Sailing the perfect storm of environmental regulation in the oil and gas industry

April 8th, 2015

Matt Jackson, Senior Director at Clutch Group, recently wrote this Inside Counsel article on the brewing regulatory pressures within the Oil and Gas industry. Check out the full text below, or read the article on Inside Counsel.

What are the three major pressures on oil and gas companies’ regulatory and compliance spend in the current environment?

There’s a perfect storm approaching the energy and gas industry. A term-limited White House administration is aggressively pursuing a series of broad environmental regulations that promises to put serious pressure on the industry’s compliance spending. Further, companies are finding it difficult to navigate a convoluted landscape of environmental and financial regulatory agencies with overlapping jurisdictions and varying standards. Lastly, regulators have become increasingly aggressive and sophisticated by incorporating data analytics into their monitoring and enforcement activities.

Translation: the cost of maintaining suitable compliance programs is going up when the industry is least suited to deal with it. Let’s peer into the eye of the storm. What are the three major pressures on oil and gas companies’ regulatory and compliance spend in the current environment?

Brewing White House legislation

New environmental regulations being pushed by the Obama Administration cover a wide range of topics, from addressing methane emissions, to ramping up drilling requirements in certain regions, to toughening standards on offshore drilling requirements. Taken collectively, they’re aimed at reducing incentives for drilling and production within the U.S.

Other proposed regulations are aimed at restricting the shipment of oil by train, a practice that has risen dramatically in the last five years to keep pace with increased production.

Against the backdrop of drilling disasters and accidents that have had generational impacts, these measures have received broad general public support. However, there are significant costs associated with complying with these wide ranging regulations. A sustained months-long drop in oil prices has left the industry much less suited to absorb increasing compliance and regulatory costs, forcing companies to rethink their compliance strategy and programs.

A tangled net of mandates

There’s also a confusing landscape of overlapping regulatory bodies and agencies within the industry. Both the Environmental Protection Agency (EPA) and Interior Department are contemplating proposed rules to combat different environmental concerns, causing an unneeded overlap of mandates. Further complicating things is the interplay between state and federal regulatory regimes. In many instances, state and federal regulators have concurrent powers; however, state regulators will sometimes treat federal regulations as minimal standards, and in other instances federal regulations are used to preempt state regulations. There is an increasing price to navigating these murky waters.

Not only are energy companies subject to stringent environmental regulation, they face equally tough—and muddles—financial regulation. The Federal Energy Regulatory Commission (FERC), the U.S. Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) all have overlapping and concurrent authority to regulate the energy markets, specifically price manipulation and false reporting. All three agencies derive their power from separate pieces of legislation and have different standards they apply.

Use of data analytics on the rise

The EPA’s Next Generation Compliance program is specifically designed to take a modern approach to compliance and to take advantage of new tools and approaches (data analytics and targeting), while also strengthening the vigorous enforcement of environmental laws.

Starting in 2014, the FERC, continuing to expand its surveillance capabilities, began receiving a daily feed of data from the CFTC’s Large Trader Report, which includes the open financial positions for natural gas and electric products that are traded on exchanges for each large trader. The CFTC’s Division of Analytics and Surveillance (DAS) has integrated this information into its automated surveillance screens and uses it in its continuous surveillance of natural gas and electric markets.

Regulators’ preference to include data analytics in their tool box is catching on. Other regulators, including the SEC, have publicly stated their intent to rely on data analytics to monitor industries and markets. Their Office of Compliance Inspections and Examinations (OCIE) stated that it made massive enhancements to its data analytics capabilities this past year.

So what?

So what’s an energy company to do?

First, spend that compliance dollar proactively and efficiently. Regulators are not waiting for violations to surface—they are actively hunting for them. Energy companies must match that aggressiveness in their approach to compliance.

Second, know the trends and points of emphasis of your regulators. Recognizing the complexity of the regulatory environment and the priorities of the regulatory agencies in your industry and then implementing a sound, auditable compliance program is crucial.

Third, it’s imperative for energy companies to match the sophistication of the agencies that regulate them when it comes to compliance. We live in the age of big data, and mastering your data can be the difference between compliance and litigation. In this calm before the storm, companies should ramp up their advanced data analysis and tools very quickly and without breaking the budget.