The Final Shutdown

By Terry Avchen
Friday, 24 April 2009

There are a variety of situations that prompt the closing of an energy exploration site in the oil and gas industry whether it is 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 that involve the closure of the site, which must be considered separately 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, the Division of Oil, Gas and Geothermal Resources (DOGGR) is a watchdog agency that regulates statewide oil and gas activities with uniform laws and regulations. Other local agencies may have even more stringent requirements.

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 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 process by acting as a coordinator for the numerous agencies the company ultimately had to report to.

An environmental attorney can help guide the energy executive through the 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 doesnt meet expected production levels in a given amount of time which may require contesting the original lease agreements. The attorney can monitor the timing issues in the lease and help the owner prepare, should such an event occur.
• Operating Agreements Operating agreements can affect the companys 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 fields surrounding environment is often an unavoidable and unfortunate occurrence. A comprehensive review of all historical agreements must be made to see who might have accepted what liabilities for cleanup 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.

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 companys 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.

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