On December 14, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA), a division of the Department of Transportation (DOT), issued an Interim Final Rule (the "IFR") to implement safety standards for the design and operation of underground storage facilities used in the interstate and intrastate transportation of natural gas.  81 Fed. Reg. 91860 (Dec. 19, 2016).  The IFR incorporates industry-recommended practices into mandatory federal regulations in furtherance of the agency's statutory obligations under the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016 ("PIPES Act").  This alert describes the IFR and identifies some important implications for natural gas storage facility operators and market participants.

Wholesale storage facilities are a critical component of the natural gas transportation system serving the United States.  One hundred ninety-seven underground storage facilities are part of the pipeline network transporting gas in interstate commerce subject to federal regulation, while another 203 facilities are part of intrastate pipeline networks primarily regulated by the states.  Storage facilities have recently come under heightened public scrutiny in response to an enormous leak from the Aliso Canyon facility in California in October 2015.

The new standards take effect on January 18, 2017, although PHMSA is accepting comments on the IFR until February 17, 2017. 

Requirements of the IFR

PHMSA issued the IFR as part of a statutory mandate in Section 12 of the PIPES Act, which directed PHMSA to issue minimum safety standards for underground natural gas storage facilities and, in doing so, to consider consensus standards for the operation, environmental protection, and integrity management of underground natural gas storage facilities.

The IFR establishes for the first time mandatory technical standards for subsurface facilities at storage sites (including wells, wellbore tubing, and casing) by incorporating into the Pipeline Safety Regulations at Title 49 of the Code of Federal Regulations two sets of Recommended Practices published in 2015 by the trade association American Petroleum Institute (API).  The Recommended Practices will become mandatory standards directly governing gas storage on the interstate transportation network subject to federal jurisdiction.  The Recommended Practices will also provide a baseline for gas storage safety standards on intrastate transportation networks, whether those storage facilities are inspected by PHMSA or by state regulators annually certified by PHMSA to oversee storage safety.

PHMSA's new storage safety standards amend 49 C.F.R. §§ 191-192.   Facilities constructed after July 18, 2017, must comply with the new standards immediately upon being constructed, while existing facilities have until January 18, 2018 (12 months after the IFR becomes effective), to comply.    

Surface piping at underground storage facilities has long been subject to PHMSA's Pipeline Safety Regulations but facilities below the surface − known as "downhole facilities" − have been largely unregulated.  This regulatory gap was brought to the fore by several recent major leaks of natural gas, most notably the failure of a subsurface well casing at Southern California Gas Company's Aliso Canyon facility in the Los Angeles area, which allowed an estimated 4.62 billion cubic feet (Bcf) of natural gas to escape.  PHMSA notes in the IFR that the failure of an underground gas storage facility can lead to explosions and uncontrolled burns, threats to the lives and safety of facility employees and neighboring residents, significant environmental damage associated with large-scale releases of methane, and disruptions to the reliable transportation of the nation's energy supplies.

To address these serious threats, PHMSA has incorporated by reference existing industry storage safety practices into mandatory federal regulations.  This approach was recommended as an urgent first step by the Interagency Task Force on Natural Gas Storage Safety in its Final Report issued October 2016.  The Task Force − led by the Department of Energy and PHMSA − was convened in the aftermath of Aliso Canyon, comprised of numerous federal agencies, and held workshops to solicit input from industry representatives, environmental organizations, state officials, and other stakeholders.  The Final Report specifically recommended immediate adoption of two Recommended Practice documents developed in 2015 by API in a stakeholder consensus-building process.

API's Recommended Practice 1170 is an 85-page manual that sets forth detailed technical engineering requirements for the design and operation of solution-mined salt caverns used for natural gas storage.  There are approximately 31 such facilities in the United States.   Recommended Practice 1171 is a 50-page manual that similarly sets forth detailed technical engineering requirements for the design, construction, and operation of facilities that use depleted hydrocarbon reservoirs and depleted aquifers to store natural gas.  Depleted hydrocarbon reservoirs constitute more than 80 percent of the nation's underground gas storage facilities; many are decades old and use equipment that is increasingly unable to withstand the high pressures at which natural gas is stored.

The IFR builds on prior PHMSA guidance on monitoring, verification, and assessments to ensure storage safety, most recently in an Advisory Bulletin issued in February 2016.  In issuing the IFR, PHMSA concluded that the API Recommended Practices should be the minimum mandatory standards for a wide range of construction, maintenance, risk-management, and integrity-management procedures at underground storage facilities.  In the IFR, PHMSA states that if an operator fails to take any measure recommended by the API Recommended Practices, it should have subject-matter experts justify in its written procedures why the measure is impracticable or unnecessary. 

In addition to adopting API Recommended Practices, the IFR revises PHMSA's existing reporting requirements.  Underground storage facilities must: report findings of certain conditions that could compromise structural integrity or reliability; report safety-related incidents (involving a release of gas, death, or serious personal injury or property damage) as soon as practicable but not more than 30 days after detection of each incident using DOT Form PHMSA F7100.2; obtain an Operator Identification Number through the National Registry of Pipeline and Liquefied Natural Gas (LNG) Operators; and submit annual reports using DOT Form PHMSA F7100.4-1 (beginning on July 18, 2017).

Implications of the IFR

The IFR is evidence that federal regulators are serious about quickly implementing stringent safety regulations to prevent further failures of underground natural gas storage facilities.  PHMSA has adopted a consensus-driven approach whereby regulated entities work with industry trade associations and other stakeholders to develop best practices.  Pipeline and storage safety regulation will continue to be an exercise in cooperative federalism whereby state authorities exercise their traditional roles in the oversight of intrastate facilities against a backstop of a minimum uniform set of federal standards which directly apply to interstate facilities under federal jurisdiction.  

The IFR sets forth an ambitious implementation timeline that we expect many market participants will find challenging.  PHMSA indicates that it and its state partners will inspect facilities to enforce the requirements incorporated by the IFR.  To avoid enforcement actions, owners and operators of underground natural gas storage facilities − both on interstate and intrastate pipeline systems − should review carefully API's Recommended Practices 1170 and 1171 and immediately either take steps to ensure they satisfy the design, construction, and operational criteria therein or revise their compliance programs to document where those practices are impracticable or unnecessary.  Both sets of Recommended Practices require, among other things, the lifetime maintenance of certain records. 

Owners and operators of storage facilities should also review carefully the Final Report of the Interagency Task Force on Natural Gas Storage Safety and should be prepared for stringent oversight by federal and state regulators to continue in this area.

PHMSA encourages stakeholders to actively participate in the continuing development of its natural gas storage safety program by submitting comments containing relevant information, data, or views.  Comments are due on February 17, 2017.  Any entities potentially affected by the IFR should consider submitting comments, including suggesting reforms or addressing the technical feasibility of the API Recommended Practices, the expected compliance burden, and expected economic impact.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved