minimizing the risk of “non-conforming” pipeline product · northwest pipeline gp and gas...

Minimizing the risk of “non-conforming” pipeline product

November 22, 2013

Rachel Giesber Clingman

©2013 Sutherland Asbill & Brennan LLP

Issues

• Defining product specifications

• Defining shipper and pipeline obligations

� Quality / knowledge of contaminants

� Testing

� Liability for contamination

• Civil claims for contamination event

• Operational considerations


Risks of Off-Spec Product Injection

• Delay of deliveries

• Pipeline shut in

• Cleanup, clearing, testing

• Civil suits for failing to deliver conforming product

� Shippers

� Consignees

� Consumers (including risk of class action)

• Regulatory scrutiny/investigation

� Federal

� State

• Reputational impact


Parties Involved

• Upstream parties:

� Producer

� Broker/Marketer/supplier

� Intermediate transporter

� Shipper*

• Downstream parties:

� Refinery

� Storage facility

• Contract / Tariff terms. The Shipper may the only party with whom the pipeline has a transportation agreement that addresses product quality.


Example System Overview


Defining product specifications

• Work with stakeholders to identify potential contaminants

• Add those compounds to list of “prohibited substances” in tariff/contracts

� Also define product quality in connection agreements.

• By expressly identifying contaminants (rather than merely relying on “merchantable” standard), pipeline creates a “strict liability” for introducing previously-designated contaminant.


Comparing Two Quality Specification Clauses

• Provision A: “Carrier reserves the right to reject …

[crude] which is not good merchantable oil or which otherwise materially affects or damages the quality of other shipments or causes disadvantages to other Shippers and/or Carrier.”

• Provision B: “Carrier shall not accept … [crude]

containing any of the following: waste oils, lube oils, crankcase oils, PCBs, dioxins, organic chlorides, chlorinated and/or oxygenated hydrocarbons, arsenic, lead or any other metals, chemical compounds, materials or substances that are not natural to Crude Petroleum.”


Comparing Two Quality Specification Clauses

• Provision C: “Shipper shall not inject..... [crude] containing any of the following: waste oils, lube oils, crankcase oils, PCBs, dioxins, organic chlorides, chlorinated and/or oxygenated hydrocarbons, arsenic, lead or any other metals, chemical compounds, materials or substances that are not natural to

Crude Petroleum.”


Review of Quality Specification Clauses

• Consider periodic review of quality specifications:

� Survey of employees to ensure they are not aware of any new contaminants (e.g., new wells in the area coming on-line that may utilize different production techniques/chemicals)

� Survey of other tariffs in the geographic area to ensure that the pipeline’s quality specifications adequately capture known contaminants in the area


Defining Shipper & Pipeline’s Obligations

• Equity and reason support (1) assigning liability to shipper for contamination event and (2) assigning any testing obligation to shipper

� Pipeline merely provides transportation services and cannot timely or economically test crude inputted at numerous delivery points.

� Shippers own the crude; can control quality; and have opportunity to test.


Example Clause Defining Shipper &Pipeline’s Obligations

Carrier is not responsible for monitoring receipts or deliveries for contaminants….However if contamination by shipper is found, possibly from specific listed substances, thenshipper may be excluded from further entry into applicable segments of the pipeline systemuntil such time quality specifications are met to the satisfaction of Carrier.

Any liability associated with the contamination or disposal of any Petroleum shall be borne by the Shipper who introduced into Carrier's system such Petroleum that does not comply with the above conditions.

Further, the Shipper who introduced into Carrier's system such Petroleum that does not comply with the above conditions shall be liable towards Carrier for any damages, including ……… and all consequences of transportation by Carrier of such Petroleum, including but not limited to, damages, costs and expenses of disposal and costs and expenses necessary to return the Carrier’s system facilities to service. The responsible Shipper shall also be liable for all other damages and claims, including claims for special, incidental and consequential damages and attorneys’ fees, from other Shippers, connecting carriers, or users of the non-complying Petroleum.


Operational Considerations

• Response plan

• Sample Collection � How many samples will be collected?

� From where?

� How will samples be preserved for litigation?

• Information Sharing � What information will be shared with stakeholders?

� How and when will the information be shared (e.g., letter, website, phone)?

• Testing � Is there an industry-accepted test for the contaminant? If not, will the

pipeline seek consensus from stakeholders regarding the appropriate testing method?

� What laboratory will handle testing?


Civil Claims for Contamination Event

• Negligence: duty to use ordinary care to prevent others from being injured

� Standard of care

� Tariff

� Other common law duties?

� Foreseeability of harm

� Upstream participants who do not connect to pipeline

� Scope of duty

� Tariff

� Other common law duties?

• Strict Liability

� Unreasonably dangerous product?



• Ashland Oil, Inc. v. Miller Oil Purchasing Co., 678

F.2d 1293, 1309 (5th Cir. 1982)

� Court found party strictly liable for introduction of contaminant.

� “[I]ndustrial waste sold by Waco to Miller and subsequently sold by Miller to Ashland as crude oil was, beyond cavil, unreasonably dangerous to crude oil stock and the refinery process.”



• PacifiCorp v. Northwest Pipeline GP and Gas

Transmission Northwest Corp., 879 F. Supp 2d 1171

(D. Ore. 2012)

� Held that the FERC tariff limited defendant pipeline’s duty concerning gas quality to only those parties subject to the tariff (i.e., shippers and immediate consignees).

� Because Plaintiff and defendant shipper had supply agreement that incorporated FERC tariff, the court rejected claim that shipper owed common law duty to Plaintiff. Court limited shipper’s duty to quality standards in FERC tariff.

PHMSA’s Extension of Jurisdiction to Underground Storage and Fractionation Facilities

November 22, 2013


PHMSA Statutory Jurisdiction

Jurisdiction “all facilities, rights of way, pipelines, buildings, or equipment used or intended to be used” in transportinghazardous liquids, including NGL.

No Jurisdiction

Onshore production;

Refining or manufacturing facilities; or

Storage and in-plant piping related to onshore producing, refining, or manufacturing.


PHMSA Faces Pressure to Expand& Tighten Regulations

• Since 2010, Congress, the NTSB, and other public institutions have accused PHMSA of lax regulation contributing to notorious incidents, e.g.:

� San Bruno gas explosion

� Marshall crude oil spill

• PHMSA also has been criticized for lax enforcement of existing regulations.

• PHMSA has taken substantial measures to both:

� regulate pipelines more comprehensively and

� enforce existing regulations more aggressively.


Current Regulatory Regime


PHMSA Interpretation Position


Potential Overlap


OSHA PSM Regulations

• OSHA Process Safety Management (PSM) regulations apply to in-plant operations.

� OSHA recently enhanced PSM requirements for refining facilities and is currently focused on fractionation facilities per its 2009 National Emphasis Program (NEP) (News Rel., 2009 Instr., 2011 Instr.).

• OSHA PSM regulations apply to fractionation facilities and some storage facilities.

• PSM is comprised of 14 requirements: employee participation, process safety information, process hazards analysis, operating procedures, training, contractors, pre-startup safety reviews, mechanical integrity, hot work permits, management of chance, incident investigation, emergency planning and response, compliance audits, and trade secrets.


Extending Part 195 would have Significant Industry Impact

• Part 195 requirements generally are prescriptive.

• PHMSA defined and has applied requirements to gas and liquids transportation pipelines.

• The PHMSA Part 195 regulations do not translate well to facilities; requirements for example, that are not reasonably feasible “inside the fence” include:

� Pipeline pressure requirements (e.g., determination of MAOP)

� Pipeline construction and metallurgy specification

� Connections and welding requirements

� Valve specifications

� Operational and system integrity requirements

� Recordkeeping requirements


PHMSA Recent Actions

• Initiated rulemaking on other proposed rules (not storage or fractionation) and received significant industry comment

• Authored three “interpretations”

• Inspected fractionating facilities of several operators

• Issued 3 NOPV’s to one operator with fine of $800,000 and compliance order


PHMSA’s Interpretations

Feb. 28, 2012: Refining exemption does not apply to any NGL facilities that “are used directly in the transportation of hazardous liquids.”

In-plant piping and storage used to bypass the plant or divert products to storage without processing are subject to PHMSA regulation.

August 8, 2012: A fractionation plant in a facility does not make the facility a “refinery” Only in-plant piping and storage used exclusivelyfor fractionation are exempt; all other in-plant piping and storage is regulated as part of a “materials transportation terminal.”

Nov. 28, 2012. Fractionation is not refining; a fractionation plant is a “mid-stream facility” that receives products “that are already in the stream of transportation.”

Under these interpretations, processing facilities also may be subject to Part 195 PHMSA jurisdiction.


PHMSA NOPV Findings

• The NOPV relies on Part 195 requirements to find numerous potential violations “inside the fence,” related to, e.g.,

• In-plant piping

• Determination of Maximum Operating Pressure (MAOP) of each pipe

• Testing plan to validate MAOP of all components

• Maintenance of all overpressure protection devices in the facility

• PHMSA-compliant Integrity Management Program

• Design requirements of other components

• Steel piping corrosion protection

• Procedures and manuals

• Facility maps and records


Potential Industry Impact

• PHMSA regulations overlap existing requirements; there is no reduction in current compliance program of OSHA PSM

• Likely overlap and duplication of OSHA/PSM regulations

• Risk of inconsistent requirements, OSHA/PSM vs. Part 195 (e.g., different schedules of testing, inspection, maintenance; different types of testing and record requirements)

• Dual requirements for paperwork, inspections, safety/compliance training, and disclosure and reporting and operator guidelines

• Potential shutdown of facilities and through put to perform extensive work necessary to bring assets into compliance or retest to meet PHMSA requirements


Administrative Procedures Act (APA)

• APA requires notice and publication of substantive rules and a comment period (5 U.S.C. § 552 et seq.).

• An agency may not impose new requirements without notice and an opportunity for comment. See General Elec. Co. v. EPA, 290 F.3d 377, 380 (D.C. Cir. 2002).

• PHMSA has materially changed regulations, without notice or rulemaking, through the definitions of “refinery,” “materials transportation terminal,” or “mid-stream facility” used in PHMSA’sguidance to ONEOK. Id. at 383-85 (EPA “Guidance Document” determined to be a legislative rule).

• PHMSA violated its own internal rulemaking policy.• Absent a reasoned analysis and the process required by law, the

operators of newly included facilities will have no say in whether such an expansion of regulatory jurisdiction is appropriate or meets the numerous requirements set out in the PSA.

PHMSA’s Extension of Jurisdiction to Underground Storage and Fractionation Facilities

November 22, 2013

Rachel Giesber Clingman

minimizing the risk of “non-conforming” pipeline product · northwest pipeline gp and gas...

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