Client Challenge:

These are hectic times for U.S. oil and gas producers. Global demand is flat … in some cases the market is shrinking, and the pricing is 50% of what it was in mid-2014. Furthermore, it is not clear when the demand and pricing will increase. In situations like this, acquisition and divestiture activity usually increases.

Mergers and acquisitions can be challenging for oil and gas firms, due to the sheer number of regulatory and environmental compliance issues surrounding the oil and gas industry. Under current federal and state environmental regulations, a property owner may be held liable for previous hazardous materials management or disposal practices, regardless of the property’s owner’s knowledge or participation in those practices. Because of this liability risk, records/forms need to be filed and archived, installation steps need to be recorded and all operations details need to fit within the scope of existing environmental regulations. Everything needs to be accounted for ahead of any closing, including air regulation compliance, spill reporting, produced water management plans, lease operations, hazardous materials management, and more.

This is a lot of information to process over the course of an acquisition.

Oil and gas companies need to be secure in the knowledge that the operations they are purchasing are up-to-date with all required permits and regulations. The companies need to understand that these new assets are in compliance and there aren’t any lingering surprises or liabilities.

If non-compliance issues are identified the purchasing client needs to know what the cost and timing will be to bring these issues into compliance. They also need to know how the cost of correcting these issues will be addressed in the purchase and sale agreement. Identifying and addressing these issues are what makes for a successful acquisition.

In order to address potential issues, oil and gas operators are now turning to qualified engineering firms to review potential site acquisitions for regulatory and environmental compliance as part of the sale. This process includes detailed physical inspections of the subject facilities, interviews with site personnel, reviews of records and documentation related to the subject facilities and reviews of state and federal regulatory agency records, documents and databases associated with the site.

In 2013, a leading independent energy company (“The Client”), which engages in the acquisition, production and development of oil and gas properties in several U.S. energy basins, approached Halker Consulting LLC (“Halker”) for help reviewing a potential site acquisition in an effort to support its growing portfolio. In addition to the Limited Phase 1 Environmental Site Assessment, The Client contracted with Halker to conduct a lease evaluation of the subject facilities in order to identify any facilities that did not conform to generally accepted standards for the oil and gas industry.

The Solution:

Environmental Review
To complete the Environmental Site Assessment, the following tasks were performed:

• A detailed physical inspection and reconnaissance of each of the subject facilities.
• Interviews with the current site owner’s personnel.
• Reviews of the selling companies records and documents for the subject facilities.
• A review of state and federal regulatory agency records, documents, databases and historical record reviews associated with the sites in question.
• Reconciled site inspections; interviews; and agency records, documents, and database review results with federal and state laws and regulations.

In addition to the site reviews and staff interviews, the process included database research. To determine if the subject properties had any historical environmental incidents the following databases were searched: the National Response Center (NRC) database of oil and chemical spills, the U.S. Environmental Protection Agency (EPA) Envirofacts database, and the state natural resources database. Halker also performed a search of available federal and state environmental and regulatory databases in accordance with EPA Standards and Practices for All Appropriate Inquires (40 CFR Part 312), and ASTM Standard Practice for Environmental Site Assessments (E 1527‐05).

Lease Review
The Lease Evaluation portion of this project was primarily concerned with facility performance, functionality, and longevity.

Oil and gas prices have been falling in the U.S. due to a range of larger economic forces—including oversupply, price manipulation and fluctuating demand—leaving many producers with some hard choices to make in the event of further revenue reductions. As a result, firms are now looking to cut short-term costs and make well-informed investments in the future of their sites in order to weather this market.

This was a concern for The Client, and Halker’s value-added engineering was able to help in several ways:

Cost reduction through process optimization — Existing systems can be improved by focusing on efficiency improvements, addressing product quality needs and eliminating redundancies. The overall goal of process optimization is to reduce the cost of production at existing sites and reduce long-term maintenance needs.

Revenue generation through de-bottlenecking — By bringing more to market, operators can increase potential revenues from existing sites by both increasing production and adding new products to the mix. Where is production currently being held back? Done right, engineered de- bottlenecking can allow operators to make more money with their existing resources.

Construction savings — Would shifting to prefab or modular facilities help with overall system efficiency and cost? This approach can be used for both retrofit applications as well as new builds, minimizing the cost of construction.

Site reliability — Well-engineered systems are more reliable and often cheaper to operate due to the lack of needed repairs and the minimal downtown, saving The Client both now and down the road by minimizing its sunk costs.

For The Client, Halker conducted a Lease Review that addressed many of these concerns, including existing facility equipment, material selections, material and equipment condition, facility process flow, and overall site compliance with accepted industry standards in maintenance and upkeep. Both the processing facility and wellhead were evaluated for all sites. Halker reviewed the facilities at each of the 10 subject properties, inspecting the tank batteries, piping and valves, and wellhead at each. A materials list was also assembled for each site.

Halker, as an industry leader in providing proven oil and gas facility engineering and design, is well positioned to help operators address these challenges. Halker Consulting has been providing this fit-for-purpose facility engineering and design from the ground up for numerous clients for as long as the company has been in existence. Our combined client portfolio of multi-well facility design is defined by over 250 wells on less than 25 sites in various productions basins.

The Result:

For the environmental portion, both state and federal regulations for each of the following review points were addressed, including questionnaire results from the acquired company, field inspection results, document review findings, and recommendations for further action.

• Air regulations and compliance
• Spill prevention, remediation, disposal and reporting
• Produced water management
• Pit regulations
• Stormwater management
• Lease operating requirements
• Hazardous materials management. including hydrogen sulfide, naturally occurring radioactive material (NORM), mercury, asbestos, and polychlorinated biphenyls (PCBs)
• Other environmental or regulatory concerns

The resulting Lease Review report included details on the existing state of each installation, complete with photos, and recommendations for any needed updates and repairs. As a result of these assessments, The Client was able to determine not only the condition and operability of the subject properties, but also what steps, if any, would be needed to bring them into compliance and operating efficiently and reliably once the deal was closed.

Due diligence: The Client knew the condition of the assets it was purchasing. This helped it complete all necessary due diligence ahead of the sale and go into the closing with a complete picture of the condition of the subject sites.

Long-term planning: With this detailed site information in hand, The Client was better able to assess its long-term site planning needs, handling all needed maintenance and compliance issues immediately with an eye toward future growth and development.

Cost savings: By better understanding the state of the subject facilities, The Client was able to negotiate the purchase from a position of strength, fully aware of the pros and cons of the potential acquisition. At the end of the day, this information helped The Client minimize its capital outlay and refocus its resources instead on the maintenance, repair, and improvement of its new assets.