Underground Injection Issues – State Regulations

Underground Injection Issues – State Regulations

                                                                                                                        December 29, 2012
The Saltwater Disposal Institute (SDI) specializes in economical, safe management of oil and gas wastes, primarily waste water via deep-well injection. We publish this blog in order to shed light on regulatory trends, public attitudes, and industry responses for operators and investors.

Are Class II (oil and gas wastes) Disposal Wells Different from Commercial Disposal Wells?
Disposal wells are the final tier of Pollution Prevention and waste management; they remove wastes from the environment in a singularly permanent fashion by emplacing the material deep underground. Class II wells handle oil and gas wastes that are specifically exempt from Federal RCRA Subtitle C (hazardous waste) regulations. Class II Commercial wells (sometimes called Class IIC) accept waste water from any oil and/or gas well for a disposal fee. Commercial Class II wells are an increasingly attractive investment vehicle in the oil industry because they can have a predictable income stream and cost structure and therefore represent a comparatively low-risk. Commercial wells must pass more stringent regulatory barriers and as such have a higher threshold for doing business.

The following is a list of jurisdictions and the agency with primary authority over that Class II Underground Injection Control Program (UIC):

Class II Jurisdictions:
State Primacy       Tribal Primacy                    Joint State-EPA Primacy               Federal EPA Primacy
Arkansas                  Fort Peck                                Alaska                                                     Arizona
Alabama                  Navajo Nation                        California                                               Kentucky
Colorado                                                                     Florida                                                    Michigan
Idaho                                                                            Indiana                                                   New York
Illinois                                                                         South Dakota                                         Pennsylvania
Kansas                                                                                                                                           Tennessee             
Louisiana                                                                                                                                      Virginia
Montana                                                                                                                                
Mississippi
Missouri
Nebraska
Nevada
New Mexico
North Dakota
Ohio
Oklahoma
Oregon
Texas
Utah
West Virginia
Wyoming

Of those 21 states with Class II UIC Primacy, the following is the legal status of Class II commercial wells:

Arkansas:  Commercial well receives deliveries of Class II fluids by tank -truck from multiple oil and gas well operators, and charges a fee at the disposal well facility. 
Alabama:  The State Oil and Gas Board of Alabama does not distinguish between private and commercial disposal wells.
Colorado:  The Colorado Oil and Gas Conservation Commission does not differentiate between commercial and private injection wells.
Idaho:  The Idaho Department of Lands does not permit the operation of any Class II injection wells.
Illinois:  The Illinois Department of Natural Resources does not distinguish between commercial and private wells.
Kansas:  The Kansas Corporation Commission does not distinguish between commercial and private wells.
Louisiana:  The Louisiana Depart of Natural Resources recognizes three types of Class II injection wells – private, Commercial Injection Well,  and Commercial Slurry Fracture Injection Well. 
Mississippi:  The State Oil and Gas Board of Mississippi does not distinguish between commercial and private injection wells.

Missouri:  The Missouri Department of Natural Resources does not distinguish between commercial and private injection wells.
Montana:  The Montana Oil and Gas Board does not differentiate between commercial and private injection wells.
Nebraska:  In Nebraska, a commercial disposal facility is specifically engaged in the business of underground injection of brine generated by third party producers for a fee or compensation. In addition, the produced brine must originate off-site as a result of oil and gas production operations only, and must be transported to the facility by tank truck.
Nevada:  The Nevada Commission of Mineral Resources recognizes no difference between commercial and private injection wells.
New Mexico:  The State of New Mexico Energy, Minerals and Natural Resources Department recognizes no difference between commercial and private injection wells.
North Dakota:  The North Dakota Industrial Commission recognizes separate commercial and private injection wells.
Ohio:  The Ohio Department of natural Resources does not differentiate between commercial and private injection wells. 
Oklahoma:   The Oklahoma Corporation Commission differentiates between commercial and private injection wells.
Oregon:  The Oregon Mineral Land Regulation and Reclamation does not recognize the difference between commercial and private injection wells.
Texas:  The Texas Railroad Commission recognizes commercial and private classes of injection wells.
Utah:  The Utah Department of Natural Resources does not differentiate between commercial and private injection wells.
West Virginia:  The West Virginia Department of Environmental Protection does not recognize a difference between commercial and private injection wells.    
Wyoming:  Commercial wells, of whatever class, are treated as Class I wells under the jurisdiction of the Wyoming Department of Environmental Quality.

In summary, only seven of the 21 primacy states recognize commercial wells and impose an increased regulatory burden. In those states where the Federal EPA is involved with the program, most recognize commercial sites but do not differentiate in their regulatory burdens. 

Why the differentiation of commercial wells?
Regulatory strategy appears to have several motives for the increased burden placed on commercial wells:

·         Commercial wells are often very high volume facilities.

·         Commercial wells can stand increased permitting and annual fees.

·         Commercial wells can constitute a “Moral Hazard” in the oil and gas business sector.

Injection rates:  Of the 265 commercial Class II wells permitted or pending in Oklahoma, the average permitted rate is 6,222 bpd – this is a rate two or three times what an average water-flood well might be permitted but is not exorbitant. A typical private disposal well may indeed be permitted at a similar rate and a private disposal well in a large de-watering project may even be ten times this rate. Commercial wells do not, as a class, dwarf the permitted rate of private wells. Utilization rates – that is, the percent injected every day as a percent of maximum permitted rate – of commercial disposal wells is hard to determine and even harder for private wells. In Oklahoma in 2010, within the 48 counties that had commercial disposal wells, the average utilization was 18% of permitted rate. This suggests that commercial wells are not injecting at exaggerated rates but indeed are very close to what the run-of-the-mill private wells are injecting. In summary commercial disposal facilities do not, as a class, exceed injection rates of private injection facilities.

Increased fee structure:  Increased fees for commercial wells are usually defended by invoking their increased regulatory burden, surely a circular argument. Commercial disposal wells have an increased regulatory burden because the operators are not represented by potent lobbying organizations the way larger oil and gas operators are.   Another argument for higher fees is the higher profits suspected for commercial wells, but it would be extremely difficult to prove that a commercial well is any more profitable than an individual water-flood well or private disposal well. The former represents a free-standing profit center that is often operated by an oilfield trucking company that depends for its profits on both trucking charges and disposal fees. The latter is part of a much larger oil and gas production operation whose production and revenue is bolstered to a greater or lesser extent by water-flooding. It is certainly not obvious which operation has the greater profit margin. Commercial disposal wells are not inherently more profitable than oil and gas producing wells.

“Moral Hazard” argument:  Moral hazard is an economic concept that occurs when the party with more information about its actions or intentions has an incentive to behave inappropriately from the perspective of the party with less information. In the oil and gas waste management business sector, the actor with most of the information is the injection well operator and the actor with less information is the regulatory agency. For commercial disposal well operators, there may be an incentive to exceed permit conditions in order to maximize revenues; the hazard presents itself as the regulatory agency is unaware of the permit exceedances and may incur remedial costs due to environmental impacts. The question is whether the commercial operator is under more or less moral hazard than the oil and gas producer that operates private injection and disposal wells.  It can be argued that both operators can see a direct volume injected: revenue equation. For the commercial well operator, more injection means more income from clients. For the oil and gas operator, more injection means more “sweep” of the reservoir and more oil production. Both operators will have a motivation to protect their injection wells by avoiding inappropriate or unknown liquids; neither operator wants their well to be fouled with precipitates or other particulates. In summary, it is not at all clear that the commercial operator is subject to higher moral hazard than the private well operator.

Summary:  Are Commercial Wells Different?
It is plain that commercial disposal wells are not demonstrably different than private disposal wells. Both facilities can handle high volumes of waste water and both can exceed their permit limits either accidentally or purposely.  Both facilities are engineered to maximize revenue. A few states in the National UIC Program have instituted higher regulatory burden for commercial wells, this factor alone would argue that commercial wells are the safer facility. Disposal wells are a necessary part of America’s oil and gas business; they will continue to operate as the nation’s oilfields continue to produce oil and gas. From the investor’s point of view, commercial disposal wells – whether singled out for more stringent regulations or not – will continue to be needed across the industry. They deserve to be looked at carefully as sources of revenue.

 

 The Authors:

Marian M. Smith, Ph.D., University of South Carolina (Geology) is a partner in Odin Oil and Gas, LLC, in Oklahoma City, OK. Dr. Smith has expertise in reservoir geology and image analysis. For most of her career she was an educator at all levels from graduate school geology courses at Michigan Technological University to the teaching of science in middle school in South Carolina. At present she is combining her background in research and teaching to work as a consultant with Dr. Langhus at Odin Oil and Gas, LLC.

 Bruce G. Langhus, Ph.D., is a petroleum geologist with over 45 years' experience in oil and gas business including water-flood design and operation; Class I, II, and III disposal well location, permitting and operation; and injection well remediation.  Dr. Langhus has been the Class II Program Manager in Oklahoma, the second largest UIC program in the country.  He was a founding partner of ALL Consulting, a successful geotechnical consultancy in Tulsa, OK.  Dr. Langhus is now part of Amerex Resources, operators of disposal facilities in Texas, Oklahoma, Montana, and North Dakota.