EPA Finalizes Clean Air Act Audit Program Providing Penalty Leniency for Self-disclosure by New Owners of Oil and Natural Gas Exploration and Production Facilities

On March 29, 2019, the US Environmental Protection Agency (the EPA) finalized its New Owner Clean Air Act Audit Program (the CAA Audit Program) for the oil and gas sector. The CAA Audit Program, which was initially announced in 2018, builds on EPA’s prior programs providing for waiver or reduction of penalties for self-disclosed violations by tailoring existing audit policies to new owners of upstream oil and natural gas exploration and production facilities. Consistent with the EPA’s announced plans, participants in the CAA Audit Program must enter into a binding agreement (Standard Agreement) with the EPA in order to be eligible for penalty mitigation/forgiveness, a significant change from previous audit policies that provide for penalty mitigation through discovery, disclosure, correction, and prevention of violations.

The EPA’s form of Standard Agreement provides that, in order for a new owner of a facility to participate in the CAA Audit Program, the following criteria must be satisfied:

• The new owner must not have been responsible for environmental noncompliance at the subject facility(ies) prior to the date of acquisition;
• Prior to the transaction in which the new owner acquires subject facility(ies), neither the new owner nor the seller had the largest ownership share of the other entity, and they did not have a common corporate parent; and
• The new owner has notified the EPA of its plan to participate in the CAA Audit Program within nine months of (a) the date of acquisition of the subject facility(ies), or (b) the date the EPA finalizes the CAA Audit Program, whichever is later (but in no event can acquisition of the subject facility(ies) be earlier than 12 months before the date the EPA finalizes the CAA Audit Program).

A new owner that satisfies the conditions above will consult with the EPA in order to conduct an audit of compliance by its facility(ies) with agreed upon provisions of the Clean Air Act, related regulations, and applicable State Implementation Plans. At a minimum, a new owner must assess storage tank battery vapor control system design, and comply with the Vapor Control System Engineering and Design Analysis, Field Survey, and Correction Action Guidelines set forth in Appendix B of the Standard Agreement, which provides directions and guidelines for reviewing these systems and timelines for submission of all necessary documentation. Appendix C of the Standard Agreement specifies reporting and recordkeeping requirements, including a semiannual and final report.

The Clean Air Act Audit Program is separate from, and does not change, the EPA’s existing audit programs, nor does it address violations of non-federally enforceable state requirements. A new owner participating in the Clean Air Act Audit Program may enter into a parallel audit agreement with a state that has an audit policy or equivalent self-disclosure program; although a parallel agreement with a state with an equivalent audit policy or self-disclosure program is not required for participation in the federal program. A new owner also may enter into an audit agreement with a state that has an audit policy or equivalent self-disclosure program in lieu of an agreement with the EPA; however the EPA may take enforcement action with respect to violations that were not disclosed or disclosed but not corrected.

The EPA anticipates that the Clean Air Act Audit Program will yield significant pollutant reductions and public health and environmental protections by providing additional flexibility for, and encouraging self-disclosure and correction of violations by, new owners of upstream oil and natural gas exploration and production facilities.