An Introduction to Oil & Gas Law
Oil and gas law is a subset of energy law that covers the exploration, extraction, and management of oil and gas resources. It typically encompasses a variety of areas including contract law, administrative law, and environmental law. Being such a multifaceted practice, it comes as no surprise that oil and gas law is a significant and complex part of the industry, spanning the United States and beyond!
At the core of oil and gas law are (you guessed it) oil and gas leases. These leases outline all of the rights and responsibilities of both the land owner and the service company. Essentially, a land owner agrees to allow a service company to come onto their land , and in exchange for access to produce oil, the land owner will receive a percentage of royalties in return. Signing a lease is a big deal, and there are a good number of considerations that land owners need to keep in mind. For instance, what rights are they granting to the service company? What term length are they agreeing to? These are just a couple important questions that someone entering into an oil and gas lease would want to know! Information on this and related questions can be difficult to find, so I created this blog to help people find answers to these and other oil and gas legal issues!
Key Laws in Oil & Gas Law
Oil & Gas operations are governed by a multitude of regulations, legal frameworks, and best practices. Among these are international agreements, federal laws, state regulations, and local ordinances.
International Regulations
At the international level, the Organization of Petroleum Exporting Countries (OPEC) plays a vital role in regulating the oil and gas market. Comprising 13 member countries, OPEC controls the supply of oil in order to keep prices stable on the global market. Russia is also a key player in the international oil and gas landscape, operating outside of OPEC but often cooperating with the organization to regulate prices, primarily through the OPEC+ alliance, which also involves Saudi Arabia, Mexico, Kazakhstan, Azerbaijan, Bahrain, Nigeria, Oman, South Sudan, and Sudan. OPEC+ members agree to cut oil production to affect global prices. Despite its escape from collapse in the 1990s, OPEC has been facing several challenges in the face of the United States’ shale boom and the worldwide supply chain disruption caused by the COVID-19 pandemic.
On a global scale, the International Energy Agency (IEA) provides policy advice, analysis, and data on the energy sector, while the International Atomic Energy Agency (IAEA) focuses on promoting the peaceful use of nuclear energy.
U.S. Federal Regulations
At the federal level, the Department of Energy (DOE) is responsible for oil and gas production, while the Federal Energy Regulatory Commission (FERC) regulates the wholesale and interstate sales of energy products, including oil and gas. The Federal Energy Regulatory Commission, under the DOE umbrella, assumes the responsibility in lieu of the Federal Power Act and the Natural Gas Act of 1938. The Federal Energy Regulatory Commission has approved two new natural gas pipeline projects in the Eastern United States, which just came online in January and March 2021. Both pipelines, known together as the Atlantic Coast Pipeline (ACP), are still in the planning stages, which includes tackling opposition from environmentalists and regulatory agencies. The Federal Energy Regulatory Commission must grant permits before the pipelines can begin construction. In 2019, President Donald Trump lifted the restrictions preventing the United States from exporting crude oil from one area of the Arctic National Wildlife Refuge.
Non-federal laws affecting the Oil & Gas industry include the National Environmental Policy Act of 1969, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and the Energy Policy Act of 2005, which addresses energy production in the United States. The Department of the Interior’s regulations concerning the U.S. Outer Continental Shelf are another relatively new addition, as the section of the country had until 2017 been off-limits to oil drilling.
Additionally, the Clean Air Act and the Clean Water Act contain regulations concerning the oil and gas sector, as do the Endangered Species Act Amendments of 1982 and the Energy Policy Act of 2005. The Department of Transportation also oversees various aspects of the oil and gas industry most notably through the Pipeline Safety Act of 1979, the Planning and Community Right to Know Act, and the Superfund Amendments and Authorization Act. Other federal law aspects impacting oil & gas include tax, bankruptcy, tort, antitrust, securities, and commodities.
State Regulations
Each state has its own regulatory framework with respect to Oil & Gas production. For example, the Louisiana Legislature passed legislation effective June 18, 2021 clarifying the scope of liability for "historical development" of the oil and gas industry. In California, the State Water Resources Control Board recently granted a one-year extension for oil wells to comply with health and safety regulations, with an additional six week grace period if necessary.
Oil & Gas Contracts
The nature of the oil and gas industry, through its complex technical and economic factors, means that the industry is heavily dependent on contractual agreements.
For example, lease agreements are common in the exploration and production (E&P) business. Ley, Rule Making & Compliance states in their article on oil and gas leases that "Oil and gas leases provide, in exchange for a rental payment or bonus, for the grant of a leasehold interest in the oil and gas in the land covered by the lease, usually during a primary term, with the specific right to enter the land and explore for and produce oil and gas and with a right for the lessee to retain the lease beyond the primary term by paying a specified shut-in royalty or continuing the production of oil and gas during any secondary term."
However, lease agreements are not the only type of contractual agreements entered into in the industry; joint venture agreements are also a popular choice for various projects. A joint venture agreement is commonly entered into where the parties to the agreement have a common purpose for which they wish to pursue a joint venture.
Inevitably, production sharing contracts are also used, particularly in Malaysia. The following provides a general definition of production sharing contracts:
"Production sharing contracts are contracts concluded between a government authority and a foreign contractor whereby the foreign contractor agrees to carry out an exploration and production project, at its own cost and risk, in respect of the oil produced from a part of the government authority’s territory, over some years, and, as royalties and corporate income taxes, are paid, shares the profits of the project with the government authority in agreed proportions."
Clearly, on a practical level, due to their complexity and number, there are a variety of contractual agreements that one can enter into in the oil and gas sector.
Environmental and Safety Regulations
Oil and gas operators are subject to a wide range of environmental and safety standards that govern the exploration, development, and production activities. These regulations are designed to protect the environment and human health from the potential hazards associated with oil and gas operations. Among the most important laws in this context are:
The National Environmental Policy Act (NEPA) On the federal level, NEPA is the primary law governing the environmental review of proposed actions. Its scope and requirements vary according to the project being reviewed. In general, if a project is determined to be a "major federal action" that may significantly affect the environment, an environmental impact statement (EIS) is required. The EIS must discuss the purpose and need for the proposed action, as well as the potential adverse environmental effects. Alternative courses of action must also be considered, along with their sustainability and effect on the public. The EIS must include any unavoidable environmental impacts, mitigating measures to reduce those impacts, and an impact-benefit analysis. Oftentimes, the regulatory agency can issue a finding of no significant impact (FONSI) if it determines that the proposed action will not have any significant impact on the environment. A FONSI allows the project to move forward without an EIS. A state may alternatively interpret its own environmental regulations or expedite decisions on proposed federal action in lieu of NEPA requirements.
Clean Air Act On the federal level, the Clean Air Act (CAA) regulates emissions of air pollutants in the United States. Authorized state or tribal governments may implement a state implementation plan (SIP), subject to federal approval, to reach or maintain national ambient air quality standards (NAAQS). The EPA has adopted NAAQS for many different criteria air pollutants, which cover a multitude of sources such as power plants and manufacturing facilities. The NAAQS include secondary standards designed to protect human health and welfare. The CAA also allows for the imposition of stricter standards for more localized areas termed non-attainment areas. These stricter rules provide for an additional layer of protection in areas that are not meeting the NAAQS. The CAA prohibits construction or alteration of certain facilities or activities with the potential to produce emissions that exceed the standard limits. The scope of regulation varies according to whether the facility is major or minor, but all sources must obtain some type of permit from their state, tribe, or the EPA before beginning construction work. Oil and gas operations are considered a source subject to requirements for new source review (NSR), PSD, and Title V major source. The NSR provisions apply to large new facilities . Once a facility begins operation, it is designated as a PSD major source in a non-attainment area.
Clean Water Act The Clean Water Act (CWA) regulates discharges of pollutants in the nation’s surface waters and the development of wetlands. States or tribes may administer CWA programs. Operators seeking to discharge into waters that don’t meet water quality standards should expect to pay a higher fee for discharge permits. Federal authorities and, if applicable, the States administer a permitting program known as National Pollutant Discharge Elimination System (NPDES) permitting. If an operator discharges pollutants to a United States navigable body of water, it must first obtain a permit. The permit application details the methodology for testing the discharge. If the discharge meets effluent limitations guidelines, the permit is approved and the facility is authorized to discharge pollutants. States, tribes, and territories also establish groundwater quality standards, determine if water quality standards are achieved, assess water quality conditions, and use their expertise to promote and plan for the protection and reasonable beneficial use of water.
Comprehensive Environmental Response, Compensation, and Liability Act The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is designed to address hazardous wastes at uncontrolled or abandoned sites. It assigns liability for clean-up to potentially responsible parties (PRPs) and establishes a procedure for decontaminating sites. The National Priority List (NPL) is a list of sites that are targeted for investigation and possible cleanup. If the EPA determines that a site poses a present or potential risk to human health or the environment and requires further investigation or cleanup, it can add the site to the NPL, using similar criteria to that used by the states. If a CERCLA facility is located or operated on a NPL site, parties may be liable for natural resource damages. Liability is strict and joint and several. Many CERCLA events are triggered by oil spills or leaks at oil drill sites that pollute neighboring water bodies. To answer these regulations, companies should implement a detailed definition of the term environmental compliance. Environmental compliance includes the following:
Penalties for non-compliance can be civil, criminal, or administrative. Some regulations impose significant fines, which in turn trigger spill remediation or cleanup obligations under CERCLA. Prison terms apply under several statutes, including for instance the following: Civil enforcement actions may be initiated by either of the following: Public liability exposure under state laws can also result from spills, site repair or remediation and civil penalties.
Arbitration and Litigation in Oil & Gas Law
Dispute Resolution in the Oil & Gas Industry
As with any industry, the oil and gas sector is not immune from disputes. The complexity of business dealings, combined with the financial value of contracts and agreements in the industry, often means that disagreements over contract terms can become monumental disputes. It is common for these disputes to ultimately be decided in arbitration, a process that has long been a preferred method of dispute resolution in the industry.
The types of disputes that characterize the oil and gas industry include joint operating agreement conflicts between parties as to how property is managed, production sharing agreements over the division and production of marketable resources, and joint bidding agreements regarding bidding processes. Asset purchase agreements and their management, production, development, and operation are also frequently the subject of litigation. Compensation issues frequently arise in all of these contexts.
Generally, oil and gas disputes can be resolved using formal litigation in the judicial system. However, in most cases, the disputes are instead resolved privately under the agreed upon procedures in the contracts. Either party can initiate the dispute procedure. In many instances, the terms of procedural and dispute resolution favor the choice of either arbitration or mediation. Thus, frequently, it is the parties’ decision to move forward with either type of alternative dispute resolution process. Courts will typically enforce the parties’ choice for arbitration, unless the arbitration provision does not comply with statutory requirements.
The Future of Oil & Gas Law
The landscape of oil and gas law will undoubtedly face changes as the industry is forced to adapt and evolve. For instance, as environmental regulations become more stringent, we may see changes to drilling and leasing policies at both the state and federal levels. Exploring alternative forms of energy, such as wind and solar, may also have an impact on the industry as a whole. In Texas , the recent push for wind energy has opened the door for increased lawsuits related to wind lease issues, and may do the same for solar leases. Further, as technology develops, the industry may move towards leaner operations that rely more heavily on technological advancements than on human labor. This trend will continue to affect both hiring needs and staffing requirements.