Midstream Environmental Developments

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Midstream Environmental

Developments

Recent History and Coming Attractions

Ronald Tenpas

November 2013

© Morgan, Lewis & Bockius LLP

Categories for Discussion

• Environmental Regulations with Broad Market Impact

• Recent or Developing Environmental Regulations with Direct Effects

• Enforcement Focus


Broad Market Impacts

• Coal-oriented regulation making oil and gas comparatively more attractive.

– Standards limiting CO2 emissions for new and existing coal plants.

– Obama Administration Objective: Final by 2016

• State/regional cap-and-trade systems focused on utilities.

– e.g., Regional Greenhouse Gas Initiative (“RGGI”), a cooperative effort amongst northeastern states.


Actions That Will Potentially Limit or Make Infrastructure Development More Difficult

• Endangered Species Listings

• Definition of “Waters” for Army Corps of Engineer Permits


USFWS – ESA Settlements to Address Listing Petition Backlog

• Agency required, under ESA, to respond to listing petitions within 90 days of receipt.

• Environmental nonprofits brought suit due to backlog. Resulted in subsequent settlements, approved on Sept. 9, 2011.

• Settlements required ESA to complete initial findings on over 600 species and finalize listing decisions on 251 species by 2016.


FWS – ESA Listing Workplan FYs 2013 - 2018

Stated on USFWS website:*

“As part of a court-approved settlement, the U.S. Fish and Wildlife Service (Service) has committed to publish certain Endangered Species Act (ESA) listing actions – petition findings, listing determinations, critical habitat designations –in Fiscal Years 2013-2018. The agreement is intended to significantly reduce ESA-related litigation and allow the agency to focus its resources on the species most in need of ESA protection.”

* http://www.fws.gov/endangered/improving_esa/listing_workplan_FY13-18.html


FWS – ESA Listing Workplan FY 2013 Example

• Stipulated FY13 12-Month Petition Findings:

– Rattlesnake-Master Borer Moth; Coleman’s Coralroot

• Stipulated FY13 Proposed Listings (if warranted) and/or Proposed Critical Habitats (if prudent and determinable):

– Pocket Gopher Puget Trough Species; Lesser Prairie Chicken; Gunnison Sage-Grouse; Sierra Amphibians; Arizona Gartersnakes; Ashy Storm Petrel; Dakota Skipper & Poweshiek; Eastern Small-Footed Bat/Northern Long-Eared Bat; FL Bonnetted Bat; Kittlitz’s Murrelet; New Mexico Jumping Mouse; Oregon Spotted Frog; Red Knot; Rosemont Talussnail; Sage-Grouse, Greater; Wolverine; Yellow-Billed Cuckoo

• Stipulated FY13 Final Listings and Critical Habitats (if determinable):

– Gunnison Sage-Grouse

• Stipulated FY13 Revised Proposed or Final Critical Habitats:

– Comal Springs Invertebrates; Riverside Fairy Shrimp; Woodland Caribou; Northern Spotted Owl; Suckers; Southwest Willow Flycatcher; Tidewater Goby; Coachella Valley Milkvetch; Salt Creek Tiger Beetle; California Plants; Buena Vista Lake Shrew; Canada Lynx

Full listings of FY13-FY18 available at: http://www.fws.gov/endangered/improving_esa/FY13-18_ESA_Listing_workplan.pdf.


Waters Covered by the Clean Water Act

• Affects development projects where covered waters will be impacted (e.g., stream or wetlands).

• If covered waters are impacted, often a “dredge & fill” permit -- issued by the Army Corps of Engineers -- is required.

• There is confusion in the courts as to what waters are covered.

• Coast Guard and EPA are preparing to issue a joint regulation to provide clarification.


Direct Regulation on Midstream

• Performance standards related to various midstream operations.

• Went into effect in 2012 with amendments made in September 2013.


Oil and Natural Gas Sector NSPS and NESHAP Update

• Final Rule published on August 16, 2012; effective October 15, 2012; amendments finalized on September 23, 2013.

• Sets NSPS for:

– Gas wells

– Compressors

– Storage Vessels

– Pneumatic Controllers

– Leaking Components and SO2 Emissions from Onshore Natural

– NSPS for SO2 emissions from natural gas processing plants;

• Sets NESHAP for:

– Glycol Dehydration Unit Process Vents

– Leak Detection and Repair (“LDAR”)


NSPS - Compressors

EPA’s rule impacts:

• Centrifugal Compressors. Located at gathering stations, these are often equipped with wet seal systems.

– Final Rule requires a 95% reduction in VOC emissions from compressors with wet seal systems.

• Accomplished through flaring or by routing captured gas back to a compressor suction or fuel system

• Reciprocating Compressors. Located at boosting stations. These compressors use rod packing systems which, over time, leak gas and VOCs. The Final Rule requires they be replaced:

– Every 26,000 hours of operation (monitoring and documentation of hours required); or

– Every 36 months (monitoring and documentation of hours not required).


NSPS - Storage Tanks

• In September 2013, EPA updated the NSPS for oil and natural gas to address VOC

emissions from storage tanks used by the crude oil and natural gas production industry.

• “Affected facilities” are those constructed after Aug. 23, 2011 that have potential VOC

emissions of 6 or more tons/yr and are used to store crude oil, condensate, unrefined

petroleum liquids known as “intermediate hydrocarbon liquids,” or produced water. The

storage tanks may be located anywhere along the production and transmission process.

• Updates to 2012 Rule:

– Set phase-in date for installation of VOC controls;

– Establish alternative emission limits for tanks where emissions have declined;

– Clarify test protocols for control equipment;

– Clarify the types of tanks subject to the rule;

– Streamline compliance monitoring requirements to ensure leaks are repaired while EPA

addresses monitoring issues raised in reconsideration petitions; and

– Adjust requirements for submitting annual reports.


NESHAP Glycol Dehydrators

A glycol dehydrator is used to remove water vapor from gas. Those located at compressor stations are subject to the NESHAP for Natural Gas Transmission and Storage. The August 2012 rule retained existing standards for large glycol dehydrators and set new standards for small glycol dehydrators.

• Small dehydrators have an annual average natural gas flow rate of less than 85,000 m3/day or annual average benzene emissions of less than 1 ton.

– The final rule sets out a formula to determine the unit-specific limit for emissions of BTEX based on the unit’s natural gas throughput and gas composition.

– New small glycol dehydrators must comply with the air toxics requirements immediately upon startup. Existing small glycol dehydrators must comply within three years after the effective date of the rule.

• The 1 ton/yr benzene compliance option was retained for large glycol dehydrators.


NSPS/NESHAP - Other

• NSPS - New/Modified Pneumatic Controllers

– The final rule requires that VOC emissions - for continuous-bleed, gas-driven controllers located at gas processing plants – are zero.

• There are certain exceptions for high-bleed controllers for limited purposes,

i.e., operation requirements and safety.

• NESHAP - Leak Detection and Repair (“LDAR”)

– Leak detection and repair requirements are strengthened.

– Compliance for new sources required within 60 days of final rule; existing sources covered by air toxics rule have an additional year to comply.

• Sulfur Dioxide (SO2) for Sweetening Units

– For units that produce at least 5 long tons/day of sulfur, SO2 emissions must be reduced by 99.9%.


Enforcement

• Pipeline and Hazardous Materials Safety Administration

• Justice Department

– Civil

– Criminal


PHMSA Enforcement – Cases

• Corrective Action Orders (CAO): CAO cases are initiated when PHMSA determines that a particular pipeline represents a serious hazard to life, property, or the environment. They usually address urgent situations arising out of an accident, spill, or other significant, immediate, or imminent safety or environmental concern. In such cases, PHMSA identifies actions that must be taken by the operator to assure safe operation.

• Notices of Probable Violation (NOPV): After routine inspections, incident investigations, or other oversight activity by authorized Federal or Interstate Agent pipeline inspectors, the PHMSA Regional Director assesses whether probable violations have occurred, and, if appropriate, issue an NOPV to the operator. The NOPV alleges specific regulatory violations and, where applicable, proposes appropriate corrective action in a Compliance Order and/or civil penalties.

• Notices of Amendment (NOA): PHMSA inspections, incident investigations, and other oversight activities routinely identify shortcomings in an operator's plans and procedures under PHMSA regulations. In these situations, PHMSA issues a NOA letter alleging that the operator’s plans and procedures are inadequate and requiring that they be amended.

• Notices of Proposed Safety Order (NOPSO): PHMSA may issue a NOPSO to notify an operator that a particular pipeline facility has a condition or conditions that pose a pipeline integrity risk to public safety, property, or the environment. NOPSOs address pipeline integrity risks that may not constitute a hazardous facility requiring immediate corrective action but do need to be addressed over time

• Warning Letters: For probable, low-risk violations, PHMSA has the option of issuing a Warning Letter notifying the operator of alleged violations and directing it to correct them or be subject to further enforcement action.


PHMSA EnforcementEnforcement Cases Initiated (2010 – 2013)

0

20

40

60

80

100

120

2010 2011 2012 2013

Corrective Action Order Cases Notice of Probable Violation Cases

Notice of Amendment Cases Warning Letter Cases

Notice of Proposed Safety Order CasesStatistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/Actions_opid_0.html


Corrective Action Order Cases

Oil Pipelines

Gas Pipelines

Notice of Proposed Safety Order Cases

Oil Pipelines

Gas Pipelines

PHMSA EnforcementBreakdown of 2012 Enforcement Statistics –

Cases Initiated

• The oil pipeline cases involved leaks/spills ranging from 215 barrels to 2,780 barrels.

• Three of the four gas pipeline cases involved leaks of undetermined amounts. The fourth case involved an exposed pipeline.

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• Each of these cases identified pipeline integrity risks to public safety, property, or the environment including ruptured pipelines, inadequate testing/inspection of pipelines, and a lack of required documentation.

Statistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/Actions_opid_0.html


Operations & Maintenance Corrosion ControlProcedure Manuals Qualification of Pipeline PersonnelIntegrity Management Incident ReportsConstruction Pipeline Component DesignOther


Cases Initiated

Notices of Probable Violation

Of the 178 probable violations

identified by PHMSA in 2012, 10

were withdrawn.

68

10

11

14

27

39

4419

Statistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/NOPV_opid_0.html?nocache=12#_TP_1_tab_2


Procedure Manuals Operations & MaintenanceCorrosion Control Public AwarenessIntegrity Management Incident ReportsConstruction Control Room ManagementQualification of Pipeline Personnel Other


Cases Initiated

Notices of Amendment

9

9

1016

17

4941

Statistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/NOPV_opid_0.html?nocache=12#_TP_1_tab_2

1012 13


PHMSA Enforcement – Orders

• Corrective Action Orders (CAO): CAOs are used in Corrective Action Order cases and can be issued before or after the operator has had a chance to respond to the alleged pipeline integrity risks in the case, either in writing or with an administrative hearing. The order can be issued before the operator has a chance to respond if PHMSA determines that the order is needed to prevent likely serious harm to life, property or the environment.

• Final Orders: Final Orders are often used in NOPV cases as the final adjudication after the operator has had a chance to respond to the allegations in the case, either in writing or with an administrative hearing. Final Orders contain the findings of PHMSA on all items alleged in the case.

• Consent Orders: Consent Orders are the result of negotiations between PHMSA and the operator to enforce a Consent Agreement signed by both parties.

• Orders Directing Amendment (ODA): ODAs are used in Notices of Amendment cases as the final adjudication, after the operator has had a chance to respond to the allegations in the case, either in writing or with an administrative hearing. ODAs contain findings for each item in the Notice of Amendment case, either dismissing the item or requiring the operator to make the changes to their plans and procedures.

• Safety Orders: Safety Orders are used in Safety Order cases after the operator has had a chance to respond to the alleged pipeline integrity risks in the case, either in writing or with an administrative hearing. Safety Orders require the operator to address any identified issues that cause the pipeline

integrity risk.

© Morgan, Lewis & Bockius LLPStatistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/Actions_opid_0.html

PHMSA EnforcementEnforcement Orders Issued (2010 – 2013)

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013

Corrective Action Orders Final OrdersConsent Orders Orders Directing AmendmentSafety Orders

24

714

0

43

878589

51012 10

41 0 1 2 30


2012 Enforcement Data

• Notices of Probable Violation:

– Total NOPV Cases Initiated: 74

– Average Proposed Penalty: $117,076

– Range: $0 – $3,699,200

• Final Orders:

– Total Final Orders: 87

– Average Penalty Assessed: $112,594

– Range: $0 – $3,699,200*

2013 Enforcement Data

• Notices of Probable Violation:

– Total NOPV Cases Initiated: 58

– Average Proposed Penalty: $104,210

– Range: $0 – $1,700,000

• Final Orders:

– Total Final Orders: 43

– Average Penalty Assessed: $39,337

– Range: $0 – $143,700

PHMSA EnforcementCivil Penalties from Enforcement Orders (2012-2013)

Statistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/Actions_opid_0.html?nocache=5599#_TP_1_tab_1

* The $3,699,200 penalty is an outlier. The second highest assessed penalty in 2012 was $524,900.


Year CompletedCases*

Penalties Proposed

Penalties Assessed

Percent of Proposed Penalties that Were

Assessed

2010 34 $4,537,800 $3,802,260 84%

2011 54 $3,454,300 $3,285,650 95%

2012 42 $7,107,200 $6,629,700 93%

2013 11 $512,800 $512,800 100%

PHMSA EnforcementTotal Penalties in Resolved Cases (2010 – 2013)

Statistics compiled from http://primis.phmsa.dot.gov/comm/reports/enforce/CivilPenalty_opid_0.html?nocache=5001#_TP_1_tab_3

* “Completed Cases,” as defined by PHMSA, only include “closed cases” and “open cases for which penalties have been assessed in a Final Order and collected.”


DOJ Enforcement

• Since 2010, there have been five pipeline cases (e.g., spills, air violations due to bad compressors) and in each, the civil penalty exceeded $1 million.

– The settlement typically also includes a company commitment to future capital improvement or operating changes (up to $44 million in one case)

• Criminal cases for impacts to endangered species, particularly due to bad spills or from construction practices, or for making false statements to the government.


Questions and Answers

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Midstream Environmental Developments