by Cal Chapman

Last month at the Texas Eagle Ford Shale Expo in Corpus Christi, I heard several discussions about big assets changing hands. Thanks especially to my environmental engineering background, I have many times worked with real estate professionals, attorneys, and developers, on big commercial deals where “due diligence” was being performed. What is “due diligence?” 

To start the story, let’s talk about a “for instance” property: it’s been a little strip center for 30 years, with a dry cleaning operation and a convenience store as two of the tenants over that time. The seller wants to make a sale, at the best (highest, of course!) price the market will offer. The buyer wants to get it at a reasonable price, AND know before the closing if there are any “un-obvious” and unreasonable risks involved. In the perfect world, and the perfect transaction, the seller is supposed to accurately describe ALL of the conditions present that might pose unusual or unreasonable risk, and tell the operating history he or she knows. In my opinion, the principle of “full disclosure” ought to mean that the entire history is described no matter what. And one major point to always keep in mind: if you buy the property without learning of the risk (or properly attempting to learn), you may be “joined” into that liability forever!

Of course, the real world doesn’t often work in “full disclosure” mode. We all are guilty, at least sometimes, of slanting the story to make ourselves look a little better, or make the strip center look a little more valuable, and a little less risky. If the convenience store had underground gasoline storage tanks for many years, and I am the seller, I may describe the on-site operation as “just great, never any spills or leaks.” And for a dry cleaning operation? Did they use cleaning chemicals on site, or did the clothes get sent to an off-site cleaning facility? Did it start out in 1985 with on-site chemical use, and then a few years later that tenant decided to “job out” the actual clothing treatment? What kinds of chemicals were used, and how much volume, for how long? Where did used or spent chemicals go? Most of the sellers I meet answer, “I don’t know,” or “Oh, it was a great operation, really clean!”

For this kind of commercial real estate deal, we are often asked to perform a “Phase I Environmental Site Assessment.” This is a study of the property, intended to write up the environmental history of the particular site, and the neighboring properties! Yes, it’s possible that a neighbor has actually caused environmental damage to the property we are evaluating! So this study documents all of the historical information that can be learned about the site and the area, and there are MANY sources to comb for this data. We can search old maps and aerial photos, regulatory registration databases that show old gas stations, landfills, manufacturing plants, and the like. We may find old city directories, which were used for advertising. They list property addresses and business names, year by year, often from the 1920’s through the 1970’s. And, by the way, another element of the study is to declare “data gaps” – those time frames for which NO information shows up on the property we’re researching.

Once we have all that data pulled together and understand what it appears to describe, it’s time to walk the property and the neighborhood in detail. It’s time to interview people who are knowledgeable about this little strip center, its tenants over the years, and what’s been happening in the local community. It’s time to learn if the structure, and utilities, and other property improvements are in good shape, or if they’re really run down. Once we’ve done all that sleuthing, the report is written, and we make recommendations about any risks that might need further study. We might recommend a “Phase II Environmental Site Assessment” with actual sampling, and laboratory analysis of those samples. What might we sample for? There could be gasoline residues in soils around buried fuel tanks and product dispensers. It might be that solvents from dry cleaning got dumped out the back door into the grass or the alley for a time. There might be high concentrations of lead in an old exterior paint on the building, or the water tank, or the canopy.

The commercial strip center is a big real estate deal in some people’s eyes. To others, it’s a pretty small asset.  For comparison, what if the asset is an Eagle Ford Shale production lease? It could easily include oil and gas wells, water wells, well pads, pipelines, and a processing facility or terminal.

What if the asset is a petroleum refinery? Or what if it’s a terminal, for storage and shipping of petrochemicals, fuels, fertilizers, or other hazardous but valuable materials? The same principles of due diligence should be applied, to check out all existing conditions of the facility. Environmental factors, physical and mechanical factors, the neighbors – all of these need checking, of course. But there are so many other elements to evaluate.  For the Eagle Ford production, somebody needs to review the minerals lease and terms involved.  The same needs to be done for any surface rights leases. All environmental factors should be reviewed. 

For a complex facility, what about the operating permits required by various regulatory agencies? Are any pollution control, or water treatment, or electrical system improvements needed to stay in compliance with regulatory agencies? Are there any regulatory inspections or enforcement actions “hanging over” this business Does a change in ownership mean you have to get a new “Certificate of Occupancy” for an operating business?! If pipelines are included, what inspection information is available to say they’re being operated right, protected against corrosion, kept in compliance with regulations?

One of the hardest parts of performing due diligence is to check out that asset that is mostly underground, can’t be accessed, or otherwise is very hard to properly For big, above-ground bulk storage tanks, nobody wants to take them out of service, empty the product, and then do a thorough cleaning, so I can climb inside with a flashlight and look around! Instead, we must rely on review of the operating records, look over this asset from the outside, check the plans for how it was supposed to be built (if plans are still available), and then maybe specify some additional testing. We want to interview operators and engineers on staff, and see if those people can give us a good feeling about the equipment, and the processes being used. In many cases, it’s the quality of the documentation, and the way in which the on-site people speak, that gives me a good feeling, or a not-so-good feeling, about the plant, or the equipment, or the pipeline, or the terminal.

This due diligence work should be done to check environmental conditions, in every case.  Our approach always asks questions about air, about water/wastewater, and about waste management. These are major regulatory areas of concern, in broad categories. But just as important is to check out the physical condition of buildings, of equipment, of all the process areas. Somebody with good knowledge has to dig into written records, into all the data that is supposed to be filed under this permit, or that production report.

It is really important that a qualified, third-party consultant be brought in to do this kind of work. The seller is almost never in charge of this process. Most often the buyer asks for a feasibility or option period of time, maybe a month after an earnest money agreement is signed (for smaller deals), and these studies are done inside that first month. When the buyer gets information that supports the deal, then everyone proceeds toward transaction closing. If the study points out some questions, or even finds some hazardous condition that was not known before, the buyer may say, “no more” and terminate the contract.  Or the two sides might re-negotiate the price and amend the deal.

So I said a qualified, third-party consultant is needed to do the review.  Who is qualified to perform the kinds of assessment being described above?  In a smaller deal, with a smaller property or set of assets, it may be one person with a lot of education and experience in the right field(s), who provides the expertise. But in many cases, it is a team of people, each of whom brings a different type of background. For me, I want to see very experienced, deliberate, and open-minded people on the team, who know the type of operation involved, are familiar with how it is regulated and permitted, and who can capably interview folks with direct site and vicinity knowledge.

Do you know the biggest problem I see in due diligence? The prospective buyer usually isn’t willing to pay enough for the due diligence work, to get the protection these studies should provide. Going back to the commercial strip center example, if a bank is providing financing for that transaction, it will almost certainly require a Phase I assessment, as part of the deal.  Now, the good companies with very experienced “assessors” will charge several thousand dollars to do the study, the assessment. But there are plenty of other companies who will offer to do it for $2,000, or $1,500.  In the Phase I world, “you get what you pay for!”  I urge both the prospective buyer AND the banker to find a strong consultant for this type of study. Saving money on a “risk assessment” usually brings more risk!

There are some great industry-standard documents we use, built by huge efforts from many talented and experienced performers. The main standard for Phase I assessments is from the American Society for Testing & Materials (ASTM). It is referred to as E1527, and was just updated in 2013. I recommend a review of its table of contents or outline, which can be found by web search pretty easily. Interestingly, there are quite a few things a Phase I is not designed to study, including mold, asbestos, lead-based paint and some other things. These are project elements which your assessment professional should be able to address, maybe by teaming with other qualified professionals as needed.

The performance of “due diligence” work is very interesting and intensive. I often describe it as “detective work” for the non-law-enforcement person! It takes imagination and prudence, at the same time. Since I am also a student of history, it is fun and valuable to build the historical use “story” of a property with attention to building architecture, to the types of utilities observed (old electrical wiring, for instance), even the sizes of pipes, and the materials they’re made of. And it is amazing how much old information is sometimes found in fire insurance maps, city directories, almanac entries, and other historical documents!

Due diligence is a form of detailed inspection. As my old friend said, “don’t EXPECT what you don’t INSPECT!”  And especially when you’re going to invest your hard-earned money in a new asset, please take the time and attention to learn its history, find out what is good AND not so good about it, BEFORE YOU CLOSE THE DEAL!

Cal Chapman is co-founder of Chapman Engineering, which began business in fall 1988. He is a licensed “Cathodic Protection Specialist” through the National Association of Corrosion Engineers (NACE, now called NACE International), and is a licensed professional engineer in Texas and New Mexico. Chapman Engineering provides cathodic protection, AC mitigation, coatings and corrosion protection specifications, and other engineering services. The company performs environmental compliance, assessment and remedy services in oilfield, petroleum wholesale, and industrial settings. In-house staff includes engineers, geologists, corrosion technicians and environmental scientists. Please contact Chapman Engineering at 800-375-7747.

by Cal Chapman

As I wrote in the previous issue, the Eagle Ford Shale development is causing a huge construction boom in infrastructure, pipelines, and plants. Our business is in the corrosion protection and environmental compliance, assessment and cleanup industries. It’s difficult to admit, but most of the problems we are asked to solve can be called “self-inflicted wounds!”

What do I mean by that? In the case of corrosion issues, we find most of the problems to be man-caused. They’re not just “luck of the draw” or Mother Nature inflicting “acts of God.” The corrosion hole in a pipe, for instance, was very often started by some person not doing his or her job right. An environmental contamination problem may begin as somebody cross-threads a fitting, or attaches two different metals to each other. A product leak results, and then the release gets discovered, and then a lot of money is spent to clean it up, investigate how widespread the damage is, and so on. Hopefully, nobody gets hurt in the whole process, or that multiplies the negative consequences.

What can be done about all this? We preach INSPECTION! This should be done during construction, when repairs are being done, and even when maintenance and other fairly mundane procedures are being performed.

There are so many work areas that need attention. As just one discussion point, if a new plant or facility is being designed and built, the designers had better do their work well. The materials and equipment have to be ordered and brought to the site. Good craftsmen, contractors, and construction managers had better be “on the job.” But on top of all that, QUALIFIED AND EXPERIENCED INSPECTORS need to be ON THE JOB! Here are a few qualifications for inspectors, in my opinion:

1. An inspector has to be properly trained in his or her field of expertise, including some certification by a well-known, independent institution. Most trades have this sort of independent training and standards-writing body, and the trades-people know which organization is strong for a particular trade;
2. That inspector should have work experience in the field of expertise, too, IN ADDITION TO the book and classroom training. There are people who excel at classroom stuff. Do they have the work time in the field, which has taught them there are a whole bunch of problems which don’t fit the classroom examples? That there are a lot of answers that fall in the huge gray area between “it’s clearly this way” and “it’s clearly that way?”
3. The inspector has to be INDEPENDENT, and have the AUTHORITY to shut down a crew doing bad stuff, or correct a work practice that’s not right. We so frequently see an inspector who is brought in by the contractor, under that bid package, because the “specs” say it should be that way. What is the motivation for this inspector to “call a foul” on the contractor’s people, or a subcontractor? He works WITH them, FOR them! Then again, the inspector may belong to the operating company, who’s paying for the whole project. He or she is the “company man.” And yet, he or she is still often motivated to “get pipe in the ground,” and not necessarily make sure all the pipe coating is inspected for damage. When everyone is in a hurry to get the project done, the inspector takes a lot of heat for any holdups, in the face of that driving motivation. The inspector needs a strong sense of right and wrong, and the strength of personality to say “STOP” when everyone wants it to keep going! (In that case, the company really ought to hire a completely independent inspector, with clear authority to stop the job based on clear specifications, procedures and industry-standard test methods being used.)

So what is the cost of NOT doing good inspection? Every time there is an accident related to construction, investigations dig into the “root cause.” Those construction accidents are often pretty high-visibility and get a lot of attention. Contrast that with the leak from a tank or a pipeline a few years after it was built. You no longer have a lot of people working on the site, day to day. The story may not make the news. But if it is a leak, and the system gets shut down, and a product spill has to get assessed and cleaned up, we are probably looking at tens of thousands, or hundreds of thousands of dollars in costs. If somebody does get hurt because of it, cost just went up a whole lot more. That is when the cost of inspection looks like a great investment, in comparison to what just happened. But it’s a few years too late.

Not enough people take this line of thinking and turn it the other way. If you do perform good inspection, you are most likely going to operate that asset for a lot less money, and at a lot lower risk, over its lifetime. What is that worth in dollars? I would love to see studies done that show good-quality inspection DOES pay back as a good investment. We don’t measure what never happens...(think about that.)

Over the years, my selling technique has basically been to tell people, “use our leak detection process” or “use our corrosion protection approaches” and we will save you money by preventing leaks, or minimizing the sizes of problems if they occur; we will help you sleep better at night because of that. But I could not measure them actual dollar savings in accidents avoided, releases that never happened, and product that stayed inside the tank or pipeline. It’s an intuitive argument that makes sense, if I can just get somebody to think about it. Now, how much budget they may be willing to steer to this approach is another question . . . and that’s a continual balancing act: how much money to spend on “preventive maintenance” and on up-front inspection, versus saving all that money and betting that nothing bad will happen.

You know, there is one other problem area with inspection. Finding good inspectors is not all that easy. If they are good, they are usually very busy. And we don’t find a lot of young people entering the work force who say, “I want to become an inspector, a quality assurance specialist.” And yet, in every field, for the sake of health and safety, for the security of the structure or facility owner and operator, and even for the contractors and their personnel to perform better-quality work job by job, we NEED GOOD INSPECTORS.

--

Cal Chapman is co-founder of Chapman Engineering, which began business in fall 1988. He is a licensed “Cathodic Protection Specialist” through the National Association of Corrosion Engineers (NACE, now called NACE International), and is a licensed professional engineer in Texas and New Mexico. Chapman Engineering provides cathodic protection, AC mitigation, coatings and corrosion protection specifications, and other engineering services. The company performs environmental compliance, assessment and remedy services in oilfield, petroleum wholesale, and industrial settings. In-house staff includes engineers, geologists, corrosion technicians and environmental scientists. Please contact Chapman Engineering at 800-375-7747.

by Cal Chapman

The Eagle Ford Shale development is causing a huge construction boom in infrastructure, pipelines, and plants. But it’s also causing big growth in water needs and power needs, and it’s introducing some interesting environmental and corrosion factors.

How do we measure growth? Well, we can certainly try and count the number of jobs available in a certain town, or county, and compare that with past years and decades. For each town and county, sales tax collections are tracked and compared. Recent studies show pretty clearly that sales tax revenues in counties affected by Eagle Ford growth are at least ten times greater than what was the case five years ago. As for employment, some estimate that 100,000 new jobs have come to South Texas thanks to the Eagle Ford Shale. These new people, new jobs, and new revenues also multiply the growth rate, with the need for more store clerks, schoolteachers, policemen, and so on. And that amazing growth strains the existing infrastructure, for sure.

So what is infrastructure? It is roads. It is power lines. It is water and wastewater systems. It is natural gas distribution piping in the towns, and propane gas systems in RV parks. It is cell phone towers and other radio and communication antennas. Some will even consider it to be school systems and local government functions like fire and police and courts and building inspection. We hope that the water and sewer utilities, the electric power generation and distribution companies, the state and county road authorities, and the telephone and data carriers are all focused closely on this growth, with good planning and budgeting and construction management.

Environmental issues that accompany growth can be as simple as, “Where do you find new water supply? Where does a community landfill its solid waste? Is the useful life of the landfill going to change with growing disposal needs? What happens with a wastewater treatment plant that’s now too small?” The good news is that expanding revenues for communities can help to tackle these kinds of issues. But what if new water supply is not readily obtainable? What if a city has to try and buy new land for solid waste disposal – for a new landfill? And then get the regulatory permit work done? These can be painful, expensive tasks to take on.

We also see a lot more corrosion and potential for corrosion troubles thanks to these expansions of infrastructure. As mentioned last month, a lot of South Texas soils will quickly damage exposed steel thanks to high salt contents and lots of clays. What does steel have to do with growth? Think of bridges for roads and railroads. Think of high-voltage power line towers. Think of the pipelines, not just for oil and gas, but for water. Yes, many of those water lines are now made of plastic. However, the valves, fittings, and lots of other parts are made of steel or ductile iron, of bronze or brass, or of other metal alloys. Every time a metal is used, it needs to be coated if it’s going into contact with soil or water. Even nightly dewfalls on bare metal above ground can cause substantial corrosion attack.

When two different metals are used, and they’re put into direct contact with each other, oops – that has just become a battery, discharging energy! We call this “dissimilar-metals corrosion,” and it can quickly turn a piece of steel pipe, which has been thread-connected, say, to a brass valve body, into a rusted, leaking mess! Whether the product inside is water, or wastewater, or oil and gas from production, this type of condition MUST be avoided! And yet we sometimes see otherwise knowledgeable “I&E” (instrumentation and electrical) technicians connect stainless-steel instrument tubing directly to carbon steel pipes. This is a no-no, guaranteed to cause the regular steel to corrode, especially if most of this equipment is buried in the soil. The same type of problem is often found in city natural gas distribution systems, when a technician inadvertently uses a brass fitting in what is otherwise an all-steel plumbing setup.

Yet another corrosion problem occurs when new steel pipe is added to an existing steel system. Unless cathodic protection and good coatings are put in place, the newer steel pipe – because it holds more energy in it than the existing steel – becomes an anode, and corrodes preferentially when it is “touched off to” the older steel pipe. Just that apparent little difference in “old pipe” to “new pipe” makes the same type of “dissimilar-metal” corrosion process occur.

Another thing to hone in on is this:  when the small city or utility district, or electric cooperative, now growing like crazy, contracts to build an expansion of the water treatment plant, or to extend a wastewater or power line, we want to see good project design, followed by good construction and inspection practices, following by good ongoing maintenance and corrosion protection practices. That’s true for the school, the pipeline, the new water line, the new propane tank . . . you get the picture. It is our considered opinion that spending a little more money on this design and construction, and followed by a little more money on preventive maintenance over time, results in MUCH LONGER SYSTEM LIFE, and much less cost to operate, and maintain, and repair every system over its useful life. Oh, and let’s keep training in mind, too. The operators of all these systems need good training in their fields of expertise – another valuable investment!

There’s another type of corrosion problem, related to steel pipelines and high-voltage power lines that needs attention. As newer pipelines have been built, and been given really good-quality coatings, these pipelines can actually “generate” and hold electricity on them, thanks to high-voltage power lines being nearby. Referred to as “AC induction,” this phenomenon may create both a safety hazard and a potential for external corrosion on the pipelines.

We are very concerned about pipeline corrosion for yet another reason. If new structures are built, and coated, and then buried in the earth or put underwater, it’s not every part of the structure that comes under corrosion attack. It’s only the parts that got coated poorly, or where maybe the coating got scraped off as the pipeline was laid into the ditch. If we only expose a small part of the structure to Mother Nature’s attack, she gets to focus all the electrochemical reactions in that one local area. With a lot of metals, and steel is the most common one used for most of the infrastructure we’re talking about, this results in formation of a pit. And everyone can picture what a pit represents:  an ever-deepening hole, maybe not that wide, but causing a wall to get thinner and hold less pressure, or a tank floor that ends up springing a leak. These things happen. And that’s why we stress the need for inspection during construction, for good coatings when they can be used, and for cathodic protection of those metal surfaces for the life of the system.

Cal Chapman is co-founder of Chapman Engineering, which began business in fall 1988. He is a licensed “Cathodic Protection Specialist” through the National Association of Corrosion Engineers (NACE, now called NACE International), and is a licensed professional engineer in Texas and New Mexico. Chapman Engineering provides cathodic protection, AC mitigation, coatings and corrosion protection specifications, and other engineering services. The company performs environmental compliance, assessment and remedy services in oilfield, petroleum wholesale, and industrial settings. In-house staff includes engineers, geologists, corrosion technicians and environmental scientists. Please contact Chapman Engineering at 800-375-7747.

by Cal Chapman

New pipeline construction is going “fast and furious” in the Eagle Ford Shale region, in the West Texas “Wolfcamp”, “Bone Spring” and related shales, and all across mid-America with the Bakken, Niobrara and other successful unconventional oil and gas plays.  Companies who build and operate pipelines must attract customers with product to move, secure the land over which pipeline right-of-ways will be cobbled together, and then construct the pipelines.

What happens when a pipeline runs near a high-voltage AC power line?

When soil resistivity is lower, and the voltage driving current along the AC power lines is high enough, the pipeline acts like the “secondary winding” of a transformer.  It receives AC power from the high-voltage lines by what is called “electrical induction.”  Once that power builds on the pipeline, AC electric current flow is going to happen.  When that AC current finds a place to “jump off” the pipeline to go back to the AC power grid, corrosion holes are created in the pipeline metal.  This is AC-induced corrosion, and it is a severe threat to pipeline integrity.

This induced AC power may even pose safety risks to the welders, laborers, operators and other people building the pipeline!  AC power can actually build up on the pipe as it sits above grade on cribbing.  Any time a pipeline is located in “near parallel” to parallel arrangement with high-voltage AC power lines, even for just a mile or two, a qualified corrosion engineering consultant should be brought in to check the situation.

Risks of AC-induced Corrosion and Voltage Buildups

These risks for AC-induced corrosion and unsafe voltage buildups are significant.  A recent story about a Barnett Shale area worker, directed to do some repair to a chemical injection system for a pipeline’s internal corrosion control system, tells the tale.  The gentleman walked up to a chemical injection point and reached up to close a small ball valve, before changing out some injection equipment.  The AC voltage buildup on this pipeline was so great that, when he touched the valve handle, he was hurled backwards by the jolt of “grounding out” the induced AC power!  From what was passed on, he did not suffer lasting injuries.  But this was way more than 15 volts of induced AC (the maximum “safety” voltage threshold), and a significant current passed through part of his body for the instant he was in contact with both the pipe and the earth.

AC Mitigation Systems Might Be Needed

If the opportunity for AC power buildup on the pipeline is pronounced, then “AC mitigation” systems must be designed and installed.  Similar to electrical grounding and lightning protection approaches, these mitigation systems are specialized in design, construction and monitoring.  Recognizing the need for them is paramount, especially when soil resistivities are low and chemical ions such as chlorides are present in higher concentrations in soils.  A lot of the soils in the Eagle Ford Shale play have this “not good” combination of resistivity and soil chemistry factors.  The same can be said, too, for a lot of West Texas and southeastern New Mexico.

Read this article in the Eagle Ford Shale

Cal Chapman is co-founder of Chapman Engineering, which began business in fall 1988. He is a licensed “Cathodic Protection Specialist” through the National Association of Corrosion Engineers (NACE, now called NACE International), and is a licensed professional engineer in Texas and New Mexico. Chapman Engineering provides cathodic protection, AC mitigation, coatings and corrosion protection specifications, and other engineering services. The company performs environmental compliance, assessment and remedy services in oilfield, petroleum wholesale, and industrial settings. In-house staff includes engineers, geologists, corrosion technicians and environmental scientists. Please contact Chapman Engineering at 800-375-7747.