Insights into Common Due Diligence Compliance Shortcomings: Part Two

Industrial Oils: SPCC and Used Oil Management

Continuing with our four-part mini-series on Common Due Diligence Compliance Shortcomings, this article is going to focus some common non-compliance issues (NCIs) we find related to oil management.

The goal of this mini-series is to expand upon typical compliance short comings that are identified as part of a Limited Environmental, Health & Safety (EHS) Compliance Review (LECR). LECRs are most commonly conducted during the due diligence period in conjunction with a Phase I Environmental Site Assessment. Conducting LECRs can be beneficial in mergers and acquisitions (M&A) transactions that involved the purchase or sale of facilities that engage in light industrial or manufacturing operations with possible compliance reporting obligations or permitting requirements. A LECR sometimes identifies material issues that require specific management in purchase and sale agreements to resolve; however, more often we see issues that are low risk and relatively easy to correct, such as those issues discussed in part of this mini-series.

Spill Prevention, Control and Countermeasure (SPCC)

The SPCC regulations apply to all facilities that store, handle, process, gather, transfer, refine, distribute, use or consume “oil” or “oil products”. The original regulations were published in 1973 as part of the Clean Water Act (CWA) with regulations aimed at preventing oil discharges to navigable waterways and establishing procedures, methods, and equipment-related requirements for facilities to develop and implement SPCC Plans.  

The first thing to consider is: what is an “oil” under the SPCC regulations? Most people think of oil as being petroleum-based, but under the SPCC regulations, oil products include both petroleum and non-petroleum oils. Non-petroleum oils include animal, fish, vegetable, and nut oils, fats, and greases. This is a fairly all-encompassing definition of oil, and in LECRs, we often find facilities that do not realize certain materials they store at their facility fall under the SPCC definition.

The SPCC regulations require a written plan (called an SPCC Plan) for non-transportation related facilities (i.e. facilities that do not store or transport oil for commercial or industrial use) that could reasonably be expected to discharge oil into “navigable waters or adjoining shorelines [of the United States]”, and that store oil in quantities that exceed certain thresholds. The definition of a navigable water of the United States has been the subject of much debate over the past several decades and could be the topic of another miniseries – because the definition can include stormwater ditches and intermittent streams, most facilities are typically considered to have a potential to discharge into a navigable waterway.

Therefore, we are going to focus on the SPCC thresholds: namely, either 1) a total aggregate aboveground oil storage capacity greater than 1,320 gallons; or, 2) total aggregate capacity of completely buried underground storage tanks (USTs) greater than 42,000 gallons of oil.

When calculating the total aboveground oil storage capacity, it’s important to remember that capacity is the key word in determining whether the threshold has been exceeded – in other words, an empty 1,500-gallon aboveground storage tank (AST) that previously held diesel fuel and has not been taken out of commission permanently would count towards the threshold determination. Fortunately, the SPCC regulations do allow you to only count containers that are 55-gallons or greater in size. Below are some “rules of thumb” for quickly determining if your oil storage might exceed the SPCC threshold.  

It’s important to also note that machine reservoirs and electrical transformers may also contain oils in quantities exceeding the SPCC thresholds. These are considered “containers” unless they are permanently closed. As with drums, any of these containers that are less than 55-gallons in capacity would not need to be counted.

In BBJ Group’s experience, the most common NCIs we see related to SPCC regulations include:

• Being unaware that oil storage in 55-gallon drums and plant machinery could exceed the SPCC threshold – e.g., storing maintenance oils in less than 24 drums but also having several hydraulic oil reservoirs with capacities greater than 55-gallons;
• Not counting certain materials stored onsite that would be considered an oil under the SPCC regulations – e.g., soybean oils at a food production facility;
• Not including used oil as an “oil” when determining oil storage capacity;
• An inaccurate inventory of applicable containers – e.g., not including transformers or elevator reservoirs; and/or,
• Lack of compliance with an existing SPCC Plan – e.g., not including all oils or not conducting required inspections.

While there are other aspects of SPCC compliance we see (e.g., stale SPCC Plans or lack of secondary containment), the above are the most common we run into. They can be easily addressed at relatively low cost and are typically managed post-close in a transaction.

Used Oil Management

Used oil is no longer always considered a waste material that must be disposed of – it can be refined several times over to produce oil of similar quality to virgin oil products. As such, in 1992, the United States Environmental Protection Agency (USEPA) established the Used Oil Management Standard [40 CFR 279] to encourage used oil recycling and to provide guidelines for facilities that choose to recycle their used oil instead of disposing of the oil as a fully regulated Resource Conservation and Recovery Act (RCRA) hazardous waste. Under these rules, recycling used oil means fewer requirements, less recordkeeping, and lower fluid management costs. However, there are certain management standards that facilities must follow to demonstrate compliance with these more flexible regulations.

USEPA intended these management standards to be based on common sense and good business practices to encourage more facilities to consider recycling of their used oil. In fact, today most facilities do choose to follow these standards rather than the more burdensome hazardous waste regulations. Although the USEPA’s rules are used as a model for many states, several states (cough, cough…California) treat used oil as a hazardous waste and require a bit more management. Facilities in these states may have additional requirements such as record-keeping, reporting, and container management.

The USEPA’s requirements for storing used oil are fairly simple and generally follow “good housekeeping” methods, including the use of “Used Oil” labels on containers and keeping containers and tanks in good condition (i.e. no rusting, leaking, or deteriorating). Unlike hazardous wastes that have accumulation time limits, USEPA considers used oil that will be recycled to be a commodity, so to facilitate economic hauling and recycling of used oil, there is no federal regulatory accumulation time limit.

Despite the relatively straightforward requirements for managing used oil, we still see some common NCIs, including:

• Keeping containers closed with latched drum lids and funnels; and
• Proper labeling of containers as “Used Oil”.

While very easy to correct, these simple NCIs are considered violations of the Used Oil regulations and can result in violations for the facility if inspected. One of the benefits of having the LECR conducted as part of environmental due diligence is that these seemingly minor issues can be caught and corrected.

Summary

Oil management can be managed proactively through proper planning and container management. By ensuring a facility is in compliance with oil management regulations, it can help set the stage for compliance in other areas because good housekeeping, labeling, and record-keeping are the foundations of both SPCC and used oil management requirements. Using the LECR to identify these issues early on – and before purchasing an operating business – will help ensure that facility personnel are aware of environmental management issues and may affect other areas of operations in a positive way, which is always good for the bottom line.