Under the Wyoming Supreme Court’s recent ruling in Pennaco Energy, Inc. v. KD Company LLC, 2015 WY 152 (Wyo. 2015), parties assigning agreements pertaining to oil and gas development should be aware that, absent express language in the agreement to the contrary, they could remain responsible in the event of subsequent breaches by their assignees, even when those breaches occur years later.

The dispute in Pennaco surrounded several surface use and water storage agreements executed by Pennaco Energy, Inc. (Pennaco) and landowners in Johnson and Sheridan Counties, Wyoming, during the 1990s. The surface use agreements required Pennaco to make annual payments to the landowners, provide compensation for surface damages, and reclaim all wells on the covered lands upon termination of Pennaco’s oil and gas leases. The water storage agreements similarly required Pennaco to make annual payments, but also obligated it to construct certain pipelines and reservoirs. Pennaco complied with these obligations until 2010, when it assigned a portion of its interests in the agreements to CEP-M Purchase, LLC (CEP-M). Soon thereafter, CEP-M assigned all of its rights to High Plains Gas, Inc. (High Plains). Neither CEP-M nor High Plains made the required annual payments and both failed to comply with several other provisions of the agreements.

On December 9, 2015, EPA announced important changes to its environmental audit policy and voluntary disclosure program with the launch of its new eDisclosure portal (eDisclosure Notice) intended to streamline the disclosure process. Voluntary disclosure of potential or confirmed violations of federal environmental laws discovered through a qualifying audit must now be made electronically through the eDisclosure portal. Disclosures made pursuant to the New Owner Policy, however, must be submitted in hardcopy and confidential business information must be submitted in hardcopy to receive protection from public disclosure.

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Introduction

Imagine you are general counsel explaining to your management that the insurance benefits you thought the other party to a corporate transaction had assigned to your company to cover assumed liabilities are not actually available. Now you have major lawsuits pending against your company with no corresponding insurance benefits to provide defense or indemnity because your own company’s insurance will not respond to those claims. Worse still, the lawsuits also name the other party to the transaction, and a dispute is rapidly brewing between the companies concerning not only who is responsible to defend the claims asserted against both entities, but also who gets the insurance benefits. This would not be a pleasant conversation.

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Rule Now Effective In All Other States, But Legal Challenges Loom Nationwide

As discussed in a previous Davis Graham alert, on May 27, 2015, the Environmental Protection Agency (EPA) and the Army Corps of Engineers (Corps) issued the new Clean Water Rule (Rule) defining the extent of jurisdictional “Waters of the United States” regulated under the Clean Water Act (CWA). The Rule was set to take effect nationwide on August 28, 2015. Right before that effective date, however, a federal judge in North Dakota temporarily stayed the Rule in 13 states, including Colorado and several other Western states. The Rule has taken effect in all other states, pending any actions by various other courts where judicial challenges have been brought, resulting in a patchwork regulatory landscape and further complicating the legal status of the Rule. Below is a brief discussion about what you should know if you are undertaking a project where Clean Water Act jurisdiction might be an issue.

In June 2015, 13 states—Alaska, Arizona, Arkansas, Colorado, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota, South Dakota, Wyoming, and the New Mexico Environment Department and State Engineer—filed suit in the District of North Dakota challenging the Rule on multiple grounds. On August 27, 2015, a day before the Rule’s effective date, the district court granted the plaintiff states’ motion for preliminary injunction, thereby barring implementation of the Rule during the pendency of that case. On September 4, 2015, the court issued an order clarifying and limiting the scope of the injunction to apply only to the 13 plaintiff states. The court declined to apply the injunction nationwide out of respect for other states not party to the litigation and other courts that have denied or have yet to rule on motions for preliminary injunctions in cases challenging the Rule.

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Who is Covered by the New Rule?

Colorado-licensed investment adviser representatives (IARs) and Colorado-licensed broker-dealer sales representatives are now required to file their current business email addresses with the Colorado Securities Commissioner.

Since the rule applies only to Colorado-licensed IARs, SEC-registered advisers whose employees are exempt from the federal Advisers Act definition of an “investment adviser representative” are not required to comply with this new rule for those employees.

How Do I File?

Representatives or their employer firms may file email addresses by visiting the following page and clicking on the link provided. In addition to a business email address, you will need to provide the full name of the representative, as well as his/her CRD number. Alternatively, firms with substantial numbers of representatives may file email addresses by sending a spreadsheet to the Colorado Division of Securities. Additional instructions on how to comply can be found here.

How Do I Stay Current?

Email addresses of affected individuals should be updated promptly when they change, but no later than thirty (30) days following such change. The Colorado Division of Securities may also make direct requests for email addresses, in which case such information should be provided no later than fifteen (15) days following a request.

On Tuesday, August 18, 2015, with much fanfare, EPA released pre-publication versions of several proposed rules affecting air quality permitting and regulation of sources in the oil and gas sector. While EPA’s promised “methane rules” and proposed Control Technique Guidelines (CTG’s) for state emissions control requirements for oil and gas sources may have grabbed the spotlight for being completely new and different among the proposals released, also included was EPA’s proposed rule for making Clean Air Act (CAA) source determinations in the onshore oil and gas sector. This proposed Source Determination Rule follows two significant EPA attempts to clarify the process for making source determinations in the onshore oil and gas sector through guidance, but which guidance has not prevented significant litigation and disputes between permitting authorities, the regulated community, and other stakeholders regarding when and how to “aggregate” multiple pollutant emitting activities in the same CAA stationary source permit. Will this third attempt by EPA through rulemaking to clarify the process for making source determinations for oil and gas activities prove successful? We highlight a few significant aspects of the proposed rule below, to help you answer this question for yourself, or develop your own comments.

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When oil prices fell precipitously in the second half of 2014, many predicted that the resulting financial pressures on U.S. E&P companies would force them to rapidly scale back production. To date, the industry has defied these predictions – greater efficiency, high-grading of drilling plans, cost savings, robust capital raising and strong hedging positions have allowed domestic producers to maintain production at or near historically high levels even with rig counts falling significantly. However, the impact of some of the factors that have helped sustain production in the face of lower prices may now be eroding. In particular, the pace of capital raising has slowed significantly in recent months, with some planned offerings being pulled due to adverse market conditions. In addition, the benefits of deeply in-the-money hedge positions entered into before the 2014 price decline and the dramatic improvements in cost structures seen earlier this year cannot be continued indefinitely. Finally, with reports of concerned bank regulators questioning the quality of some loans made to energy producers and renewed pressure on commodities prices, it may turn out that predictions of a period of significant retrenchment in the industry will, belatedly, prove to be correct.

In this environment, many companies will continue to be focused on shoring up their balance sheets and/or liquidity positions and, when circumstances permit, acquiring new assets at what may prove to be bargain prices. This alert provides some thoughts on these topics from a legal perspective.

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The Colorado Oil and Gas Conservation Commission (Commission) recently published an updated Rules 1101 and 1102: Flowline Guidance (Guidance)¹ confirming the agency’s intent to begin random audits of operators’ flowline integrity records in 2016 to determine compliance with applicable Commission flowline regulations for the 2015 calendar-year. These audits will continue indefinitely thereafter. The Commission’s focused oversight of flowlines will impact oil and gas operators via potential increased enforcement and penalties for any non-compliance with the Commission’s rules governing flowlines.

The Guidance also details an alternative method for complying with flowline integrity testing requirements and provides recommended best practices for flowline installation and integrity testing. Flowlines are broadly defined in the Commission’s 100-Series Rules as “those segments of pipe from the wellhead downstream through the production facilities ending at: in the case of gas lines, the gas metering equipment; or in the case of oil lines the oil loading point or LACT unit; or in the case of water lines, the water loading point, the point of discharge to a pit, the injection wellhead, or the permitted surface water discharge point.”

The Guidance responds to the Commission’s February 1, 2014 report titled Risk-Based Inspections: Strategies to Address Environmental Risk Associated with Oil and Gas Operations (Risk-Based Inspections Report) which identified equipment failures, including pipeline failures, as a significant source of spills. The Risk-Based Inspections Report presents an evaluation of 1,638 spill reports and Commission staff interviews and concludes that spills are more likely to occur from equipment (process piping, pipelines, tanks, and valves) failures during the production phase of oil and gas development.

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On May 27, 2015, the Environmental Protection Agency (EPA) and the Army Corps of Engineers (Corps) issued a pre-publication final rule defining the jurisdictional “Waters of the United States” regulated under the Clean Water Act (CWA). Unless blocked by some federal legislation or court order, the final rule will go into effect 60 days after publication in the Federal Register. That effective date will likely be around mid-August.

As with the proposed rule—on which the agencies received more than 1 million comments—EPA and the Corps purport that the final rule promotes clarity, certainty, and efficiency by “providing simpler, clearer, and more consistent approaches” for determining which waters are regulated under the CWA. However, many regulated operators oppose the final rule and assert that it unlawfully expands federal jurisdiction.

Much of the final rule incorporates long-standing EPA and Corps guidance, regulations, and common practice regarding which waters are considered jurisdictional. Some portions of the rule, however, break new ground. Focused largely on applying the “significant nexus” test from Justice Kennedy’s concurrence in the 2006 U.S. Supreme Court Rapanos case, these new provisions in practice could operate to substantially expand the areas regulated under the CWA. In the Western U.S., the final rule poses unique concerns for the regulated community due to the region’s topography and aridity. Several Western industries in particular—including the oil and gas, mining, construction, municipal, renewable energy, and agricultural sectors—should closely examine the final rule for potential impacts to planned and ongoing projects and operations.

This client alert describes the final rule and areas of particular concern to operators in the Western U.S.

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