Expert Opinion: The Final Shutdown

ExpertThere are a variety of situations that prompt the closing of an energy exploration site in the oil and gas industry – whether it be devastation from natural disasters like hurricanes Katrina, Rita and Gustav, the collapsing economy and the falling price of oil and gas, increasing oil supplies, increased restrictions on exploration, or the trend of energy producers switching to the cleaner, renewable energy industry. At bottom, it is a business decision based on cost-benefit analysis. Executives must be aware of the responsibilities and legal requirements involved in such a process.

When considering shutting down energy production on a site, it is essential to consult an attorney experienced in the complex legal issues involved with energy development, and oil and gas exploration and production. It is common for oil and gas companies to have both in-house and outside counsel to help guide them through the maze of bureaucratic red tape to obtain the necessary permits and to meet required laws and regulations before, during and after the process.

With any business transaction, legal issues can arise involving the closure of the site that must be taken into consideration aside from typical management issues. Each state has local and county agencies set up to specifically monitor energy exploration and enforce the strict laws, regulations and quality control measures designed to facilitate environmental responsibility and reduce contamination. In California, for example, the Division of Oil, Gas and Geothermal Resources is a watchdog agency which regulates state­wide oil and gas activities with uniform rules, laws and regulations.

Other local agencies may have even more stringent requirements. Your environmental attorney can act as a liaison between each entity involved in the shutdown process, including the oil company, state and local agencies, the Environmental Protection Agency, and local county officials.

Plugging the Hole

Stringent regulations that create the largest legal hurdles pertain to the most critical component to shutting down a site, the plugging and abandoning of wells. Typically, there is at least some contamination created during the energy exploration process.

Some sites may have been operating in excess of 50 years. Such contamination has to be cleaned up in a way that regulators deem acceptable, while still taking into account methods that are cost-effective to the company.

I recently worked on a matter which involved shutting down a refinery. The site was extremely contaminated and required extensive environmental cleanup to meet quality control standards. During the course of the matter, we had to guide my client through the complex, regulating the process by acting as a coordinator for the numerous agencies the company ultimately had to report to.

Help Through the Maze

An environmental attorney can help guide the energy executive through bench­marks so that the company may obtain authorization for closing down an oil and gas field. Certain considerations must be met, including:

  • Oil leases – Typically, an owner will enter into an oil lease that may dictate when the exploration site can be abandoned and what provisions have to be made after production ceases. An environmental attorney oversees all of the contractual issues pertaining to the lease, from creation of the lease agreement and its enforcement to any potential legal conflicts derived therein. For example, the lease may state the company must abandon the site if it doesn’t meet expected production levels in a given amount of time – which may require contesting of the original lease agreements. The attorney can monitor the timing issues in the lease and help the owner prepare for any contingencies should such an event occur.
  • Operating agreements – Operating agreements can affect the company’s obligations should abandonment be pursued, as well as obligations to clean up contamination and waste. For instance, the agreement may not only require the company to clean up the contamination, but to restore the property to its condition before drilling began – a very expensive proposition.
  • Additional contract supervision – All other contracts must be reviewed, including royalty agreements, unit agreements and profit sharing agreements to determine monies owed in case of abandonment and again, specific requirements of abandonment. Any employment agreements must also be considered.
  • Act as liaison – As I mentioned before, there are a variety of agencies responsible for regulating energy exploration sites and each has specific measures that must be met before authorization for closure can be given. A liaison is needed to correspond with agency officials and to make sure all agency requirements are met.
  • Determine responsibility – Damage and pollution to an oil field’s surrounding environment is many times, an unavoidable and unfortunate occurrence. A comprehensive review of all historical agreements must be made to see who might have accepted what liabilities for clean up in the past. A review of current and former owners can help determine who is liable for environmental contamination in the event the agreements do not provide specific directions for this. An attorney can make a determination, after full due diligence, as to who is ultimately liable for the inevitable environmental cleanup of an oil field once it is abandoned.
  • Cost-benefit analysis – As in most business transactions, the bottom line will ultimately dictate the best course of action. The cost of shutting down an energy production site is exorbitant and must be carefully considered.

Some questions to keep in mind during the shutdown process are: Is it economically feasible for the company to completely stop energy production and plug the oil wells due to low oil and/or gas production or significant profit loss? Is it more economical to sell the exploration site? Or does it make more financial sense to keep the site running to save the company from financial ruin?

In one case, after analyzing the company’s profits and losses and comparing that number to the costs associated with shutting down the field, we found that it made more sense to keep the site operating to save the company from teetering on the brink of bankruptcy.

An experienced legal representative well-versed in environmental and energy law and legislation can help prepare owners for any issues that arise when abandoning an energy exploration site, as well as help avoid any potential legal pitfalls that may come their way.

Having one of these skilled and knowledgeable legal professionals on your side could be the key to a smooth shutdown process, one in which it’s almost as easy, relatively speaking, as turning off a light switch.

Without such counsel on your side to provide guidance, you’re more likely to find yourself stumbling in the dark for the way out.