In March 2020 we published our whitepaper Maintaining Compliance in a Changing Regulatory Landscape, which covered changes in oil and gas regulations. At the time of releasing the whitepaper, we had no idea we were standing at the edge of a global pandemic and historical downturn in the oil and gas industry. We are writing this post as an update to our original whitepaper because the world has changed and so have compliance challenges.
Q: Let’s talk about the elephant in the room – how has the COVID-19 pandemic impacted the oil and gas industry from a regulatory and compliance standpoint?
A: The EPA issued a guidance memo on March 26, 2020 providing agencies with wide enforcement discretion during this crisis, although they said the agency “…expects all regulated entities to continue to manage and operate their facilities in a manner that is safe and that protects the public and the environment.” What is different, however, is that if there are virus-related issues to maintaining compliance, then companies should document the situation(s) to demonstrate how compliance has been impacted. Documentation can help companies respond to an EPA request, and facilitate a workaround. Companies may consider utilizing the Audit Policy to self-disclose known compliance issues. This self-audit/self-disclosure could eliminate or minimize future violation penalties.
Q: Would you provide an example of a virus-related issue?
A: The most common example would be if key personnel are sick or quarantined, making it impossible for them to make field inspections or take samples or if they cannot fulfill their work responsibilities because of the severity of their symptoms.
Q: Are states taking different approaches than the federal government to the crisis?
A: Regulatory agencies in Texas, Utah, Colorado and Oklahoma have communicated statements similar to the EPA. The most significant concerns, however, are likely air quality, which typically have the most burdensome requirements. Agencies are saying in effect that they expect compliance, but if you have compliance related gaps due to COVID-19, document those issues and contact them. Companies should take reasonable measures to address any compliance requirements. It is expected there may be some leniency on various administrative issues such as a late submittal, for example, and may be accepted by an agency without violation.
Q: How are regulatory agencies coping with the current environment?
A: Like most non-essential businesses, regulatory agencies have closed their physical offices and their employees are working from home. In Colorado, the Colorado Oil and Gas Conservation Commission (COGCC) is moving forward with rulemaking for implementing changes mandated by SB-181, which was the primary topic of our March whitepaper. During the April 29 remote hearing, the Director spelled out the next steps for rulemaking which will continue this summer with the newly seated Professional Commission still on track to be seated July 1.
Q: The number of rigs working in Colorado as of mid-April was 16, half of what it was a year ago. How are drillers handling regulatory and compliance today?
A: For one thing, since there have not been any workforce reductions at the COGCC they are continuing their field inspections and paperwork activities. The agency also continues to issue NOAVs, or Notices of Alleged Violation. In January, we saw an uptick in NOAVs issued, over three times more than any previous month. The NOAVs appeared to be focused on common administrative violations from the past. Even though COGCC staff may be working remotely from home, they are focused on maintaining compliance.
Q: Regulatory agencies may not be taking their foot off the gas, but many E&P operators have reduced staff in the wake of the commodity price collapse. How does that impact their ability to comply?
A: Unfortunately, this is not the first downcycle the industry has endured. The first thing that happens when key people are let go is communication channels break down. Inter-departmental communication is essential to effective compliance, but when you lose the experience of a knowledgeable employee, it makes compliance more difficult. Second, there can be confusion in terms of who is picking-up the functions of the person or people that were let go. Not knowing who to turn to can be a serious problem when it comes to time-sensitive compliance issues. The regulator, however, still has a job to do and their mission is not to give a company a break just because they are experiencing internal organizational challenges.
Q: What advice would you give an operator?
A: First, focus on communication. In today’s environment with everyone working remotely from home, the communication issues become a bigger problem. If you think you are communicating, then you are probably not communicating enough. If you feel like you are over-communicating, then you probably have it about right.
Second, make sure you have an organized workflow that everyone understands. Having an effective process in place helps the organization adapt faster and more effectively, because workflow participants know what needs to be done. That makes redistributing the work faster and easier and ensures people are working on the right thing at the right time.
Third, during this difficult time make sure you are prioritizing right. Bring time-sensitive obligations to the front of the line and push back anything that gets in the way of meeting compliance obligations due to regulators. Compliance with air quality regulations usually floats to the top of the stack in terms of priorities.
Q: What risks do operators face amid cutbacks, changing regulations and the uncertainty inherent to the current situation?
A: One of the biggest risks is that no one is picking-up key compliance tasks that someone who is no longer with the organization used to perform. In that case, you may not find out you have a compliance problem until the regulator issues a series of NOAVs. Smaller companies with limited staff can benefit significantly from an audit of their compliance process. It is not that expensive and can save significant dollars by avoiding fines.
Most NOAVs are focused on paperwork violations, and minor in nature. But if the COGCC finds that an operator is willfully not complying, they can take a more aggressive stance towards that operator on other factors.
In our experience, it is less expensive to comply up front than having respond and defend multiple violations down the road. As we advise our clients, it is best to avoid making the regulatory agency your compliance team.
Q: Many operators are shutting in wells. What do they need to be aware of?
A: Make sure shut-in wells are tracked closely. Several states require monthly operations reports that are used to estimate production for making revenue projections and other forecasts. Make sure your reports are accurate, it is an easy target for violations.
Also, wells shut-in for up to two years have special compliance considerations. In Colorado for example, each one needs a mechanical integrity test and those tests cost money. Closely tracking all shut in wells will help reduce unnecessary costs down the road if properly managed. And keep in mind that shut-in wells still have compliance requirements, such as the need to maintain surface facilities, handle any spills, conduct leak mitigation inspections and more.
Since 1958, TCO Land Services is one of the longest-standing land services companies in the oil and gas industry. Our services are delivered by experienced land professionals who have delivered thousands of successful projects over a nearly 60-year track record. Our proprietary TitleSuite™ technology-based land services platform ensures our work is performed efficiently, productively and that we deliver the highest quality product. Nearly six decades in business – we must be doing something right.
VP Business Development
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