The development of new oil and gas in various shale plays around the U.S. has led to a rise in the number of transfers and acquisitions of pipeline assets. Prudent operators have always requested and reviewed documentation as part of their due diligence in making acquisitions, but it is becoming increasingly important that certain records be located during due diligence or factored into the transaction if such records are lacking and must be recreated. Decision makers involved in pipeline acquisitions may only involve pipeline safety managers or counsel late in the process, without sufficient time to include the issue of records as part of the transaction. That can be a costly mistake.
Construction and manufacturer records, hydrostatic pressure test records, computations of maximum allowable and/or operating pressure limits and class location reviews (for natural gas pipelines) are all now routinely reviewed during government inspections. Those records are also given close scrutiny after any incident or during any litigation. PHMSA regulations clearly require that certain records be maintained for the life of a pipeline (see 49 C.F.R. Parts 192.517; 195.310), but records are often lost or misplaced over time, as the result of transactions, office moves, etc. In addition, as a result of several pipeline incidents, PHMSA has redoubled its efforts to inspect for records that are required to be maintained or that the Agency expects that a prudent operator should maintain. For example, with respect to natural gas transmission pipelines PHMSA now requires operators to submit annual report data on pipeline mileage that lacks verifiable records (see Pipelinelaw post here). More recently, PHMSA advised operators to validate material and strength test records and prepare a plan to obtain missing material documentation in advance of undertaking flow reversals, product changes and conversions of service (see Pipelinelaw post here).
It can be very expensive to have to recreate records no longer maintained (e.g., conducting new pressure tests to validate operating pressures). Civil penalties for not maintaining (or recreating) records can also be extremely costly. Consequently, operators should consider these issues in any transaction and consider the implications to the overall cost of an acquisition both in terms of time, money and compliance risk.