Beyond Phase I Environmental Site Assessments-conducting Business Environmental Risk Assessments Of Oil Field Acquisitions

Abstract

Environmental due diligence investigations for proposed oil field acquisitions are typically conducted for two different purposes. In the first case, an oil company desires to purchase an oil field to conduct on-going crude oil and natural gas production operation. In the second case, the owner of the property (an oil company) desires to sell an existing oil field operation to a real estate developer for residential, commercial, or industrial redevelopment. The American Society of Testing Materials (ASTM) has developed a standard practice for conducting Phase I Environmental Site Assessments (Phase I Assessment) associated with the transfer of commercial property (E-1527-97). The primary objectives of the ASTM standard practice is to identify apparent conditions of environmental concern and conduct adequate due diligence so that the buyer can avail himself of the “innocent purchaser provision” under Comprehensive Emergency Response, Compensation, and Liability Act (CERCLA). These objectives have limited relevance for most acquisitions of oil field properties. Most oil field properties have environmental impairments. The threshold questions relate to the allocation of risk for current and future liabilities between the buyer and seller. There is a petroleum products exclusion under CERCLA. An Environmental Business Risk Assessment goes beyond the traditional Phase I Assessment to better meet the business needs of purchasers of oil field properties. The scope of the Environmental Business Risk Assessment is tailored to the level of sophistication and the risk tolerance of the buyer and the nature of the deal. Buyers of oil field properties can range from oil companies with environmental staffs to real estate developers who have limited knowledge of oil field operations. Sophisticated buyers may only need assistance identifying “exception” issues and estimates of the most likely cost and worst case scenario costs associated with these identified current and future liabilities. These buyers can generally estimate future well abandonment and facility demolition costs in-house. These buyers may also be able to estimate in-house remediation costs associated with shallow crude oil–impacted soil and other conditions typical of oil field operations. Less sophisticated buyers may need more assistance in these areas. For buyers interested in redevelopment of oil fields, the threshold question is can the site be prepared for redevelopment at a low enough cost in order that the developer can make a desired rate of return on their investment. One way to address this issue is through a focused Phase I/Phase II Assessment conducted in stages. The primary objective of Phase I is to gather just enough information to select locations for the focused Phase II investigation. The objective of the first stage of the Phase II Investigation is to confirm the general nature and extent of environmental impairments to ascertain whether it makes sense to continue. In some cases, this initial investigation will suggest that the cost of site remediation will exceed an economic threshold that makes redevelopment of the site unattractive. If the initial Phase II Assessment work is favorable, additional work is conducted consistent with the level of business risk and uncertainty the developer is willing to accept. Historically, oil field sellers have provided either a full or partial indemnification to the buyer for environmental conditions that existed before the date of sale or have provided a due diligence period after the date of sale for the buyer to conduct additional environmental investigations. In the later case, the buyer could make claims against the seller for environmental conditions that were discovered that had a liability above a certain dollar amount as a post-closing adjustment to the purchase price. These types of deals are less common today. More typical today is an “as-is” sale where the seller is willing to entertain adjustments in the purchase price for environmental impairments identified by the buyer in a due diligence period before closing. The Environmental Business Risk Assessment provides information the buyer needs to make informed business decisions about allocation of risk as a part of the negotiation of the Purchase and Sales Agreement.