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inability to deliver materials to worksites; and
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weather-related damage to pipelines and other transportation facilities.
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Due to the Trusts lack of industry and geographic diversification, adverse developments in the Trusts existing area of
operation could adversely impact its financial condition, results of operations and cash flows and reduce its ability to make distributions to the Unit Holders.
The Subject Interests are operated for oil and natural gas production and are focused exclusively in the San Juan Basin. This concentration could disproportionately expose the Trusts interests to
operational and regulatory risk in that area. Due to the lack of diversification in industry type and location of the Trusts interests, adverse developments in the oil and natural gas markets or the area of the Subject Interests, including,
for example, transportation or treatment capacity constraints, curtailment of production or treatment plant closures for scheduled maintenance, could have a significantly greater impact on the Trusts financial condition, results of operations
and cash flows than if the Royalty were more diversified.
The operators of the Subject Interests are subject to
extensive governmental regulation that could affect the cost, manner and feasibility of conducting operations on the Subject Interests, which in turn could negatively impact Trust distributions, estimated and actual future net revenues to the Trust
and estimates of reserves attributable to the Trusts interests.
Oil and natural gas operations on the Subject
Interests are subject to laws and regulations adopted or promulgated by federal, state and local authorities. From time to time, those requirements may require Hilcorp and other operators of the Subject Interests to incur substantial costs or
restrict production. Changes in price controls, taxes and environmental laws relating to the crude oil and natural gas industry have the ability to significantly affect crude oil and natural gas production, operations and economics. We cannot always
predict with certainty whether agencies or courts will change their interpretation of existing requirements, whether government authorities will adopt new requirements or the effect such changes may have on our business or financial condition.
Environmental laws, in particular, may change frequently and at times may force Hilcorp and other operators of the Subject
Interests to incur additional costs as those changes are implemented, or in instances of possible
non-compliance,
to incur penalties. Additionally, the discharge of natural gas, crude oil, or other pollutants
into the air, soil or water may give rise to substantial liabilities to government agencies and third parties, and may require Hilcorp and other operators of the Subject Interests to incur substantial costs of remediation.
Some of the complex environmental requirements to which operation of the Subject Interests may be subject include the Comprehensive
Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Oil Pollution Act of 1990, the Clean Air Act, the Clean Water Act, the Endangered Species Act, the Safe Drinking Water Act, the Occupational
Safety and Health Act and analogous state statutes along with regulations developed under these laws. See Item 2. PropertiesRegulation.
The future course of U.S. environmental regulation is especially difficult to predict at the current time because of uncertainties about the policies of the Trump Administration. For example, the federal
government may or may not continue developing regulations to reduce greenhouse gas emissions from the oil and gas industry. Even if federal environmental efforts slow, states may continue pursuing new regulations.
Any new requirements under environmental or other statutes could increase the cost to operate the Subject Interests, change the nature of
such operations, delay operations or reduce the liquidity of, or otherwise negatively impact, the financial condition of Hilcorp and the other operators of the Subject Interests. Such costs, delays and changes in operations could have a material
adverse effect on the operation of the Subject Interests, which in turn could negatively impact Trust distributions, estimated and actual future net revenues to the Trust and estimates of reserves attributable to the Trusts interests.
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