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Environmental due diligence is a form of proactive environmental risk management typically conducted before purchasing, selling, or leasing a property or business. Due diligence investigations can help prevent costly environmental liabilities by identifying them early in the transaction, thereby protecting all parties’ interests. There is an increased opportunity for significant cost-savings when the hired consultant accounts for tangential aspects during their investigation.
Environmental due diligence encompasses tangential aspects that are not the primary focus of the investigation. Aspects such as these may indirectly impact the environmental risks or liabilities associated with the property or business or the transaction’s overall feasibility or value.
Tangential Aspects of Environmental Assessment: A Case Study
A major oil company requested environmental due diligence for a large property acquisition. The property acquisition was part of a larger company acquisition and involved hundreds of oil and gas well locations, facilities, tanks, and equipment. It was necessary to modify the Phase I assessment for the work. Of the hundreds of well locations, 50 were chosen for Phase I work and field verification. According to the consultants, any environmental liabilities exceeding $2 million must be identified during this evaluation. Phase I examined the locations of wells for potential environmental liabilities, such as petroleum releases, but did not examine the wells themselves. Even though the consultants were experts in evaluating the condition of oil and gas wells, the oil company addressed this aspect of the investigation in-house. The company did not consider the tangential legal implications, liability for plugging costs, potential impacts on property value, and potential penalties for non-compliance with regulations.
Many wells excluded from the consultants’ due diligence were over 50 years old and out of operation. The company’s in-house investigators did not perform a field review. The result was an underestimation of the number of wells that required plugging and their associated costs. The estimate for plugging a well was between $20,000 and $30,000 per well. The plugging costs for this transaction were much higher, ranging from $80,000 to $120,000 per well, resulting in a $42 million increase. The oil company made a mistake in thinking the plugging costs were insignificant. Environmental due diligence should always include tangential factors.
Additional examples of tangential aspects of environmental due diligence might include the following:
The information obtained during or upon completing an investigation can inform negotiations and contractual arrangements between the parties involved in the transaction. Environmental consultants could spot some issues big enough to kill a deal. Other issues may allow buyers to adjust the purchase price or negotiate an indemnity to shift financial responsibility for environmental risk. It may also be possible to purchase environmental insurance for sufficient financial protection.
The specific steps involved in environmental due diligence depend on the type and scope of the transaction, as well as any applicable regulations or guidelines. Consult an experienced environmental professional to ensure that your due diligence process meets all your needs and requirements. Find out more about SCS’s environmental due diligence services.