad industry is quite expansive. It is thus impracticable to cover all potentially important regulatory changes on the horizon in this column. Below, however, are a few specific laws and/or enforcement-related activities that oil and gas companies should be aware of in 2015.

1. New OSHA workplace injury reporting requirements
New U.S. Occupational Safety and Health Administration (OSHA) regulations [codified as 29 CFR Part 1904] went into effect in January. In essence, they require employers to notify OSHA whenever any employee is killed on the job or suffers a work-related hospitalization, amputation or loss of an eye. This marks a departure from prior regulations, which required employers to report all work-related fatalities, but only in-patient hospitalizations involving three or more employees. Under the new regulations, employers are required to notify OSHA of any work-related fatalities within eight hours and must report any work-related in-patient hospitalizations, amputations or eye losses within 24 hours. All employers covered by the Occupational Safety and Health Act, even those who are exempt from maintaining injury and illness records, are required to comply with these new severe injury and illness reporting requirements. The eight- and 24-hour reporting timelines begin when an employer learns about the fatality or injury, not when the injury occurs.

2. Continued evolution of state and local fracking regs
Perspectives on the costs and benefits of hydraulic fracturing vary widely, to say the least. And so it should come as no surprise that fracking-related regulations vary widely from state to state and locality to locality as well. However, there is one blanket generalization that can be applied to state and local fracking regulations—they are moving targets. As a result, companies performing fracking-related activities should pay close attention not only to the specific regulations in the areas in which they are drilling, but also to the potential for new laws and regulations to be passed in these areas.

Residents of Denton, Texas, for example, approved a city ordinance banning fracking on November 4, 2014. According to the rule, operators within the city limits can continue pumping from wells they’ve already fracked, but they cannot re-frack the sites. In early February, citizens of Maryland rallied in support of a bill that would delay fracking in the western part of the state for the next eight years. Around the same time, California was on the verge of finalizing what one newspaper described as “the most comprehensive state oversight of hydraulic fracturing in the nation.” And a local government in Michigan was moving to indirectly regulate oil and gas development within its jurisdiction; observers saw it as an attempt to mollify anti-fracking sentiment among constituents.

Clearly, concerns over the environmental impact of fracking have increased, with a strong focus on aquifers, surface water and groundwater—particularly those that relate to drinking water sources. Typically, state regulations on fracking cover site design, drilling, well design and specifications, regulatory oversight/monitoring, and handling of materials and wastes. Although portions of these regulations are intended to protect the environment, they often do not include analytical testing requirements. The federal government has not enacted new analytical testing hurdles, but some states are beginning to do so.

3. Tougher reporting on ‘conflict minerals’
Extracted in conflict zones and considered to be a source of funding for further fighting, so-called “conflict minerals” are subject to increasing regulatory scrutiny—and new SEC reporting requirements directly affect certain manufacturers of products widely used in the oil and gas sectors.

This is thanks to Section 1502 of the Dodd Frank Act, which created assessment and reporting requirements for issuers whose products contain conflict minerals such as tin, tantalum, tungsten and gold (all of which are widely used in the oil and gas industry). Though the SEC modified some of the reporting requirements in light of a ruling by the Court of Appeals for the DC Circuit, the rule’s due diligence requirements are largely still in place. However, the ultimate parameters of the SEC requirements could change pending final resolution of a legal challenge against the rule.

As written, the requirements mandate that manufacturers whose products contain these minerals file Form SD with the SEC. If required to file a Conflict Minerals Report, issuers must also describe the due diligence procedures they performed related to the resources in question. Issuers that do not need to file the report, however, still must disclose their “reasonable country of origin inquiry” and briefly describe the inquiry they undertook in their Form SD.

Issuers that conclude that their products are “DRC conflict free” may state as much—provided they have obtained an independent private sector audit as required by the Conflict Minerals Rule. According to the SEC, when products have “not been found to be ‘DRC conflict free’ ” or are “DRC conflict undeterminable,” the issuers are required to provide: certain disclosures for those products related to the conflict minerals’ country of origin (if known); facilities used to process the conflict minerals (if known); and the issuer’s efforts to determine mine or location of origin.

Regardless of the ultimate status of the legal challenge, securing full compliance with these rules is likely to consume considerable time, effort and money. Companies should work with their risk-management and legal teams to plan ahead for the changes—to the extent this is possible amid the existing uncertainties.

4. Looking ahead to federal game-changers
Back in January, the Obama Administration announced its goal of cutting methane emissions from the oil and gas sector by 40 to 45 percent (from 2012 levels) over the next decade. According to the administration, the EPA will drive the rulemaking process as the agency seeks to set standards for both methane and volatile organic compounds (VOC) emissions. This will apply to emissions from new and modified oil and gas production sources, as well as natural gas processing and transmission sources.

Regulators aim to issue a proposed rule this summer and finalize it in 2016. Sources to be targeted by the new regulations include pneumatic pumps, leaks from well sites, gathering and boosting stations, and compressor stations. Depending on the stringency of the promulgated rules, the new regulations could have a significantly negative impact on operators in the natural gas market. Developments should be watched closely so that the rules’ potential impact can be both complied with and factored into producers’ cost structure. Through civil and criminal prosecution, the EPA will continue to ramp up its enforcement efforts against the oil and gas industry in 2015, with producers likely facing strict and focused enforcement of the new emissions regulations. Producers, beware.

Source: Oil & Gas Monitor


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.

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