Oil and gas companies need to be prepared for unexpected environmental liabilities

December 12, 2013

Oil and gas companies need to be prepared for unexpected environmental liabilities

Oil and gas companies need to be prepared for unexpected environmental liabilities

Politicians and media commentators often have harsh words for companies that suffer environmental mishaps, characterizing them as the result of a blatant disregard for safety. However, this simplistic view overlooks the fact that all companies have an intrinsic motivation to ensure that their operations are as safe as possible. When an accident does happen, it should be taken as an opportunity to study what went wrong and determine how additional safeguards could have made a difference.

Following pipeline explosion, remediation to begin in Milford, Texas

Earlier this month, an unexpected explosion rocked a small town south of Dallas when a construction crew working in the area inadvertently drilled into a 10-inch pipeline carrying liquefied petroleum gas (LPG). Although no injuries were reported, several vehicles at the site were set on fire and a number of nearby homes and schools had to be evacuated.

In an interview with KTVT-TV in Dallas, Hill County Emergency Management Director Tom Hemrick explained why the situation could easily have become much more serious — there is another, slightly larger pipeline just feet away from the one that exploded. This line, which also carries LPG, had to be left running in the aftermath of the explosion, when flames continuously spewed from the damaged pipe.

It may seem like it was a risky decision to leave the pipeline open, but Hemrick explained that “the flow [of gas] cools the line” and stopping it would actually have increased the risk of a second explosion by allowing temperatures to rise rapidly. It is fortunate that cool heads were able to assess the situation and determine the best course of action. If the pipeline had been shut down as a knee-jerk reaction, stakeholders could be facing a much more complicated remediation process.

Chevron, which operates the West Texas LPG system, reported that it had cut off the flow of LPG to the damaged pipe and was monitoring the adjacent line for signs of danger. Even then, the fire still had to be left burning for more than 24 hours, as it was the only way to remove the gas that was already in the damaged segment of the pipeline.

Remediation project surrounded by uncertainty

Cleanup efforts are just getting underway in Milford and it remains unclear exactly how much it will cost to repair the property damage and restore the local environment. The entire operation will be subject to federal and state environmental compliance standards and, due to the significant amount of publicity surrounding the incident, remediation managers should be prepared for their work on this project to come under significant regulatory scrutiny.

Past examples show how cleanup plans based on assumptions made at the outset of a remediation project often turn out to be inadequate, due to uncertainty about the extent of an incident’s impact on the local environment. Even when an in-depth site assessment is performed upfront, additional monitoring and reporting will always be necessary to ensure that remediation work stays on the right track.

ExxonMobil updates estimate of damages from Arkansas oil spill

In a compelling example of how environmental liabilities can “snowball” and create unexpectedly large costs, ExxonMobil recently updated its estimates for expenses related to an oil spill that occurred in Mayflower, Arkansas. In March, a ruptured pipeline sent thousands of barrels of oil into the residential community, located about 30 miles northwest of Little Rock.

In a report submitted to the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA), Exxon reported that the total cost of the Mayflower incident has risen to more than $70.5 million. Company spokesman Aaron Stryk clarified that this figure accounts for “costs related to cleanup and remediation,” but does not include the purchase of residential properties affected by the spill. Property records reviewed by the Houston Chronicle show that ExxonMobil has purchased at least 20 houses, several of which have been demolished due to the discovery of oil underneath their foundations.

The breakdown of these costs includes:

  • $58.8 million for emergency response
  • $7.5 million for remediation
  • $1.2 million for property repairs
  • $300,000 for lost product
  • $2.7 million for “other costs” such as covering temporary housing and living expenses for those displaced by the spill.

Exxon will also likely have to pay civil penalties to settle claims regarding regulatory compliance failures. The PHMSA has identified nine “probable” violations and recommended a $2.6-million penalty. Exxon has yet to formally respond to the agency’s proposal.

Working with environmental experts can help reduce risks

These examples highlight the need for companies in heavy industries to constantly consider potential environmental liabilities when making long-term financial and operational plans. While these risks can often be seen most prominently in the oil and gas sector, many other businesses, from manufacturers to retailers, must plan for similar risks.

For example, virtually any facility that has a significant volume of oil in an above- or underground storage tank is likely to be required to maintain a comprehensive Spill Prevention, Control and Countermeasure (SPCC) Plan. Many other potentially hazardous chemicals must also be contained adequately.

As Exxon’s experience with the Mayflower spill shows, emergency response can be by far the most costly part of dealing with an accident that causes environmental damage. Having comprehensive plans in place before an incident occurs can greatly reduce the cost and complexity of subsequent remediation efforts. In turn, the faster environmental liabilities are resolved, the sooner a company can get back to focusing on its core business interests.

Any organization that is concerned about maintaining regulatory compliance, interested in establishing or expanding an SPCC Plan or needs to have an environmental risk assessment performed at one of its sites should contact experienced environmental consultants for information about the options that are available. Property owners in the Southeast should strongly consider working with a local firm for their environmental needs, as this ensures that the professionals who handle a project will be familiar with the region’s unique ecological circumstances