STONE ENERGY — Notice of Probable Violation

party submissionOfficial PDF420117004_Operator Response to Notice_09062011.pdf#

420117004_Closure_04012013_text.pdf, page 1Official PDFCERTIFIED MAIL - RETURN RECEIPT REQUESTED April 1, 2013 Mr. David H. Welch President and CEO Stone Energy Corporation 625 East Kaliste Saloom Road Lafayette, LA 70508 CPF 4-2011-7004 Dear Mr. Welch: On September 14, 2012, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued to Stone Energy a Final Order in the above-referenced case. This Order included a Compliance Order and Civil Penalty assessment. Payment of the civil penalty was received on September 27, 2012. Based on our review of the documentation you provided, it has been determined that you have complied with the terms of this Order. Accordingly, this case is now closed and no further action is contemplated with respect to the matters involved in this case. Thank you for your cooperation in this matter. Sincerely, R. M. Seeley Director, Southwest region Pipeline and Hazardous Materials Safety Administration#

420117004_NOPV PCP PCO_08082011_text.pdf, page 1Official PDFNOTICE OF PROBABLE VIOLATION PROPOSED CIVIL PENALTY and PROPOSED COMPLIANCE ORDER CERTIFIED MAIL - RETURN RECEIPT REQUESTED August 8, 2011 Stone Energy Mr. Jerry Wenzel Vice President, Production and Drilling 625 East Kaliste Saloom Road Lafayette, LA 70508 CPF 4-2011-7004 Dear Mr. Wenzel: On December 6-10, 2010, a representative of the Pipeline and Hazardous Materials Safety Administration (PHMSA) pursuant to Chapter 601 of 49 United States Code inspected Stone Energy procedures for Integrity Management in Lafayette, Louisiana. As a result of the inspection, it appears that you have committed probable violations of the Pipeline Safety Regulations, Title 49, Code of Federal Regulations. The items inspected and the probable violations are: 1. §195.49 Annual report Beginning no later than June 15, 2005, each operator must annually complete and submit DOT form RSPA F 7000-1.1 for each type of hazardous liquid pipeline facility operated at the end of the previous year. A separate report is required for crude oil, HVL (including anhydrous ammonia), petroleum products, and carbon dioxide pipelines. Operators are encouraged, but not required, to file an annual report by June 15, 2004, for calendar year 2003.#

420117004_NOPV PCP PCO_08082011_text.pdf, page 2Stone Energy (Stone) did not submit accurate annual reports. Stone submitted PHMSA Form 7000-1.1 for years 2005 through 2009 but the data included in the report was not accurate. For example, data from the 2009 annual report Part J (Integrity Inspections Conducted and Actions Taken Based on Inspection) shows an entry of 0 miles. During the inspection, integrity assessments were reviewed that indicate IM assessments were performed through a hydrostatic test. The East Cameron 46 pipeline was assessed on June 28, 2009. Additionally, Data in Part K (Mileage of Baseline Assessments Completed) from the 2009 report shows an entry of 0 miles for all dates. This does not appear to be accurate considering that assessment records for both the West Cameron 45 pipeline and the East Cameron 46 pipeline were examined at the inspection. There should have been mileage entries for assessments made in 2005 and 2009. In reviewing older annual reports they too, do not indicate the data accurately in Part K. 2. §195.452 Pipeline integrity management in high consequence areas. (d) When must operators complete baseline assessments? Operators must complete baseline assessments as follows: (1) Time periods. Complete assessments before the following deadlines: If the pipeline is Then complete baseline assessments and assess at least 50 percent of the not later than the following date line pipe on an expedited basis, according to a schedule that prioritizes beginning with the highest risk pipe, assessment: not later than: Category 1 March 31, 2008 September 30, 2004 Category 2 February 17, 2009 August 16, 2005 Category 3 Date the pipeline begins operation Not applicable Stone did not assess at least 50% of their highest risk segments prior to the August 2005 deadline and failed to complete all baseline assessments prior to the February 2009 deadline. Stone operates approximately 32 miles of pipeline and performed their HCA identification in 2005. The team reviewed the baseline assessment records. Specifically, the West Cameron 45 pipeline and the East Cameron 46 pipeline hydro-test records, which indicated that these two assessments were completed on August 20, 2005 and June 28, 2009 respectively. Both of these were after the deadlines and no other assessments were performed. 2#

420117004_NOPV PCP PCO_08082011_text.pdf, page 33. §195.452 Pipeline integrity management in high consequence areas. (f) What are the elements of an integrity management program? An integrity management program begins with the initial framework. An operator must continually change the program to reflect operating experience, conclusions drawn from results of the integrity assessments, and other maintenance and surveillance data, and evaluation of consequences of a failure on the high consequence area. An operator must include, at minimum, each of the following elements in its written integrity management program: (3) An analysis that integrates all available information about the integrity of the entire pipeline and the consequences of a failure (see paragraph (g) of this section); (g) What is an information analysis? In periodically evaluating the integrity of each pipeline segment (paragraph (j) of this section), an operator must analyze all available information about the integrity of the entire pipeline and the consequences of a failure. This information includes: (1) Information critical to determining the potential for, and preventing, damage due to excavation, including current and planned damage prevention activities, and development or planned development along the pipeline segment; (2) Data gathered through the integrity assessment required under this section; (3) Data gathered in conjunction with other inspections, tests, surveillance and patrols required by this Part, including, corrosion control monitoring and cathodic protection surveys; and (4) Information about how a failure would affect the high consequence area, such as location of the water intake. Stone did not perform the necessary data analysis or data integration. Stone’s IM program Section 3 briefly talks about integration of information, but it focuses on ILI assessments. There is no process identified that addresses how Stone will document their integration of data from hydro-test assessments. During the inspection, PHMSA asked Stone to demonstrate compliance with the regulation. Stone was unable to demonstrate that they had integrated the information from their hydro-test assessments. There was no documentation of the overall results of integrated data analysis and conclusions regarding the integrity of the segment, including the nature of the integrity threats identified. The 2005 and the 2009 West Cameron 45 pipeline hydro-tests experienced leaks. These events should have initiated some review and action by Stone which should be documented per the IM requirements. 4. §195.452(f) (See Above) (3) An analysis that integrates all available information about the integrity of the entire pipeline and the consequences of a failure (see paragraph (g) of this section); (g) What is an information analysis? In periodically evaluating the integrity of each pipeline segment (paragraph (j) of this section), an operator must analyze all available information about the integrity of the entire pipeline and the consequences of a failure. This information includes: (1) Information critical to determining the potential for, and preventing, damage due to excavation, including current and planned damage prevention activities, and development or planned development along the pipeline segment; (2) Data gathered through the integrity assessment required under this section; 3#

420117004_NOPV PCP PCO_08082011_text.pdf, page 4(3) Data gathered in conjunction with other inspections, tests, surveillance and patrols required by this Part, including, corrosion control monitoring and cathodic protection surveys; and (4) Information about how a failure would affect the high consequence area, such as location of the water intake. (j) What is a continual process of evaluation and assessment to maintain a pipeline's integrity? (2) Evaluation. An operator must conduct a periodic evaluation as frequently as needed to assure pipeline integrity. An operator must base the frequency of evaluation on risk factors specific to its pipeline, including the factors specified in paragraph (e) of this section. The evaluation must consider the results of the baseline and periodic integrity assessments, information analysis (paragraph (g) of this section), and decisions about remediation, and preventive and mitigative actions (paragraphs (h) and (i) of this section). Stone did not follow their procedures in performing their Risk Analysis. Stone Energy IMP section 5.04 states that they did not segment the existing pipelines but goes on to say: “Newly constructed or acquired pipelines will be evaluated to determine whether or not segment subdividing would prove advantageous to the risk analysis process.” The team reviewed the available documentation for Stone’s Risk Analysis. West Cameron 45 pipeline consists of two different vintages of 8 inch pipeline, 1987 and 2009. PHMSA asked Stone to provide the evaluation of the newly constructed line to see if segmentation would be warranted. Stone could not demonstrate that the evaluation was performed. Stone’s section 5.08 states that the frequency of the evaluation “will be at least annually.” Appendix I “Risk Analysis” indicates some reviews were performed in 2005 and 2006. The last entry states that EC45 risk analysis was “tabled.” No further indications are made regarding Stone’s risk analysis. Stone’s Recordkeeping Manual Section 9 “Pipeline Integrity Management Risk Analysis Reviews” did list some dates that imply a review was conducted but did not contain content of the Risk Analysis Review Meeting such as factors considered or results. Neither of these “records” contains the required content to demonstrate that an adequate risk analysis review was conducted. 5. §195.452(f) (See Above) (1) A process for identifying which pipeline segments could affect a high consequence area; (3) An analysis that integrates all available information about the integrity of the entire pipeline and the consequences of a failure (see paragraph (g) of this section); (6) Identification of preventive and mitigative measures to protect the high consequence area (see paragraph (i) of this section); 4#

420117004_NOPV PCP PCO_08082011_text.pdf, page 5Following the April 2005 IM audit, Stone was notified that they needed to document the process(es) used and determinations made in determining whether facilities could or could not effect HCAs (See CPF # 4- 2005-5036M and 4-2005-5039). During this inspection, PHMSA followed-up on this issue and Stone could not demonstrate that it had completed the evaluations and it is still unknown if this facility could affect an HCA. Subsequently, no assessment or other IM required actions have been taken in regards to the Holly Beach Tank Battery, a jurisdictional facility. 6. §195.452(f) (see above.) (6) Identification of preventive and mitigative measures to protect the high consequence area (see paragraph i of this section) (i) What preventive and mitigative measures must an operator take to protect the high consequence area? (1) General requirements. An operator must take measures to prevent and mitigate the consequences of a pipeline failure that could affect a high consequence area. These measures include conducting a risk analysis of the pipeline segment to identify additional actions to enhance public safety or environmental protection (3) Leak detection. An operator must have a means to detect leaks on its pipeline system. An operator must evaluate the capability of its leak detection means and modify, as necessary, to protect the high consequence area. An operator's evaluation must, at least, consider, the following factors–length and size of the pipeline, type of product carried, the pipeline's proximity to the high consequence area, the swiftness of leak detection, location of nearest response personnel, leak history, and risk assessment results. (4) Emergency Flow Restricting Devices (EFRD). If an operator determines that an EFRD is needed on a pipeline segment to protect a high consequence area in the event of a hazardous liquid pipeline release, an operator must install the EFRD. In making this determination, an operator must, at least, consider the following factors–the swiftness of leak detection and pipeline shutdown capabilities, the type of commodity carried, the rate of potential leakage, the volume that can be released, topography or pipeline profile, the potential for ignition, proximity to power sources, location of nearest response personnel, specific terrain between the pipeline segment and the high consequence area, and benefits expected by reducing the spill size. Stone did not perform the required evaluations as specified in their IM Plan. Stone’s IM Plan section 6.01 states that the Integrity Assessment Team must conduct an evaluation during the annual review meeting. During the inspection PHMSA asked to see the documentation where Stone reviewed and evaluated the required elements related to the Preventative and Mitigative Measures. None was provided. PHMSA also reviewed Stone’s IMP Recordkeeping Manual Section 8 Preventative Measures Reviews. This section lists several measures that Stone will consider but lacks specific determination and implementation specifics. It does not indicate what preventative and mitigative measures were considered, adopted or not adopted. Stone’s IM Plan section 6.06 states that the Integrity Assessment Team must conduct an evaluation during the annual review meeting. During the inspection PHMSA asked to see the documentation where Stone reviewed and evaluated the required elements related to the Leak detection system. None was provided. PHMSA also reviewed Stone’s IMP Recordkeeping Manual Section 10 EFRD/Leak Detection Assessment Review but it does not contain documentation of the application of a risk-based decision- making process for leak detection enhancements. 5#

420117004_NOPV PCP PCO_08082011_text.pdf, page 6Stone did not perform the required evaluation to determine if EFRD’s are required. There are currently no EFRD’s installed on Stone’s pipeline systems. During the inspection PHMSA asked to see the documentation where Stone evaluated and determined that EFRD’s were not required. None was provided. 7. §195.452(f) (see above.) (7) Methods to measure the program's effectiveness (see paragraph (k) of this section); (k) What methods to measure program effectiveness must be used? An operator's program must include methods to measure whether the program is effective in assessing and evaluating the integrity of each pipeline segment and in protecting the high consequence areas. See Appendix C of this part for guidance on methods that can be used to evaluate a program's effectiveness. Stone did not perform the required program effectiveness reviews. Stone’s IM plan section 8 indicates that Stone will perform annual evaluations and will document these in an “Annual Evaluation Report” to be kept for the life of the pipeline. During the inspection PHMSA asked Stone to demonstrate compliance with this requirement and no documentation of periodic self assessments or management audits was produced. Stone Energy IMP does not indicate the frequency at which program evaluation through performance measures will take place. Stone Energy IMP Recordkeeping Manual Section 13 Programs Effectiveness contains one document with no date or the individuals involved in this review. Proposed Civil Penalty Under 49 United States Code, § 60122, you are subject to a civil penalty not to exceed $100,000 for each violation for each day the violation persists up to a maximum of $1,000,000 for any related series of violations. The Compliance Officer has reviewed the circumstances and supporting documentation involved in the above probable violation(s) and has recommended that you be preliminarily assessed a civil penalty of $39,900 as follows: Item number PENALTY 2 $20,600 5 $19,300 Proposed Compliance Order With respect to items 1, 3, 4, 5, 6, and 7 pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration proposes to issue a Compliance Order to Stone Energy. Please refer to the Proposed Compliance Order, which is enclosed and made a part of this Notice. Response to this Notice Enclosed as part of this Notice is a document entitled Response Options for Pipeline Operators in Compliance Proceedings. Please refer to this document and note the response options. Be advised that all material you submit in response to this enforcement action is subject to being made publicly available. If you believe that any portion of your responsive material qualifies for confidential treatment under 5 U.S.C. 552(b), along with the complete original document you must provide a second copy of the document with the portions you believe qualify for confidential treatment redacted and an explanation of why you believe the redacted information qualifies for confidential treatment under 5 U.S.C. 552(b). If you do not respond within 30 days of receipt of this Notice, this constitutes a waiver of your right to 6#

420117004_NOPV PCP PCO_08082011_text.pdf, page 7contest the allegations in this Notice and authorizes the Associate Administrator for Pipeline Safety to find facts as alleged in this Notice without further notice to you and to issue a Final Order. In your correspondence on this matter, please refer to CPF 4-2011-7004 and for each document you submit, please provide a copy in electronic format whenever possible. Sincerely, R. M. Seeley Director, Southwest Region Pipeline and Hazardous Materials Safety Administration Enclosures: Proposed Compliance Order Response Options for Pipeline Operators in Compliance Proceedings 7#

420117004_NOPV PCP PCO_08082011_text.pdf, page 8PROPOSED COMPLIANCE ORDER Pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration (PHMSA) proposes to issue to Stone Energy a Compliance Order incorporating the following remedial requirements to ensure the compliance of Stone Energy with the pipeline safety regulations: 1. In regard to Item Number 1 of the Notice pertaining to Annual Reports. Stone Energy shall submit amended PHMSA F 7000-1.1 annual reports for years 2005 through 2009 showing actual mileage of baseline assessments completed and actual mileage of integrity inspections conducted and actions taken based on inspection. 2. In regard to Item Number 3 of the Notice Stone must review their IM Plan and develop the process they will utilize to analyze and integrate data from hydrotests. Stone must also perform the required data analysis and integration. 3. In regard to Item Number 4 of the Notice Stone must perform the required evaluation and determine if segmentation is necessary. Following the evaluation, Stone should perform the proper risk analysis. 4. In regard to Item Number 5 Stone must perform the appropriate “could affect” evaluation. If it is determined that the facility could affect an HCA then the integrity program should be modified appropriately to ensure compliance with all parts of the integrity management regulation requirements for this facility. 5. In regard to Item Number 6 of the Notice Stone should perform and fully document Preventative Measures Reviews and EFRD/Leak Detection Assessment Review at the appropriate intervals and documented to indicate what preventative and mitigative measures were considered, adopted or not adopted and documentation of the application of a risk-based decision-making process for leak detection enhancements. 6. In regard to Item Number 7 of the Notice Stone shall perform periodic self assessments and management audits of its IMP process and document the results. Stone Energy shall amend its IM Plan to indicate the frequency at which program evaluation through performance measures will take place. 7. Stone Energy should complete items 1 through 7 within 90 days of receipt of the Final Order. 8. It is requested (not mandated) that Stone Energy maintain documentation of the safety improvement costs associated with fulfilling this Compliance Order and submit the total to R. M. Seeley, Director, Southwest Region, Pipeline and Hazardous Materials Safety Administration. It is requested that these costs be reported in two categories: 1) total cost associated with preparation/revision of plans, procedures, studies and analyses, and 2) total cost associated with replacements, additions and other changes to pipeline infrastructure. 8#

420117004_Final Order_09142012_text.pdf, page 1Official PDFSEPTEMBER 14, 2012 Mr. David H. Welch President and CEO Stone Energy Corporation 625 East Kaliste Saloom Road Lafayette, LA 70508 Re: CPF No. 4-2011-7004 Dear Mr. Welch: Enclosed please find the Final Order issued in the above-referenced case. It makes findings of violation, assesses a civil penalty of $39,900, and specifies actions that need to be taken by Stone Energy Corporation to comply with the pipeline safety regulations. The penalty payment terms are set forth in the Final Order. When the civil penalty has been paid and the terms of the compliance order completed, as determined by the Director, Southwest Region, this enforcement action will be closed. Service of the Final Order by certified mail is deemed effective upon the date of mailing, or as otherwise provided under 49 C.F.R. § 190.5. Thank you for your cooperation in this matter. Sincerely, Jeffrey D. Wiese Associate Administrator for Pipeline Safety Enclosure cc: Mr. Jerome F. Wenzel, Jr., Executive Vice President – Operations, Stone Energy Corporation Mr. Rod M. Seeley, Director, Southwest Region, OPS Mr. Alan Mayberry, Deputy Associate Administrator for Field Operations, OPS CERTIFIED MAIL - RETURN RECEIPT REQUESTED#

420117004_Final Order_09142012_text.pdf, page 2U.S. DEPARTMENT OF TRANSPORTATION PIPELINE AND HAZARDOUS MATERIALS SAFETY ADMINISTRATION OFFICE OF PIPELINE SAFETY WASHINGTON, D.C. 20590 ____________________________________ ) In the Matter of ) ) Stone Energy Corporation, ) CPF No. 4-2011-7004 ) Respondent. ) ____________________________________) FINAL ORDER Between December 6-10, 2010, pursuant to 49 U.S.C. § 60117, a representative of the Pipeline and Hazardous Materials Safety Administration (PHMSA), Office of Pipeline Safety (OPS), conducted an on-site pipeline safety inspection of the integrity management program of Stone Energy Corporation (Stone Energy or Respondent) in Lafayette, Louisiana. Stone Energy operates a 30-mile crude oil system in the Gulf of Mexico.1 The inspection included the East Cameron #46 pipeline and the West Cameron #45 pipeline located offshore of Louisiana.2 As a result of the inspection, the Director, Southwest Region, OPS (Director), issued to Respondent, by letter dated August 8, 2011, a Notice of Probable Violation, Proposed Civil Penalty, and Proposed Compliance Order (Notice). In accordance with 49 C.F.R. § 190.207, the Notice proposed finding that Stone Energy had committed various violations of 49 C.F.R. Part 195 and proposed assessing a civil penalty of $39,900 for the alleged violations. The Notice also proposed ordering Respondent to take certain measures to correct the alleged violations. Stone Energy responded to the Notice by letters dated September 6, 2011 and June 7, 2012 (collectively, Response). The company supplied additional information and requested that PHMSA reconsider the proposed civil penalty amount for certain alleged violations. Stone Energy did not request a hearing and therefore has waived its right to one. FINDINGS OF VIOLATION The Notice alleged that Respondent violated 49 C.F.R. Part 195, as follows: 1 Pipeline Safety Violation Report (Violation Report), (August 9, 2011) (on file with PHMSA). 2 Id.#

420117004_Final Order_09142012_text.pdf, page 32 Item 1: The Notice alleged that Respondent violated 49 C.F.R. § 195.49, which states: § 195.49 Annual report. Beginning no later than June 15, 2005, each operator must annually complete and submit DOT form RSPA F 7000-1.1 for each type of hazardous liquid pipeline facility operated at the end of the previous year. A separate report is required for crude oil, HVL (including anhydrous ammonia), petroleum products, and carbon dioxide pipelines. Operators are encouraged, but not required, to file an annual report by June 15, 2004, for calendar year 2003.3 The Notice alleged that Respondent violated 49 C.F.R. § 195.49 by failing to complete and submit DOT form RSPQ F 7000-1.1 for each type of hazardous liquid pipeline operated at the end of the previous year. Specifically, the Notice alleged that although Stone Energy filed annual reports for calendar years 2005-2009, the reports included inaccurate or missing data. For example, the Notice alleged that Part J of the company’s 2009 annual report stated it had conducted zero miles of integrity inspections, yet a review of its integrity assessment records showed that Stone Energy had assessed the East Cameron #46 pipeline on June 28, 2009. This particular inspection should have been reflected on Part J of the 2009 annual report. The Notice further alleged that Stone Energy also entered zero on Part K of the 2009 annual report for the number of pipeline miles for which it had completed baseline assessments, yet the OPS inspection confirmed that the company had actually examined both the West Cameron #45 and East Cameron #46 pipelines in 2005 and 2009. The 2009 annual report should have included the appropriate mileage entry for these assessments. In its Response, Stone Energy did not contest this allegation of violation. Accordingly, after considering all of the evidence, I find that Stone Energy violated 49 C.F.R. § 195.49 by failing to file complete annual reports for calendar years 2005-2009. Item 2: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(d)(1), which states: § 195.452 Pipeline integrity management in high consequence areas. (a) . . . (d) When must operators complete baseline assessments? Operators must complete baseline assessments as follows: (1) Time periods. Complete assessments before the following deadlines: If the pipeline is: Then complete baseline assessments not later than the following date according to a schedule that prioritizes assessments: And assess at least 50 percent of the line pipe on an expedited basis, beginning with the highest risk pipe, not later than: Category 1…….. March 31, 2008 September 30, 2004 Category 2…….. February 17, 2009 August 16, 2005 Category 3…….. Date pipeline begins operation Not applicable. 3 Section 195.49 was subsequently amended, effective November 26, 2010.#

420117004_Final Order_09142012_text.pdf, page 43 The Notice alleged that Respondent violated 49 C.F.R. § 195.452(d)(1) by failing to complete baseline assessments for its pipeline segments that were located in or could affect High Consequence Areas (HCAs), 4 prior to the deadline of February 17, 2009. In addition, it alleged that Stone Energy also failed to assess at least 50% of the highest-risk pipeline segments prior to the August 16, 2005 deadline. Stone Energy operates approximately 32 miles of pipeline and performed its HCA identification process in 2005. During the OPS inspection, the agency determined that Stone Energy had completed baseline assessments through the use of hydrostatic testing for the West Cameron #45 pipeline and the East Cameron #46 pipeline on August 20, 2005 and June 28, 2009, respectively. Both of these assessments occurred after the deadlines and no other assessments were performed for the rest of Respondent’s facilities. In its Response, Stone Energy stated that it had discovered an additional pressure test on the East Cameron #46 Pipeline, which was conducted on February 5, 2006. Therefore, it requested that PHMSA reconsider this probable violation and the associated civil penalty. However, after a meeting with OPS on May 15, 2012, Stone Energy acknowledged this 2006 hydrotest was a spike test and could not be used as a baseline. Accordingly, I find that Respondent violated 49 C.F.R. § 195.452(d)(1) by failing to complete all baseline assessments prior to the February 2009 deadline and failing to assess 50% of its highest-risk segments prior to the August 2005 deadline. Item 3: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(3), which states: § 195.452 Pipeline integrity management in high consequence areas. (a) . . . (f) What are the elements of an integrity management program? An integrity management program begins with the initial framework. An operator must continually change the program to reflect operating experience, conclusions drawn from results of the integrity assessments, and other maintenance and surveillance data, and evaluation of consequences of a failure on the high consequence area. An operator must include, at minimum, each of the following elements in its written integrity management program: . . . (3) An analysis that integrates all available information about the integrity of the entire pipeline and the consequences of a failure (see paragraph (g) of this section);. . . (g) What is an information analysis? In periodically evaluating the integrity of each pipeline segment (paragraph (j) of this section), an operator must analyze all available information about the integrity of the entire pipeline and the consequences of a failure. This information includes: (1) Information critical to determining the potential for, and preventing, damage due to excavation, including current and planned 4 High Consequence Areas are defined as commercially navigable waterways, high population areas, other populated areas, and unusually sensitive areas. See 49 C.F.R. § 195.450.#

420117004_Final Order_09142012_text.pdf, page 54 damage prevention activities, and development or planned development along the pipeline segment; (2) Data gathered through the integrity assessment required under this section; (3) Data gathered in conjunction with other inspections, tests, surveillance and patrols required by this Part, including, corrosion control monitoring and cathodic protection surveys; and (4) Information about how a failure would affect the high consequence area, such as location of the water intake. The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(3) by failing to develop and implement a written integrity management program (IMP) that included an analysis that integrated all available information about the integrity of its entire pipeline and the consequences of a potential failure. Specifically, it alleged that Stone Energy failed to conduct a proper information analysis that considered data gathered through the integrity assessment process, as detailed in § 195.452(g). PHMSA alleged that during the OPS inspection, Stone Energy had been unable to demonstrate that it had integrated data from its hydrotest assessments. There was no documentation of the overall results of an integrated data analysis or any conclusions the company had reached regarding the integrity of each pipeline segment, including the nature of the integrity threats identified. Stone Energy had allegedly experienced leaks when it conducted the 2005 and the 2009 hydrotests on the West Cameron #45 pipeline. PHMSA alleged that these events should have initiated some sort of review and action by Stone Energy, including an information analysis per the integrity management requirements. In its September 2011 Response, Stone Energy did not contest the alleged violation. However, the company stated in its June 2012 Response that it had confirmed that the West Cameron #45 pipeline did not have a leak and therefore this item had been cleared. The alleged violation, however, is for the failure to have a process that properly integrated and analyzed data from various integrity assessments. Regardless of whether or not the West Cameron #45 line experienced a leak during a particular hydrotest, Stone Energy still could not produce documentation that it had conducted a proper information analysis. Accordingly, I find that Respondent violated 49 C.F.R. § 195.452(f)(3) by failing to conduct an information analysis as part of its IMP. Item 4: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(3), as quoted above, by failing to develop and implement an IMP that included an analysis integrating all available information about the integrity of its entire pipeline and the consequences of a potential pipeline failure. Specifically, the Notice alleged that Section 5.04 of Stone Energy’s IMP required the company to evaluate "newly constructed or acquired pipelines….to determine whether or not segment subdividing would prove advantageous to the risk analysis process." During the inspection, OPS requested documentation of such an evaluation for the West Cameron #45 pipeline, since it consisted of two different vintages of 8-inch pipe. Stone Energy could not demonstrate that this type of evaluation had been performed. Further, Section 5.08 of the company’s IMP stated that periodic evaluations conducted pursuant to § 195.452(j)(2) would#

420117004_Final Order_09142012_text.pdf, page 65 occur “at least annually,” but PHMSA alleged that documentation for such reviews only existed for years 2005 and 2006. In its Response, Stone Energy did not contest the allegations but stated that it would perform another risk analysis for the 2009 pipeline addition to evaluate whether segmentation was warranted. The company also agreed to keep each analysis for the life of the pipe and to include the date of the analysis in the documentation. Accordingly, I find that Respondent violated 49 C.F.R. § 195.452(f)(3) by failing to follow its own IMP procedures for risk analysis and periodic evaluations. Item 5: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(1), which states: § 195.452 Pipeline integrity management in high consequence areas. (a) . . . (f) What are the elements of an integrity management program? An integrity management program begins with the initial framework. An operator must continually change the program to reflect operating experience, conclusions drawn from results of the integrity assessments, and other maintenance and surveillance data, and evaluation of consequences of a failure on the high consequence area. An operator must include, at minimum, each of the following elements in its written integrity management program: . . . (1) A process for identifying which pipeline segments could affect a high consequence area; . . . (3) An analysis that integrates all available information about the integrity of the entire pipeline and the consequences of a failure (see paragraph (g) of this section); . . . (6) Identification of preventive and mitigative measures to protect the high consequence area (see paragraph (i) of this section); . . . . The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(1) by failing to develop and implement an IMP that included a process for identifying which pipeline segments could affect an HCA. Specifically, it alleged that after an April 2005 integrity management audit, OPS notified Stone Energy that it needed to document the processes used to determine whether its facilities could affect an HCA.5 During the current inspection, OPS allegedly requested this documentation but Stone Energy still could not provide it. Therefore, it was still unknown whether the company’s Holly Beach Tank Battery could affect an HCA. In its Response, Stone Energy requested that PHMSA reconsider this item. The company contended that it had submitted the required information after the 2005 Notice of Amendment and OPS did not request further information and that following a May 15, 2012 meeting with OPS, the parties concluded that no further action was required for this item. I disagree. Stone Energy was charged with failing to have a process in place to identify which of 5 See CPF No. 4-2005-5036M and 4-2005-5039. http://primis.phmsa.dot.gov/comm/reports/enforce/Actions_opid_0 html.#

420117004_Final Order_09142012_text.pdf, page 76 its pipeline segments could affect HCAs. Stone Energy could not produce any documentation or other proof that it had a proper process in place for identifying which of its facilities could affect an HCA, as of the date of the 2010 OPS inspection. Accordingly, I find that Respondent violated 49 C.F.R. § 195.452(f)(1). Item 6: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(6), as quoted above, and § 195.452(i), which states, in relevant part: § 195.452 Pipeline integrity management in high consequence areas. (a) . . . (i) What preventive and mitigative measures must an operator take to protect the high consequence area?—(1) General requirements. An operator must take measures to prevent and mitigate the consequences of a pipeline failure that could affect a high consequence area. These measures include conducting a risk analysis of the pipeline segment to identify additional actions to enhance public safety or environmental protection. Such actions may include, but are not limited to, implementing damage prevention best practices, better monitoring of cathodic protection where corrosion is a concern, establishing shorter inspection intervals, installing EFRDs on the pipeline segment, modifying the systems that monitor pressure and detect leaks, providing additional training to personnel on response procedures, conducting drills with local emergency responders and adopting other management controls…. (3) Leak detection. An operator must have a means to detect leaks on its pipeline system. An operator must evaluate the capability of its leak detection means and modify, as necessary, to protect the high consequence area. An operator’s evaluation must, at least, consider, the following factors—length and size of the pipeline, type of product carried, the pipeline’s proximity to the high consequence area, the swiftness of leak detection, location of nearest response personnel, leak history, and risk assessment results. (4) Emergency Flow Restricting Devices (EFRD). If an operator determines that an EFRD is needed on a pipeline segment to protect a high consequence area in the event of a hazardous liquid pipeline release, an operator must install the EFRD. In making this determination, an operator must, at least, consider the following factors—the swiftness of leak detection and pipeline shutdown capabilities, the type of commodity carried, the rate of potential leakage, the volume that can be released, topography or pipeline profile, the potential for ignition, proximity to power sources, location of nearest response personnel, specific terrain between the pipeline segment and the high consequence area, and benefits expected by reducing the spill size. The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(6) and (i) by failing to develop and implement an IMP that identified preventive and mitigative (P&M) measures to protect HCAs in the event of a pipeline failure. Specifically, it alleged that Section 6.01 of Stone Energy’s IMP required the company’s Integrity Assessment Team to conduct an evaluation#

420117004_Final Order_09142012_text.pdf, page 87 during its annual review meeting to determine what P&M measures were needed to enhance public safety or environmental protection. However, during the OPS inspection, Stone Energy could not produce documentation that this evaluation had occurred. The Notice further alleged that Stone Energy did not perform the required evaluations of its leak detection system and the need for emergency flow restricting devices (EFRDs). In its Response, Stone Energy did not contest this allegation of violation. Accordingly, after considering all of the evidence, I find that Stone Energy violated 49 C.F.R. § 195.452(f)(6) and (i) by failing to develop and implement an IMP that identified preventive and mitigative (P&M) measures to protect HCAs in the event of a pipeline failure. Item 7: The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(7) and (k), which state: § 195.452 Pipeline integrity management in high consequence areas. (a) . . . (f) What are the elements of an integrity management program? An integrity management program begins with the initial framework. An operator must continually change the program to reflect operating experience, conclusions drawn from results of the integrity assessments, and other maintenance and surveillance data, and evaluation of consequences of a failure on the high consequence area. An operator must include, at minimum, each of the following elements in its written integrity management program: . . . (7) Methods to measure the program’s effectiveness (see paragraph (k) of this section); . . . (k) What methods to measure program effectiveness must be used? An operator’s program must include methods to measure whether the program is effective in assessing and evaluating the integrity of each pipeline segment and in protecting the high consequence areas. See Appendix C of this part for guidance on methods that can be used to evaluate a program’s effectiveness. The Notice alleged that Respondent violated 49 C.F.R. § 195.452(f)(7) and (k) by failing to perform the required program effectiveness reviews. Section 8 of Stone Energy’s IMP required that Stone Energy perform annual evaluations and document these audits in a report maintained for the life of the pipe. However, Stone Energy could not produce any documentation during the OPS inspection showing compliance with its own IMP. In its Response, Stone Energy did not contest this allegation of violation. Accordingly, after considering all of the evidence, I find that Stone Energy violated 49 C.F.R. § 195.452(f)(7) and (k) by failing to follow its own procedures for measuring the effectiveness of its IMP. These findings of violation will be considered prior offenses in any subsequent enforcement action taken against Respondent.#

420117004_Final Order_09142012_text.pdf, page 98 ASSESSMENT OF PENALTY Under 49 U.S.C. § 60122, Respondent is subject to an administrative civil penalty not to exceed $100,000 per violation for each day of the violation, up to a maximum of $1,000,000 for any related series of violations. In determining the amount of a civil penalty under 49 U.S.C. § 60122 and 49 C.F.R. § 190.225, I must consider the following criteria: the nature, circumstances, and gravity of the violation, including adverse impact on the environment; the degree of Respondent’s culpability; the history of Respondent’s prior offenses; the Respondent’s ability to pay the penalty and any effect that the penalty may have on its ability to continue doing business; and the good faith of Respondent in attempting to comply with the pipeline safety regulations. In addition, I may consider the economic benefit gained from the violation without any reduction because of subsequent damages, and such other matters as justice may require. The Notice proposed a total civil penalty of $39,900 for the violations cited above. Item 2: The Notice proposed a civil penalty of $20,600 for Respondent’s violation of 49 C.F.R. § 195.452(d)(1), for failing to assess at least 50% of its highest-risk pipeline segments prior to the August 2005 deadline and for failing to complete all baseline assessments prior to the February 2009 deadline. Stone Energy did not contest either the allegations of violation or the proposed penalty amount. Accordingly, having reviewed the record and considered the penalty assessment criteria, I assess Respondent a civil penalty of $20,600 for violation of 49 C.F.R. § 195.452(d)(1). Item 5: The Notice proposed a civil penalty of $19,300 for Respondent’s violation of 49 C.F.R. § 195.452(f)(1) for failing to develop and implement an IMP that included a process for identifying which pipeline segments could affect an HCA. As discussed above, I found that Stone Energy was actually notified of this requirement after the April 2005 audit but still could not demonstrate, as of the date of the 2010 inspection, that it had completed this identification process. The process used by an operator for identifying the portions of its pipeline and facilities that could potentially impact high-population and environmentally sensitive areas is a fundamental step in establishing an effective IMP. The failure to identify such areas means that such higher-risk areas may not be adequately protected. Accordingly, having reviewed the record and considered the penalty assessment criteria, I assess Respondent a civil penalty of $19,300 for violation of 49 C.F.R. § 195.452(f)(1). In summary, upon review of all the evidence and consideration of the assessment criteria for each of the Items cited above, I assess Respondent a total civil penalty of $39,900. Payment of the civil penalty must be made within 20 days of service. Federal regulations (49 C.F.R. § 89.21(b)(3)) require such payment to be made by wire transfer through the Federal Reserve Communications System (Fedwire), to the account of the U.S. Treasury. Detailed instructions are contained in the enclosure. Questions concerning wire transfers should be directed to: Financial Operations Division (AMZ-341), Federal Aviation Administration, Mike Monroney Aeronautical Center, P.O. Box 269039, Oklahoma City, Oklahoma 73125. The Financial Operations Division telephone number is (405) 954-8893. Failure to pay the $39,900 civil penalty will result in accrual of interest at the current annual rate in accordance with 31 U.S.C. § 3717, 31 C.F.R. § 901.9 and 49 C.F.R. § 89.23. Pursuant to#

420117004_Final Order_09142012_text.pdf, page 109 those same authorities, a late penalty charge of six percent (6%) per annum will be charged if payment is not made within 110 days of service. Furthermore, failure to pay the civil penalty may result in referral of the matter to the Attorney General for appropriate action in a district court of the United States. COMPLIANCE ORDER The Notice proposed a compliance order with respect to Items 1, 3, 4, 5, 6, and 7 in the Notice for various violations of 49 C.F.R. Part 195. Under 49 U.S.C. § 60118(a), each person who engages in the transportation of hazardous liquids or who owns or operates a pipeline facility is required to comply with the applicable safety standards established under chapter 601. Pursuant to the authority of 49 U.S.C. § 60118(b) and 49 C.F.R. § 190.217, Respondent is ordered to take the following actions to ensure compliance with the pipeline safety regulations applicable to its operations: 1. With respect to the violation of § 195.49 (Item 1), Respondent must submit amended PHMSA F 7000-1.1 annual reports for years 2005 through 2009, showing the actual pipe mileage of baseline assessments completed, the actual mileage of integrity inspections conducted, and the actions taken by Stone Energy based on such inspections. 2. With respect to the violation of § 195.452(f)(3) (Item 3), Respondent must review its IMP and develop the process it will utilize to analyze and integrate data from hydrotests. Stone Energy must also perform the required data analysis and integration. 3. With respect to the violation of § 195.452(f)(3) (Item 4), Respondent must perform the required periodic evaluation and determine if segmentation is necessary. Following the evaluation, Stone Energy must perform the proper risk analysis. 4. With respect to the violation of § 195.452(f)(1) (Item 5), Respondent must perform the appropriate "could affect" evaluation. If it is determined that the facility could affect an HCA, then the integrity program must be modified appropriately to ensure compliance with all parts of the integrity management regulation requirements for this facility. 5. With respect to the violation of § 195.452(f)(6) and (i) (Item 6), Respondent must perform and fully document Preventative Measures Reviews and EFRD Leak Detection Assessment Review under its IMP at the appropriate intervals, indicate what P&M measures were considered and adopted or not adopted, and document the application of a risk-based decision-making process for leak detection enhancements. 6. With respect to the violation of § 195.452(f)(7) and (k) (Item 7), Respondent must perform periodic self-assessments and management audits of its IMP and document the results. Stone Energy must also amend its IMP to indicate the#

420117004_Final Order_09142012_text.pdf, page 1110 frequency at which program evaluation through performance measures will take place. 7. Stone Energy must complete Compliance Items 1-6 above within 90 days of receipt of the Final Order. 8. It is requested (not mandated) that Stone Energy maintain documentation of the safety improvement costs associated with fulfilling this Compliance Order and submit the total to R. M. Seeley, Director, Southwest Region, Pipeline and Hazardous Materials Safety Administration. It is requested that these costs be reported in two categories: 1) total cost associated with preparation/revision of plans, procedures, studies and analyses; and 2) total cost associated with replacements, additions and other changes to pipeline infrastructure. The Director may grant an extension of time to comply with any of the required items upon a written request timely submitted by the Respondent and demonstrating good cause for an extension. Failure to comply with this Order may result in the administrative assessment of civil penalties not to exceed $100,000 for each violation for each day the violation continues or in referral to the Attorney General for appropriate relief in a district court of the United States. Under 49 C.F.R. § 190.215, Respondent has a right to submit a Petition for Reconsideration of this Final Order. The petition must be sent to: Associate Administrator, Office of Pipeline Safety, PHMSA, 1200 New Jersey Avenue, SE, East Building, 2nd Floor, Washington, DC 20590, with a copy sent to the Office of Chief Counsel, PHMSA, at the same address. PHMSA will accept petitions received no later than 20 days after receipt of service of this Final Order by the Respondent, provided they contain a brief statement of the issue(s) and meet all other requirements of 49 C.F.R. § 190.215. The filing of a petition automatically stays the payment of any civil penalty assessed. Unless the Associate Administrator, upon request, grants a stay, all other terms and conditions of this Final Order are effective upon service in accordance with 49 C.F.R. § 190.5. The terms and conditions of this Final Order are effective upon receipt of service. ___________________________________ __________________________ Jeffrey D. Wiese Date Issued Associate Administrator for Pipeline Safety#