Transfer of environmental liabilities in the oil and gas sector - WSP

Transfer of environmental liabilitiesWSP Environment & EnergyHoping for the best while preparing for the worstFor each party, there must be a balance between hoping for thebest while preparing for the worst with regards to environmentalresponse costs. Due diligence helps to narrow the spectrum ofrisk, however, it is extremely difficult to accurately characterizethe full extent of contamination through a Phase I or Phase II ESA;therefore, leaving the potential environmental liabilities on thetable. Environmental liability transfer solutions, such as WSP’s ownActive Transfer program, have the capacity to protect all partiesfrom the entire spectrum of potential risk.Our Active Transfer program, like any responsible environmentalmanagement program, requires a detailed environmentalinvestigation and analysis of an asset; identifying the extent ofcontamination, defining the program goals, outlining theoverall strategy, and setting the baseline against which theseller is protected, and the progress toward site closure ismeasured. Defining the value of the liability ensures the selleris not discounting the price of the asset too deeply, while thebuyer is getting a fair depreciated value for the quantifiedenvironmental impacts.Perception of Total Cost of Transaction by PartyPerception of Total Cost of Transaction by Party140120100How does environmental liability transfer deliver value?Liability transfer can be structured to enable multi-national oil andgas companies to unlock the potential value of underperformingproperties in their portfolios. WSP’s Active Transfer allows theseller to uncouple the asset from the environmental liability.By transferring the environmental liability to WSP, theunencumbered asset can be sold at fair market value. Thisprovides multiple benefits to the seller:1. The number of potential buyers can be expanded to includecompanies that can maximize the value of the asset even if theyhave no appetite for environmental management;2. The transaction can focus on the business. The negotiationof the asset value without the potentially uncertain range ofenvironmental liabilities is a much more focused discussion;3. The environmental liability is gone. There is no risk that an upsetin a buyers’ business plan will divert funds from the environmentalobligations to support operations, leaving the legacy to return tothe seller. No liability transferred to WSP has ever reverted backto a seller; and$ in $ in millions806040204. While WSP is managing the legacy liability, our engineers andgeoscientistsBuyer's Perceptionwill be able to discern any change in conditions dueto Seller's new Perception operations of the buyer, eliminating the expansion of theWSP's Projected Costrisk being managed on behalf of the seller and buyer.It is not just the seller that benefits:1. The buyer can focus on the investment without staffing forenvironmental remediation management;0Total PerceivedCost by PartyTotal Precieved Costby PartyClaimManagementClaim ManagementGroundwaterRemediationSoil RemediationSoilRemediationWasteManagementWaste Management2. The transaction can focus on the business. The negotiationof the asset value without the potentially uncertain range ofenvironmental liabilities is a much more focused discussion;Buyer's Buyer’s PerceptionSeller's Seller’s PerceptionWSP's WSP’s Projected Potential CostsNote: This graph illustrates how each party in a transaction viewsthe total cost of the environmental liability based on observationsfrom hundreds of transactions WSP has supported. We havethe tools to manage the program in a manner that ensures fairmarket value of the environmental liability transaction for allparties involved.3. The environmental liability is gone. The buyer does not haveto worry about reserves for liability that is being managed byWSP and funded by the seller; and4. While WSP is managing the legacy liability, our engineers andgeoscientists will be able to protect the buyer from potential claimsthat conditions, which were simply unknown at the time of thesale, are due to the operations of the buyer. The responsibility for“unknowns” will be WSPs, eliminating the burden of negotiationsand potential litigation.Page 2.t

TRANSFEROR OF OBLIGATIONSTransfer of environmental liabilitiesWSP Environment & EnergyTime is moneyTime is money, especially in asset transactions. There are manycases where the sale of a contaminated property has beenhindered by: uncertainty surrounding the exact value of liability;concerns about the adequacy of clean-up by a purchaser; and,the companies’ view of the likelihood of the regulatory agencyrequiring a site clean-up, if not already required. Active Transfer“un-hinders” and streamlines the process.With Active Transfer, we have been able to save clients tens ofmillions of dollars through efficiency and technical expertise byreducing the cost of conventional environmental remediation. Thescenario below shows the percentage of cost savings we deliveredto a client using Active Transfer for a site in the United States.THIRD-PARTYLAW-SUITSTECHNICAL SOLUTION REMOVES RISK & REGULATORY REQUIREMENTSMANAGEMENT OF CONTRACT & INSURANCE BY WSPTRANSFER BACKED BY INSURANCE PRODUCTSCONTRACTUAL TRANSFER TO THE ACTIVE TRANSFER ENTITYCLIENTSKNOWNENVIRONMENTALOBLIGATIONSCost savings result due to:• Implementation of alternative remediation technologies• Proper scaling of remediation system• Streamlined process through removing the opportunityfor disputes between parties• Increased efficiency for project initiativesGeneralized Cost Cost of ofRemediation using usingStandard Standard Practice PracticeGeneralized Cost Cost of ofActive Active Transfer TransferInfrastructurePotential Future CostInfrastructurePotential Future Cost0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Transfer FeesActive Transfer One-time FeesValue of Active Transfer (cost savings)Transfer FeesNote: Active These Transfer savings One-time Fees do not include the savings associatedwith Value divesting of Active Transfer carrying (cost savings) costs (to the seller), the reduction ofmanagement required (buyer), or the capital invested inremediation prior to the initiation of the Active Transferprogram. Therefore, the savings are potentially greater thanthe percentages shown above.How is the financial structure secured?In the current market conditions, the ability to quantify and manageliabilities and risks effectively is paramount. A properly structuredliability transfer can provide multiple layers of protection for boththe seller and buyer. Our approach, establishing a separate entityprotected by a trust, is capable of performing even in the eventthat all parties to the original transaction dissolve.UNKNOWNENVIRONMENTALOBLIGATIONSAbove: The layers of protection between our client andthe risks associated with an environmentally impaired asset.InfrastructureInfrastructurePotential Future CostPotential Future CostScenarios for Active TransferActive Transfer has the ability to bring a client peace of mind bymanaging their known and unknown environmental obligations,changes in regulation and limiting the exposure to third-partylawsuits. Active Transfer is a favorable solution in a number ofscenarios, some of which are described below:Transfer FeesTransfer Active Transfer Fees One-time FeesCHANGESINREGULATIONDeadlock Active Value of Transfer in Active a transactionOne-time Transfer (cost Feessavings)Value of Active Transfer (cost savings)Selling an environmentally-impaired property involves negotiationsbetween the responsible party(ies), regulators, buyers, auditors,and lawyers. Buyers often quantify the oversight and managementof environmental obligations significantly higher than expected,citing they are burdensome and distracting from the underlyinggoals of a company. By introducing a third party to accept theenvironmental obligation, clear ownership of the environmentalobligation is established to overcome historic liability chains.Furthermore, the indemnity is transferrable and can followownership of the property.Clean-up balance sheetsOil and gas companies typically establish financial reserves forenvironmental obligations at active, inactive or closed assets.Closed or inactive assets are associated with a negative cashflow due to ongoing environmental costs, carrying costs, taxes,insurance, utilities, and maintenance, among other expenditures.Active Transfer can eliminate environmental liability from thebalance sheet and cap the cost of managing the liability whiletransferring the risk. This is accomplished by WSP through accurateand fully auditable estimated reserves for environmental liabilitiesand added protection above the reserve estimates.Page 3.

Transfer of environmental liabilitiesWSP Environment & EnergyComplex portfoliosA property transaction, including a complex portfolio of sites,carries the risk of improper sale of environmentally impairedreal-estate and may put the seller at risk if the buyers are notcapable of responsible care. If the buyers opt not to addressthe environmental issues of a site, obligation may fall back onthe seller. Active Transfer can remove the environmental liabilityassociated with the transaction before, during, and after thetransaction has taken place, using tailored solutions to eachunique property in the portfolio.Active Transfer in practiceFacilitating Redevelopment in New YorkA site-specific transaction company (a Liability Transfer entity)was formed to manage, remediate, and assume liability forthe environmental conditions at properties located in aformer industrial section of a major city in New York State.The liability transfer structure used protected the sellers,the buyer/developer, and the future occupant of the propertyagainst liability for the transferred environmental conditionsat the properties.The Liability Transfer entity was individually established anduniquely tailored to address both the known and unknownenvironmental liabilities. The buyer and sellers deposited theestimated clean-up funds into two separate independentlymanaged trusts that were used solely for environmental workto be performed at the properties. More importantly, theLiability Transfer entity provided a seamless indemnity to theparties. The liability transfer structure provided a solution thateffectively addressed ongoing environmental obligations andenabled the parties to each focus on their core business andcontribute to the economic vitality of the community.A Certificate of Completion was received for the parcelfrom the New York State Department of EnvironmentalConservation. The project demonstrated the ability ofthe liability transfer process to align the interests of thesellers, buyer, developer, municipal government, and stateregulatory authority.Demonstrated successThe ongoing divestiture of underperforming assets seen in theoil and gas industry will be accelerated by environmental liabilitytransfer solutions. In place of a limited number of potential buyersand slow progress toward closure caused by archived liability, aprogram such as Active Transfer opens up the market by settinga value on responsibly extinguishing the liability independent fromthe property transaction. Oil and gas companies will benefit fromthis freedom to transact the asset at a fair market value, confidentthat their environmental liabilities will not return to surprise themin the future.Contact UsFor more information on this subject and about WSP’sservices please contact any of our specialist advisors:John Black, Executive Vice PresidentT. 703-318-3913E. john.black@wspgroup.comSteve Kretschman, Vice PresidentT. 412-604-1040E. steve.kretschman@wspgroup.comCraig Anderson, Senior Technical ManagerT. 612-343-0510E. craig.anderson@wspgroup.comUNITEDBY OURDIFFERENCEwww.wspenvironmental.com/usa