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The Energy Law Blog

Oil & gas exploration, developmnet, & marketing in the gulf coast

Supreme Court of Texas Clarifies How to Prove Lost Value

Posted in Exploration and Production, Litigation, Oil & Gas Contracts, Texas

By Andrew Wooley

On May 8, 2015, the Supreme Court of Texas held in Phillips v. Carlton Energy Group, LLC[1]/ that an expert witness’s pre-suit evaluations of a coal bed methane concession in Bulgaria and his and another expert’s opinion testimony at trial were too speculative to support a jury’s damage finding for tortious interference related to the concession, but that several bona fide offers to purchase an interest in the concession, even if based on the same pre-suit expert evaluations, were “reasonably certain” valuation evidence potentially sufficient to support a damage award.

The decision is noteworthy for two reasons.  First, it extended the existing requirement that lost profits be proved with “reasonable certainty” to proof of lost value when valuation is based on an extrapolation of estimated profits.  (“We can think of no reason … why it would make sense to deny damages based on speculative evidence of lost profits but allow recovery of lost value based on the same evidence.”)  Second, by its holding that bona fide offers in a recognized market to buy or sell an asset can be reasonably certain evidence of value, even if the offers are based on unverifiable assumptions and speculative extrapolations, the supreme court clarified in Phillips that the “reasonable certainty” required to prove lost value is not the same as that required to prove lost profits: “[W]hen evidence of potential profits is used to prove the market value of an income-producing asset, the law should not require greater certainty in projecting those profits than the market itself would.”

The trial court in Phillips entered judgment for the plaintiff on its tortious interference claim against defendant Phillips, subject to a remittitur of the jury’s $66.5 million damage finding to $31.16 million.  The plaintiff conditionally agreed to the remittitur, and both the plaintiff and Phillips appealed.  The court of appeals reversed the remittitur and other aspects of the trial court’s judgment, and rendered judgment for the plaintiff on the jury’s verdict.[2]/  Phillips and the other defendants successfully petitioned the supreme court for review.  The supreme court has jurisdiction over questions of law, which it exercised to clarify that proof of lost value requires “reasonable certainty” but that the meaning of “reasonable certainty” for proof of lost value is not exactly the same as “reasonable certainty” for proof of lost profits.  The supreme court does not have jurisdiction to decide whether a particular jury finding is supported by factually sufficient evidence, however, so it necessarily remanded that question to the court of appeals for its determination.  The court of appeals will therefore reconsider the evidence in the record of the fair market value of the plaintiff’s lost interest in the Bulgarian concession in light of the “reasonably certain” criteria explained by the supreme court in Phillips and decide whether the record evidence is sufficient to support the jury’s award of $66.5 million damages and whether the trial court erred in suggesting a remittitur to $31.16 million.  No matter how the court of appeals disposes of the case on remand, the case may well end up before the supreme court a second time.

[1]/     58 Tex. Sup. Ct. J. 803, 2015 WL 2148951, 2015 Tex. LEXIS 439 (Tex. May 8, 2015).

[2]/    Carlton Energy Grp., LLC v. Phillips, 369 S.W.3d 433, 465 (Tex. App.—Houston [1st Dist.] 2012).

EPA and BSEE Team Up to Resolve Offshore Environmental Violations

Posted in Environmental

Recently, when there was talk about Houston-based ATP Oil and Gas’ (ATP) legal problems, it was inevitably about its bankruptcy and its effort to bring the overriding royalty interests it had conveyed back into the bankrupt estate as debt instruments. That should change now that the Department of Justice (DOJ), acting jointly on behalf of EPA and BSEE, has announced its settlement with ATP Infrastructure Partners (ATP-IP) in the first joint judicial enforcement action resolving alleged violations of both the Clean Water Act (CWA) and Outer Continental Shelf Lands Act (OCSLA).

This settlement should garner its own share of interest, if for no other reason, because BSEE and EPA are taking the issues serious enough to require all submittals to be signed by a responsible corporate official in addition to imposing a $1 million fine.

It highlights three trends that industry should be aware of: the willingness of EPA and BSEE to work together to address violations of environmental regulations off-shore, requiring corrective measures that include enhanced reporting and third-party auditing, and multiple mandated certifications by a designated officials.

The Violation

In March 2012, BSEE conducted an inspection of ATP’s floating production platform facility, known as the ATP Innovator, while it was moored to the sea floor about 45 nautical miles offshore of southeastern Louisiana (about 125 miles south of New Orleans) and engaged in the production of oil and natural gas. ATP operated a float cell on the platform as an essential part of its wastewater treatment system to separate and remove oil and suspended solids from its produced water prior to its discharge into the Gulf. During the inspection, BSEE officials discovered a metal tube “hidden in the rafters” that went from a tank holding Cleartron ZB-103, a water clarifier that the government alleges was used as a dispersant, to the outfall pipe at a location downstream of the designated NPDES sampling point; thus, making the added chemical undetectable in required NPDES samples.

According to the complaint (PDF) DOJ filed in February 2013, Cleartron ZB-103 was routinely “injected into the outfall pipe to mask oil sheen on the ocean surface resulting from ATP’s discharge of wastewater containing quantities of oil in excess of its NPDES permit limit.” DOJ further alleged that this setup was intended to allow ATP to mask any oil sheens resulting from the discharge of wastewater that exceeded the permit limit for oil content. Under the NPDES General Permit, the Oil & Grease content of produced water discharges is limited to a monthly average of 29 mg/L and a daily maximum of 42 mg/L, and the General Permit only requires the collection of Oil & Grease samples once per month.

However, permittees are also required to sample their produced water discharge for Oil & Grease any time that a sheen is observed in the vicinity of the discharge. Thus, the mere presence of a produced water sheen is not necessarily a permit violation, but it will necessitate additional sampling to determine if a violation has occurred. The government also noted that the Cleartron ZB-103’s MSDS states that it is harmful to aquatic life. For these reasons, the government claims that the discharge of Cleartron ZB-103 in this manner was an unlawful discharge of a CWA “pollutant.”

Following the BSEE inspection, the piping that ran from the Cleartron ZB-103 tank to the discharge pipe was removed, the ATP Innovator ceased operations and was removed from the deepwater. It now resides at the Port of Corpus Christi, Texas, sitting idle with no plans for future use in United States waters.

The DOJ filed its complaint against two entities—ATP and ATP-IP. ATP is the ATP Innovator’s operator and ATP-IP is the platform’s owner. Sometime after the BSEE inspection, but before DOJ filed its complaint, ATP declared bankruptcy citing reduced cash flows caused by the deepwater drilling moratorium instituted after the 2010 Deepwater Horizon oil spill. Normally, the automatic stay afforded to bankrupt entities would protect these entities against litigation, but the DOJ’s enforcement action was exempt from the automatic stay based on a “police and regulatory” exemption. ATP’s bankruptcy has not been resolved; therefore, the government’s claims against it await resolution.

The government’s Complaint alleges six causes of action:

  1. CWA § 309(d) civil penalties for violations of CWA § 301(a) for unauthorized chemical dispersant discharges;
  2. CWA § 309(d) civil penalties for permit violations;
  3. CWA § 311(b)(7)(A) and (D) civil penalties for oil discharge violations;
  4. Injunctive relief under OCSLA, 43 U.S.C. § 1350(a);
  5. Injunctive relief under CWA Section 309(b); and
  6. Declaratory judgment declaring the applicability of the police and regulatory exception to the Bankruptcy Code’s automatic stay pursuant to 11 U.S.C. § 362(b)(4).

ATP-IP unsuccessfully sought to have all of DOJ claims against it (Claims 3, 4, and 5) dismissed. See United States v. ATP Oil & Gas Corp., 955 F.Supp.2d 616 (E.D. LA. 2013).

The Relief Sought by the Government

Both EPA regulations and the General NPDES permit restrict the discharge of dispersants into the ocean or any other waters. See 40 C.F.R. § 110.4 & NPDES General Permit, Part I, Section C.3 (expressly stating that the “operator shall minimize the discharge of dispersants, surfactants and detergents except as necessary to comply with the safety requirements of [OSHA, BSEE, and BOEM]… .). The DOJ alleged that ATP had been discharging significant quantities of dispersants, i.e., Cleartron ZB-103, on a daily basis, from October 2010 to March 2012—a period of about 16 months which at a statutory maximum of $37,500 per day for each of the three violations listed above exposed ATP to a maximum potential fine of about $54 million.

In addition to statutory penalties, the DOJ sought injunctive relief measures under both the CWA and OCSLA for operational practices to prevent future unauthorized discharges of pollutants into the offshore waters. This included the pipe setup itself, which still exist, in part, because only the pipe itself was removed, leaving the tube for use in future permit violations.

ATP-IP’s Consent Decree

To resolve this enforcement action, ATP-IP agreed to pay a $1 million fine and perform corrective measures including the permanent elimination of the Cleartron ZB-103 access point in the wastewater discharge outfall pipe. More importantly, the Consent Decree (PDF) requires that at least 30 days before anyone uses the ATP Innovator again for exploration, development, or production activities in US waters, ATP-IP will certify to the government that:

  • The platform has sufficient wastewater treatment equipment and operational plans to meet and maintain CWA permit discharge limits and prevent unlawful discharge of pollutants.
  • The platform’s surface production-safety systems will be maintained in a manner that provides for protection of the environment in accordance with BSEE’s regulations.
  • All platform operations will be performed in a safe and workmanlike manner in accordance with BSEE’s regulations.

As a further safeguard, with respect to the platform, ATP-IP must notify the DOJ, EPA and BSEE if any of the following actions occur:

  • The addition of any wastewater treatment equipment or surface production-safety equipment before the requisite certification is made.
  • Removal of the tube and permanent sealing of the discharge pipe.
  • Plans for its sell or transfer of ownership.
  • Plans for its salvage or scraps.
  • Plans for its use or lease for exploration, development, or production activities.
  • The required third-party audit of its wastewater treatment operations and surface production-safety systems for compliance with the CWA and OCSLA.
  • After every six months, its location and ownership.

Each Notification, Certification and Report Must be Signed By a Responsible Corporate Official

In a showing of how serious BSEE and EPA are taking these alleged violations, the consent decree requires each of the above notices, certifications and audit reports submitted by ATP-IP to the government to be signed by a responsible corporate official with the following certification:

I certify under penalty of law that this document and all attachments were prepared under my direction or supervision in accordance with a system designed to assure that qualified personnel properly gather and evaluate the information submitted. Based on any personal knowledge I may have and my inquiry of the person or persons who manage the system, or those persons directly responsible for gathering the information, the information submitted is, to the best of my knowledge and belief, true, accurate, and complete. I am aware that there are significant penalties for submitting false information, including the possibility of fine and imprisonment for knowing violations.

The consent decree neither defines the term “responsible corporate official.” It is unclear whether this term will be interpreted as consistent with the similar provisions of the NPDES signatory rule. See 40 C.F.R. 122.22. The above certification language is almost identical to that which is required by NPDES regulations that must be signed by a responsible corporate officer or their duly authorized representative. See 40 C.F.R. § 122.22 (d). If the term “official” as used in the consent decree is equivalent to “officer,” then the only real difference is that the consent decree does not allow a “duly authorized representative” to sign the above-required certifications.


This consent decree is significant because it shows for the first time EPA, BSEE and DOJ working together, locally and in Washington D.C., to impose enhanced monitoring and auditing requirements on entities subject to enforcement actions for environmental violations in the Gulf of Mexico. The best means for avoiding liability in this case is to document compliance programs and due diligence in reviewing permit related submittals with those who prepared the documents to ensure their accuracy..

This is clearly an attempt by the government to change the corporate culture at ATP-IP and to send a message to the rest of the regulated community. While monetary penalties generally imposed upon a company may not sufficiently deter certain types of risk-taking within a corporation’s culture, making a corporate official personally assume responsibility and even potential criminal liability for the accuracy of government submittals related to compliance with a consent decree should get every executives attention and hopefully their attention will radiate across their company and perhaps the industry.

Ultimately, this case underscores the government’s expectation that upper management be actively involved in ensuring corporate compliance with federal environmental laws. Corporate executives and in-house counsel in heavily regulated environments are well-advised to implement effective compliance programs and to ensure that such programs are actually followed in order to avoid even the specter of personal liability.

Sierra Club Asks Court to Ban Use of Legacy DOT-111 Tank Cars

Posted in Environmental

As if crude producers and midstream transportation companies don’t already have enough problems trying to get crude oil from production fields to refineries thanks to inadequate pipeline infrastructure, tank car supply, rail safety concerns, and new regulations, they now also have to address a new, potentially market-busting lawsuit. In September, the Sierra Club, one of the largest environmental organizations in the United States, filed a lawsuit seeking an immediate ban on the transportation of crude oil in allegedly outdated and unsafe tank cars despite the fact that the government has proposed regulations to address the same concerns.

The Proposed Regulations

Following a series of train accidents in 2013, and a number of petitions asking for more stringent railroad safety regulations, the Pipeline and Hazardous Materials Safety Administration (PHMSA) and Federal Railroad Administration (FRA) published an advance notice of proposed rulemaking (ANPRM) on September 6, 2013. At the requests of the Sierra Club, the government extended the comment period to allow additional time for more public participation and both the Sierra Club and ForestEthics (the NGOs) submitted comments relevant to the proposed rulemaking.

The Petition for an Emergency Ban

Not willing to wait for the wheels of government to turn, the two NGOs jointly filed a petition with the Secretary of Transportation on July 15, 2014, just before the proposed rules were to be published, asking DOT to issue an emergency order banning the use of unjacketed (legacy) DOT-111 tank cars to ship Bakken crude and other highly flammable crude oil. The petition claims that unjacketed DOT-111 are unsafe because in rail accidents the cars are prone to puncture, spill oil, and trigger fires and explosions. They argue that the continued use of these tank cars poses an “imminent hazard.”

Instead of directly responding to the NGOs’ petition, the government issued a Notice of Proposed Rulemaking, as planned, about two weeks later. We reported in our recent blog entry about the content and impact of these new rules, which proposes three options for phasing out of the legacy DOT-111 tank cars, none of which includes an immediate ban on their continued use. Thus, if finalized as proposed, the new rules would shippers to continue to use legacy DOT-111 tank cars to ship Bakken crude until October 2018.

The Writ of Mandamus

Although the proposed rule addresses many of the DOT-111 safety concerns by requiring retrofits and operational changes, the NGOs claim that the proposed four-year phase-out of legacy tank cars is a “glacial pace [that] is unacceptable.” Thus, they filed an original Writ of Mandamus with the United States Court of Appeals for the Ninth Circuit on September 11, 2014, seeking to force the DOT to respond their petition for an immediate ban. For a legal basis, the NGOs argue that the All Writs Act gives the Ninth Circuit Courts of Appeals jurisdiction and they claim that the DOT has violated the Administrative Procedure Act a number of ways by taking an unreasonable amount of time to respond to their Rail Car Petition.

First, the NGOs claim that threat posed by the continued use of legacy DOT-111 tank cars is so severe that the 2018 ban contemplated in the proposed rules is simply too extended. Second, they even argue that the threat of harm is so great that the rulemaking process itself will take too long and leave too much to chance. For these reasons, they claim that the DOT had an obligation to respond to their petition for emergency order within a reasonable time, i.e., 30 days. Third, the NGOs argue shippers, who own the legacy DOT-111 tank cars, lack the necessary incentives created by financial liability to stop using DOT-111 tank cars to ship Bakken crude because they generally do not bear liability for rail accidents once a rail carrier accepts a shipment. And finally, the NGOs claim that the DOT’s proposed delay banning the DOT-111 tank cars will cause prejudice because Canada has already banned the DOT-111 tank cars; thereby incentivizing North American marketers to use the unsafe DOT-111 tank cars in America and the newer and safer tank cars in Canada until after the 2018 ban.

The NGOs acknowledge that most “unreasonable delay cases” entail lengthier delays involving rulemaking proceedings that take years to complete, but argue that their petition is unique and different because it seeks an “emergency action” to abate an imminent hazard that cannot wait for a rulemaking because “lives are at stake.” Likewise, while the NGOs admit that “there is no per se rule as to how long is too long, [they nonetheless claim that] ‘a reasonable time for agency action is typically counted in weeks or months, not years,’ particularly when urgent health or environmental harms are at stake, as the case here.” Citing In re American Rivers, 372 F.3d 413, 419 (D.C. Circuit 2004).

A Case to Follow

On September 22, 2014, the Ninth Circuit denied the petitioners’ request for an expedited decision but ordered the DOT to respond to the NGOs’ writ. The court specifically directed the DOT to propose a timeline for its response to the Rail Car Petition. According to the briefing schedule, the Ninth Circuit’s ruling will likely come in early 2015.

Crude oil producers should keep an eye on how the Court and the agency address the NGOs’ request because if the DOT ultimately bans legacy DOT-111, the marketplace would immediately lose about 25 percent of tank cars available to transport crude oil in North America, creating an immediate shortage of rail cars until the industry can manufacture new tank cars using the newer standards.

Liskow & Lewis Attorney to Participate in TexFed Oil & Gas Conference

Posted in Tax

In early November, the Texas Federal Tax Institute will host the TexFed: Oil & Gas Tax Conference in New York City. This is the first time a conference of this nature will be held in the Big Apple, and I am honored to participate as a member of a panel that will explore farmout transactions, joint operating agreements and the use of tax partnerships to optimize the after-tax economics of these transactions.

With the re-emergence of the domestic oil and gas exploration and production business, oil and gas farmout transactions have returned to prominence as a means by which a party with an oil and gas property can join together with a party who has an interest in deploying its capital to exploit that property. Our panel will define, analyze and discuss customary domestic farmout transactions and the resulting tax consequences thereof, including when to elect to be excluded from the partnership tax rules and alternatively when to use the partnership tax rules to avoid traps for the unwary and achieve tax efficiencies for the farmout transaction. In particular, we’ll analyze and discuss the innovative “cash and carry” transaction, which, when properly implemented, can result in tax efficiencies for both the farmor and the farmee in the transaction.

The conference targets attorneys, accountants and corporate finance personnel with an interest in understanding how these transactions are implemented to meet the objective of the parties. The conference will cover a broad range of issues including the tax rules for oil and gas operations, master limited partnerships, financing oil and gas activities through volumetric production payments, investments by tax-exempt investors and application of the at-risk and passive loss rules. In short, the conference is a comprehensive overview of current issues that industry tax, corporate finance, merger and acquisition, accounting and legal personnel need to understand. There also will be networking events which offer the attendees the opportunity to meet new people and make new connections in the industry.

I’m looking forward to seeing many of my friends and contacts in New York next month, and I hope you’ll consider joining us at the conference as well. Visit the Texas Federal Tax Institute’s website to register.

Trans Energy Settlement Shows Need for E&P Wetlands Compliance Strategy

Posted in Environmental

On September 2, 2014, the Department of Justice announced a settlement in United States v. Trans Energy, Inc., No. 14-117 (N.D.W.Va.), requiring the oil and gas company to pay $3 million in civil penalties and to spend approximately $13 million to restore 15 sites in West Virginia that had been developed without dredge and fill permits. The United States and the West Virginia Department of Environmental Protection alleged that the company impounded streams and discharged dirt, sand, rocks and other materials into streams and wetlands without permits to construct well pads, pipeline stream crossings, surface impoundments, and other structures relating to natural gas extraction. According to the Justice Department, the violations affected 13,000 linear feet of stream and more than an acre of wetlands.

The Trans Energy settlement shows that exploration and production (E&P) companies need a rigorous compliance strategy for wetlands permit requirements. In this regard, the legal commentary has placed a high degree of emphasis on the jurisdictional question under Section 404 of the Clean Water Act of whether a planned activity will involve the discharge of dredged or fill material into “waters of the United States.” See our previous blog entry on the proposed rule redefining the “waters of the United States” covered by the Clean Water Act.

On the other hand, the legal commentary has virtually ignored the importance of Nationwide Permits (NWPs) 12 and 39 to E&P activities. The Army Corps of Engineers (Corps) issues NWPs for activities that have minimal individual and cumulative adverse effects on the aquatic environment. The most recent versions of the NWPs were reissued in 2012, and they will be valid for five years, until March 18, 2017. See 77 Fed. Reg. 10184 (Feb. 21, 2012).

NWP-12 is for “utility line activities.” It authorizes activities required for the construction, maintenance, repair, and removal of “utility lines and associated facilities” in “waters of the United States,” provided the activity does not result in the loss of greater than 1/2-acre of “waters of the United States” for “each single and complete project.” 77 Fed. Reg. at 10271. “Utility lines” are defined broadly enough to include oil and gas gathering lines. In addition, NWP-12 expressly authorizes the construction of access roads for the construction and maintenance of “utility lines,” with certain limitations. NWP-12 requires pre-construction notification to the Corps only for seven specified types of circumstances, including where:

  • A Rivers and Harbors Act Section 10 permit is required;
  • The length of the “utility line” in “waters of the United States” exceeds 500 feet; or
  • The discharge results in a loss of more than 1/10th of an acre of “waters of the United States.”

Id. at 10272.

Moreover, NWP-39 authorizes discharges of dredged or fill material into non-tidal “waters of the United States” for the construction or expansion of commercial and institutional building foundations and building pads and attendant features necessary for the use and maintenance of the structures. The discharge must not cause the loss of greater than 1/2-acre of non-tidal “waters of the United States,” including the loss of no more than 300 linear feet of stream bed (unless for intermittent and ephemeral stream beds the Corps waives the 300 linear feet limit). Id. at 10279. Notably, the Corps has expressly stated that the construction of oil and gas well pads is a type of commercial development appropriate for authorization under NWP-39. Id. at 10223. Pre-construction notification is required for all NWP-39 permits.

The use of the NWPs also requires water quality certification under Section 401 of the Clean Water Act. The Louisiana Department of Environmental Quality has issued water quality certification (PDF) for NWP-12 without conditions, but it will issue such certification for NWP-39 only on a case-by-case basis. Likewise, the Texas Railroad Commission, which handles water quality certifications for federal permits covering activities associated with oil and gas exploration, development, and production operations, has issued water quality certification for activities under NWP-12 (PDF).

Individual Section 404 permits are not required when a nationwide permit is available. The E&P industry should utilize the NWP program as a way to streamline and simplify wetlands permit requirements. For more information about the NWP program, please contact Robert Holden or Lesley Pietras.

BSEE’s Investigations and Review Unit Changes the Playing Field on the OCS

Posted in Environmental

The Bureau of Safety and Environmental Enforcement’s (BSEE’s) Investigations and Review Unit (IRU) substantially enhances the civil and criminal enforcement of the Outer Continental Shelf Lands Act (OCSLA) and the regulations issued thereunder.


In 2010, in the wake of the Deepwater Horizon oil spill, the Department of Interior renamed the Minerals Management Service (MMS) the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE). DOI then restructured BOEMRE into three new Bureaus: BSEE, the Bureau of Ocean Energy Management (BOEM) and the Office of Natural Resources Revenue. The reorganization gave BSEE regulatory authority (PDF) over safety and environmental affairs for OCS exploration and production activities.

As part of the restructuring of the MMS, DOI Secretary Salazar established the IRU within BOEMRE via Secretarial Order No. 3304, issued June 29, 2010. The IRU was established (PDF) “to root out internal problems and target companies that aim to game the system.” Its purpose was “to establish the internal capability in BOEMRE” to: (1) promptly and credibly investigate and respond to allegations or evidence of misconduct and unethical behavior by BOEMRE employees and industry; (2) oversee and coordinate BOEMRE’s internal auditing, regulatory oversight and enforcement systems and programs; and (3) assure the ability of BOEMRE to swiftly assess and respond to emerging issues and crises on a Bureau-wide level, including spills and other significant events. Secretary Salazar originally intended the IRU’s functions to continue within the three new bureaus; however, as of fiscal year 2013, the IRU was operating only within BSEE (PDF).

Questions Regarding the Composition and Functioning of the IRU

The IRU describes itself as “a team of professionals with law enforcement backgrounds or technical expertise.” The head of the IRU reports to the BSEE Director. The current head of the IRU was formerly a supervisory special agent with the EPA’s Criminal Investigation Division. The IRU staff includes a federal criminal prosecutor and experienced law enforcement agents.

The Natural Resources Committee for the House of Representatives has questioned DOI about the IRU’s composition and activities. Rep. Richard Hastings (R-Wash.), House Natural Resources Committee Chairman, on behalf of the Committee, said in a letter (PDF) to Secretary Salazar, dated March 4, 2013, “More than two years after its creation, little is known about the IRU’s personnel, organization, and activities.” In particular, Rep. Hastings raised concerns about the IRU’s makeup, pointing to (1) BOEMRE’s 2010 request for $5.8 million (PDF) to equip the IRU and staff it with twenty new employees; (2) a 2012 statement by BOEMRE Director Bromwich “that the IRU would be staffed by prosecutors, investigators, and scientists;” (3) BSEE’s description of the IRU as “a team of professionals with law enforcement backgrounds or technical expertise;” and (4) a 2012 job listing for IRU special investigators noting duties including collecting evidence and witness statements. According to Rep. Hastings, it was “unclear how many people actually work in the IRU, what their backgrounds and expertise are,” whether they “serv[e] in a law enforcement capacity” or are authorized to carry firearms, and “how they are to interact with witnesses or collect evidence. . . .”

Rep. Hastings was particularly concerned that the IRU had been acting as a law enforcement organization beyond its authority and without sufficient oversight by the DOI, Congress or the public, instead reporting only to the BSEE Director. Rep. Hastings requested that the DOI produce any policies and guidance concerning coordination between the IRU and the DOI’s Office of Inspector General (DOI-OIG) or Ethics Office, as well as any status reports or results of investigations provided by the IRU to the DOI-OIG. The Natural Resources Committee has received a response from the DOI, but the DOI response is not publicly available at this time.

IRU Investigations

The IRU shares BSEE’s regulatory jurisdiction. It investigates violations of safety and environmental regulations in parallel with and in addition to ordinary BSEE investigations. Typical BSEE investigations are conducted by BSEE district personnel and are fact-finding proceedings. These investigations may result in the issuance of Incidents of Noncompliance (INCs) with requirements for corrective actions and/or the imposition of civil penalties. See 30 C.F.R. §§ 250.191, 250.1404. In all but the most egregious cases, the typical civil enforcement action has in the past been resolved with the correction of the noncompliance and the payment of any required civil penalty.

The IRU has an investigatory role greater than that of BSEE inspectors. The IRU investigation may be triggered by an accident, a whistleblower, or an INC. The IRU concentrates on matters involving serious personal injury or harm to the environment, or serious risks of such harm. If after a detailed investigation, the IRU determines that a criminal violation may have occurred (i.e., a willing and knowing violation of the statute, regulations, or lease provision, see 43 U.S.C.§ 1350(c)), the IRU may refer the investigation to the DOI-OIG for further investigation. With respect to an investigation that has been triggered by an INC, the IRU or DOI-OIG investigation may continue regardless of whether the INC has already been resolved or any civil penalty paid.

In contrast to the IRU, the DOI-OIG has criminal enforcement authority within the agency. (The DOI-OIG agent is the counterpart to an FBI agent in a regular criminal investigation.) The DOI-OIG may then refer the case to the United States Attorney’s Office for criminal prosecution, which in turn may bring the matter before a grand jury to seek an indictment.

The IRU investigation of an INC may not be apparent to an operator. An operator that has been issued an INC can no longer assume that the matter is closed simply because it corrected the noncompliance and paid a civil penalty—an investigation could be ongoing within the IRU. For example, an operator might only learn of the IRU investigation when it receives a request from the IRU to provide documents and/or make its employees available for interviews. Operators should know that if an investigation proceeds to IRU interviews of the operator’s employees and contractors, the IRU considers the violation to be a serious issue with possible criminal implications. Failure to cooperate in an IRU investigation could itself be construed as a violation of the OCSLA.

The IRU has the authority to interview and take oral statements from employees and contractors. The IRU may tape record the interviews (generally the operator will only receive copies of the tapes after indictment). For reasons of logistics, the interviews are unlikely to take place offshore. The individual who is subject to an IRU interview has a clear right to have his or her attorney present; however, the IRU will have discretion about allowing company attorneys to be present. The interview process itself raises a number of concerns, such as: (1) a government interview is intimidating and scary to employees; (2) the employees may be unaware of their right not to be interviewed; (3) the employees may be unaware of their right to their own counsel at the interview; (4) the employees may be unaware of the possible use of the interviews in a future criminal case; and (5) many employees may not be sophisticated about complex technical terms and actions on a rig or platform, creating a risk of miscommunication of regulatory significance. For these reasons, when the IRU is conducting interviews, it makes sense for the operator to implement a pro-active legal response.


We recommend that operators respond to and treat accident investigations and INCs more carefully than ever. Accidents involving serious injuries and INCs involving serious environmental and safety risks will receive heightened scrutiny by BSEE’s District Office and the IRU. It is not only actual harm, but also the risk of harm, either to an individual or to the environment, that triggers criminal enforcement. The IRU is now a mature organization, staffed with highly capable and experienced investigators tasked with ensuring more active enforcement of BSEE regulations. OCS operators and their counsel should be aware of the heightened risk of criminal investigations and possible prosecution.

Proposed Railroad Rules May Impact Crude Oil Producers: Proposed DOT/PHMSA Oil Tank Car Rules

Posted in Environmental

Prompted by concerns heightened by several recent high profile train derailments and accidents, coupled with the boom in the number of oil-carrying trains, the Obama administration, through the Pipeline and Hazardous Materials Safety Administration (PHMSA), has proposed two new sets of rules aimed at addressing the perceived risks posed by the increase in rail transportation of crude oil primarily from the Bakken shale. These rules are similar to ones just issued in Canada that will also require the phase-out of older rail tank cars. See 79 Fed. Reg. 45,016 (Aug. 1, 2014) (comments are due on September 30, 2014).

Notice of Proposed Rulemaking

According to Transportation Secretary Anthony Foxx, the “Bakken crude oil is on the high end of volatility compared to other crude oils,…[and] its production is skyrocketing, up from 9,500 rail car loads in 2008 to 415,000 last year, a more than 4,000 percent increase.” To address their concerns, PHMSA, through a Notice of Proposed Rulemaking (NPRM), is seeking to require the phase-out of tens of thousands of tank cars now in High-Hazard Flammable Train service (defined as a single train containing 20 or more tank carloads of Class 3, i.e., flammable liquid material), within as little as two years, unless they are retrofitted to meet new safety standards. For trains transporting crude oils that exhibit certain physical properties, the new rules, if promulgated, will also require lower speed limits, better braking, and a formal sampling and testing program for volatile liquids, including oil.

These new speed limits—40 mph for trains with tank cars that do not meet the new standards, 50 mph maximum for those that do, and a 30-mph restriction for those that do not comply with stricter braking requirements—may affect the oil and gas industry mainly by slowing down transportation of crude. On the other hand, the tank car phase-out may pose real issues if it causes a shortage of transportation options before industry is able to meet the demand for new or retrofitted tank cars.

Under the proposed rules, the rail cars facing retrofit or phase-out—known as DOT-111 cars—account for 228,000 of the 335,000 active tank car fleet, and 92,000 of them move flammable liquids, such as crude oil and ethanol. Of these 92,000 tank cars, only 18,000 have been built to the industry’s latest safety standards. These older-model DOT-111 tank cars used to transport both crude oil have long been known to be vulnerable to failure in derailments. The Obama Administration has rejected calls from some for an immediate ban on shipping volatile crude in the older DOT-111 tank cars, claiming that the proposed phase-out appropriately balances the need to transport crude, but doing it safely.

The need for safer tank cars is not new. The rail industry voluntary took steps in 2011 to improve tank car design and since then all the tank cars built for this service meet a new industry standard, known as CPC-1232. However, two of the three options proposed by PHMSA for a new agency standard, to be known as DOT-117, require a greater shell thickness than CPC-1232 requires. But even when 55,000 of the newer CPC-1232 cars are in service by 2015, there will still be 45,000 older ones being used to meet demand.

Cost and Other Implications to Shippers

It would be a mistake to think that these rules would only have a significant impact on manufacturers of tank cars and rail carriers. On the contrary, oil and gas companies could be significantly affected by these rules. Almost all tank cars are owned or leased by the shippers of the crude oil. Those companies that own their tank cars would have to pay for their retrofit, repurposing, or disposal, and/or the cost of new tank cars. Although PHMSA expects that lease rates would not increase as a result of the new standard, it is hard to imagine that the lessor would not pass on some of these additional costs to the lessee. Finally, the agency acknowledges that rail carriers are likely to pass on additional fees to the shippers as a result of increased fuel and track maintenance required by the added weight of new or retrofitted tank cars.

Another potential cost to oil and gas companies is related to potential delays from slower speeds and reduced tank car capacity. As to the latter issue, the agency argues that the new tank cars would be allowed to have a higher Gross Rail Load (maximum weight) than the regular DOT 111 tank cars; therefore, there would not be a loss in oil capacity. The agency also expects industry to come up with new materials that weigh less but still meet their requirements. While those assumptions regarding capacity are debatable, there is no argument that reduced speeds will result in delays. The agency estimates the rail carrier’s cost of delay at $500 per hour. Regardless of the hourly cost, one would suspect that some of those costs will be passed on to the shipper.

Shippers will also have increased regulatory liability in at least one aspect of the rule. Current rules require the shipper to certify that it has properly assessed the hazards of the material and selected the appropriate shipping classification. Under the proposed rules, this certification will also include certifying that the newly-required written sampling and testing program is in place and properly implemented. Therefore, knowing violations of this sampling and testing program requirement could subject the shipper to civil penalties under 49 C.F.R. §171. The new sampling and testing program must include information about and justification of testing frequency, methods used, and quality assurance measures. This program also has its own costs to prepare and implement, which would have to be covered solely by the shipper.

Advance Notice of Proposed Rulemaking

In addition to the notice of newly proposed rules on tank cars, PHMSA also issued an Advance Notice of Proposed Rulemaking (ANPRM) seeking comments on plans to propose new regulations regarding the need for most trains carrying crude oil to prepare comprehensive oil-spill response plans. Currently, railroads do not have to create such plans, but PHMSA claims that derailments in Quebec, Alabama, North Dakota, Virginia, and elsewhere since last year have revealed gaps in emergency response training, equipment and staff. Specifically, PHMSA seeks comments about the volume of crude oil carried by a train that would trigger oil spill response planning, i.e., trains with 1 million gallons or more of crude, trains with 20 or more tank cars of crude oil, 42,000+ gallons of crude per train or another threshold.

Currently, railroads are not required to tell communities where they are shipping crude oil. Instead, railroads provide limited information on hazardous materials shipments to emergency response agencies by request. Even then, they only have to disclose what hazardous products they are shipping, not how much or when. State and local officials, however, are beginning to demand to know more details about hazardous shipments. Some railroads are cooperating, while others cite security and competitive concerns for not providing the requested information. It is unclear at this time whether the response plan requirements will impact only the railroad companies or whether they may also place some burden on the companies whose crude oil the trains will carry.

A Key Decision: Supreme Court of Texas Sides with Liskow Amicus Brief on Behalf of TXOGA

Posted in Litigation

On June 20, 2014, the Supreme Court of Texas ruled in Key Operating & Equipment, Inc. v. Hegar (PDF) that a mineral lessee in a pooled oil and gas unit has the right to use the entire surface of the pooled acreage, regardless of the location of the producing well or whether actual production from beneath the accessed surface can be proven. Key Operating is a significant, though not surprising, victory for the Texas oil and gas industry. Liskow & Lewis attorneys Butch Marseglia and Jillian Marullo submitted an Amicus Curiae brief (PDF) on behalf of the Texas Oil and Gas Association.

Key Operating involved the surface rights of a mineral lessee operating in a pooled unit. Key Operating & Equipment, Inc. (“Key”) held oil and gas leases on two contiguous tracts, the Hegar Tract and the Richardson Tract. Key built a road across the Hegar Tract to access wells located on both tracts. In 2000, the only well located on the Hegar Tract stopped producing, and Key’s lease on that tract expired. That same year, Key’s owners purchased an undivided 12.5% interest in the mineral estate of the Hegar Tract and immediately leased that interest to Key in a lease which gave Key the right to pool the minerals. Key then pooled the Hegar and Richardson Tracts and continued to use the road across the Hegar Tract to access a producing well on the Richardson Tract. Soon after, Will and Loree Hegar purchased the surface of the Hegar Tract, and they later brought suit, claiming that Key’s use of the road constituted a trespass. The trial court enjoined Key from using the road on the Hegars’ property, finding that Key’s use was a trespass because it was not reasonably necessary to extract minerals from beneath the Hegar Tract.

The First Court of Appeals initially reversed, but on rehearing withdrew its opinion and affirmed, basing its decision on the trial testimony of a petroleum engineer that no minerals were being extracted from beneath the Hegar Tract by the well located on the Richardson Tract. The court first found that because Key’s lease and pooling agreements were not part of the Hegars’ chain of title (because they were not executed at the time of severance), they did not bind the Hegars and could not “contractually expand Key’s right to use the Hegars’ surface.” The court further reasoned that Key’s implied right to use the surface of the Hegar Tract was conditioned on proof of actual production from beneath that tract. Disconcertingly, the court of appeals held that the case was “decided under the accommodation doctrine,” which neither Key nor the Hegars contended applied.

The Texas Supreme Court unanimously reversed, holding that a mineral lessee has the right to use the entire surface of a pooled unit to produce minerals from anywhere on the unit. Noting that pooling serves the important Texas policy of preventing waste and relying on the longstanding legal principle that production anywhere on a pooled unit is treated as taking place on every pooled tract, the Court reasoned that

. . . once pooling occurred, the pooled parts of the Richardson and Hegar Tracts no longer maintained separate identities insofar as where production from the pooled interests was located. . . . Because production from the pooled part of the Richardson Tract was legally also production from the pooled part of the Hegar [T]ract, Key had the right to use the road to access the pooled part of the Richardson [T]ract.

The Court further reasoned that, as owners of 12.5% of the minerals beneath the Hegar Tract, Key’s owners had the right to use the surface to develop those minerals as well as the right to pool those minerals. Key’s owners’ inherent rights as mineral interest owners, therefore, which they leased to Key, “include[d] the right to ingress and egress over the surface of any pooled acreage for the purpose of producing minerals from any part of the pooled acreage.” Because the Court concluded that its decision turned on Key’s implied surface rights, it declined to address the court of appeal’s chain of title reasoning. However, the Court did note that “the Hegars took their surface title subject to the mineral lease assigned by Key’s owners to Key” which gave Key the right to pool and “gave rise to Key’s right to use the road.” The Court also declined to address the accommodation doctrine because it was not raised in the trial court and thus was not properly before the court of appeals.

Air Permitting Update: D.C. Circuit Decision Helps E&P Facilities

Posted in Environmental

On May 30, 2014, in an unanimous decision in National Environmental Development Association’s Clean Air Project v. U.S. Environmental Protection Agency, the United States Court of Appeals for the District of Columbia Circuit vacated EPA’s policy limiting the reach of the Sixth Circuit’s decision in Summit Petroleum Corp. v. EPA.

In Summit, the Sixth Circuit concluded that EPA’s interpretation of the term “adjacent” in the context of source aggregation under the Clean Air Act’s Title V and NSR permitting was unreasonable in its application to geographically dispersed oil and gas facilities. The EPA had argued that an operationally interdependent relationship (in the Summit case, spanning a 43-square mile area) was enough to find that pollutant-emitting activities were “adjacent.” For more on this decision, see our previous blog entry here.

Several months after the Summit decision was published, EPA issued a policy directive stating that it would continue to consider interrelatedness in determining adjacency when making source determinations in areas outside the jurisdiction of the Sixth Circuit. For more on the Summit directive, see our previous blog entry here.

An industry group brought suit in the D.C. Circuit against EPA, arguing that its Summit directive resulted in a competitive disadvantage for industries located outside of the Sixth Circuit. EPA raised procedural arguments related to standing, ripeness, and finality of agency action. The agency also argued that it is not required to ensure national uniformity in response to judicial decisions.

At the outset, the Court dismissed the agency’s procedural arguments. On the merits, the Court pointed to EPA’s “Regional Consistency” regulations which require the agency to “[a]ssure fair and uniform application by all Regional Offices of the criteria, procedures, and policies employed in implementing and enforcing” the Clean Air Act. See 40 C.F.R. § 56.3 (a). Thus, the Court concluded that EPA’s own regulations require it to achieve national uniformity in how CAA permitting rules are applied, and that nothing in the regulations exempted inconsistencies created by a judicial decision. See National Environmental Development Association’s Clean Air Project v. U.S. Environmental Protection Agency, No. 13-1035, slip op. at 17 (D.C. Cir. May 30, 2014).

The Court disagreed with EPA’s contention that the doctrine of intercircuit nonaquiescence required a different result. The doctrine has been raised by agencies refusing to acquiesce to a decision of an individual circuit court that contravenes other circuits, in the hope that the individual court’s decision will ultimately be overturned by the Supreme Court or Congress. The Court stated that the doctrine “does not allow EPA to ignore the plain language of its own regulations.” Id. at 19. The Court noted that EPA may 1) revise its regulations to require aggregation when there is functional interdependence, or 2) revise its uniformity regulations. Finally, the Court noted that the agency chose not to appeal the Sixth Circuit decision to the U.S. Supreme Court. Id. at 18.

The Court’s decision is good news for the oil and gas industry. Now, on a nationwide basis, exploration and production facilities will only need to be aggregated for major source determinations if they are “adjacent” in an ordinary sense of the word—bearing in mind, of course, that there may still be some uncertainty about what “adjacent” means in the oil patch.

In addition, as a practical matter, the Court’s decision places an even greater emphasis on the choice of forum for litigation challenging CAA permitting regulations or policy. If EPA loses in one federal appeals court, the agency would be forced to eliminate any regional inconsistency, with its only other recourse being an appeal to the Supreme Court or formal agency rulemaking.

EPA and Army Corps of Engineers Propose Significant Revisions to Definition of “Waters of the United States”

Posted in Environmental

On March 25, 2014, the Environmental Protection Agency (“EPA”) and the Army Corps of Engineers (“Corps”) jointly released a proposed rule purporting to clarify the scope of the “waters of the United States” protected under the Clean Water Act. The agencies claim that, as a result of the Supreme Court’s decision in Rapanos v. United States, 547 U.S. 715 (2006), the scope of regulatory jurisdiction in the proposed rule is narrower than under the existing regulations. It appears, however, that the proposed rule actually expands the scope of the waters regulated by the Act.

Rapanos considered whether wetlands, located near ditches or man-made drains that emptied into traditional navigable waters, fell within the scope of the Clean Water Act. A four-justice plurality interpreted the term “waters of the United States” as covering those “relatively permanent, standing or continuously flowing bodies of water,” Rapanos, 547 at 739, that are connected to traditional navigable waters, and wetlands with a “continuous surface connection” to such relatively permanent water bodies, id. at 742. In contrast, in a concurring opinion, Justice Kennedy concluded that “waters of the United States” includes wetlands with a “significant nexus” to traditional navigable waters. Id. at 779. He further stated that wetlands possess the requisite nexus if they “either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity” of traditional navigable waters. Id. at 780.

EPA and the Corps have imported the “significant nexus” standard from Justice Kennedy’s concurring opinion into the proposed rule, applying it not only to adjacent wetlands (the subject of Rapanos), but also to other categories of water bodies, such as tributaries of traditional navigable waters or interstate waters, and to “other waters” (that is, waters not fitting in another category). For example, the agencies represent that all tributary streams are physically and chemically connected to downstream traditional navigable waters, interstate waters, and the territorial seas via channels and associated alluvial deposits. Based on this assertion, the agencies propose that all waters that meet the new regulatory definition of “tributary” are “waters of the United States” by rule, without the need for a case-specific analysis. The agencies propose to define tributaries in reference to physical characteristics (the presence of a bed and banks and an ordinary high water mark) and contribution of flow to traditional navigable waters, interstate waters, territorial seas, and impoundments. The proposal specifies that a tributary “can be a natural, man-altered, or man-made water” and includes waters “such as rivers, streams, lakes, ponds, impoundments, canals, and ditches” not otherwise excluded. Moreover, contrary to the plurality opinion in Rapanos, the proposal provides that the flow “may be ephemeral, intermittent or perennial.”

Based on the “significant nexus” standard, the proposed rule also defines “waters of the United States” to include all waters – not just wetlands – adjacent to a traditional navigable water, interstate water, the territorial seas, impoundment or tributary. The proposed rule defines “adjacent” as bordering, contiguous, or “neighboring,” and then expansively defines “neighboring” as including waters located within the “riparian area” or “floodplain” of traditional navigable waters, interstate waters, territorial seas, covered impoundments, or covered tributaries, or waters with a shallow subsurface hydrological connection to such a jurisdictional water.

Finally, based on Justice Kennedy’s “significant nexus” standard, the proposed rule modifies the definition of “other waters” (that is, those waters not fitting in another category under “waters of the United States”). In the current regulation at 40 C.F.R. § 122.2, “other waters” are defined based on whether they could affect interstate or foreign commerce. The proposed rule deletes this language. Instead, it states that “other waters” are “waters of the United States” on a case-specific basis, where those waters alone, or in combination with other similarly situated waters located in the same region, have a “significant nexus” to – that is, significantly impact the chemical, physical, or biological integrity of – a traditional navigable water, interstate water, or the territorial seas.

Thus, in some aspects, the proposed rule expands the scope of waters protected under the Clean Water Act, and industry may wish to comment on the rule. Comments will be accepted for 90 days after the proposed rule is published in the Federal Register. EPA has submitted the proposed rule for publication in the Federal Register, but it has not been published yet. An unofficial version of the proposed rule is available here.