Pipeline Safety Regulation.
We have pipelines to deliver our production to sales points. Some
of our pipelines are subject to regulation by the United States Department of Transportation, or DOT,
with respect to the design, installation, testing, construction, operation, replacement and management
of pipeline facilities. In addition, we must permit access to and copying of records, and must make
certain reports and provide information, as required by the Secretary of Transportation. The states in
which we have pipelines have comparable regulations. We believe that our pipeline operations are in
substantial compliance with applicable requirements.
Recently enacted pipeline safety legislation, the Pipeline Safety, Regulatory Certainty, and Job
Creation Act of 2011, reauthorizes funding for federal pipeline safety programs, increases penalties for
safety violations, establishes additional safety requirements for newly constructed pipelines, and
requires studies of certain safety issues that could result in the adoption of new regulatory
requirements for existing pipelines. The Pipeline Hazardous Materials Safety Administration of the
DOT has also published an advanced notice of proposed rulemaking to solicit comments on the need
for changes to its safety regulations, including whether to revise the integrity management
requirements and add new regulations governing the safety of gathering lines. Such legislative and
regulatory changes could have a material effect on our operations and costs of transportation service
due to more stringent and comprehensive safety regulation and higher penalties for violations of those
regulations.
Sale and Transportation of Gas and Oil.
The Federal Energy Regulatory Commission, or the
FERC, approves the construction of interstate gas pipelines and the rates and service conditions for
the interstate transportation of gas, oil and other liquids by pipeline. Some of our pipelines related to
the Point Arguello unit are subject to this regulation by the FERC. Although the FERC does not
regulate the production of gas, the FERC exercises regulatory authority over wholesale sales of gas in
interstate commerce through the issuance of blanket marketing certificates that authorize the
wholesale sale of gas at market rates and the imposition of a code of conduct on blanket marketing
certificate holders that regulate certain affiliate interactions. The FERC does not regulate the sale of oil
or petroleum products or the construction of oil or other liquids pipelines. The FERC also has oversight
of the performance of wholesale natural gas markets, including the authority to facilitate price
transparency and to prevent market manipulation. In furtherance of this authority, the FERC imposed
an annual reporting requirement on all industry participants, including otherwise non-jurisdictional
entities, engaged in wholesale physical natural gas sales and purchases in excess of a minimum level.
The agency’s actions are intended to foster increased competition within all phases of the gas industry.
To date, the FERC’s pro-competition policies have not materially affected our business or operations. It
is unclear what impact, if any, future rules or increased competition within the gas industry will have on
our gas sales efforts.
The FERC and other federal agencies, the United States Congress or state legislative bodies and
regulatory agencies may consider additional proposals or proceedings that might affect the gas or oil
industries. We cannot predict when or if these proposals will become effective or any effect they may
have on our operations. We do not believe, however, that any of these proposals will affect us any
differently than other gas producers with which we compete.
Market Manipulation Regulations.
The FERC with respect to natural gas, the Federal Trade
Commission with respect to petroleum and petroleum products, and the Commodity Futures Trading
Commission with respect to commodity and futures markets, operating under various statutes have
each adopted anti-market manipulation regulations, which prohibit, among other things, fraud and price
manipulation in the respective markets. Should we violate anti-manipulation laws and regulations we
could be subject to substantial one or more of the following: civil penalties, potential disgorgement of
profits, the payment of refunds and criminal penalties. We could also be subject to third-party damage
claims.
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