OIL AND GAS: Puny fines, scant enforcement leave drilling violators with little to fear

November 14th, 2011 – First in an occasional series: Oil and gas drillers who pollute groundwater, spill toxic chemicals or break other rules have little to fear from the inspectors and agencies regulating the surge in American petroleum production.

A Greenwire review of enforcement data from the largest drilling states shows that only a small percentage of violations result in fines, and the fines that are levied often amount to little more than a rounding error for billion-dollar companies.

In Texas, 96 percent of the 80,000 violations by oil and gas drillers in 2009 resulted in no enforcement action. West Virginia, a state with 56,000 wells, issued 19 penalties last year. And Wyoming, the center of Rocky Mountain energy, collected $15,500 in fines in 2010.

Pennsylvania, the most aggressive about fining violators, sought penalties for more than a quarter of the violations found last year. It levied fines for 4 percent of the violations, with the penalties totaling $3.7 million. The largest of those was a $900,000 fine against a drilling company that contaminated the water of 16 homes.

That was less than the profits the company makes in three hours.

Some states don’t even track key enforcement data, so regulators don’t know which companies have already been fined repeatedly.

The United States is experiencing an oil and gas boom the likes of which have not been seen in decades. Until a few years ago, onshore production had been confined to Alaska, the dusty plains of Texas and the wide open spaces of the Rocky Mountain West. But advances in the drilling practice called “hydraulic fracturing” have enabled companies to pry oil and gas out of deep shale formations under densely populated areas like Pennsylvania and New York state.

According to the federal Energy Information Administration, shale gas production grew, on average, nearly 50 percent a year from 2006 to 2010.

Regulation of that boom falls almost entirely to a patchwork of state agencies such as the Pennsylvania Bureau of Oil and Gas and the Colorado Oil and Gas Commission. In Texas, oddly enough, oil and gas production is regulated by the Texas Railroad Commission, a three-member panel that has not overseen railroads in years. The agencies vary widely in approach, resources and assertiveness.

Oil company executives and state regulators say those agencies are aggressively regulating this new wave of drilling. Congress has largely taken them at their word. And the oil industry has fiercely disputed any suggestion that more federal regulation is needed.

“The system is working well from an environmental standpoint,” said Lee Fuller, vice president for government relations for the Independent Petroleum Association of America, which represents many of the companies driving the current surge.

“If you look at the overall management of oil and gas production, you have a million wells out there. They’re drilling 35,000 or so a year. There is no compelling systemic indication that this is causing environmental problems,” Fuller said.

State agencies, he continued, “are capable of modification, which is what you’d ask of any program. The counterpoint is to put it in the hands of the EPA, where there’s no knowledge and no better capability to handle what’s taking place.”

But there is little to back up the assertions that states are doing a good job besides the word of the industry and regulators themselves.

Earlier this year, Elizabeth Ames Jones, then a member and now chairwoman of the Texas Railroad Commission, told a U.S. House committee her agency is “the gold standard,” as she argued against federal regulation of hydraulic fracturing.

But a comprehensive review by a Texas legislative agency last year described the Railroad Commission’s regulation of oil and gas production and its enforcement as unfocused and lax. The Texas Sunset Advisory Commission called for a “fundamental restructuring” of the agency, starting with changing its name, saying the state needed to create an agency “poised to provide robust oversight” of drilling.

The review compared the agency to a state trooper who pulls over 100 speeders, issues tickets to four but lets the other 96 off with just a warning.

“If you never get penalized for it, you’re probably not going to stop speeding,” said Sunset Advisory Commission director Ken Levine. “That’s essentially what’s happening in the field.”

The enforcement rate was the same when responding to complaints from the public.

The agency received 681 complaints in 2009 that resulted in the discovery of 1,997 violations. Again, 96 percent resulted in no enforcement action.

“When the public sees so few enforcement actions for violations found from its complaints,” the Sunset report stated, “the public’s confidence in the Commission’s enforcement process is undermined.”

‘Bubbling Road’

A few of those 1,997 violations stemmed from complaints about gas leaking from a facility on the ranch where Elizabeth Todd Burns was living with her husband and sons. They were among the 96 percent that were cleared with no enforcement action. Burns’ confidence in the Railroad Commission was not undermined. It had disappeared long before.

One day in March 2008, Burns noticed a dark spot in a road next to an Exxon Mobil Corp. facility on the ranch. When she brought a “Flir” infrared camera, she could see fumes drifting from the spot.

Burns, who describes herself as a “simple housewife,” called Exxon to complain. But she also posted the video to the blog she started to vent her frustrations with oil companies that have leases under the South Texas ranch that has been in her husband’s family for decades.

Originally from Cincinnati, Burns moved with her husband and sons onto the 38,000-acre spread in 2005 with plans to build a new house and live the ranch life. What they found were the skeletal remains of a decaying oilfield from a decades-old lease — a maze of rusting pipelines, leaking wells and piles of old junk from well sites with scary warning labels.

When the dark spot turned into a gurgling puddle, she named it “The Bubbling Road” and posted more video. It was around then the Railroad Commission showed up. She says she did not call the agency, but documents list her as having complained.

An inspector visited the site and ordered Exxon to dig up the pipe and fix the leak. But he did not recommend any enforcement action against the company for allowing gas to leak for months.

Exxon’s earthmovers showed up. A year later, though, the cleanup still wasn’t done, and benzene had been detected in groundwater 32 feet below the surface. Still, the agency gave Exxon another chance.

“Failure to bring the aforementioned statewide rules violation into compliance may result in the District Office requesting legal enforcement action,” said a Dec. 22, 2009, letter from Glenn Monette, engineering specialist at the commission. Burns said that to her knowledge, no enforcement action was taken against Exxon. The next month, Monette’s office did refer one of the violations, an unpermitted pit, to the central office for enforcement but not the leaks.

“Exxon went and put some duct tape on it, and the Railroad Commission comes out and says there’s no violation,” Burns said. “It’s just a joke.”

Exxon Mobil spokesman David Eglinton said the leak sites are part of the Railroad Commission’s Operator Clean-up Program.

“Consistent with appropriate remedial actions for such sites, impacted soils have been removed, and we continue to work with the RRC to conduct the appropriate environmental investigations and to remediate affected areas to applicable regulatory standards,” Eglinton said. “We take our environmental responsibilities seriously.”

Burns’ husband’s family has sued Exxon in a dispute about operations on the ranch. But Burns said she is not a party to the suit.

Burns said she is not opposed to drilling on the ranch or elsewhere. She believes that Exxon is stifling development, sitting on reserves that bolster its stock price, while letting its aging equipment deteriorate. Burns would like a new company to come in, drill the leases and clean up the mess.

“They’ve contaminated so much that a lot of new companies won’t come in,” she said. “They’re wasting resources.”

Uneven violation tracking, penalties

There is no standard for how often a state should seek penalties. But the Sunset Advisory Commission report noted the Texas Council on Environmental Quality, the state’s main environmental regulator, seeks penalties in about 20 percent of violations, five times the rate of the oil and gas regulators.

And in neighboring Louisiana, regulators took regulatory action — issuing “compliance orders” — in 93 percent of cases in 2009 and 70 percent in 2010.

“We expect operators to have their wells in good shape whether we’re there or not,” said Chris Sandoz, assistant director of the engineering division of the Louisiana Office of Conservation.

Texas Railroad Commission executive director John Tintera disputes the criticism that his agency’s enforcement is lax. He does agree with the Sunset panel’s recommendations that his agency should be more “transparent.” He said the commission is actively engaged in plans to post information on its website that would allow members of the public to track violations all the way through to enforcement. Such a system, he said, could be available within a year or so.

“No agency can have a police officer behind every stop sign,” Tintera said. “We prioritize our inspections, and we respond to every complaint. In seeking compliance, we have many tools, one of which is to go to enforcement.”

But before regulators seek a formal enforcement, he said, they can order a well to be sealed, preventing its owner from selling any of the oil and gas it is producing. That, he said, motivates drillers to fix the problem quickly. “That has a very strong impact,” he said.

Tintera said 8,487 severances were issued in 2009. But thousands of those were for infractions that didn’t involve the environment or safety, such as paperwork violations or overproduction. A Railroad Commission spokeswoman said the agency could not give a breakdown by type of violation.

The reason for the limited enforcement in Texas, the Sunset staff wrote, is the agency “views compliance as an end in itself.” Its inspectors often do not seek penalties when they find violations, such as leaks and spills, as long as the company fixes the problem.

But that means violators don’t need to fear punishment. If they get caught, all they have to do is go back and do it right. And just as a state trooper doesn’t know how many informal warnings a speeder has received, field staff have limited information on whether the drillers they are dealing with are repeat violators.

States vary widely in the information they gather. Pennsylvania has a public database, accessible on its website, that accomplishes what Texas is trying to develop. It shows each violation, tracking it all the way through to any fine that is levied against a driller. But that is uncommon.

Many other states don’t track violations, enforcement and the number of penalties assessed against oil and gas producers. To find such information, state employees would have to go back through individual files, as Texas Railroad Commission staff did for the Sunset review. Among those states are Wyoming, North Dakota and New Mexico.

Without that kind of information, the Sunset report said, regulators “cannot determine or ensure effective and consistent enforcement across the state.”

On the other hand, nearly all the agencies give detailed accounting of how much oil and gas was produced. Some also tout how quickly they are approving permits to drill. (It’s three days to a permit in Texas.)

Regulator asks company to investigate itself

Oil and gas companies are often national or international in scope, and when dealing with states, they start with the advantage of sheer size.

For example, Exxon Mobil’s 2010 revenues of $383 billion are several times the size of the state budget in California ($87 billion), the largest in the nation. Occidental Petroleum Corp. had 2010 revenues of $19 billion, larger than the budget of a midsized state such as Colorado, where it operates as Oxy USA.

At the level of state regulatory agencies, the numbers are much smaller, especially when it comes to fines.

As companies drilled 2,311 wells in Colorado last year, the state’s Oil and Gas Conservation Commission issued 10 fines totaling about $1.2 million. Most were follow-ups from previous years.

One was, at the time, the largest fine in the history of the agency, $423,300 against Williams Production RMT Co. for poisoning the water supply of Ned Prather’s hunting cabin near DeBeque, Colo.

One day in May 2008, Prather arrived at his cabin and gulped down a cup of water from the kitchen sink. Right away, he told The Denver Post, his throat burned, his head throbbed and he felt like he was suffocating. His wife drove him to the hospital. Tests would later show the water had benzene and related chemicals at a concentration 20 times the safety limit.

State officials asked Williams to lead a group of local drillers with operations in the area to investigate whether drilling had contaminated Prather’s water.

Prather’s lawyer, Richard Djokic, compared the practice to letting the suspects investigate a murder.

“Imagine you have a body on the ground here, and we’re all standing around holding guns,” Djkokic told the Post. “A cop comes and says, ‘Figure out amongst yourselves who did this and let me know.’”

The result of Williams’ investigation of itself: Williams didn’t do it. After drilling monitoring wells and conducting tests, Williams maintained its operations had nothing to do with fouling Prather’s well.

Before finishing the case, the commission hired its own consultants to test the water, building on the monitoring wells paid for by the companies. It spent at least $129,000 on the services of four environmental contractors and two chemistry laboratories, in addition to hundreds of hours of staff time.

More than two years later, commission staff recommended fining Williams $498,000.

But when the case was resolved in July 2010, staff recommended reducing that by 15 percent because the company “demonstrated a prompt, effective and prudent response” and coordinated the company-funded probe, spending about $1.3 million, and spent $8.5 million to improve its water-management operations in the area. The company agreed to settle the case, though it admitted to nothing.

Williams’ parent company brought in profits of $2.6 billion in 2008. According to securities filings covering the period of Prather’s fateful gulp, the company brought in profits of more than $423,000 in two hours of operations.

David Neslin, director of the commission, noted that the money Williams spent on the investigation outstripped any economic benefit that the company gained from the violations. The fine, he said, was the result of an extensive process, including negotiations, consultation with top managers and, finally, a public airing before the commission.

“Settling these matters is not an exact science,” Neslin said.

Tests done on Prather, 63, didn’t show permanent damage. But he already had health problems, such as shaking in his hands and head, and they’ve gotten worse.

Fines are generally stiffer in Pennsylvania, which is the volatile center of the United States’ shale boom. As drilling in the state’s Marcellus Shale ramped up, the state Department of Environmental Protection raised permit fees and doubled the number of staffers regulating oil and gas. Still, it has been harshly criticized by environmentalists and even other state regulators for being lax. The 117 fines it levied in 2010 accounted for about 4 percent of the violations found.

“We’ve taken enforcement very seriously,” said John Hanger, the former head of the Pennsylvania Department of Environmental Protection (DEP) at the time. “We enforce the rules here. No state in the country has a stronger regulatory environment than Pennsylvania.”

But not every violation results in enforcement. Records show no attempt to seek penalties in 2010 after three DEP employees found standing water around a well near Lathrop, Pa., and a constant bubbling from around the concrete that is supposed to seal the well. And a Wyoming company saw no enforcement action after a meter reading showed gas leaking out of the top of the drill steel.

Part of the $3.7 million in fines Pennsylvania levied last year was a $900,000 fine against Chesapeake Energy for contaminating the water supplies of 16 homes in Bradford County in northern Pennsylvania. The new head of the state’s DEP noted it was the largest fine the state had ever levied against an oil and gas operator.

Still, it represented less than three hours of profits for Chesapeake, which made a $2.8 billion profit last year. And it adds up to $56,250 for each home.

But even if a fine does not dent the bottom line at corporate headquarters, it is still punishing for local managers who have to explain themselves before state boards and agencies, Wyoming Oil and Gas Supervisor Tom Doll said.

“It’s embarrassing,” Doll said. “I’ve been on the other side of that. You don’t want to go do that again.”

In one state, New Mexico, regulators have issued no fines for more than a year, because they are not allowed to anymore. In 2009, the state Supreme Court agreed with Marbob Energy Corp., a driller based in Artesia, N.M., that the state Oil Conservation Commission had to ask the attorney general to go to court to sanction an operator and could not issue fines.

Industry defends state regulators

Industry’s defense of state regulation usually comes in response to the suggestion that U.S. EPA should play a stronger role in regulating drilling.

As proof, industry representatives generally cite a publication of the Ground Water Protection Council called “State Oil and Natural Gas Regulations Designed to Protect Water,” recent comments by members of the Obama administration’s “fracking panel” that reviewed the safety of gas drilling and the work of an organization called STRONGER Inc., a nonprofit affiliation of industry, state regulators and the environmental community that conducts a type of peer review for state regulators.

The Ground Water Protection Council is an organization of state officials who regulate oil and gas and water issues. The “Key Message No. 1″ in the council’s May 2009 report: “State oil and gas regulations are adequately designed to directly protect water resources.”

But the description in the report’s executive summary undercuts that assertion, saying the study “is not an evaluation of state programs.”

Obama’s fracking panel, formally a subcommittee of the Secretary of Energy Advisory Board, has given mixed reviews of state regulation. It delivered an interim report in August that said the effectiveness of current regulations “is far from clear” and added, “Absent effective control, public opposition will grow, thus putting continued production at risk.”

But four of the panel’s nine members offered a more upbeat assessment when they testified last month. Steven Holditch, professor of petroleum engineering at Texas A&M University, said the state regulators who testified before the panel “indicated that they think they’re doing a very good job.”

Daniel Yergin, author of widely respected books on energy and chairman of IHS Cambridge Energy Research Associates, said, “We were all, I think, very impressed by the quality and the focus and the experience, the long experience, of the states in terms of regulating oil and gas.”

Former Clinton administration Council on Environmental Quality Chairwoman Kathleen McGinty noted that the panel was not asked to recommend which agency should regulate oil and gas. But she said they did not find a gap in the regulatory safety net.

“There is nothing in the testimony we heard or the substance that we focused on,” McGinty said, “that led to a glaring conclusion that there was an actor missing from the scene.”

STRONGER Inc., which stands for State Review of Oil Gas Environmental Regulations, puts together teams that include industry, state and environmental representatives to review states.

“To me that’s the best verification” of state regulatory effectiveness, said Tom Stewart, executive vice president of the Ohio Oil and Gas Association. He is a believer in STRONGER and a board member.

He said the review process was a crucial part of updating hydraulic fracturing regulations in Pennsylvania, where drilling in the Marcellus shale is a divisive issue. And he said it has helped many other states upgrade their regulations.

But Wilma Subra, an environmental scientist from Louisiana who represents the environmental community on the STRONGER board, said it overstates STRONGER’s mission to say it offers proof of state regulatory effectiveness.

The reviews are voluntary, and Subra says STRONGER has had difficulty persuading states to volunteer for a full review of their programs. Eleven of the 30-plus oil and gas states have never been reviewed. In the past few years, STRONGER has evaluated regulations only of the narrow process of hydraulic fracturing regulations. It hasn’t reviewed a full state regulatory program since Tennessee in 2007.

“Hydraulic fracturing is two to three pages of the guidelines, out of maybe 80,” she said. “It’s looking just at hydraulic fracturing, not the pits, and not so much the enforcement.”

Click here to see the Texas Sunset Commission’s report on oil and gas regulation by the Texas Railroad Commission.

Click here to see the “Self-Evaluation Report” of the oil and gas regulatory agency, the Texas Railroad Commission.

Click here to see the Texas Railroad Commission’s latest “Self-Evaluation Report.”

Click here to see Elizabeth Todd Burns’ blog about oil and gas operations on her husband’s family ranch.

Click here to see the December 2009 letter from Texas officials on the “Bubbling Road.”

Click here to see the January 2010 letter from Texas officials on the “Bubbling Road.”

Click here to see the consent order in the case of Ned Prather in Colorado.

Click here to see the report cited by industry to show the sufficiency of state regulation.

Click here to see the webpage of STRONGER Inc.

By Mike Soraghan, E&E reporter

Replicated only for posterity. All credit goes to Mike Soraghan and Eenews.net. Copyright 2011. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Original article found @http://www.eenews.net/public/Greenwire/2011/11/14/1

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