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EPA Issues Draft Audit Policy for New Owners of Upstream Oil and Natural Gas Exploration and Production FacilitiesNovember 13, 2018
Building on its prior programs for waiver of, or reduction of, penalties for self-disclosed violations, the Environmental Protection Agency (EPA) has announced the development of the New Owner Clean Air Act Audit Program (CAA Audit Program) in order to tailor existing audit policies to new owners of upstream oil and natural gas exploration and production facilities. A crucial component of the CAA Audit Program will require that participants assess the vapor control system designs of storage tank batteries. As discussed below, a significant difference between existing EPA audit policies and the CAA Audit Program is the requirement for participants in the CAA Audit Program to enter into a binding agreement with EPA in order to be eligible for penalty mitigation/forgiveness.
In 2000, EPA issued revisions to its general audit policy (originally created in 1995) under a new policy: “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations” (2000 Audit Policy). The 2000 Audit Policy provides the criteria for penalty reduction/forgiveness for violations of federal environmental regulations for companies that voluntarily discover, disclose, and correct those violations. In 2008, EPA modified the 2000 Audit Policy through “The Interim Self-Disclosure Policy” (2008 New Owners Policy), which provides special forgiveness terms for new owners in respect of pre-acquisition violations and certain post acquisition penalties. To qualify, new owners must self-disclose environmental violations within nine months of an acquisition (and enter into “audit agreements” providing for self-disclosure) (see OMM August 22, 2008, Client Alert: EPA Implements Audit Policy for New Owners).
CAA Audit Program
The new CAA Audit Program is meant to offer assurance that the noted self-audit policies will apply to new owners of oil and gas operations, including penalty mitigation opportunities, which go beyond what was offered by the 2000 Audit Policy and 2008 New Owners Policy. The CAA Audit Program centers on a draft standard audit program agreement template (Template Agreement): an agreement that a new owner must execute with EPA in order to be eligible for penalty mitigation or forgiveness under the CAA Audit Program (EPA is seeking feedback on the Template Agreement from a wide range of stakeholders). By way of contrast, under the 2000 Audit Policy and 2008 New Owners Policy, a participant was not required to enter into any agreement with EPA, but received penalty mitigation through discovery, disclosure, correction, and prevention of violations.
In its current draft form, the Template 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 non-compliance at the subject facilities prior to the date of acquisition;
- Prior to the transaction in which the new owner acquires subject facilities, 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 EPA of its plan to participate in the CAA Audit Program within six months (a) of the date of acquisition of the subject facilities, or (b) of the date EPA finalizes the CAA Audit Program, whichever is later (but in no event can acquisition of the subject facilities be earlier than 12 months before the date EPA finalizes the CAA Audit Program).
A new owner that satisfies the conditions above will consult with EPA in order to conduct an audit of its facilities’ compliance with agreed-upon provisions of the Clean Air Act, related regulations, and applicable State Implementation Plans. At a minimum, a new owner must comply with the Vapor Control System Engineering and Design Analysis, Field Survey, and Correction Action Guidelines set forth in Appendix B of the Template Agreement, which provides directions and guidelines for reviewing these systems and timelines for submission of all necessary documentation. Appendix C of the Template Agreement specifies reporting and recordkeeping requirements, including a semi-annual and final report.
EPA and Industry Commentary
EPA states in a Questions and Answers document that the CAA Audit Program “is not a replacement for vigorous enforcement,” but “will result in more voluntary correction of non-compliance and will allow EPA to devote its enforcement resources to correcting non-compliance at facilities that elect not to return to compliance voluntarily.” Some trade organizations, (including the Independent Petroleum Association of America through a comment to EPA) have voiced concerns regarding Appendix B of the Template Agreement, arguing that the requirements exceed federal regulatory requirements under the Clean Air Act and may result in different treatment of oil and natural gas production from other industries. In addition, the groups argue that compliance with state audit programs that offer equivalent protections to the CAA Audit Program should be accepted by EPA as compliance with the CAA Audit Program. These groups predict that operators may be less likely to participate in the CAA Audit Program because of these issues.
EPA highlights that, while the CAA Audit Program has elements that are similar to the 2000 Audit Policy and 2008 New Owners Policy, the CAA Audit Program is separate from those policies and does not alter them. Therefore, affected businesses should consider whether they can benefit under the CAA Audit Program, 2008 New Owners Policy, or 2000 Audit Policy by conducting a compliance audit in connection with transactions currently contemplated and those completed in the last year.
EPA has not announced a timeline for finalizing the CAA Audit Program and Template Agreement. We will continue to monitor developments in connection with the CAA Audit Program, including with respect to any impact of the 2018 elections and newly gained EPA oversight power of the Democratic Party in the House of Representatives.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Eric Rothenberg, an O’Melveny partner licensed to practice law in New York, John D. Renneisen, an O’Melveny senior counsel licensed to practice law in the District of Columbia, and Jesse Glickstein, an O’Melveny associate licensed to practice law in the District of Columbia, New Jersey, and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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