Acquisition of oil and gas assets abroad management essay

Course: BA LLB (Hons.)Batch: 2010-15Semester: VSECTORAL REPORT

ACQUISITION OF OIL AND GAS ASSETS ABROAD

Mentor: RAJKUMARLecturerUniversity of Petroleum and Energy StudiesDehradunSubmitted by:NIVEDITA GIRI (R450210079)PRATIK RAOKA (R450210086)RAJNANDINI DAS (R450210094)

ACKNOWLEDGMENT

The authors would sincerely seek to acknowledge and extend their gratitude for the effective mentoring of the faculty for the discipline, Mr. Rajkumar, who helped us in observing the chosen topic from both legal and economic perspectives. His methods helped us work upon the topic in a more refined and accurate manner. The kind of understanding he instills while dealing with the affairs of the sector is commendable.Furthermore, we would like to thank Mr. Rajkumar for letting us choose the topic ourselves which helped us in following our own interest. We are wishful of taking more of such endeavors under his guidance.

INDEX

Page No.Introduction …………………………………………………………………….. 5Necessity to acquire Oil and Gas Assets ……………………………………….. 11Acquiring Energy Security ……………………………………………………… 12ONGC Videsh Limited ……………………………………………………… 12CIS & Far East ……………………………………………………… 12Middle East …………………………………………………………. 16Africa ………………………………………………………………… 18Latin America ………………………………………………………. 22Bharat Petroleum Corporation Limited …………………………………… 25Indian Oil Corporation Limited ……………………………………………. 26Reliance Industries Limited ………………………………………………… 27RIL-BP venture ……………………………………………………… 27Oil India Limited …………………………………………………………… 28Environmental Threat and Risk Management ………………………………… 29Environmental Threats and Management ………………………………… 30Compliance Liability ………………………………………………… 31Clean-up Liability …………………………………………………… 32Common Law Liability ……………………………………………… 34P & A Liability ………………………………………………………. 34Sea Gull Case ……………………………………………………. 35Other ThreatsRisks Associated with Types of Oil and Gas Assets ………………… 36Oil and Gas Properties: Surface Waters or Shallow Aquifers ….. 36Natural Gas Properties …………………………………………… 37Environmental Risks …………………………………….. 38Marketing ………………………………………………… 38Royalty Risks ……………………………………………. 39Midstream Assets ………………………………………………… 40Indian Properties ………………………………………………… 41Risks associated with Financing and Acquisition ……………………………… 43Acquisition and Financing ………………………………………………….. 43Securities Offerings ………………………………………………………….. 43Due Diligence Consideration ……………………………………………………. 45Local Area Knowledge ………………………………………………………. 45Information Review ………………………………………………………….. 45Seller Due Diligence …………………………………………………………. 46Purchase Agreement Considerations …………………………………………. 47Page No.Use of Special Conditions …………………………………………… 47Indemnity Caps ……………………………………………………… 47Earn-outs and Contingent Payments ………………………………… 48Conclusion ……………………………………………………………………….. 49Bibliography …………………………………………………………………….. 50ACQUISITION OF OIL AND GAS ASSETS ABROAD

INTRODUCTION

Energy is the lifeline of every economy. It is the prime mover of economic growth. Availability of energy with required quality of supply is one of the keys to sustainable development. It has a direct impact and influence on the quality of services in the fields of education, health, food and security. Oil and gas forms a small but significant part of the energy sector. Of all other sources of energy, hydrocarbons are the most critical and will continue to be so in the foreseeable future. Its level of utilization directly asserts the level of economic development. Emerging economies are expected to drive energy usage to still higher levels. For countries like India, access to affordable energy is critical to the economic growth of the nation and enhanced standards of living of its population.The Integrated Energy Policy of the Planning Commission defines Energy Security asunder:”We are energy secure when we can supply lifeline energy to all our citizens irrespective of their ability to pay for it as well as meet their effective demand for safe and convenient energy to satisfy their various needs at competitive prices, at all times and with a prescribed confidence level considering shocks and disruptions that can be reasonably expected.”[1]Therefore, it is safe to infer that the chief emphasis of energy security policy of India focuses mainly on meeting the energy needs of all citizens and the ability to provide it to all citizens disregarding their capacity to pay.Securing energy sources is of strategic importance. Majority of the established hydrocarbon resources in the world are confined to and controlled by few countries, whereas the demand is world-wide. The concerns related to assured supply are threats of supply disruptions, terrorism, and instability in exporting nations, nationalist backlash, geo-political rivalries, speculative trading and business cartels. Recent global developments like economic downturn of 2008-09 and geo-political unrests in Middle-East countries have once again demonstrated the vulnerability of world’s crude oil prices and the resultant impact on economic growth of countries.The proven oil reserves worldwide at the end of 2009 were approximately 1333 billion barrels. The main concentration of oil is in Middle-East Asia followed by South and Central America. Additionally North American region accounts for significant portions of oil reserves because of large oil sands deposits. The Middle-East accounts for major share of world’s gas reserves, followed by Europe and Eurasia. Russia and CIS countries are the most prolific gas suppliers contributing to Europe and Eurasia region.The global economic recession that began in 2008 and continued up to 2009 adversely affected the global energy demand in the short term and consequently also the exploration and production activities. During this period, the service contracts in many countries were terminated or renegotiated in order to cope with the economic downturn. The energy demand world over is on the rise again with signs of economic recovery in USA and other western countries. This may result in an increase in the E&P activities in coming years.Energy security remains a concern for India as the country faces challenges in meetings its energy needs. The country depends on imports to meet more than 75% of its hydrocarbon energy requirements. The growth in domestic oil and gas production is not commensurate with the growing consumption of petroleum products in the fast developing economy like India. The 12th Five Year Plan aims at overcoming the shortfall in availability of oil and gas in the country. The Plan purposes to expedite the exploration activities in the non-producing areas of Indian sedimentary basins; induct key technologies to improve processing techniques in seismic surveys and intensify exploration activities in existing as well as new fields. The consumption and production rate of oil and gas by India is shown as under in Table 1.1. and 1.2. respectively.C:Users500012054DesktopUntitled.png

Table 1.1. India’s Crude Oil Consumption[2]

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Table 1.2. India’s Crude Oil Production[3]

In order to supplement domestic availability of Crude Oil and Gas, there has been substantial effort on acquisition of assets abroad. Oil PSUs, namely, ONGC Videsh Limited (OVL), Oil India Limited (OIL), GAIL, Indian Oil Corporation Limited (IOCL), Bharat petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) have invested Rs. 59, 108 crore (i.e. US$ 13 billion) up to 31.03.2011 on acquisition of assets mainly oil production assets viz. Sakhalin, Russia, GNOP and Block 5A in Sudan, Imperial Energy in Russia, Block BC-10 in Brazil, Block 06.1 in Vietnam, AFPC Syria and MECL Columbia. OVL has produced Oil and Oil Equivalent Gas (O + OEG) to 8.802 MMT, 8.776 MMT, 8.870 MMT and 9.448 MMT during 2007-08 to 2010-11.Production from overseas oil and gas blocks presently contributes about 10.5% of domestic production of India. The share of overseas production vis-à-vis indigenous production in given below in Table 1.1:

Table 1.3 Overseas Production vis-à-vis Domestic Production[4]

Year2007-082008-092009-102010-112011-12Total Domestic (MMTOE)66.5366.3581.0189.989.85Overseas Production of OVL (MMTOE)8.88.788.879.459.00Overseas Production as % of Domestic13.23%13.23%10.95%10.51%10.02%The Ministry of Petroleum and Natural Gas is engaged in oil diplomacy through negotiations with Governments of other nations, Inter-Governmental Commissions, Joint Working Groups and region-specific events like the India-Africa Hydrocarbon Conference. Indian oil PSUs are being constantly encouraged to adopt a global vision in their pursuit of raw materials and raw material-producing assets abroad, and to pursue acquisition of oil and gas assets overseas. At present, India’s oil companies are undertaking the act of acquisition of assets in more than twenty countries including Vietnam, Russia, Sudan, Myanmar, Iraq, Iran, Egypt, Syria, Cuba, Brazil, Kazakhstan, Gabon, Colombia, Nigeria Sao Tome Principe, Trinidad and Tobago, Nigeria, Venezuela, Oman, Yemen, Australia and Timor-Leste. The total investment by oil PSUs overseas is Rs. 64, 832 crore which includes two pipeline projects in Sudan and Myanmar. OVL’s purchase of Imperial Energy is the largest acquisition of a foreign company by oil PSU. They produced 9.4 million tonnes of oil and oil equivalent gas in 2010-11 (which is equal to 22% of domestic oil production) from its assets in Sudan, Vietnam, Venezuela, Russia, Syria and Colombia. By 2020, OVL is expected to exceed an annual production level of 20 MMTOE.It is often mulled over whether India should acquire oil and gas assets abroad or just import crude oil. Assessing the current scenario, OVL has purchased 8.4% of the giant Kashagan oil field in Kazakhstan for US$ 5 billion. Located in the north Caspian Sea, this is the world’s largest oil discovery since 1968, with reserves estimated to be as high as 30 billion barrels. With crude prices at US$100 per barrel, OVL will recover the full value of its investment in a little more than six years. If prices fall, it will take longer. The deal is for 25 years.[5]Viewed this way, it looks like a great investment in a high-cost crude market. In 2009, OVL made a disastrous US$2billion deal to buy Russia’s Imperial Energy, and quickly found that output from its wells had dropped sharply. The asset in Kazakhstan is unlikely to suffer the same fate. It might be impossible to transport the oil physically to India, but that does not matter. OVL’s stake ensures that 8.4% of Kashagan output can be swapped with any other seller worldwide.Though OVL has assets in over a dozen countries, it has to be considered whether it makes sense to buy into oil projects or whether to save the cash and buy oil on spot and negotiated rates from global suppliers. China prefers to acquire assets, Japan opts to buy oil, instead. India does both. It is pointless to pose this question to OVL, because its mandate is to acquire and operate oil and gas properties overseas.The government and our energy policymakers must enunciate the benefits of acquiring energy assets over simply buying the product in the market. Without a clear cost-benefit analysis, this debate cannot be settled. In the past, the government has talked about energy security as the principal driving force behind overseas acquisitions. But that is facile: Japan’s experience shows that functional oil markets offer security, with some reserves thrown in. And oil markets functioned even during the two Gulf wars.However, for OVL and ONGC, there is one huge positive factor in the deal. It has helped turn a lot of the cash pile that the state-owned company was sitting on into a concrete asset that the government cannot take away in the form of oil subsidies or special dividends. And that is a pretty compelling reason to buy.Acquisition of oil and gas assets requires environmental exploitation. With growing concerns for environment and climate changes across the globe, certain measures and precautions are taken up so that environment is not made a scapegoat for economic development. This report throws light on the environmental, political, economic and other risks that Indian companies face while undertaking the trade of acquisition of oil and gas abroad and also examines the measures that have often been adopted to deal with the risks.

NECESSITY TO ACQUIRE OIL AND GAS ASSETS

The Indian sub-continent has been undergoing an accelerated growth in the recent past. In spite of the global economic slowdown, the average growth rate of India’s gross domestic product (GDP) during the period 2006-09, was about 8.6 per cent. The corresponding average growth rates of net national income and personal disposable income were 14.5 per cent and 14.7 per cent, respectively. India’s per capita energy consumption is 383 Kg of Oil Equivalent (KGOE) as against the world average of 1,737 KGOE, which indicates a significant potential for growth in the demand for energy. As per the Integrated Energy Policy of the Planning Commission, Government of India, India’s energy need is expected to grow four-fold from 433 Million Tonnes of Oil Equivalent (MTOE) to around 1,856 MTOE by 2032. However, India depends largely on imports with over 75% of oil and 16% of gas consumption being imported. The Government of India is keen to increase the per capita consumption of energy to raise living standard of country. Higher economic growth is driving income growth, which in turn is driving up industrial investment and fuel consumption. In general, demand exceeds supply and there is a broad-based energy shortage, which is either met by imports or remains unmet. Oil and gas merger and acquisition value and count is shown below in the graphical representation:

Table 1.4. Oil and Gas Merger & Acquisition Deals by Value and Count[6]

AQCUIRING ENERGY SECURITY

The formation of ONGC Videsh Limited in 1989 started the business of overseas acquisition of oil and gas assets. The main objective of this 100 percent subsidiary of the flagship national oil company was to help the country achieve energy security.

Following the foray of OVL into acquisition of oil and gas assets abroad, other upstream and even downstream players in the oil and gas sector started acquiring oil and gas assets from other nations. A few companies that have been actively involved in this game of acquisition besides OVL are Indian Oil Corporation limited (IOCL), Oil India Limited (OIL), Bharat Petroleum Corporation Limited (BPCL), Reliance Industries Limited (RIL), Hindustan Petroleum Corporation Limited (HPCL), GAIL and Cairn India. This report gives out an outline of overseas acquisition trade of oil and gas assets undertaken by the companies mentioned above.

ONGC VIDESH LIMITED

ONGC Videsh Limited (OVL) is a wholly owned subsidiary of Oil and Natural Gas Corporation Limited (ONGC), the flagship national oil company of India. Its primary business is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields, exploration, development, production, transportation and export of oil and gas.OVL’s international oil and gas operations produced 8.753 MMT of O+OEG in 2011-12 as against 0.253 MMT of O+OEG in 2002-03. Their overseas cumulative investment has crossed US$ 10 billion and they currently own assets in CIS & far-east, Middle-East, Africa and Latin America.

ASSETS:

CIS & FAR-EAST:

VIETNAM

OVL owns 3 blocks in Vietnam. They are as follows:

Block 06.1

Block 06.1 is an offshore Block located in the south–east of Vung Tau on the southern coast of Vietnam. OVL acquired the exploration License for this Block in 1988.  After subsequent assignments and transfers of PI between the parties to Block 06.1 and Petro-Vietnam, the present holdings of PIs with effect from 17th October 2011 are ONGC Videsh 45%, TNK Vietnam B.V. 35%, the operator, and Petro-Vietnam 20%. Lan Tay field in the Block has been developed and the field started commercial production in January, 2003. OVL’s share of production from the project was 2.023 BCM of gas and 0.036 MMT of condensate during 2011-12. Wells Lan Do-2P and Lan Do-1P have already been drilled and completed between 14th January, 2012 to 18th April, 2012.

Block 127

Block 127 is an offshore deepwater Block. The Production Sharing Contract (PSC) for the Block was signed on 24th May, 2006. The company is the chief operator and holds 100% PI in the Block. They have acquired 1,150 sq km 3D seismic data in the Block and completed the interpretation of the seismic data. Location for drilling of exploration well was identified and the well was drilled in July 2009 to a depth of 1265 metres. However, no trace of hydrocarbons could be found, therefore, they relinquished the block to Petro-Vietnam.

Block 128

Block 128 is an offshore deepwater Block. The PSC for the Block was signed on 24th May, 2006 and the extension to the exploration Phase-I for the Block 128 was valid till 15th June, 2012. OVL holds 100% PI in the Block with operatorship. 1650 sq km of 3D seismic data was acquired and interpreted in the Block by the company and location for drilling of exploration well was identified. Drilling was attempted on the location during September 2009, but the well could not be drilled as the rig had difficulty in anchoring at the location due to hard carbonate sea bottom. Meanwhile, OVL unearthed the key to the anchoring problem and asked for extension to the exploration phase to undertake review of additional Geological and Geophysical (G&G) data to find out a viable location for drilling to fulfill the PSC commitment.  Petro-Vietnam (PVN) has suggested OVL to continue the exploration programme in the block for additional two years with effect from 16th June, 2012 by revisiting the geological model with the integration of data likely to be available with the assistance from PVN.

MYANMAR

OVL owns 5 blocks in Myanmar. They are participating in the complete hydrocarbon exploration, production and transportation chain comprising combined Upstream Field development of A-1 and A-3 Blocks, Offshore Pipeline JV Company and Onshore Pipeline Company. OVL holds a stake in Shwe Offshore Pipeline Joint Venture Company (PipeCo-1) and also in PipeCo-2. As per the current estimates, OVL’s share of investment jointly for Blocks A-1 and A-3 including Pipeco-1 & 2 projects is estimated at about US$ 1 billion. They acquired 3 offshore deepwater exploration Blocks i.e. AD-2, AD-3 and AD-9 on 23rd September, 2007 in Myanmar. OVL is the operator with 100% PI in all the three Blocks, with an investment of approximately US$ 24 million in the Blocks till 31st March, 2012.

Block A1, A3

OVL holds 17% PI in Blocks A1 and A3 and remaining stakes by Daewoo (51%), GAIL and KOGAS (8.5% each) and the remaining 15% is with MOGE. Block A-1 extends over an area of 2,129 sq. km of Rakhine Coast in Arakan offshore in north-western Myanmar. Commercial quantity of natural gas has been discovered in the Block in two fields, Shwe and Shwe Phyu.  The Shwe and Shwe Phyu field appraisals have been completed by the consortium and the Gas Initially In-Place reserves certified by an independent firm for the Shwe and Shwe Phyu gas fields are 3.83 TCF.  Out of 16 wells drilled so far in the block, 9 have been found gas bearing.Block A-3, the adjacent block of Block A-1, covers presently an area of 3,441 sq km with bathymetry up to 1,500 meters in the Rakhine offshore. So far six exploratory wells have been drilled in this Block out of which three are gas bearing.  Commercial quantity of natural gas has been discovered from Mya Gas Field. The Gas initially in-place reserves certified by an independent firm for the Mya Gas field are 1.52 TCF.

Blocks AD- 2, AD- 3 & AD- 9

OVL acquired three offshore deepwater exploration Blocks i.e. AD-2, AD-3 and AD-9 on 23rd September, 2007 in Myanmar. The Blocks have been awarded on the basis of mutual understanding and cooperation between India and Myanmar in the hydrocarbon sector. The blocks are found to be at high risk with uncertain rewards and after due consideration the company has relinquished the Blocks at the end of the First Exploration Period in case of AD-2 and after Study Period in blocks AD-3 and AD-9 which ended on 22nd December, 2010.  The Company has written off the acquisition cost of the block AD-2 amounting to US$ 392.70 million.

RUSSIA

Sakhalin- 1

Sakhalin-1 is a large oil and gas field in Far East offshore in Russia, covering an area of approximately 1,146 sq km. OVL acquired stake in the field in July, 2001.  They hold 20% PI in the field with Exxon holding 30% PI as operator; Sodeco, a consortium of Japanese companies holding 30% and balance 20% PI by Rosneft, the Russian National Oil Company (NOC). Production started in October, 2005. Odoptu first stage production started in September, 2010. Development of Arkutun Dagi is in progress and first oil is expected to be produced in third quarter of 2014. During 2011-12, OVL’s share of production from the project was 1.498 MMT of oil and 0.494 BCM.

Imperial Energy

OVL acquired Imperial Energy Corporation Plc., an independent upstream oil Exploration and Production Company having its main activities in the Tomsk region of Western Siberia, Russia on 13th January, 2009 at a total cost of US$ 2.1 billion. Imperial’s interests currently comprise of nine blocks in the Tomsk region i.e. Block 69, 70-1, 70-2, 70-3, 77, 80, 85-1, 85-2 and 86 with a total licensed area of approximately 13,500 square kilometres with 14 licenses. The Production licenses were granted to the Company during 2005 to 2010 and are valid till 2027 to 2031. As on 1st April, 2012, OVL’s share of 2P reserves in the project was 110.122 MTOE (O+OEG).The post acquisition development activities of Imperial Energy included drilling of 72 development wells and construction of facilities increasing the production level to above 15,000 BOPD in April 2012The exploration efforts have shown positive results.  Based on the exploration and development efforts put forward so far, Imperial Energy has primarily focused on exploiting from Upper Jurassic formation with relative good reservoir characteristics. Concurrently, Imperial is consolidating all the data generated so far to develop its strategy for exploitation of oil from its tight sand reservoirs as next course of action, for which the job of scouting and identification of a suitable technologies is in hand. A provision for impairment of Rs. 1,953 crore has been made for this project as the asset is performing lower as compared to the estimates and the value in use computed for the asset as on 31st  March, 2012 was lower than its carrying value.  During the year 2011-12, production of Imperial Energy was 0.771 MMT of oil as compared to 0.770 MMT during 2010-11.

SATPAYEV PROJECT, KAZAKHSTAN

OVL signed agreements with KazMunaiGas (KMG), the National Oil Company of Kazakhstan for acquisition of 25% participating interest in Satpayev exploration block on 16th April, 2011 at Astana, Kazakhstan. This transaction marked OVL’s entry in hydrocarbon rich Kazakhstan. Acquisition, Processing and Interpretation of 1200 sq km of 2D Seismic data have already been completed and location for drilling has been identified.

MIDDLE EAST

IRAN

Farsi Offshore Exploration Block

Farzad B is an offshore exploration Block in Persian Gulf, Iran. The contract for the Block was signed on 25th December, 2002. Pursuant to the discovery of gas made by the Consortium led by OVL, it submitted a commerciality report to National Iranian Oil Company (NIOC), Iran on 23rd December, 2007.  NIOC approved the Commerciality of the Farzad B area on 18th August 2008. The Master Development Plan (MDP) for the Farzad B Gas Field was submitted to Iranians during April, 2009.  Development Service Contract for the field remains under discussion.

IRAQ

Exploration Block-8

OVL is the sole licensee of Block-8, a large on-land exploration Block in Western Desert, Iraq spread over 1.5 sq km.  The Exploration & Development Contract (EDC) for the Block was signed on 28th November, 2000. The contract was ratified by the Government of Iraq on 22nd April, 2001 and was effective from 15th May 2001.  Since then, the work relating to archival, reprocessing and interpretation of the existing seismic data has been completed. However, OVL had to notify the force majeure situation to the Ministry of Oil, Iraq in April, 2003 due to prevailing conditions in Iraq. In 2008, OVL was informed that Government of Iraq had decided to re-negotiate the Block-8 contract in line with the provisions of the new oil and gas law which was expected to be promulgated soon.  Re-negotiation is yet to commence. Till then OVL is following up the matter with Iraqian authorities.

SYRIA

Al Furat Project (4 PSA)

The project is owned by Himalaya Energy Syria B.V. (HESBV), a Joint Venture Company of ONGC Nile Ganga B. V., a wholly owned subsidiary of OVL and Fulin Investments Sarl, a subsidiary of China National Petroleum Company International (CNPCI), holding 50% shares each. The fields are operated by Al Furat Petroleum Company (AFPC), jointly owned by Syrian Petroleum Company (50%), the National Oil Company of Syria, Shell Syria Petroleum Development Co. (31.25%) and HESBV (18.75%).  Due to geo-political development in gulf countries, European Union imposed oil trade sanctions on Syria in September, 2011.  The EU sanctions were specifically targeted at crude oil exports making vessel availability, associated insurance and payment extremely difficult. Shell has issued a letter informing AFPC and Syrian authorities that the present situation of preventing the contractor from discharging their obligation under PSC Contract as arisen due to EU sanctions and was like a Force Majeure situation for foreign partners.

Block-XXIV

The Contract for Exploration, Development and Production of Petroleum for the Block XXIV, Syria was signed on 15th January, 2004 with effective date from 29th May, 2004. OVL holds 60% PI in the Block with IPR Mediterranean Exploration Ltd., the operator, and Tri Ocean Mediterranean holding PI of 25% and 15% respectively.The exploration phase for the block expired on 28th September, 2011. The consortium over achieved the physical work commitment by drilling a total of 14 wells in the Block in this phase.  During the financial year of 2012, the consortium drilled 7 exploratory wells, out of which 3 wells flowed oil and gas and 1 well showed presence of hydrocarbon.  Extended production testing of three exploratory wells in Abu Khashab area was carried out to acquire reservoir data and also to know its production potential. 1 development well was also drilled during the current financial year of 2012. Based on the exploration results, the Government of Syria granted development rights for additional areas of three formations in Abu Khashab area.  Presently, Plan of Development (PoD) of Abu Khashab area is being prepared by the operator.  Further, the consortium’s request for granting of development right for Romman Area is under active considerations of the Syrian Authorities.  Meanwhile, the operator has invoked ‘Force Majeure’ in the Block with effect from 30th April, 2012 citing effects of  US sanctions and deteriorating law and order situation in the operational areas.  Rashid Field has been under extended production testing with an average rate of production of 180 BOPD. However, due to worsening law and order situation in and around Rashid field, the facilities have been shut down with effect from 13th June, 2012.

AFRICA

LIBYA

Exploration Block NC- 189

OVL acquired a 49% stake in the on land Block NC- 1989 in June, 2003. Turkish Petroleum Overseas Company (TPOC), a subsidiary of National Oil Company of Turkey, held the remaining 51% PI with operatorship in the block.  Three exploratory wells were drilled in this Block and all the wells were plugged and abandoned as dry wells.  The Company decided to relinquish the Block at the end of the exploration period on 11th December, 2009. But due to unrest in Libya, the formal communication from NOC towards relinquishment of the Block is still awaited.

Block 81- 1

Block 81-1 is an onshore exploration Block located in Ghadames Basin in south-west Libya. The Exploration and Production Sharing Agreement (EPSA) for the Block is effective from 10th December 2005. OVL holds 100% PI with operatorship in the Block. The acquisition, processing and interpretation of 811 LKM 2D and 502 sq km. 3D seismic data have been completed. The Interpretation of Geo scientific data of Block 81-1, Libya was carried out at G & G centre of OVL at New Delhi.  Based on the study, some leads were identified but unfortunately none could be matured for drilling.  On the recommendation of Management Committee, the seismic data was reprocessed at GEOPIC, ONGC Dehradun and the analysis brought out three small subtle features in 3D area and a marginal prospect in 2D area.  In spite of best efforts a drillable prospect did not emerge due to high risk and marginal nature of the prospects.  The Company has relinquished the Block at the end of the first phase of exploration which ended on 9th December, 2010.  The relinquishment formalities of the block have been completed and the formal letter of relinquishment is awaited from NOC, Libya.

Contract Area 43

Participating Countries and their shares- OVL 100%

OVL acquired Contract Area 43 located in Cyrenaica offshore basin in the Mediterranean Sea under an Exploration and Production Sharing Agreement (EPSA) effective from 17th April, 2007. Contract Area 43 consists of four blocks Finalization of interpretation report of Geo scientific data is in progress at G&G centre of your Company in New Delhi.  Due to civil unrest in Libya, notice for Force Majeure was served to NOC, Libya with effect from 26th February 2011 and the operations at Libya were suspended.  However after improvement of civil unrest and safety situation at Libya, the Force Majeure notice has been revoked and the operations have been resumed with effect from 1st June, 2012.

NIGERIA

Block OPL 279

OPL 279 is a deepwater offshore exploration Block in Nigeria. OVL’s Joint Venture Company ONGC Mittal Energy Limited (OMEL) through its wholly owned subsidiary company OMEL Exploration & Production Nigeria Ltd., as the operator, held 45.5% PI in the Block. Other partners in the Block are EMO, a local Nigerian company with 40% PI and TOTAL with 14.5% PI. The Phase I of exploration expired on 22nd February 2012. All MWP commitments under exploration phase I in the Block have been fulfilled including acquisition of 534 sq km of 3D seismic data and drilling of well Kuyere-1 in Jan-Feb, 2010 with discovery of hydrocarbons in three pay zones. Based on the post-drill analysis of G&G data, some prospects were identified in deeper stratigraphic levels of this block. However the identified prospects do not offer a standalone discovery case for any viable commercial development. A notice of relinquishment was accordingly issued to NNPC on 21st November 2011.

Block OPL 285

OPL 285 is a deepwater offshore exploration Block in Nigeria. Currently, OMEL through its wholly owned subsidiary company OMEL Energy Nigeria Ltd., as operator, holds 64.33% PI in the Block. Other partners in the Block are EMO, a local Nigerian company with 10% PI and TOTAL with 25.67% PI.  As per terms of the agreement, EMO is carried by other participants in their respective share of participation. The committed MWP of the block for the first phase of exploration has been completed with acquisition of 524 sq km of 3D data and drilling of one well, Opueyi-1 in Aug-Sep, 2010. Two sub-commercial hydrocarbon zones are encountered in the well.

Block- 2, Nigeria- Sao Tome & Principe, JDZ

Block-2 is a deep water exploration Block located in Nigeria-São Tomé & Principe Joint Development Zone (JDZ). ONGC Narmada Limited (ONL), Company’s 100% subsidiary incorporated in Nigeria, holds 13.5% PI in the Block. Other partners in the Block include Sinopec (28.67% PI), Addex Petroleum (14.33% PI), ERHC Energy Inc. (22% PI), Equator Exploration (9% PI), Amber (5% PI), Foby (5% PI) and A & Hatman (2.5% PI) with Sinopec as the operator. Operator has acquired license of 3D seismic data and interpreted the data. Based on the same, a well was drilled in 2009. Though the well showed presence of hydrocarbons, the volumes were inadequate to warrant a commercial development. OVL has communicated its intention of not continuing on the block to the Operator and Joint Development Authority (JDA) of Joint Development Zone Nigeria-São Tomé & Principe as the development of the project is not commercially viable.

SUDAN

Greater Nile Oil Project (GNOP) 1, 2 & 4

OVL holds 25% PI in the GNOP through its wholly owned subsidiary ONGC Nile Ganga BV (ONGBV) which was acquired on 12th March, 2003. Other partners in this project are CNPC (40% PI), Petronas of Malaysian (30% PI) and Sudapet of Sudan (5% PI). GNOP consisted  of  the upstream assets of on-land Block 1, 2 & 4 spread over 49,500 sq km in the Muglad Basin, located about 700 km South-West of the capital city of Khartoum in Sudan. The project is jointly operated by all partners through a joint operating company Greater Nile Petroleum Operating Company (GNPOC), registered in Mauritius.A new Joint Operating Company (JOC), Greater Pioneer Operating Company (GPOC) has been registered in Mauritius for petroleum operations of Block 1, 2 & 4 in RSS. OVL holds 25% equity share in GPOC through its wholly owned subsidiary ONGC Nile Ganga B.V. and the project is jointly operated by all partners.

Block 5 A

Block 5A is located in the Muglad basin. OVL stake in the Block from OMV of  Austria on 12th May, 2004 and holds 24.125% PI along with Petronas of Malaysia (67.875% PI) and  Sudapet (8% PI). The Block was operated by White Nile Petroleum Operating Company (WNPOC), a consortium of Petronas and Sudapet. Since 9th July 2011, cessation of South Sudan from Republic of Sudan (ROS), the entire block area is located in the territory of the Republic of South Sudan (ROSS). Subsequently, the PI of Sudapet has been transferred to Nilepet, the National Oil Company of ROSS as per the Presidential Decree issued on 8th November, 2011. The Company along with Petronas and Nilepet has signed a Transition Agreement on 13th January 2012 with the Government of RSS for the continuation of its right for petroleum exploration and exploitation in Block 5A.  The partners of Block 5A, including OVL, have incorporated a new operating company SUDD Petroleum Operating Co. Ltd. (SPOC) registered in Mauritius on 7th March 2012. The block will now be jointly operated by all partners. OVL’s share of oil production from the project was 0.174 MMT during 2011-12 as compared to 0.226 MMT during 2010-11.

SOUTH SUDAN

Greater Pioneer Operating Company

The average production from Block 1, 2 & 4 operated by GNPOC, Sudan during April 2011 to June 2011 was 133,089 BOPD before partition of the country. South Sudan was formed as a new sovereign country in July 2011 which is land locked. The fields of GNPOC straddle across North Sudan and South Sudan and about 60% of production comes from South Sudan fields. The fields of Block 5A are now entirely in South Sudan. All Processing facilities, Crude Oil Pipeline and Export Facilities are situated in North Sudan.The production of GNPOC started falling gradually due to various reasons. Productivity of South Sudan fields of GNPOC was affected due to lack of skilled manpower and support services. Dispute has arisen over the transit fee for transporting South Sudan oil through Heglig-Port Khartoum pipeline and export. Due to failure of negotiation for transit fee between the two countries, Govt. of South Sudan ordered shutdown of oil production from GNPOC-South fields and Block-5A on 23rd Jan, 2012 which resulted in fall of production of GNPOC to about 52,000 bopd and production from Block 5A to zero.Partners of Blocks 1, 2 & 4 executed a ‘Transition Agreement’ (TA) with the Govt. of South Sudan on 13th January, 2012 as part of new Exploration and Production Sharing Agreement (EPSA) for contract area of Blocks 1, 2 & 4 falling in South Sudan. P.I. of “Sudapet” has been transferred to “Nilepet”, the National Oil Company of South Sudan as per the Presidential Decree issued dated 8th Nov. 2011, considering the block as a sovereign property of South Sudan.Subsequently, a new JOC for petroleum operations in South Sudan, for Blocks 1, 2 & 4 has been registered in Mauritius in the name of ‘Greater Pioneer Operating Company’ (GPOC). The shareholding of ONG BV in GPOC is 25% in accordance with P.I. in the asset under joint operatorship with other partners.Presently the straddled Blocks 1, 2 & 4 in Sudan and South Sudan are being operated by JOCs named, GNPOC and GPOC respectively.

Block 5 A

Block 5A is located in the Muglad basin and spread over an area of about 20,917 sq km. OVL acquired stake in the Block from OMV Aktiengesellschaft, Austria on 12th May, 2004 and holds 24.125% PI along with Malaysian National Oil Company, “Petronas” (67.875% PI) and National Oil Company of Sudan, “Sudapet” (8% PI).

LATIN AMERICA

BRAZIL

Block BC- 10

Block BC-10 is a deepwater offshore Block located in the Campos Basin. OVL holds 15% PI in the project.  Other partners in the Block are Shell with 50% PI as operator and Petrobras with 35% PI.    Phase-1 development of the Block was completed using sub-sea wells which connect via sub-sea manifolds, flowlines, and risers to a Floating Production, Storage and Offloading Vessel (FPSO).  Drilling of 11 wells (10 producers and 1 gas injector) is operational; oil production commenced on 12th July 2009.  The Phase II development would involve drilling of seven producer wells and four water injector wells. The Batch drilling of wells started in April 2012.  The Subsea & Pipeline installation work is scheduled in October 2012 and first Oil is expected in October 2013.

Blocks BM- SEAL- 4 & BM- BAR- 1

OVL through its indirect wholly owned subsidiary OCL acquired PI in exploration blocks BM-SEAL-4 and BM-BAR-1 in Brazil in August 2008. OVL holds 25% PI in each of these blocks with Petrobras (operator) holding remaining 75%.  Drilling of an exploratory well is currently in progress in block BM-SEAL-4.  In Block BM-BAR-1, two exploratory wells have been drilled without success for which OVL has conveyed its decision to relinquish its share in the venture.

Block BM- ES- 42 BM- S- 73

OVL, through its indirect wholly owned subsidiary OCL, holds 100% PI in the deep water offshore Block BM-ES-42 in Brazil. Seismic data acquisition, processing and G&G studies of PSTM & PSDM data have been completed. As OVL could not farm out up to 50% PI to mitigate exploration risk in the block as per Board’s decision, the block has been surrendered at the end of 1st exploration phase i.e., 11th March, 2012.

Block S- 74

OVL through its indirect wholly owned subsidiary OCL, holds 43.5% PI in Brazil offshore Block BM-S-74 covering an area of 165.4 sq km. Other partners in the block are Petrobras (operator) and Ecopetrol with 43.5% and 13% PI respectively.  Seismic data acquisition, processing and G&G studies and drilling of 1 commitment well have been completed. The well has been declared dry and hence abandoned.  The consortium has decided to relinquish the block.

COLOMBIA

Mansarovar Energy Colombia Limited

Mansarovar Energy Colombia Limited (MECL), Colombia is a 50:50 joint venture of OVL and Sinopec of China. Since 1st April, 2006, MECL’s assets constitute a 100% interest in Velasquez fee mineral property and a 50% interest in the Nare Association contracts where the Colombian national oil company, Ecopetrol holds the remaining 50%. MECL also owns 100% of the 189-km Velasquez-Galan pipeline, connecting the Velasquez property to Ecopetrol’s Barrancabermeja refinery.  OVL’s share of oil production from MECL was 0.561 MMT during 2011-12 as compared to 0.468 MMT during 2010-11.

Blocks RC- 8, RC- 9 & RC- 10

OVL acquired exploration blocks RC–8, RC-9 and RC-10 in offshore Colombia. Currently Blocks are running in Phase-II, expiring on 29th November, 2013. In Block RC-8, OVL as Operator holds 40% PI with Ecopetrol and Petrobras holding 40% PI and 20% PI respectively. In Blocks RC-9 and RC-10, OVL and Ecopetrol hold 50% PI each. OVL is Operator in RC-10 Block while Ecopetrol is Operator in RC-9 Block. All the three Blocks have completed three years of exploration Phase-I on 29th November, 2010, successfully completing minimum committed work of the Blocks

Blocks SSJN- 7 & CPO- 5

OVL participated in the Bidding Round 2008 in Colombia and was awarded two on land Blocks i.e. SSJN-7 with 50% PI and CPO-5 with 100% PI.  Later in the year 2010, 30% PI in CPO-5 Block was divested to   Petrodorado. Two exploratory locations have been released for drilling in Block CPO 5 under Phase-1. In Block SSJN-7, acquisition & processing of 2D seismic data in part of the identified area has been concluded. The Phase-I of exploration of these blocks expired in June, 2012.  Due to delay in grant of environment permits and approvals from concerned authorities, Operator of SSJN-7 and ONGC Videsh in case of block CPO-5 have sought extension to the running exploration period.

CUBA

Block N- 25, 26, 27, 28, 29 & N- 36

Blocks 25, 26, 27, 28, 29 and 36 are deep water offshore exploration Blocks located in Cuba’s Exclusive Economic Zone (EEZ) for which the agreement for acquisition of 30% PI in the Blocks from Repsol-YPF of Spain was signed on 23rd May, 2006. The other partners in the Blocks are Repsol-YPF with 40% PI as operator and Statoil with 30% PI. The drilling of first of the two commitment wells has been completed on 11th May, 2012 without any oil and gas find and the well was declared dry.

Block N- 34 & N- 35

Blocks 34 and 35 are deep water offshore exploration Blocks located in Cuba’s Exclusive Economic Zone (EEZ) for which the PSC was signed on 10th September, 2006. OVL holds 100% PI in the Blocks as the Operator.  Acquisition, processing and interpretation of 2D and 3D seismic data have been completed.  The block area has increased from 4300 to 4800 sq km after annexation of additional 500 sq km of area.  The exploration period would expire on 12th September 2012.

VENEZUELA

San Cristobal Project

OVL signed an agreement with Corporación Venezolana del Petróleo S.A. (CVP), a subsidiary of PDVSA on 8th April, 2008 and acquired 40% PI in San Cristobal Project, Venezuela.  San Cristobal project covers an area of 160.18 sq km in the Zuata Subdivision of proliferous Orinoco Heavy Oil belt in Venezuela. The project is operated jointly by your Company and the PDVSA. The JV Company has been named “Petrolera IndoVenezolana SA” (PIVSA). CVP, a subsidiary of PDVSA holds 60% equity in JVC and OVL holds 40% equity through ONGC Nile Ganga (San Cristobal) BV, a wholly owned subsidiary of ONGC Nile Ganga B.V.  Though OVL received its dividend of US$ 56.224 million for 2008, dividend for 2009 and 2010 amounting to US$ 72.34 million and US$ 83.2 million respectively remained unpaid due to cash flow difficulties being faced by PDVSA/CVP, which is being followed-up.  During 2011-12, OVL’s share of oil production was 0.894 MMT as compared to 0.757 MMT during 2010-11 and current production is approx. 40000 BOPD.

Carabobo-1 Project

OVL along Indian Oil Corporation Limited (IOCL), Oil India Limited (OIL), Repsol YPF (Repsol) and Petroliam Nasional Berhad (PETRONAS) was awarded by the Government of the Bolivarian Republic of Venezuela  40% ownership interest in an Empresa Mixta which will develop the Carabobo 1 North and Carabobo 1 Central blocks located in the Orinoco Heavy Oil Belt in eastern Venezuela. Four Stratigraphic wells and six slant wells drilled for collection of samples and study of petrophysical properties for drilling development wells for accelerated production of first oil in 2013. Presently, basic engineering & FEED for upgrader and downstream facilities and 3D-Seismic study, civil works for well pads have been awarded and other tendering Processes/approval from PCB & awarding of drilling contract for Development of the Field are in progress.

BHARAT PETROLEUM CORPORATION LIMITED

BPCL entered the upstream sector in 2003 with the aspirations of reasonable supply security of crude, hedging of price risks, to become a vertically integrated oil company and to add to BPCLs bottom-line.Considering the need for a focused approach for E&P activities and implementation of the investment plans of BPCL at a quicker pace, a wholly owned subsidiary company of BPCL, by the name Bharat Petro-Resources Limited (BPRL), with an authorized share capital of Rs. 1000 crores, was incorporated in October 2006, with the objective of carrying out Exploration and Production activities.The first overseas onshore block was awarded to the BPCL consortium in Oman in June 2006. Subsequently, 1 offshore block in Australia and 1 offshore block in the Joint Petroleum Development Area (JPDA) between Australia and East Timor were also awarded to the BPCL consortium. Also, 2 blocks have been acquired through the Farm-in process (1 offshore block in Australia in 2006 and 1 shallow water block in the North Sea in early 2007). Further, BPRL has bid successfully for an offshore acreage in the North Sea (UK) in 2008. BPRL and M/s Videocon Industries Limited (VIL) jointly bid successfully for the acquisition of 10 deep water exploration blocks across 4 concessions in offshore Brazil. These blocks were held by M/s EnCana Corporation, Canada, through their affiliate M/s EnCana Brazil Petroleo Limitada (EnCana). In December 2008, BPRL farmed into an offshore block in Mozambique with 10% PI, and in January 2010, farmed into an offshore block in Indonesia.All the above blocks are in various stages of Exploration. BPRL consortium has drilled 12 wells in 2010. A discovery has been announced in the Campos basin in Brazil and also in offshore Mozambique. BPRL has partnerships with some world renowned Operators including Petrobras and Anadarko.

INDIAN OIL CORPORATION LIMITED

IOCL is the highest ranked Indian company in the latest Fortune Global 500 listings, ranked at the (125th position). IOCL’s vision is driven by a group of dynamic leaders who have made it a name to reckon with. Its business strategy focuses primarily on expansion across the hydrocarbon value chain, both within and outside the country. To enhance upstream integration, they have been pursuing exploration and production activities both within and outside the country in collaboration with consortium partners.The overseas portfolio includes 11 blocks spanning Libya, Iran, Gabon, Nigeria, Timor-Leste, Yemen and Venezuela. The company is associated with 2 successful discoveries in oil exploration blocks, one in India and another in Iran. IOCL also farmed into an exploration block in Gabon along with Oil India Ltd. (OIL) as the operator. In addition, the IOCL-OIL collectively acquired participating interest in a block in Nigeria. The Corporation, in consortium with OIL, Kuwait Energy and Medco Energy of Indonesia has acquired a participating interest in 2 exploration blocks in Yemen. As part of consortium, IOCL has been awarded Project -1 in the Carabobo heavy oil region of Venezuela. To boost E&P activities, the company has incorporated Ind-OIL Overseas Ltd., a special purpose vehicle for acquisition of overseas E&P assets in consortium with Oil India Ltd.

RELIANCE INDUSTRIES LIMITED

In April 2010, RIL entered into a joint venture with the USA based Atlas Energy, Inc. (Atlas) under which RIL acquired 40% interest in Atlas’ core Marcellus Shale acreage position. RIL has become a partner in approximately 300,000 net acres of undeveloped leasehold in the core area of the Marcellus Shale region in southwestern Pennsylvania for an acquisition cost of US$ 339 million and an additional US$ 1.36 billion capital costs This joint venture has materially increased RIL’s resource base and provided an entirely new platform from which its exploration and production business has grown and simultaneously enhanced its ability to operate unconventional projects in the future.Additionally, RIL has farmed out 20% PI in the blocks Borojo North and Borojo South in Colombia, 30% PI in block 18 and 25% PI in block 41 in Oman. The company now has 13 blocks in its international E&P portfolio including 2 in Peru, 3 in Yemen, of which 1 producing and 2 exploratory, 2 each in Oman, Kurdistan and Colombia, 1 each in East Timor and Australia, amounting to a total acreage of over 93,500 sq. km.

RIL-BP Venture

Reliance Industries Ltd. (RIL) and BP have completed the acquisition that leaves BP with a 30% stake in 21 oil and gas production sharing contracts (PSCs) that Reliance operates in India, including the producing KG D6 block. This significant step will commence the planned alliance which will operate across the gas value chain in India, from exploration and production to distribution and marketing. The completion of the deal delivers one of the largest ever foreign direct investments into India. The two companies will also form a 50/50 joint venture for the sourcing and marketing of gas in India which will also accelerate the creation of infrastructure for receiving, transporting and marketing natural gas. BP will pay RIL an aggregate consideration of US $7.2 billion subject to completion adjustments for the interests to be acquired in the 21 production sharing contracts. Further performance payments of up to US $1.8 billion could be paid based on exploration success that results in development of commercial discoveries. According to calculations by Jefferies & Co. analysts after the deal was announced in February, the US $7.2 billion purchase price translates to a unit price for the proved and probable reserves near US$9.3/boe. Mukesh Ambani, chairman and managing director, Reliance Industries, said, “The alliance with BP will boost our efforts to realize the true potential of India’s hydrocarbon reserves. The globally renowned expertise of BP and the in-depth domestic experience of Reliance make for a formidable alliance which will deliver unparalleled value for the country in its pursuit of energy security.” Bob Dudley, BP group chief executive, commented: “This major investment is directly aligned with our strategy of creating long-term value by forming alliances with strong national partners, gaining material positions in significant hydrocarbon basins and increasing our exposure to growing energy markets.”

OIL INDIA LIMITED

Taking into consideration India’s liberalisation policy and dismantling of the Administered Pricing Mechanism (APM), OIL expanded its business activities both within and outside the country, adding hydrocarbon related ventures like gas based power generation to its portfolio.OIL is actively pursuing opportunities to acquire producing E&P assets, exploration acreages, etc. in Africa, Middle East, South East Asia, South America, CIS countries and Russia, and is willing to associate with reputed companies to jointly fulfill this objective.

ENVIRONMENTAL THREAT AND RISK MANAGEMENT

The potential for adverse effects on living organisms associated with pollution of the environment by effluents, emissions, wastes, or accidental chemical releases; energy use; or the depletion of natural resources.[7]According to Merriam-Webster’s Dictionary, ‘risk’ is defined as “the possibility of loss of injury” or “someone or something that creates or suggests a hazard.” Explicit in the definition is risk’s association with chance and probability. Implicit in the definition is the ability to quantify that probability. While that process of quantification may be impulsive and cursory for the layman assessing everyday risks, science has made well, a science of empirically quantifying risk. Within the realm of environmental risk, this process involves a multi-staged analysis characterized by a “risk assessment”, “risk characterization” and “risk management”[8].According to the EPA a risk assessment is “the evaluation of scientific information on the hazardous properties of environmental agents, the dose-response relationship, and the extent of human exposure to those agents” (EPA Glossary of IRIS Terms). In essence a pollutant is identified and its possible effects on those exposed is described (Cobourn, 2005). The result of this analysis “is a statement regarding the probability that populations or individuals so exposed will be harmed and to what degree,” (EPA Glossary of IRIS Terms) also known as a risk characterization.Once risk has been assessed and characterized, “political, social, economic and engineering implications together with risk-related information” are gathered “in order to develop, analyze and compare management options and select the appropriate managerial response to a potential chronic health hazard” (EPA Glossary of IRIS Terms). This process is called risk management. Together these steps comprise the scientific approach to risk. Seeing as science is a product of the human capacity for reason and rationalization, it is unsurprising that this mode of thinking parallels everyday human decision-making.The consideration in the analysis of economic, political, social and engineering considerations implies the consideration of power and influence. If public health were the only concern in the risk management process, removal of environmental hazards would be an obvious strategy.In a very real way, the socio-political and economic considerations of the process undermine the scientific credibility of those assessing riskAnother way in which the accepted paradigm of environmental risk analysis undermines the scientific method is by ignoring the informal and experiential evidence provided by those who are exposed to environmental hazards. It is accepted that experimentation on humans (particularly measuring effects of hazardous agents on human health) is unethical and immoral. Those who live in communities where they are exposed to hazardous agents, however, can provide science with the next closest thing. The problem arises, though, when, unable to speak in the scientific language of ‘environmental risk’ or present evidence that accords with the previously described model of risk, communities affected by environmental hazards are prevented from communicating their knowledge, gleaned from experience, in a manner that is accepted by scientific authorities. For those scientific authorities, however, community generated information is often the only way to gather truly accurate data.The EPA still 7did not give credence, at least initially, to the knowledge of the local community. It is distressing to imagine how the EPA might act when an economic or political interest in pitted against the public health interests of an affected community.The implications of this situation are twofold. First, those being affected by environmental hazards are deprived of agency in dealing with their problems and are left to wonder how their voice is being incorporated into a supposed democratic dialogue. Secondly, science – a method in and of itself that gives credence to the observed and the experiential – fails to take advantage of the large repository of local knowledge that exists within every community. This failure leads to a growth in the Diaspora between the professional and the layman, which, in turn, works to undermine our faith in the benefits attributed to society through science.

Environmental Threats and Management

(1) Liability for non-compliance with environmental laws (e.g., permitting requirements);(2) Liability for cleanup of environmental contamination (e.g., Superfund), including damages to natural resources, that runs with the land;(3) Common law liability for environmental conditions that affect third parties (e.g., contamination of downstream property owner’s drinking water well); and(4) Liability for plugging and abandonment (P&A) of wells (e.g., requirements to plug wells under fee and federal leases)

4.1.1. Compliance Liability

Oil and gas operations are heavily regulated and violations of such regulations can create substantial liabilities for an oil and gas operator, either to achieve compliance (e.g., implement air emission controls) or to mitigate damages caused by the non-compliance or operations (e.g., clean up of contamination attributed to the oil and gas operator’s non-compliance). In a stock transaction, a buyer will automatically inherit these liabilities. But even in an asset transaction, a buyer may obtain these liabilities if the non-compliance continues post-closing or, where the transaction covers all or substantially all of a seller’s assets, the non-compliance liability transfers because the transaction is held to be a de facto merger or a “mere continuation” of the seller under applicable state law. Following is a list of the primary areas of environmental regulation of oil and gas operations.• Exploration and Production (E&P) Waste Management. State laws governing E&P waste require, among other things, permitting of pits, operation and closure requirements for pits, proper management of produced water, management practices for groundwater protection, and clean up of improper discharges of E&P wastes. These rules are in addition to requirements governing hazardous waste as discussed below.• Hazardous Waste. The Resource Conservation and Recovery Act (“RCRA”) and state equivalent statutes govern the generation, transportation, treatment, storage and disposal of “hazardous wastes.” Certain E&P wastes, i.e., drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy, are excluded from the definition of “hazardous waste.” It is important to note that the exemption is limited to wastes produced during “primary field operations.” Therefore the same wastes not produced during primary field operations, e.g., at compressor stations or during transportation, are not exempt As mentioned above, E&P wastes that are exempt from hazardous waste regulation are most often regulated by state regulations governing such wastes.• Air Emissions. The Clean Air Act and state implementing programs may require, among other things, operating permits for sources of air emissions, such as compressor stations, condensate or crude oil tanks, dehydrators, or treatment facilities, as well as emission control devices to reduce the amount of emissions to the ambient air.• Discharges to Water. The Clean Water Act, the Oil Pollution Act of 1990, and state implementing and equivalent laws for the discharge of oil, wastewater, or other pollutants, require permitting and the implementation of certain controls to reduce/prevent discharges to navigable waters. While oil and gas operations may sometimes appear far from navigable waters in the ordinary sense, the definition of jurisdictional waters under the Clean Water Act, i.e., waters of the United States, is quite broad and includes wetlands, sandflats, prairie potholes, playa lakes, or natural ponds the degradation, or destruction of which would affect or could affect interstate or foreign commerce.• Injection Wells. The Safe Drinking Water Act and state implementing laws require permits for injection and disposal wells. These laws also require mechanic integrity tests for such wells.• Filling in Lands. The Clean Water Act has requirements for dredging or filling property classified as “wetlands Such activities require a permit from the U.S. Army Corps of Engineers.• Underground and Aboveground Storage Tanks. Federal and state regulations can require permits for storage tanks, spill prevention practices, and closure requirements. These regulations may also impose clean-up liability on the owner or operator of the tanks for releases from such tanks Notably, other parties with an interest in the land, but not in the tanks themselves, may be subject to tank requirements. In this way, a party such as an oil and gas operator who never owned or operated a tank may become responsible for cleaning up contamination from a tank abandoned by a prior occupant. This type of liability comes very close to environmental liabilities that arise without regard to fault on the part of the responsible party, which is the next topic of discussion.

4.1.2. Clean-Up Liability

The principal statute of concern for clean-up liability is the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA” or “Superfund”). CERCLA creates strict liability for certain categories of persons for the clean-up of releases of hazardous substances. In addition, some states have clean-up statutes with liability structures similar to CERCLA The four categories of potentially responsible parties (PRPs) under CERCLA are:• Current “owner” or “operator”. Parties that are considered to be CERCLA-defined “owners” or “operators” are liable for releases of hazardous substances, regardless of whether the owner or operator actually caused the releases. The terms “owner” and “operator” under CERCLA do not necessarily align with the way these terms are used in oil and gas nomenclature or with their common meanings. In that way, lessees of real property have been found to be “owners” under CERCLA. Accordingly, oil and gas lessees could be deemed to be “owners” for purposes of CERCLA liability. While other more recent cases have held that lessees were not “owners” under an indicia of ownership test, they have not ruled out that lessees could be owners. A lessee serving as an oil and gas operator, whether formally so designated or not, would likely be considered an “operator” under CERCLA. The leading interpretation of this term by the U.S. Supreme Court is compelling: an operator is “someone who directs the workings of, manages, or conducts the affairs of a facility• Former owner or operator at the time of disposal. Former owners and operators are also PRPs under CERCLA for releases of hazardous substances if they were an owner or operator at the time of “disposal” of the hazardous substances. The “at the time of disposal” language arguably limits a former owner or operator’s responsibility to those releases that occurred while the owner or operator owned or operated the property. However, there is a “passive disposal” interpretation of this language that makes former owners and operators liable for earlier releases that migrated through the property while the former owners and operators were involved with the property, thereby expanding liability for this category of PRPs.• Generator/Arranger. Generators of hazardous substances and other parties that “arranged for” disposal of hazardous substances at a landfill or other facility are liable for releases of such hazardous substances regardless of whether the disposal of the hazardous substances was in accordance with law.• Transporter Similar to generators and arrangers, transporter of hazardous substances are liable for releases of such hazardous substances regardless of whether the disposal of the hazardous substances was in accordance with law.These last two categories of PRPs highlight how CERCLA liability differs from compliance liability. While both may impose obligations to clean up contamination, CERCLA liability attaches without regard to fault.a. Hazardous Substances and the “Petroleum Exclusion”It is important to note that CERCLA only applies to releases of “hazardous substances”. This term is broadly defined. However, it includes one key exclusion: “petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas).” This exclusion is commonly referred to as the “petroleum exclusion.” The U.S. Environmental Protection Agency has interpreted the petroleum exclusion to include hazardous substances that are mixed with or added to crude oil or crude oil factions during the refining process, e.g., blended or oxygenated gasoline However, the petroleum exclusion does not apply to hazardous substances that are added to petroleum or that increase in concentration as a result of contamination of the petroleum during use. In addition, oils that are specifically listed as hazardous substances, e.g., a number of waste oils, are not excluded from CERCLA.While the petroleum exclusion mitigates the impact of CERCLA liability, in particular at oil and gas operations, it is not a panacea for this liability. For example, courts have held that the petroleum exclusion does not apply to crude oil tank bottoms, sludge from leaded gasoline tanks, nor mineral oil emulsion containing hazardous substances. Accordingly, CERCLA liability remains a risk in oil and gas transactions. Notably, a buyer cannot be easily avoid this liability through an asset transaction structure because it attaches to the buyer as the entity that now “operates” the property Similarly, a seller cannot necessarily rid itself of this liability when it sells its operations because it may still retain liability as a former operator.

4.1.3. Common Law Liability

Oil and gas operators may also be targets of claims by neighboring property owners or subsequent owners or operators of a production facility for soil or groundwater contamination. The causes of such contamination include produced water disposal or injection, leaking pits or underground storage tanks, and unplugged or improperly plugged wells. The neighbor-plaintiff in such suits may plead negligence, nuisance, trespassing, or some other common law cause of action in the applicable jurisdiction. Damage awards in such cases have been substantial. Moreover, the existence of a nuisance on the property in the form of ongoing pollution caused by past activities can support abatement or damages actions against a buyer.

4.1.4. P&A Liability

P&A liability is a particular type of “environmental” liability specific to oil and gas operations. P&A liability arises primarily through private joint operating agreements, federal leases, and state and federal regulations. The primary types of P&A liability include well plugging, reclamation, and clean up of contamination. Similar to CERCLA liability and state equivalent statutes, some P&A obligations apply to oil and gas operators without regard to fault. For example, some state statutes require current operators to plug wells they did not use Federal regulations obligate the assignee of record title or operating rights under a federal lease to “remedy all environmental problems in existence and that a purchaser exercising reasonable diligence should have known at the time.” In addition, liability for such obligations can remain with a seller after a sale. Federal regulations impose continuing liability on the assignor of record title in federal oil and gas leases for lease obligations that accrue before the approval date, including responsibilities for plugging and abandoning wells drilled, installed or used before the effective date of the transfer, even after approval of the assignment.

4.1.4.1. The Seagull Case

One recent decision has significant implications for sellers and buyers of oil and gas properties. In Seagull Energy E&P, Inc. v. Eland Energy, Inc., the Texas Supreme Court held that the seller of a working interest remains liable under a joint operating agreement for operating costs not accrued at the time of assignment unless released by the other co-owners or expressly provided for in the terms of the agreement. In this case, an oil and gas operator sued a former non-operator for operating costs not accrued at the time of assignment that were not paid by the former non-operator’s assignee. The former non-operator argued that, under the terms of the operating agreement, by assigning its working interest it was released from future liabilities. The court disagreed, citing the general rule of contract law that, absent a specific provision in the joint operating agreement or a release by the other parties to a contract, a party cannot escape its obligations under a contract by merely assigning the contract to a third party. Therefore, sellers of properties may have continuing liability following a sale, not only for existing liabilities but also for future liabilities if their buyers do not pay up, including, for example, P&A liabilities for wells that were producing at the time of assignment. Buyers of properties from such sellers should avoid broad liability assumption language that could pick up this type of retained liability from their seller.