VOL. I NO.6 ARTICLE AUGUST, 1993

VOL. I NO.6 * ARTICLE * AUGUST, 1993

LIABILI1Y OF OIL AND GAS INTEREST OWNERSUNDER HAZARDOUS SUBSTANCE LAWS

[By: David E. Pierce, Professor of Law, Washburn University School of Law,Topeka, Kansas; Of Counsel Shughart, Thomson & Kilroy, Kansas City, Missouri]

I. "STATUS" LIABILIlY. The newest breed ofenvironmental laws seek to achieve their goals byimposing liability on persons that have a certain'relationship with property where a hazardoussubstance is found. Typically this relationship is"ownership" or "operation" of the property.However, it also includes those having arelationship with the hazardous substance that isfound on the property: those who created("generated") the substance and those who had arole in moving the substance to the property("arrangers" and "transporters"). The Comprehensive Environmental Response, Compensation andLiability Act (CERCLA), is the primary law thatgives rise to this sort of "status" liability. However,the Resource Conservation and Recovery Act(RCRA), the Clean Water Act (CWA), and the

Oil PollutionAct (OPA)each imposetheir ownbrand of statusliability thatmay pick upsituations thatare nototherwise

covered by CERCLA liability. Each of these lawscan apply to the ownership, development, and

operation of oil and gas interests.

II. THE MIRAGE OF EXCLUSIONS ANDEXEMPTIONS. Many persons in the oil and gasindustry believe that the "petroleum exclusion"under CERCLA and the exploration andproduction "associated waste exemption" underRCRA effectively remove oil and gas propertiesand operations from the hazardous waste arena.Although each law contains special exceptionsfrom its application to the oil and gas industry, thecourts have generally held that each statute, and itsassociated exemption, does not apply to otherstatutes that could otherwise be used to addressthe situation. For example, the petroleumexclusion under CERCLA does not limit theEnvironmental Protection Agency (EPA) or thirdparties from addressing petroleum under the OPA,CWA, and RCRA Similarly, wastes excluded fromhazardous waste regulation under RCRA maynevertheless create liability under CERCLA or theCWA or OPA See generally, Zands v. Nelson, 779F. Supp. 1254, 1257 (S.D. Cal. 1991) (RCRAapplied to CERCLA-excluded petrOleum).

III. CERCLA LIABILIlY. CERCLA liability istriggered whenever there is a release, or threat ofa release, of a hazardous substance. The presenceof the hazardous substance generally defines the

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"facility" that necessitates a cleanup to protectpublic health or the environment. The potentiallyresponsible parties include persons having anyoneof the following relationships with the "facility":

1. Present "owners" or "operators" ofthe facility;

2. Owners or operators at any timehazardous substances weredisposed of at the facility;

3. Persons who generated hazardoussubstances found at the facility;

4. Persons who arranged for disposalof hazardous substances at thefacility;

5. Persons who transportedhazardous substances to thefacility and selected the facility;

6. Interim owners of th~ propertywho did not own it at the time ofdisposal, but discovered thatdisposal had taken place on theproperty and then failed todisclose this fact to theirpurchaser.

This article addresses the extent to which ownersof oil and gas interests could come within one ormore of the CERCLA responsible party categories.CERCLA § 107(a)(I)-(4), 42 U.S.C. § 9607(1)-(4)(1988); § 101(35)(C), 42 U.S.C. § 9601(35)(C)(1988).

A. RELATIONSHIP WITH A"FACILITY". The first step in identifyingresponsible parties is to identify the "facility" at'which hazardous substances have been placed. Inthe oil and gas context the facility could be anabandoned or active drilling, reserve, evaporation,or other type of pit where a hazardous substancehas been placed. It could include areas at or nearthe well site where chemicals have been used inreworking, testing, fracing, acidizing, or otherwisetreating the well. It could be a compressor,dehydrator, separator, storage tank, or processingplant site where chemicals have been used orwastes disposed through the years. It could be a

site where oil and gas drilling or operation wasteshave been taken for disposal. Liability for thesesubstances does not require any sort of unlawful orimproper disposal activity. In most instances, thedisposal practices of the industry giving rise toliability will be the result of lawful conduct thatcomplied with the appropriate industry standards,and all applicable environmental laws, at the timeof disposal. This further demonstrates the "status"aspect of the liability: you may not have causedthe pollution, you didn't do anything morally orlegally "wrong"--you just happen to have therequisite statutory status with the property.

If the requisite status is found, the personwill be liable for the cost of whatever cleanup isdeemed necessary to protect public health and theenvironment. Although the statute provides amechanism for recouping cleanup costs from otherresponsible parties for their contribution to theproblem, if such parties are unable to pay theirshare of the costs, the responsible parties who canpay will often be required to pick up the totalcleanup tab.

The concept of "owner" under CERCLAcan include persons who merely own an interest ina facility. To date, courts have generally looked toa person's ownership interest to evaluate thedegree of control that interest permits them toexercise over the property. For example, eventhough the owner of a severed surface interest mayhave no ownership interest in the mineral estate,activities on the surface to develop the mineralestate can impose CERCLA liability on the surfaceowner--as well as the mineral interest owner. Ifthere is an abandoned pit on the property, or othercontamination associated with oilfield development, the surface owner will have a substantialamount of control over the site and, for CERCLApurposes, is an "owner" of the facility. See generally, Quaker State Corp. v. U.S. Coast Guard, 681 F.Supp. 280 (W.D. Pa. 1988) (surface owner held tobe "owner" under Clean Water Act and thereforeresponsible for cleanup of oil containment pit).

B. CERClA "OWNERS" IN AN OIL ANDGAS CONTEXT. The "owners" in the oil and gascontext can include: surface owners, mineralowners, oil and gas lessees, assignees, farmees,interest owners in a "contract area" under anoperating agreement, and interest owners in a

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ENERGY AND THE ENVIRONMENT

pooled or unitized area. Indeed, a plausibleargument can be made that every party that comesinto contact with the development process canbecome some sort of CERCLA owner, operator,generator, arranger, or transporter. The only partythat escapes liability will be the end user whomerely purchases or acquires the prOduct-regardless of how contaminated the "facility" isfrom which the production was obtained.

An owner of a nonparticipating royalty(conveyed by the mineral interest owner), or anover-riding royalty (conveyed by the working interestowner), may be able to escape liability by arguing'they do not own an interest in the contaminated"facility." Instead, they own only a right to a shareof prOduction, or money measured by production.However, to the extent local law gives them theright to compel development of the property togenerate the production or money, the partygranting the interest may be viewed as their contractor for development. This could impute themineral interest or working interest owner'sCERCLA liability to the otherwise "passive"royalty or overriding royalty interest owner.

C. CERClA "OPERATORS" IN AN OILAND GAS CONTEXT. Liability as an "operator"would include the oil and gas lessee--arguably evenif they are merely a nonoperating working interestowner in a designated "contract area." ForCERCLA purposes, the operator designated in theoperating agreement will most likely be viewed asthe other working interest owners' contractor todevelop the property for their benefit. The acts ofthe operator, and the contractors it hires (such asdrilling contractors and service companies), will beimputed to all parties to the operating agreement.See generally, Branch v. Mobil Oil Corp., 788 F.Supp. 531, 533 (W.O. Okla. 1991) (nuisance law).

However, the actions of the oil and gaslessee, and its contractors, might not be imputed toits lessor. Most oil and gas leases give the lesseethe option to develop the leased land. The oil andgas lease is more in the nature of a distinct property interest that, once granted by the lessor, is notunder the lessor's control. Although the lease mayterminate if the lessee fails to develop, the lesseeis under no obligation to develop. As long as thiselement in the relationship exists, courts will have

a difficult time in characterizing the lessee as thelessor's contractor. However, this will not impactthe lessor's potential liability as an "owner" of thesurface estate and mineral estate. It will merelyrelieve the lessor of liability as an operator, generator, arranger, or transporter. If the lessee isviewed as the lessor's contractor, the lessor'sliability would be expanded to include off-leasesites where the lessee takes hazardous substancesfor disposal.

The concept of "operator" under CERCLAhas proven to be very broad and generally includesanyone that exercises control, or has the right tocontrol, the facility. See Nurad, Inc. v. William E.Hooper & Sons Co., 966 F.2d 837 (4th Cir. 1992).As noted previOUSly, this could include a nonoperating working interest owner authorizing development through a designated operator. It wouldcertainly include the designated operator. It couldalso include the bulldozer contractor hired toprepare a drill site--since they have, for a briefmoment, limited control over the work site. Thedrilling contractor, and other service contractors,could also be considered operators if they exercisecontrol, or have the authority to control, when thedisposal activity takes place. See Kaiser Aluminum& Chemical Corp. v. Catellus Development Corp.,976 F.2d 1338 (9th Cir. 1992).

IV. MANAGING STATUS LIABILITY. Thetechnique for managing status liabilityprospectively is simple to state, but difficult tofollow: Avoid the "status" by not becoming anowner or operator of property where hazardoussubstances exist or will be generated. To practicethis teChnique, it requires information about theenvironmental condition of the property you planto acquire. This information can be obtainedthrough contractual representations by the currentowner and independent investigation by the prospective owner. If the property presents a problem, avoid purChasing, leasing, drilling, or otherwise having any sort of interest in the property;consider whether the problem area can be excisedfrom the balance of the property interests. Forexample, suppose you want to lease Section 30 butthere is an old oil and gas development site in theNorthwest Quarter that may be an environmentalproblem. In the lease you could provide for theexclusive right to extract oil and gas from Section30 but disclaim any right to enter or use the



surface and subsurface area where the suspectedcontamination is located. The lessee in such a casewould arguably have no ownership interest in theproblem "facility" nor would they have any "right tocontrol" the facility.

A second management technique, whichcould apply to existing as well as prospectiverelationships, requires: Vigilant policing of activities conducted on the property· by anyone havinga concurrent right in the property. Since anyactivity on property in which you have an interestcould give rise to your status liability, you want totry and control what others do on the property.When creating new interests in the property, suchas conveying or leasing a mineral interest, thegrantee's rights should be tailored to limit orcontrol their ability to increase your environmentalliability. This can be done by limiting the scope ofthe rights granted and through restrictive covenants. For existing interests, the focus will be onwhat is "reasonable use" of the granted interest inconducting development.

A third management teChnique, whenacquiring new property interests or permittingothers to use your property interests, requires:Precise allocation ofknown and unknown environmental liabilities among the parties supplementedwith agreements to reimburse (indemnify) oneanother for defined situations. The mineral deed,oil and gas lease, assignment, farmout, operatingagreement, drilling contract, unitization agreement,,and other conveyances or contracts affecting theproperty should address which party will be responsible for existing and future environmental

conditions on the property. Although theseagreements will not in any way relieve a party fromliability to the government or third parties, theywill be effective to define the rights of the partiesto the transaction. Once the liabilities are allocated, the parties can define to what extent they willreimburse one another in the event a problemarises. Contractual indemnities are often used toleverage known and unknown environmental risksassociated with a transaction. As with any contract,however, the indemnity is only as good as th~party

making the promise to indemnify.

V. CONCLUSION. Persons owning orparticipating in the development of oil and gasinterests are subject to significant environmentalrisks. How-ever, proper transactionplanningand property managementcan substan tiallyreduce therisks. Atthis stageof the industry'senviron-mental evolution, the key will be recognizing thepotential for such liabilities so they can be addressed or avoided.

1. Bank's claims against gas company forenvironmental damage dismissed. City of Minneapolis v. Arkla, Inc., 1993 WL 61827 (D.Minn. Feb18,1993).

Minnegasco, a division of Arkla, Inc.,owned and operated a gas plant in Minneapolisuntil 1961. During its operations, Minnegascodisposed of contaminants on part of the property.Through mesne conveyances, the MinneapolisParkland Recreation Board became owner of theproperty under note and mortgage to First Bank,

N.A The Recreation Board subsequently ceasedmaking payment on the note and sued Minnegascofor response costs and damages when it later determined the property was contaminated. First Bankintervened in the case and asserted causes of actionfor: violation of the Minnesota EnvironmentalResponse and Liability Act (MERLA); strictliability; nuisance; and, negligence. The courtdismissed the claims finding: the MERLA claimwas barred by the statue of limitations; the strictliability claim is only available to adjoining orneighboring landowners; the nuisance claim re-

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quired the right to. use, enjoy or possess the property and First Bank's security interest did notsatisfy any such right; and, any injury to First Bankunder the negligence claim was not foreseeable.

2. Florida Supreme Court reverses itself onapplication of pollution exclusion. Dimmitt Chevrolet, Inc. v. Southeastern Fidelity Insurance Corp.,No. 78,293 _ S.E.2d _ (Fla. July 1, 1993).

On motion for rehearing, the FloridaSupreme Court reversed its position on the mean-,ing of the phrase "sudden and accidental" as usedin the pollution exclusion of the applicable insurance policies. The court found the phrase to beunambiguous and meaning abrupt and unintendedthus precluding coverage for long term pollution.The court previously determined the word "sudden"to be ambiguous and found the exclusion did notpreclude coverage for pollution caused by longterm pollution from the disposal and leakage ofwaste oil. (See No.4, Judicial Developments, VolI. No.4, page 4, for a synopsis of the court'searlier decision).

3. CAA does not preempt state common lawclaims against oil companies. Gutierrez v. MobilOil Corp., 798 F.Supp. 1280 (W.D. Texas 1992).

The plaintiff landowners commenced thisaction against six oil companies which allegedlyown and operate a large, multi-tank storage facilityfor gasoline, petroleum, and other fuel products.The plaintiffs allege gross negligence, nuisance andtrespass by the companies for permitting toxicsubstances to escape from the facility and contaminate their air, land and water. The plaintiffs alsoseek injunctive relief to stop the use of the facility.The defendants removed the case to federal courtasserting the plaintiffs' claims are preempted by

the CAA and, therefore, a federal question exists.The federal court subsequently remanded theaction to state court finding that the CAA doesnot preempt purely state common-law claimsinvolving non-diverse parties. The federal courtnoted the defendants' only use of the CAA will bedefensively through evidence of their compliancewith the CAA

4. Successor corporation liable for responsecosts under CERCLA. HRW Systems Inc. v. Washington Gas Light Co., No. S-91-3143, (D.C. Md.June 9, 1993).

Corporate predecessors to WashingtonGas Light Co. operated a gas plant which allegedlycaused hazardous waste contamination. Washington Gas was sued on claims under CERCLA basedon successor liability. The court granted partialsummary judgment against Washington Gas findingit engaged in substantially the same business andthere existed a continuity of enterprise betweenWashington Gas and its predecessor. Specifically,the court found Washington Gas assumed both theassets and liabilities of its predecessors and therewas substantial continuity of directors and complete continuity of officers and employees.

5. Offshore lessee has cause of action for lossprofits under the Oil Pollution Act. Sekco Energy,Inc. v. M/V Margaret Choues(, 820 F.Supp. 1008(E.D. La. 1993).

Sekco Energy, Inc. owned and operated aleasehold interest and drilling platform off thecoast of Louisiana. While towing seismic cable,the defendant companies allowed cable to strikethe Sekco platform. The cable ripped open spilling Isopar M oil into the surrounding waters. Thedefendants did not report the spill but third partiesnoticed the oil sheen and reported it to the Minerals Management Service. The MMS shut-in theplatform to investigate the pollution. Sekco suedthe defendants on several causes of action, including Sekco's right to loss profits under the OilPollution Act of 1990 during the shut-in timeperiod. On motions for summary judgment, thecourt found such action can be maintained citing33 U.S.C. §§ 2702(b)(2)(E):

(E) Profits and earning capacity



Damages equal to the loss ofprofits or impairment of earningcapacity due to the injury, destruction, or loss of real property,personal property, or natural resources, which shall be recoverable by any claimant.

6. Insurer prejudiced by pipeline's late noticeof PCB contamination. In re Texas Eastern Transmission Corp., No. 92-1638, MDL No. 764, __F.2d. __, 1993 (3rd Cir. May 28, 1993).

Texas Eastern Transmission Corp. assertedthat its insurers should be responsible for $750million in cleanup costs associated with 89 PCBcontaminated compressor sites. The appeals court,however, affirmed the district court's earlier decision that Texas Eastern's eight month delay innotifying its insurers of the contamination prejudiced the insurers and relieved them from coverageliability. The prejudice resulted from TexasEastern's field investigations and extensive negotiations with the EPA prior to notification. (See No.6, Judicial Developments, Vol. I No.2, page 4, fora synopsis of the district court's decision).

7. Oil spill raises several issues under federal andstate water pollution acts. In Re Oriental Republicof Uruguay, 821 F.Supp. 928 (D. Del. 1992); 821F.Supp. 934, 941, 946, and 950 (D. Del. 1993).

In 1989, an oil tanker owned and operatedby the government of the Oriental Republic ofUruguay ran aground in the Delaware River. Thetanker's hull ruptured discharging approximately200,000 gallons of oil into the water. The oil spillresulted in extensive damage to the shores andwaters of the United States, Delaware, New Jerseyand Pennsylvania and required massive cleanup.Further, a substantial amount of private propertydamage resulted from the spill. In response tonumerous legal actions, Uruguay instituted anaction seeking exoneration from or limitation ofliability pursuant to the Limitation of Liability Act,46 U.S.C.A § 183(a). Various governmentalentities and private parties filed claims againstUruguay in the action. The United States Courtfor the District of Delaware issued five opinionsrelative to these claims. The findings in theseopinions are set forth as 1 through 5 hereafter:(1) 821 F.Supp. 928. The United States moved for

partial summary judgment for recovery of itsresponse costs under the CWA Uruguay assertedthe discharge was caused solely by a third party - atemporary river pilot. The court granted judgmenton liability finding the pilot was an agent of Uruguay - and not a third party - and any acts weredirectly attributable to Uruguay. The court alsogranted Delaware partial summary judgment onliability under the Delaware Oil Pollution LiabilityAct (DOPLA); (2) 821 F.Supp. 946. For liabilityunder the DOPLA, the court imposed civil penalties for each day during which oil was dischargedfrom the vessel and not for each day oil was in thewater. (3) 821 F.Supp. 934. Sun Refining andMarketing Company and Sun Oil Trading Company own and operate a refinery and terminal on theriver. Sun claimed damages from physical propertydamage and other economic loss damages unrelated to the property damage. On cross motions forsummary judgment, the court held Sun could onlyrecover economic loss damages derived directlyfrom the physical property damage caused byUruguay's negligence and not otherwise; (4) 821F. SUppa 941. On motion for reconsideration, thecourt affirmed its early opinion at 806 F.Supp. 42finding that Uruguay's intentional or unintentionalspill of oil into the waters of New Jersey constituted a violation of the New Jersey Water PollutionControl Act and the New Jersey Spill Compensation and Control Act warranting civil penalties;and, (5) 821 F.Supp. 950. Owners of boatyard andrestaurant claimed damages for deaths of ducksand economic loss damages for lost business. Thecourt found the owners had no property interest inthe ducks and thus no action existed. Further, theowners failed to establish that the economic lossdamages were derived directly from physical property damage caused by Uruguay's negligence.

8. Landowners' damages under nuisance theorylimited to fair market value of property. Briscoe v.Amoco Production Company, No. CIV-91-2072-L(W.D. Okla. June 7, 1993), reconsidered (July 6,1993).

Plaintiff landowners sued Amoco Production Company for recovery of damages fromalleged oilfield pollution. The plaintiffs acquiredthe property in April, 1991 at a cost of $24,000and are requesting recovery in excess of $300,000.Amoco moved for partial summary judgment on:(1) the measure of damages under the plaintiffs'

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nuisance and unjust enrichment theories; (2)liability for prepurchase damages; and, (3) the rightto conduct saltwater disposal on the property.With respect to the measure of damages, the court'found the costs of cleanup far exceed the diminution in the fair market value of the property andthus the proper measure of damages is the diminution in the value of the property caused by thealleged pollution, and not the actual costs of cleanup. The court noted, however, the finding did notreach any obligation Amoco may have toremediate the property. Further, on rehearing, thecourt found that recovery under the unjust enrichment theory is not limited to the diminution inthe value of the property; rather, the recovery ismeasured by the amount saved by Amoco throughits alleged use of the property without appropriatecompensation. With respect to liability forprepurchase damages, Amoco argued that recoveryof damages must be confined to the difference inthe value of the property when purchased and thevalue at the time the action was commenced, i.e.,excluding any damages prior to purchase. Thecourt denied Amoco's motion on this issue findingthat such principle does not apply to plaintiffs'

theories of temporary or public nuisance. Withrespect to the saltwater disposal issue, the courtgranted the motion finding that Amoco is authorized to dispose of saltwater in the saltwaterdisposal wells on the property based on the underlying oil and gas lease, unitization agreement, andOklahoma Corporation Commission Order authorizing disposal.

9. Contract language not broad enough to transfer CERCLA cleanup liability. John S. Boyd v.Boston Gas Co., 992 F.2d 401 (1st Cir. 1993).

The United States Court of Appeals forthe First Circuit affirmed an earlier district courtdecision finding that a pre-CERCLA purchaseagreement does not transfer CERCLA cleanupliability unless the language is broad enough totransfer unforseen environmental liability. Thecourt found the predecessor and related companies- and not the buyer - were liable for cleanup of thesubject coal and oil and gas waste facility. (SeeNo.5, Judicial Developments, Vol. I No.2, page 4,for a synopsis of the district court's decision).

1. Further correction to rule for recycled andused oil. 58 FR 33341 (June 17, 1993).

A correction in the used oil managementstandards appearing at 58 FR 26420 (May 3, 993)inadvertently amended several sections of Part 279dealing with notification requirements for used oilhandlers. This action corrects this error andrestores the original language from the final rule at57 FR 41566 (September 10, 1992).

2. Coast Guard prepares draft guidelines for oilspill response training. 58 FR 38450 (July 16,1993).

The Coast Guard has developed draftguidelines for oil pollution response training forpersonnel involved in operations at deepwater,ports and marine transportation-related facilities,and for vessel owners and operators. The CoastGuard is conducting a workshop on the draftguidelines August 27, 1993 as outlined in thenotice. Also, written comments on the draft

guidelines must be received on or before September 1, 1993.

3. Coast Guard requests comments on financialresponsibility regulations for vessels. 58 FR 38993(July 21, 1993).

On September 26, 1991, the Coast Guardpublished notice of proposed rulemaking (56 FR49006) to implement the financial responsibilityrequirements for certain vessels under Section 1016of the Oil Pollution Act of 1990 and Section 108of CERCLA The notice listed three methods todemonstrate financial responsibility: insurance,surety bond, and financial guaranty. In response tocomments on the notice, the Coast Guard prepared a Preliminary Regulatory Impact Analysiswhich addresses possible economic impact from thefinancial responsibility requirements. The CoastGuard is now seeking comments on the RIAComments must be received on or before September 20, 1993.



4. Department of Interior reopens commentperiod on natural resource damage rule. 58 FR39328 (July 22, 1993).

On April 29, 1991, the Department ofInterior issued a notice of proposed rulemaking(56 FR 19752) to revise the natural resourcedamage assessment regulations. The regulationsestablish procedures for assessing damages forinjury to natural resources resulting from thedischarge of oil under the CWA or the release ofhazardous substances under CERCLA TheDepartment has developed two types of assessmentprocedures: standard procedures for simplifiedassessments requiring minimal field observations(type A rule); and site specific procedures fordetailed assessments in individual cases (type Brule). The Department is now reopening thecomment period for the proposed rulemaking.Written comments must be received on or beforeSeptember 7, 1993.

5. Criminal fines and civil penalties up for 1992:

The EPA's 1992 Enforcement Accomplishments Report issued June 18, 1993 indicates amajor increase in 1992 for criminal fines and civil

penalties for environmental violations. Civilpenalties increased to a record $78.7 million ($50.7million in civil judicial penalties and $28 million inadministrative penalties). Criminal fines increasedfourfold in 1992 to $62.9 million. Nearly allcriminal fines were under the CWA or RCRAThe Repon further indicates that state enforcementactions far exceeded those of the EPA A copy ofthe Enforcement Accomplishments Repon andappendix - The National Penalty Repon - can beordered from the EPA Public Information Center(202) 260-2080.

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VOL. I NO.6 ARTICLE AUGUST, 1993