Economics of Disposal Projects

 

SWDI Investors’ Guide – Economics of Disposal Projects               January 22, 2013

Introduction
Income, costs, and profits from saltwater disposal (SWD) wells fit into a complex equation. If the investor is careful, costs and net revenue can be remarkably stable, leading to steady profits and reliable forecasts. This current post will take an abbreviated look at typical costs, market trends, potential problems and due-diligence issues for the careful investor.

CAPEX: Capital costs for disposal well projects can be listed in several categories:
      1. Well costs – whether drilling and completing a new well or purchase of an existing bore-hole – these costs can be very easily be into the millions. At least one well is needed but a back-up well is essential to provide constant service at a large disposal facility.
      2. Surface equipment – these items might range from several steel or fiberglass tanks, transfer and injection pumps, to extensive concrete pad and full electronic tracking systems.
      3. SWD operator may elect to use his own transport trucks to pick up and deliver water.
      4. Pipelines – long-term customers will want to be serviced by underground pipelines to avoid problems and cut costs; these might be installed by the customer or by the disposal well operator.
      5. Water treatment facilities – might include filters, oil separators, polymer breakers, and paraffin blocks. Generally treatment is meant to improve injection efficiency.

OPEX: Operation and Maintenance costs will of course be on-going throughout the life of the project.
      1. Power consumption by the facility for pumps, lights, and secondary equipment.
      2. Personnel costs can be large if 24-hour operation is adopted, if trucks are used, or if water treatment must be extensive. Heavy equipment must be used by staff but operations are not  routinely hazardous.
      3. Motor fuel, lubricants, and chemical costs can be significant.
      4. SWD well and equipment maintenance will be significant over the life of the well; working  over the well to repair bad casing or a bad packer can cost a half-million dollars.
      5. Regulatory compliance will vary between agencies but monthly and annual reports and tests are usually required. An annual mechanical integrity test of the well will require that the well is shut-in for the day with resultant loss in revenue.
      6. Environmental liabilities are unlikely but real, tanks are protected by fire-walls but wellheads are usually not and they can have leaks. Trucks can suffer leaks while loading or unloading.  Pipelines can leak at the surface or below the surface. Insurance and rapid-response need to be arranged before operation starts.

Revenues: Several profit streams may be present at the disposal facility:
      1. Disposal of produced water is of course the principal source of revenue for the well; revenue will depend upon the amount of production in the area, the average water cut (percentage of water in the production stream), and the other disposal wells in the area.
       2. Captured crude oil is also an important economic factor. The amount of entrained oil in the water will vary by region and by formation but is often close to 1% of the produced water volume. Revenue is important since the sale of this recovered oil is without royalties.
       3. Storing and selling heavy brine can be a source of profits if local operators use heavy brine for drilling or completing wells.
       4. Some produced water can be easily treated for a specific re-use such as drilling or fracking.  

Trucking: Saltwater hauling can readily be incorporated into the SWD project as a way to increase traffic to the SWD and an added profit stream. A fleet of tank trucks in several sizes can be purchased to insure access to most well site locations. Trucks and trailers are expensive, require frequent maintenance to continue to be efficient, require an adequate truck shed and yard but CAPEX and OPEX for the trucking equipment can be recouped through trucking charges to the area’s oilwell operators. Indeed, if his competitors choose to use trucks, our SWD operator will very likely be forced to add trucking to his repertoire in order to maintain customers.

Landfilling: New drilling wells and older producing wells spin-off liquid wastes that are best injected into an SWD, but they also produce copious volumes of solid wastes that cannot be injected. For example, drill-cuttings are generated while drilling a well; these cuttings are high in salinity and high in oil & grease content. Cuttings are coarse and cannot be liquefied; they are not to be injected into an SWD well except under very unusual conditions. Cuttings and other solids such as contaminated soil are best landfilled and this can be done on-site into a small, lined trench or at a large commercial facility. An oil & gas landfill can be merged with an SWD facility when there is sufficient acreage available and sufficient working capital can be arranged. Regulators usually require that a commercial landfill be equipped with an appropriate geo-membrane liner to isolate the fill contents from groundwater and surface water runoff. The incorporation of a solid waste landfill with the SWD will allow the project owners to accept and bill for all the wastes generated by E&P facilities.

Market Trends: Any business must seek to match its facilities to the demands of the market – if the restaurant is over-built to the clientele, efficiency and net revenues suffer. At the same time the businessman must be knowledgeable of market trends – are demands growing every year or are they shrinking? If a new SWD project has high CAPEX demands it will likely require several years to pay-out and accurate knowledge of the local produced water trends is vital. Following are aspects that need to be considered to understand the local market (note that the word “local” will vary from project to project, its radius is determined by the distance commonly traveled by water trucks in the area):

- Number of producing wells making water in the area. This count can be made from government records, either by county or by an easily-defined polygon. Active and shut-in wells are usually listed so that tabulations can be made.

- Change in the number of producing wells in the past 10 or 20 years. Depending upon the agency, monthly or annual totals can be retrieved and plotted in a simple graph to identify changes and current trends.

- Number of new wells drilled this year. New wells will involve large volumes of drilling waste needing to be managed. Older wells will show increases in the amount of water produced every day.

- Number of SWDs in the area and the changes in the past 10 or 20 years.

All of these trends have their own causes and implications for the current and future SWD market. The SWDI specializes in the interpretation of market trends and can help investors.

Potential Problems: There are issues that can exist in area or that can happen in the future that will have a significant effect on the economics of the SWD project:

Inadequate injection zone. The injection zone is one of the most important aspects of the SWD; it needs capability (the ability to take fluid at a given pressure, as measured by permeability) and capacity (the ability to store fluid over a long period as defined by porosity). Without both properties, the SWD may not be a suitable candidate. If the well exists and has a history of injection, certain forecasts can be attempted but if the well has not yet been drilled, the forecast will need to be extrapolated from nearby wells.

Scale and fouling in the well. Some injection zones are sensitive to certain saltwater chemistry, their permeability can be fouled with precipitating scale; this must be removed by periodic flushing with acid. At other times customers can submit waste water that contains drilling mud or cement, fluids that can permanently damage the injection zone. The SWD might need to be re-perforated or re-drilled.

Seismic activity can of course happen anywhere in the United States on any day of the year but an earthquake near an SWD has a certain implication for the news media and people who are exposed to that media. This subject has been dealt with in other blog-posts so details are not needed here. It appears to be true that some SWDs cause some earthquakes in some areas of the country. If a string of quakes is linked to an SWD, the operator may wish to perforate a different zone, cut the rate of injection, or drill a new well at another location.

Impact to nearby water well can have a myriad of causes but an SWD is a common target. Analyses of the impacted well and surrounding water wells are a must in order to identify the contaminants. The contaminants can then be related back to the impacting source which might be percolating fertilizer run-off or oilfield brine. After the point-source of the contamination is traced down, the SWD operator might want to drill a new private water well or another solution.

Loss of mechanical integrity within the SWD well implies corrosion or crack in the casing, a hole in the injection tubing, or leak in the packer. In any case it must be repaired before injection can resume. Repairs can shut-in the well for weeks waiting on repairs.

Due-Diligence Considerations: Prior to investment or purchase, the investor would do well to consider a number of factors involved in the subject SWD project:

           - Market analysis to determine current market status and future market. 

           - New drilling plays in the general area.

           - Condition of current SWDs in the area.

                 - Newly permitted SWDs in the area.

Appropriateness of the selected site:

                  - Easy road access.

                  - Adequate surface area for planned facilities.

- Separation from residences.

                  - Dates and locations of any previous spills or leaks.

- Capability of the injection zone in the area.

                  - Regional subsurface problems such as faults and corrosive groundwater.

Investors considering a SWD project must investigate the pros and cons of the specific project whether it is in operation or is meant to be drilled and the surface facilities built from scratch. An experienced, full-service contractor such as SWDI can help evaluate the project.

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.

 

 

 

 

 

Voluntary Compliance: Overcoming Permit Protests of Salt Water Disposal Wells

Voluntary Compliance: Overcoming Permit Protests of SWD Wells

Underground Injection Issues                                                                                           December 30, 2012

Disposal Well Protests:
Injection wells, especially those associated with the Shale-Gas play, appear like a drum-beat in the national news media. Injection wells have lately drawn local and national protests from citizens fearing environmental impacts. Disposal well operators and investors need to be aware of public attitudes and perceptions and especially how these perceptions can be mediated by actions of operators. One operator’s responses in particular are perhaps an indication of the changes in public opinion.

Joint venture operating partners received a permit for a commercial Class II disposal well in Oklahoma, one of a few states who distinguish commercial and private disposal wells in the oil and gas Underground Injection Control (UIC) sector. A private well can only accept waste from the operator’s producing wells while the commercial well can accept waste water from any oil and/or gas well. The proposed commercial well specified in the permit, having received no protests from industry nor public, was not drilled prior to the permit expiration. This operating partner recently filed for a new permit but the new application received over 1,300 protests, mostly in the form of petitions initiated by residents. We have written about the nature of the protests that center around lack of knowledge and lack of public trust in industry and regulators. Partly in answer to the protests, the operator has adopted a variety of additional, voluntary compliance measures. A prospective Class II UIC permittee might also consider these voluntary measures to satisfy protests and whether they pass the cost – reward test:

 

Waste-Water Monitoring:  Protestants fear hazardous or even radioactive components being put into the proposed disposal well. In order to allay those fears, the operator will install automatic liquid monitoring sensors to measure and record conductivity and specific gravity of the liquid being delivered. Conductivity is directly relatable to salinity; if the conductivity is too low, the liquid is likely not produced water but another waste that might be non-exempt. If specific gravity is too high, the liquid might be used drilling mud that would be eligible but might foul the perforated injection zone. At the same time, the sensors record the date and time, the truck bringing the waste, and the origin of the waste. All of this information is automatically up-loaded to a proprietary website. The data stream on the website can then be shared with the relevant regulatory agency or even to the public; increased transparency is a good way to build trust for the operator, the industry, and the associated regulators.  This technology is off-the-shelf but expensive and maintenance is also an added expense.

Closed Tanks to Replace Open Pits:  Disposal wells can accept a variety of oilfield wastes including spent acids and treatment fluids; some of these wastes have strong odors unlike the usual crude oil smell associated with produced water. Strong, unfamiliar noxious odors can trigger fear and anger among neighbors and citizens. An open pit used to receive trucked in wastes will liberate greater volumes of noxious odors than will a closed steel tank.  Depending upon the proximity of neighbors and the protesting community, the disposal well operator may want to consider the installation of closed tanks instead of pits. While steel tanks will be expensive to install, if they are used in lieu of pits on a new facility, the costs will be similar.

3-D Seismic Survey:  Earthquakes at injection wellsites have been linked to the presence of significant, existing faults. Several wells within a mile of the proposed location of the disposal well should be examined to check for signs of medium-sized normal faults on wire-line logs. Approximately 1.5 sq mi of 3-D seismic may be shot and processed to look for detailed stratigraphy and faulting in the geologic column. The operator will use that data to avoid faults that cut the injection zone and may contribute to induced seismicity. The decision to make all or part of the 3D survey public will depend upon the setting and the operator. Obviously the seismic will add to the CAPEX of the facility but it will give citizens and regulators a measure to confidence in the operator.

Seismic Sensors:  Some protestors are concerned about induced earthquakes; as a way to avoid such quakes a small network of seismic sensors can be installed near the well to record earth tremors in the area. The sensors ought to be sensitive enough to detect the very small (magnitude 1.0 or less) tremors that are the rule in most geographical regions. In the case of the commercial operator, local seismic monitoring data is to be transmitted in real-time to the Oklahoma Geological Survey (OGS) to correlate with seismic data from their own seismic network. Data analysis will detect any possible, shallow events that might be connected with disposal activity. Experts can then follow the timing of these shallow tremors to determine if they are growing in intensity and the operator can curtail injection to avoid the larger, more serious events. Seismic detectors are common in some states and may be required in the future.  
 

Injection Statistics:  Many commercial injection wells automatically tabulate injection rate and well-head pressure at short intervals. Such injection statistics would be ideal for determining connection to small, shallow seismic events and continuously checking the status of the injection zone. Known shallow events derived from OGS staff are to be related to injection statistics to determine a correlation. The well operator can then use this information to determine injection parameters in the future to avoid larger induced seismic events. The operator can also utilize injection statistics to determine injection rate-versus pressure to track injectibility data for the injection zone. If the well begins to show less injection rate per psi, the operator may be alerted to the possibility of the well needing remedial work. Whether or not any of this data will be shared outside the operator’s office and on what schedule can be decided by the operator in discussions with the regulatory community. Added costs for this extra compliance may partly be offset by the extra information about the injection well and the injection zone.

Site Perimeter Berms:  The disposal well’s tank battery will of course be contained within a berm to capture accidental spills, as required by regulation. A protested facility may additionally be bermed in its entirety to contain any possible storm-water runoff or catastrophic tank-truck failure. This extra compliance is not unheard of and may be more valuable in certain geographical settings.    

Sound-walls:  Off-the-shelf sound walls are available and are used by oil and gas operators who have wells in urban settings. The disposal well operator may well consider the installation of a sound wall even in a rural setting if there is a neighbor in close proximity. Sound walls are expensive and are likely not required unless a neighbor is unusually closeby.

Air-Quality Monitors:  In some locations, produced water and other eligible wastes  may contain CO₂ or H₂S in toxic amounts. Regulations will often require placards warning of these toxic gases but these placards can be more alarming than anything.  In those settings, the operator may be best served by installing perimeter monitors with alarm horns. While many jurisdictions require alarms when residences are nearby, the prudent operator will install these alarms even when only livestock is endangered.

 

Summary – The Value of Voluntary Compliance:  Compliance at Class II disposal well sites must be evaluated by the individual operator on a case-by-case basis. At issue are the added capital costs, the added operating costs, and the potential good-will and public trust accrued by the facility. Operators and investors will need to consider all the aspects of extra compliance.      

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.

Promised Land in OK: Results of a Public Protest Hearing

 

Promised Land in OK: Results of a Public Protest Hearing

Thursday, December 27, 2012

In light of the public awareness in fracking associated with the new movie Promised Land and recent documentary Gasland, operators in the oil and gas sector (which includes the saltwater management industry) must be aware of the changing political situation and the growing national and local opposition to fracking and saltwater injection wells. At the November 30th Oklahoma Corporation Commission (OCC) 2012 Oil and Gas Institute entitled, “The Oklahoma Standard: Oklahoma Oil and Gas Conservation Law and Practice”, the sixth, and last panel discussion of the day, “Review and Comment - Current issues Impacting the OCC’s Oil and Gas Conservation Adjudication Process” addressed such concerns.

Administrative Law Judge (ALJ), Kathy McKeown of Tulsa told the November 30^th meeting about a case that she informally entitled, “Beware”. As described in the proceedings, the case concerned “spacing and location exception applications for horizontal drilling and a horizontal well.” A respondent who had an interest in the unit being proposed was against the horizontal drilling and fracturing method citing his concern that it could cause ground and air pollution. For evidence that the applications should be denied, he presented a copy of the movie, “Gasland.” The movie was not admitted as evidence but it was acknowledged as a commercial movie on the record.

Michael Decker, Director, Office of Administrative Proceedings (OCC), underscored the intent of the same November 30^th panel discussion in saying, “We strive in every way to make certain that a fair hearing is provided, that everyone is listened to and that everyone is treated with the utmost respect in our proceedings. So I hope that we have that message fully articulated and that the claims that are brought before us, regardless of presented by which side or which person or which owner, are all given the fairness and respect that they should be provided.”

This blog gives a detailed account of the address made to the November 30^th panel discussion by ALJ Michael Norris, Senior ALJ out of Oklahoma City, relating to a case that he heard in August of 2012. The authors of this blog, who prepared the exhibits and gave expert witness for the operator of a proposed salt water injection well, came to know first-hand the dedication that the OCC shows in listening to the protestants of a case referred to as XXXX Energy Services, Inc.. The introduction of Norris’s talk in the proceedings described, “...the trend showing an increase in the applications for commercial disposal wells and the increased interest and opposition to such applications. The trends also demonstrate efforts by parties to organize a strenuous and effective protest.” The case referred to in his talk concerned a commercial salt water disposal well near the town of Pauls Valley in Garvin County that was previously permitted but when unable to finish in time, due to financial restraints, it went up for re-permitting. Twenty pages of documentation concerning the case including the exhibits for the defendant were presented in the proceedings book accompanying the November 30^thpanel discussion.

It is the intent of the authors of this blog to use Judge Norris’ presentation to echo the fact that a community united against a salt water disposal well or any other economic activity can greatly influence the hearing process and furthermore, we question what recourse operators have in counteracting such a strong and organized attack. Indeed, the authors of this blog see changes in government regulations that will encourage and abet citizens’ challenges.

Judge Norris described the story that he was about to relate as, “Beware II: The Sequel”, referring to Judge McKeown’s case involving the indicated use of the movie “Gasland” by an opponent of horizontal wells. He shared the trepidation associated with, at first, being assigned the XXXX case. (Judges do not know beforehand which case they will be assigned from the docket). Having heard that there was great community opposition to the salt water injection well being re-applied for by XXXX, he understandably hoped that the case would go to one of the other ALJs. His trepidation began to be realized when he entered his court room to find 50-60 people, two or three news reporters, two television stations, a county commissioner and a district attorney from the county commissioner’s office and word that a state senator was involved. The outcome of this case would not only be the immediate concern of the operator and the people of Pauls Valley but it would also be a future concern for OCC cases to come as the number of commercial disposal permits applied for has grown significantly in the past four years: 2009 – 14; 2010 – 16; 2011 -21; and, as of the end of November 2012 – 35.

The magnitude of the public opposition to this saltwater injection well was indicated by the number of signatories to a protesting petition – 1200. A petition of this size had never been presented to the Commission. The case started out with all of the Pro Se representatives in the judge’s chambers highly incensed that they hadn’t gotten proper notice and that they were not going to get a fair hearing in front of the OCC. They wanted all of the 1200 petition signers to be able to have their protests heard and had, previous to the hearing, presented a motion to have at least part of the case heard in Garvin County. They were totally convinced that the regulatory agencies were not going to give them a fair shake or a good hearing and that Judge Norris was going to be in favor of the commercial well application. Norris said that he thought that he “did not do a very good job of convincing them that they would get a fair shake.”

Judge Norris described the first part of the case going much the same as a typical case with the applicant (team) making their case and that the technical part and the strategic part and the location went very well. The Pro Se defendants objected from time to time about the information and how it was handled; the right to object in a hearing is not available to industry personnel, only their lawyers. From the beginning it was apparent to Judge Norris, “that there was a whole lot of media attention going on. It seems that fracking and commercial disposal wells go hand in hand and people are concerned about it if they are afraid of it [fracking]; sometimes legitimately, sometimes for legitimate reasons, sometimes perceived. But it is getting to be a very hot topic and some of the issues that were raised in this very well presented and organized protest.”

The protestants told Judge Norris that they felt that they could not get a concerted effort by the Transportation Department or the Commission to address their concerns. They insisted that the regulatory agencies would not serve their interest in this matter.

Judge Norris in his November 30^thdiscussion cautioned the body of lawyers and oil and gas professionals before him, “that anybody who is involved in these cases, whether they represent the applicant, or represent protestants, or just a landman trying to get interest from people, or people that own mineral interests, they (the protestants) make these arguments now that they (the protestants) cannot get a concerted effort cooperation from these regulatory agencies that protect our interests against these sorts of cases.”

Many aspects of the XXXX case represented “firsts” for the Commission as already mentioned with the number of people who signed the petition. He told of another “first” that came with the involvement of the county commissioner assisted by the district attorney for Garvin County. He explained that, “they [Garvin County Commissioners] raised issues about traffic load, transportation issue; the breakdown of roads because of weight load, increased traffic, and the actual noise and pollution that was going to happen from having 18 wheelers running up and down a lake road 24/7 taking disposal saltwater into the site. They went so far as to have the transportation or the county commission do a study that showed that they had just gotten $1.5 million to improve the road to the lake in Garvin County; new bridge, new roads, ditches, and drainage; all of this because, for those of you not familiar, Garvin County also has a noodling tournament out there. This is the main road that goes to that lake and they did not want the noodling tournament messed up or roads torn down or torn up by a bunch of 18 wheeler salt water disposal trucks going towards that lake.”

The protestants told the judge that they did a study illustrating, “that weight limit and that number of trucks and that type of disposal would destroy their brand new 1.5 million dollar improvement in about 3 years if it was allowed” and the Commissioner added that they, “were not going to allow that to happen in their community.” Judge Norris continued to emphasize the novel role of the county commissioner in this case, he continued saying, “Now whether he could or he couldn’t”, the county commissioner said that he would have people sitting out there weighing each truck that comes down the road and that every (truck) that is overweight, he would fine because he would not have them destroy the roads that were in his county. Judge Norris added that the commissioner made a lot of other dire statements. The judge commented that the protestants were very serious about it and they put on a very good case for the transportation problems involved in one of these wells and that, “nobody had considered it except that it will make a big bad impact on their community.”

Judge Norris told how the protestants again brought up their issue of notice, complaining had it not been one of the residents of the area near the disposal well habitually reading the public notice section in the paper that they would not have known anything about the proposed well.

Also new to the hearings of injection wells, Judge Norris reported, protestants are more likely to bring up the issue of groundwater pollution and the concern that water can migrate further away than any of the experts say. Judges now are seeing professional geologists and engineers being brought in from both the applicant and the protestant’s side. Furthermore, protestants are bringing up complaints new to the arena with issues such as how much noise pollution, light, and dust from unpaved roads, and unpaved turnarounds affect the landowners.

Unforeseen complications to the XXXX case arose when the Pro Se individuals who represented the protestants again came to Judge Norris and said that they thought that they were now getting a fair shake from the commission but they still had some concerns and that they now wanted to put people on the stand and he agreed. At this point in the presentation, Judge Norris related a personal story that emphasized the notion that if you think you have won half way through a trial you are asking for trouble.

The Pro Se introduced one of their own team who was a neighboring landowner. Judge Norris explained, “When he got on the stand, he was very professional, very well prepared , very articulate and he started talking about the applicant and there were numerous objections, as you can imagine, but he went on about the experience and the background and the finances of this applicant (XXXX Energy Services, LLC). And then there were appropriate objections about his qualifications to testify and finally it was on my shoulders to decide what he could say and could not say and I decided to ask him, “Sir, you seem to know a lot about this and you seem to know what you are talking about but I haven’t heard your background. Can you tell me why you know so much about this information and this particular financial arrangement that this LLC has established?”” As it turns out the Pro Se member was an SEC investigatory attorney in financial matters for 12 years at the Security and Exchange Commission, for a living, investigated fraud and misrepresentations and he said that, “This smacks of that!” Judge Norris emphasized that, “testimony like this is bound to get the attention of an ALJ.”

Judge Norris further explained that the protestant’s outside geologic expert talked about the migration of saltwater from the injection wells and they disputed the range of travel by disposal fluids claiming that migration may be much greater than the applicant’s experts had espoused.

In summarizing his message to the audience Judge Norris emphasized how this case was, “a wake-up call for anybody who is involved in this kind of application, or defense, or who works for an oil company, or who works for a disposal company, or is involved in the industry in any way; that if you are doing these things, or are involved, you should do them to the utmost of your ability and should leave no log or leaf unturned. You should prepare immensely for the case; don’t think it is going to be a command for administrative approval anymore because more and more people are incensed about these things, valid or invalid.”

He continued that there is growing concern from landowners, citing one gentleman whose property abutted the disposal well being discussed. The landowner testified that he would, “see nothing but trucks and traffic and dirt from my yard from now on.”

Judge Norris emphasized that people are very concerned and they are,“hiring the right people and the right people to protect them and try to win the battle they see is something that affects them in an immense way in the community.” He cautioned concern for,”site selections, parking, turn around areas, traffic, and all those things that may not have been a distinct consideration in the past for some things.” He added, “Any of you who are involved in disposal wells should very much consider, and have a very good selection process available when you start this because the better your site, the better the selection I think your [location] is from populated areas, the better off you are going to be from an opposition standing.”

As participants in the case referred to in this talk we appreciate the guidelines for the future but offer some questions as to the proceedings in the case, namely the role of the Pro Se opponents. We contend that if they had paid counsel they would not have had the ear (and sympathy) of the judge. Would there have been intimidation from a proper counsel insinuating that his clients were not going to get a fair hearing with the OCC? The Pro Se protestants were granted unusual latitude to oppose the application with groundless hearsay and “sidewalk engineers”. What recourse does the applicant have when the so-called expert witness has a history in the oil business but is out-of-date? Detailed testimony concerning the Arbuckle Formation was presented by the authors but countered by protestants’ geologist who used repeated reference to the Biblical Flood in his testimony.

More discussion went on with Pro Se in private chambers without XXXX’s counsel present than would have taken place otherwise. Our contention in hearing Judge Norris’s November 30^thdescription of the hearing is that the discussion concerning the road to the lake where the noodling tournament took place was not done in the hearing but in his chambers. What else was discussed that we were not privy to as part of the applicant’s team in the case?

In summary, the Pro Se protestants were allowed wide latitude in terms of ancillary issues not germane to the UIC permit.

· The OCC has no jurisdiction over traffic issues and road usage; why were these arguments entertained by the ALJ? Road noise, dust, damage to roads are all dealt with most adequately by state and local laws; overweight trucks, for example, are issued tickets and fines all around the state. Traffic has nothing to do with the issuance of UIC permits. UIC permits are not cancelled for parking tickets.

· And as to the testimony of financial arrangements of the applicant, as long as an operator has a valid operating bond, the OCC has no jurisdiction to investigate financial affairs of an operator but the protestant’s financial witness not only questioned the financial history of XXXX’s owner but exposed an indictment of one of XXXX’s partners concerning a trial that had not yet taken place. In our estimation he talked about the partner as if he were guilty in a case not yet gone to trial in Houston. As it turned out, XXXX’s partner was found innocent but not in time to clear his name that was unnecessarily and falsely defamed in this hearing. Should oil and gas applicants now investigate the credit rating and mortgage status of all the residents within a mile of the proposed injection well? Where does this stop and what is the relevance to a UIC permit?

The cause was dismissed without prejudice as it was clear to the defendant that he would not win in light of the opposition using tactics, such as what the County Roads Commissioner threatened.

The authors fully agree with the cautions that Judge Norris presented with the best advice being plan disposal wells entirely removed from residences. Going farther, however, the authors see a growing trend of allowing Pro Se protestants almost complete freedom to refute and defame responsible applicants.

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.

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.