Highly regulated, the oil and gas industry—upstream, midstream and downstream— faces a significant compliance challenge that obliges virtually every company to either internally staff effectively or outsource to meet requirements.

As regulations have grown into a complex web, technology fortuitously arrived to rescue companies from being manually overwhelmed by paper document compliance. Specifically, software has automated myriad compliance tasks and substantially simplified regulatory updating in complying with guidelines from various agencies ranging from the U.S. Environmental Protection Agency (EPA) to the U.S. Federal Energy Regulatory Commission (FERC), the government agency responsible for regulating interstate pipelines and transmission of electricity.

Even a quick look at midstream industry regulations quickly dispels any idea that compliance is getting simpler or is a game for amateurs. Realistically, regulatory compliance involves more than just a company protecting its business. Instead, it increasingly involves ways to strengthen organizations by taking proactive steps to increase production and profitability within the regulatory environment. But how?

Seeing the big picture

Who are the federal government watchdogs?

Besides the EPA and FERC, other agencies also regulate the midstream oil and gas industry, including major ones such as the federal government’s Department of the Interior, Department of Transportation—through its Pipeline and Hazardous Materials Safety Administration (PHMSA)—and the Bureau of Land Management, to name but a few. While the EPA typically comes to mind in the upstream oil and gas industry regarding environmental regulations, FERC often dominates regulatory conversations in midstream.

FERC has wide-ranging regulatory responsibilities. It regulates transmission/sale of natural gas for resale, transportation of oil by pipeline in interstate commerce, approval of siting/abandonment of interstate natural gas pipelines and storage facilities, ensuring safe operation and reliability of proposed and operating LNG terminals, overseeing environmental matters related to natural gas and hydroelectricity projects and other matters. It enforces its regulatory requirements through imposition of civil penalties.

Perhaps surprisingly, among timely issues that FERC does not regulate or involve itself include regulation of nuclear power plants, oversight of oil pipeline construction, abandonment of service at oil facilities, regulating local distribution pipelines of natural gas or approval for physical construction of electric generation facilities.

Yet the EPA is also prominent in the midstream picture on air, water and waste regulatory issues. Of particular importance is a 2011 rules suite which, according to the EPA, contains highly cost-effective regulations that would reduce harmful air pollution from the oil and gas industry while allowing continued responsible growth in production. Volatile organic compounds (VOCs) would be reduced annually by 540,000 tons, methane reduced by 3.4 million tons and air toxics reduced by 38,000 tons. By cutting VOC emissions significantly through proven technology to capture natural gas currently escaping, that gas could be sold and revenues would generate a net savings of $30 million annually, thus playing a key role in cost-effective environmental compliance.

Technology’s help

Cutting through regulatory complexities is technology. For example, a best practice program can be established that ensures all requirements are identified, are systematically addressed and all regulatory changes are continually updated electronically by date and frequency within the system. Management is sent reminders, every sentence in every regulatory rule is captured in building an extensive database, checklists are developed and regulatory changes are monitored on an ongoing basis for future developments to stay ahead of new rules. For those companies that began outsourcing compliance years ago, the key benefits delivered by a sophisticated program (instead of ad hoc efforts within a company) are primarily having a well-schooled team of multidisciplinary experts utilizing smart technology to “get compliance down to a science.”

Along the lines of a more systematic technology-driven approach, companies can now, for example, opt for regulation management or managed services departments to identify and format ready-made solutions or to manage all tasks on a site-specific basis.

Similarly, they can take advantage of an environmental facility audit protocol, which can be linked to comprehensive compliance management through a literal perpetual audit system. It actually ensures that a company’s operations are protected from avoidable compliance risks by providing the necessary tools and information to keep all of the company’s sites in perpetual compliance. But, at what cost and how do advanced technology and best practices work with the corporate balance sheet?

Setting the stage for how companies can proactively meet regulatory compliance requirements on a common-sense financial basis, consider some current trends. One, EPA inspections and lawsuits are increasing, which makes audit preparedness imperative to avoid hefty fines. Two, a company’s reputation usually feeds directly into compliance issues. Negative stories in the news media on non-compliance can both damage a company’s reputation and impact the bottom line. That includes potential loss of current customers as well as discouraging new business prospects. In turn, repairing a reputation can cost substantial time and money.

Six-part strategy

Consequently, a recommended overall regulatory compliance strategy weighted toward the financial side is six-fold. First, invest in critical personnel with skillsets, education and experience relevant to a company’s operations. Obvious? Not really. Remember that anyone can claim to be an expert so vetting qualifications is critical, and not just about general expertise but whether individuals have worked in a similar industry on relevant compliance projects.

Outsourcing, as with other aspects of this six-part strategy, can be quite beneficial for management of projects that would be impractical using internal resources. Pragmatically, staffing a compliance position internally to effectively meet requirements is typically a gamble since designees often understand some requirements but not others. Companies should certainly consider the value-added difference that this approach can provide.

For example, it frees up staff to focus on business-critical tasks and overall helps increase efficiency and productivity because staff is not bogged down in non-revenue producing activity. The bottom line is that outsourcing is just a sensible trade-off that pays for itself.

Second, in actual number-crunching, companies can also save on key employee costs including not only wages and salary but also related benefits, taxes, worker compensation and (as applicable) paid leave. These savings accrue, even at outsourcing rates higher than staff salaries, because when companies hire on a contractor basis they get outsourced experts with a variety of efficiencies in terms of specific skill sets and expertise to glove-fit task requirements, hence “more bang for the buck.”

Third, companies should secure a first-rate training program from environmental professionals. Again, the emphasis is on assuring access to individuals with specific relevant skillsets who have “been there, done that.” At facilities, it is not uncommon to see personnel not doing compliance work they should be doing or the counter-productive opposite. Consequently, it’s important to identify common mistakes before they occur to lower the risk of employees being injured and companies having to pay workers comp or associated costs.

Also, personnel should be trained on what may seem obvious. That is, why they do what they do when engaged in compliance work. In other words, they need to understand what can potentially happen with certain operations as well as understanding what draws the attention of a regulatory inspector.

Above all, it’s critical for personnel to understand that regulatory compliance is not open to debate as to whether they agree with what they are doing. The challenge is about meeting requirements that the regulatory agencies have decided must be met.

Fourth, instead of viewing compliance on a patchwork basis, companies are advised to invest in a comprehensive compliance system that will best meet overall requirements while noticeably reducing compliance costs. Too often, companies may tend toward focusing on the basics of what is just necessary for compliance. That approach, however, may actually result in not getting the appropriate permit, for example. Instead, what plays out, as noted earlier, are personnel not doing what they should and doing what they do not need to, and no permit.

The only way to capture all the necessary compliance information properly upfront, both task and operations oriented, is to institute a comprehensive system. And this system must be able to keep all information updated as regulations change, as permitting changes, as operations change.

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