Hiding Environmental and Safety Liabilities in U.S. Drilling & Transport of Oil and Gas

Oil and gas drilling and transport poses a significant threat to the environment, one that is often understated by the industry. Whistleblowers have a key role to play in exposing toxic pollution from the extraction and transport of oil and gas, and the efforts to conceal these risks from shareholders.

The United States is now the world’s leading producer of both oil and natural gas.  In less than a decade, due primarily to the shale boom and advancement of fracking, horizontal drilling, and other technologies, U.S. crude oil production has increased by 165%, and U.S. gas production has increased nearly 70%, surpassing that of Russia and Saudi Arabia.  In the coming decade the U.S. is expected to produce over 60% of new oil and gas in the world.

This growth in production has been tied heavily to the development of hydraulic fracking and horizontal drilling. Hydraulic fracking is the process of extracting oil or natural gas from deep underground by drilling into shale formations and then applying a high pressure mixture of water and chemicals to release the oil and gas inside, while horizontal drilling refers to drilling a well vertically to a certain depth and then drilling horizontally, producing more crude oil and natural gas. In 2011, hydraulically fracturing and horizontal drilling wells became the predominant method of new U.S crude oil and natural gas development, ushering in the beginning of the energy boom.

U.S. oil production stems from several key regions. In the five years between 2014 and 2019, shale oil development drove U.S. oil output from 8.8 million barrels per day to 12.2 million barrels a day, making the U.S. the world’s largest crude-oil producer. Much of this growth has been in the Permian Basin, an area encompassing a swath of West Texas and southeast New Mexico, and the Bakken Field in North Dakota and Montana. The Monterey Shale formation in California is also a contributor, though its shale oil is more difficult to extract than from Bakken or the Permian Basin.

Another major area of U.S. oil production is offshore drilling, particularly in the Gulf of Mexico. In 2018, offshore oil production in the Gulf accounted for about 16% of U.S. crude oil production. Drilling offshore offers its own unique challenges and risks. Learn more about offshore drilling here.

In addition to oil production, the U.S. is the leading producer of natural gas. As wells age, they release increasingly more gas as crude oil production diminishes. Five years into the shale oil boom, many wells have started to release significant amounts of gas, making the Permian Basin the top contributor to U.S. natural gas production. In 2018, Texas accounted for 22% of total production in the U.S.. Along with the Permian Basin, other significant formations in the U.S. are the Bakken Field (noted above) and the Marcellus. Shale formation in Pennsylvania, West Virginia and Ohio.

Moving both oil and gas from these regions are pipelines, a complex web of which runs across the United States. By 2018, there were more than 2.6 million miles of pipelines in the U.S., which combined delivered trillions of cubic feet of natural gas and hundreds of billions of tons of liquid petroleum products to market.

These sectors of the oil and gas industry pose massive risks to people and the environment across the country, risks that the industry regularly downplays or conceals from the government, public at large, and shareholders.

Environmental Impacts of Oil and Gas Production

There are significant environmental risks associated with the entire upstream (exploration and extraction) and midstream (transportation, storage, and marketing) sectors of the oil and gas industry.

In addition to being the world’s leading producer of oil and natural gas, the U.S. is also the world’s second largest emitter of greenhouse gases (“GHG”). Every aspect associated with oil and gas development and processing emits significant amounts of GHG into the air. Given the current levels of U.S. oil and gas production and expected increases, along with the construction of new and expanded oil, gas and petrochemical plants, total U.S. potential GHG emissions could amount to nearly one billion tons by 2025.

Consumption of oil and gas is one of the key drivers of these emissions, which are already having dramatic and well documented impacts, including rising sea levels, the extinction of animal and plant species, and increasingly more violent natural phenomena like hurricanes and forest fires.  Recently, fossil fuel companies have pledged to reduce the pollution driving climate change, but it is not clear that a meaningful transition to a carbon-constrained future is truly underway inside the industry.

Oil and gas production also carries a heavy risk of air and water pollution, risks that have only intensified as fracking has become more prevalent in the U.S.. While all oil and gas production methods have risks, fracking has specifically been linked to poisoned water, polluted air, animal deaths, industrial disasters, explosions, and earthquakes. A 2017 study found that up to 16% of hydraulically fractured wells spill liquids each year. Oil and gas wells in the U.S. spill more than a trillion gallons of waste each year, including naturally occurring radioactive materials that are pulled to the surface when oil and gas is extracted.

Pipelines further compound the risk. Over 8,000 significant spills have been flagged by the Federal Pipeline and Hazardous Materials Safety Administration since 1986. One of these spills occurred in November 2019, when the highly controversial Keystone Pipeline leaked more than 380,000 gallons of oil. This was only two years after its last major leak, where 407,000 gallons of oil spilled. The company had originally reported the spill at half the size.

When these spills occur, they put entire communities at risk. They can cause lasting damage to rivers and waterways, endanger the health of the surrounding population, and kill wildlife. In cases like the 2017 Keystone spill, the oil leaks into farmlands, endangering farmers’ livelihoods.

Federal and State False Claims Acts Empower Whistleblowers to Expose Hidden Environmental Liabilities

A majority of U.S. oil and gas is found on private lands. However, a significant amount of oil and gas production occurs on the Federal government’s onshore subsurface mineral estate and from its lands on the offshore continental shelf. For these operations, as well as those on state lands, the federal and state False Claims Acts offer financial rewards to whistleblowers for exposing fraud by companies benefitting from the use of this public property.  Similarly, these laws offer rewards to whistleblowers who expose fraud in connection with applications for government permits, such as permits for approvals of interstate pipelines.


Drilling on Public Lands

The False Claims Act prohibits fraud in connection with applications for permission to drill, payments of royalties and other transactions with government entities.

In order to acquire a permit for drilling on federally-owned lands, a company must obtain a lease from the Bureau of Land Management (BLM). Once a leaseholder, operator, or designated agent identifies an oil and gas deposit on a Federal lease, they can file an application for a permit to drill (APD). The BLM cannot approve an APD until the operator meets the requirements of certain laws and regulations, including the National Environmental Policy Act (NEPA), the National Historic Preservation Act, and the Endangered Species Act.

Upon receiving an APD, BLM typically conducts an onsite inspection with surface and/or mineral estate owners, resource specialists, the operator, and when applicable, other Surface Management Agencies. After completing these inspections, the BLM, together with any other relevant SMAs, conducts a NEPA analysis, and then approves, approves with modifications, denies, or defers action on the application.


Drilling in U.S. Offshore Waters

In order for a company to acquire a permit for offshore drilling on the federally-owned continental shelf, they must obtain a lease from the Department of Interior (DOI). The application process is overseen by three DOI agencies – the Bureau of Ocean Energy Management (BOEM), the Bureau of Safety and Environmental Enforcement (BSEE), and Office of Natural Resources Revenue (ONRR). Companies must undergo a bidding process for the lease through BOEM.

After acquiring a lease, the lease holder must submit an Exploration Plan in order to explore the leased areas for oil & gas deposits. Exploration Plans must include timing of project, location of operations, methods and the potential environmental impact for all activities. Once the lease is accepted companies must then pay rent to ONRR.

Before operations begin, the company must then submit a Development or Production Plan to be approved by BOEM. Additionally, the lease holder must apply to BSEE for drilling and operations permits before extraction begins. BSEE then conducts initial inspections to ensure that structures are installed properly, and equipment functions properly.

Throughout the many steps of this process, for both onshore and offshore, there is significant opportunity for the companies applying to knowingly make false statements about environmental violations and inadequate safety procedures in order to improve their chance of obtaining a lease. These misrepresentations are strictly prohibited by the federal False Claims Act (FCA). The FCA provides that any knowledgeable submission of false claims to the government by an individual or organization violates the statute, making them liable to the government’s damages.


Reverse False Claims Cases

Typical FCA claims involve submitting a bill to the government wherein the work completed is either falsified or completed improperly. However, the FCA can also be applied when a wrongdoer prevents the government from collecting what it is owed by making false statements to keep the government from receiving proper compensation. This is known as “reverse false claims.” In the case of making false statements on a lease application, a company is often underestimating risk or misrepresenting an obligation, thus depriving the federal government of the correct amount.

In one of the most famous reverse False Claims Act applications, false claims made by the oil company BP in its lease applications led up to the disastrous explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, and the subsequent massive environmental settlement that followed. Shell, Chevron Corp., Texaco, Unocal, and others have all also paid millions under the False Claims Act for failing to properly report, or pay royalties on, venting and flaring of gas.


Reverse False Claims Cases Involving Pipeline Applications

Reverse False Claims also applies to applications for permits for activities outside of public lands.  This is common in the oil and gas industry, which must obtain approval for construction and operation of a vast network of interstate pipelines to bring natural gas to the marketplace. The Federal Energy Regulatory Commission (FERC) reviews applications for construction and operation of interstate natural gas pipelines under authority of section 7 of the Natural Gas Act. Fraudulent certifications of compliance with Department of Transportation safety standards are subject to False Claims Act liability.


Reverse False Claims Cases Involving Consent Decrees

Also subject to False Claims provisions are violations of consent degrees where the company has agreed to automatic sanctions resulting from those violations. It is common for the U.S. government to enter binding legal agreements with oil and gas companies who are found to have violated safety and environmental laws. In a recent example from March 2020, the Plains All American Pipeline Company was found to have violated federal pipeline safety laws and liability for a 2015 discharge of nearly 3,000 barrels of crude oil at Refugio Beach. In order to resolve these claims, the company was required to enter a consent decree that requires significant revisions to the company’s policies and added emphasis on safety proceedings, as well as pay $24 million in penalties to various federal agencies. However, if in the future the company violates the consent decree and fails to disclose these violations, in doing so it is making false claims to the government – making it too potentially enforceable under the FCA.

Importantly, these applications of the False Claims Act to counter the hiding of environmental and safety liabilities offer key opportunities for whistleblowers.

Key Whistleblower Tools

Potential whistleblowers have more rights than they may think.  In recent years, a powerful suite of whistleblower laws has been enacted in the United States to enable private sector whistleblowers to report wrongdoing confidentially and to receive financial rewards for contributing to successful prosecutions.

Many U.S. laws applicable to fraud within the fossil fuel industry have transnational application. A whistleblower does not need to be a U.S. citizen in order to receive assurances of confidentiality and monetary rewards, and the company engaged in wrongdoing does not need to be U.S.-based in order to be held accountable.

Among the most important whistleblower laws is the False Claims Act (FCA), which regulates fraud in connection with those receiving compensation or other benefits from the government. The FCA provides for treble damages, which means companies or organizations engaged in defrauding the government through false statements on these types of permit applications may be liable to pay significant settlements and judgements to the government. In 2020 alone, whistleblowers helped to recover $1.6 billion in monetary sanctions for U.S. taxpayers, with whistleblowers receiving $309 million for their contributions to these successes in 2019.

Importantly, the FCA allows for confidential reporting. The vast majority of whistleblowers choose to keep their identity confidential, and agencies make every effort to protect the identity of the whistleblower so that they can report fraud – and still keep their job. Whistleblowers can also be eligible to receive rewards for confidentially disclosing fraud that results in a financial loss to the government. If the prosecution of fraud succeeds, the whistleblower is awarded a mandatory reward between 15% to 30% of the collected monies.

To learn more about the False Claims Act, read The New Whistleblower’s Handbook, the first-ever guide to whistleblowing. The Handbook, authored by the nation’s leading whistleblower attorney, is a step-by-step guide to the essential tools for successfully blowing the whistle, qualifying for financial rewards, and protecting yourself.   

When reporting fraud, it’s important to follow the designated channels. By going straight to the media or bypassing procedures for disclosure to government authorities, whistleblowers may potentially forfeit their rights. NWC always recommends retaining a whistleblower lawyer to help navigate the complex set of rules and regulations.

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