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DEC's Overregulation of Small Oil Producers

by Carol W. LaGrasse

reprinted from The Property Owner's Experience, (PRFA, April 1998).


DEC's Overregulation of Small Oil Producers
Over the past fifteen years, thousands of oil wells in the Bradford Field (1) in southwestern New York have gone out of production. Although the wells have the capacity to steadily produce oil for many years (2), the operators are faced with low prices and increased costs of environmental regulation. The State regulations have been one of the two deciding factor in stopping production at most of these wells, according to Thomas A. Miller, a councilman in the Town of Allegany whose family has produced oil for over 100 years. Most of the wells produce under a barrel of oil daily. Many operators use their own labor and operate under a small margin that is gobbled up by the cost of compliance with State rules.

In October 1997, DEC held workshops on new "Draft Oil, Gas and Solution Mining Regulations," which small producers criticized for failing to solve the current problem of overregulation and proposing yet more expense and difficulty for them. Mr. Miller made a statement at DEC's Olean workshop and exchanged correspondence with Assemblywoman Patricia McGee. The Assembly Member's response was to forward Mr. Miller's letter to the Director of the Division of Mines, Gregory H. Sovas. In February 1998 Mr. Sovas wrote a remarkable reply dominated by platitudes about protecting "the resources of this state," meaning biological resources rather than minerals. He stated his conviction that the oil production in the oil fields was dying anyway.

"... oil and gas production in the oil field is no longer a viable industrial enterprise, but is in the final stages of decline." (letter of February 17, 1998)

This statement raises the question of whether anti-production prejudice precludes the Division from judging the practicality of its impositions on the producer.

The prejudice of the Minerals Division director is further demonstrated by another written statement falsely accusing the producer, who has devoted his life's effort to oil production, of "keeping wells in production with virtually no maintenance" to avoid plugging.

Although posed with more technical discipline and respectful attention to the specific comments of producers, a "Summary - Oil, Gas and Solution Mining Workshops" which DEC published in January 1998, did not offer promise that major problems about which Mr. Miller complained would be alleviated.

1. Summary of Problems with DEC Regulations
(excerpts from Letter of Thomas A. Miller)
"Historically, the small producer would periodically drill a new well to maintain a level of production and therefore cash flow that would enable him to meet expenses involved in proper operation of wells. It was common for the operator to plug a couple of low volume wells from which he could salvage materials for the new wells. The plugging, and quite often the drilling, were in-house operations. Thus it was possible for a small producer to maintain an income and to properly plug and abandon useless wells at low cost.

"This all ended with the bonding requirements. Initially well bonds were somewhat available, but that availability has all but dried up. Consequently, the small producer with limited capital has lost his ability to drill new wells..."

"It is obvious that the small producer cannot stand any additional regulatory burdens. They are at a point now where they can barely afford to keep operating. They can afford even less to cease operations. Because of the stricter regulations and the increased costs of contract plugging due to the decline of the oil field, higher labor costs, etc., an average oil well which previously had a salvage value, is now a $2000 or greater plugging liability. It is impossible for the average small producer to plug wells himself, for he is so busy struggling to maintain his producing wells that he has no time for plugging. If he were to drop everything and go to plugging, he would very soon be unable to afford the cement, fuel and other plugging expenses and would be bankrupt because his existing production would drop off from lack of maintenance."

"Many wells are at the point of break-even or worse, but what recourse does the producer have? Thanks to the State regulations, the wells are a liability, so selling them is not an option..."

"Will it really benefit the environment for an oil producer to go bankrupt...? If this were to happen and the state plug the wells, there is no way the plugging costs would be recovered...

"The DEC may try to lay the blame on low oil prices. The industry has weathered low price cycles since its infancy...

"The formations produced by the small producers in New York State are slow producing but very long lasting. It is a terrible waste of valuable resource to plug wells that are still capable of producing. Penn Grade Crude is a valuable petrochemical feedstock." (excerpts, letter of Thomas A. Miller to Assemblywoman Patricia McGee, October 1997)

2. October 1997 Revised DEC Regulations
The Catch-22 for small oil producers has been that DEC dictates that they permanently seal to costly requirements wells that are not active for a short period of time. Producers would like to keep cycling out declining wells and starting new ones, but, not only are the costs of closing wells by DEC standards too great, the DEC requirements for new wells, especially the permitting and bonding, are so expensive that new wells are not feasible. Bonding is not really available to small producers, which means that for each well they must place $2,500 in escrow as long as the well is in operation.

In addition, producers face many DEC regulations during operation. Even their materials are regulated by DEC. For instance, recycling pipe, as small producers do, conflicts with DEC's requirement that pipe be tested at high pressure even though the pressures in the field are low.

Furthermore, DEC is about to institute a rule that producers can no longer dispose of the water that comes up with their oil in a production pit at the well site. Under "zero discharge policy" they will be expected to obtain and set up storage tanks for volumes of water in excess of ten times their oil volume, somehow keep the water (which is so low in salt that it freezes at 32º F) from freezing, and pay to have it hauled away to a plant in Pennsylvania where it is not treated for the small amount of salt but is discharged to a stream with briny solutions with their salt, also, untreated. Either the haul or the tipping fee would cost far more than the gross production receipts. Small producers cannot meet this expense.

Ominously, early in the proposed rules is the elimination of the previous purpose to "foster and encourage industry" from the regulations. DEC states that this change is based on legislative amendments.

"Drilling permit" is changed to "Permit to Drill and Operate" and the DEC gains authority over long lists of virtually every detail of drilling and operating. The design and layout of the pipelines all has to be presented to DEC for approval.

DEC can order an owner to plug a well if it hasn't been used for 90 days, or if — without DEC's written permission — it is "shut in" for over a year. If the owner fails to plug the wells as ordered by DEC, the agency can plug them and collect the entire cost from the owner. If DEC decides a well is a "danger" to the environment, it can "take temporary possession" of the property and plug the well, "reclaim" the site and bill the owner.

Worse yet, DEC's draft regulations assert the right to freely enter the premises of an oil producer at any time, notwithstanding signs to the contrary, and also to inspect records at any time. Many oil producers keep their records in their home.

Thus the new DEC rules officially pronounce a fundamental change in attitude toward petroleum production, which is now to be non-supportive; add an impossible-to-achieve waste water disposal requirement; give DEC more power to plug wells which operators have not yet decided to retire, and give DEC a near total micromanagement power over the operations, facilities and equipment, and records of the producers. The new rules bring in DEC as a full partner in the control of the small producer's property and business, as well as its future operations.

But the producer's partnership is with a nonproductive non-investor whose attitude is somewhere on the spectrum between disinterest and hostility toward oil production.

3. Wells closed because of DEC bonding requirement
Until 1996. Rick Buffington of Portville, N.Y. was operating two wells that belonged to Ebenezer Oil Company. The oil company decided to get out of the oil business after 100 years because of the financial investment it had tied up as security for all of its wells, according to Mr. Buffington. It offered the two wells to Mr. Buffington, who would have been pleased to acquire them, as they were on neighboring property and produced together about 2,500 cu. ft. of gas daily. The gas from the wells could easily heat ten homes. They also produced about one-half barrel of Pennsylvania crude daily.

But to assume ownership of the wells, Mr. Buffington would have had to put up $5,000 in a certificate of deposit to meet DEC's bonding requirement of $2,500 per well. To obtain bonding privately, the producer would have to pay $500 yearly but also would have to purchase liability insurance. The gross receipts at wholesale level minus the expenses to operate would not permit this, Mr. Buffington concluded.

Mr. Buffington was forced to refuse the offer, "The bonding requirements were just too excessive for the wells to continue to be operated," he said. "The gas that was lost forever in these two wells that were plugged, I don't see how it can ever be recovered."

4. DEC Flaunts its Own Rules
The State of New York owns 70 abandoned oil wells in Allegany State Park which it has not plugged. The cost of government-contracted plugging of wells in the same oil field in nearby Pennsylvania ranges from $3,730 to $273,600, and averages $24,600. The question arises of why the DEC feels the "environmental" considerations have to be met with inflexible deadlines to plug still productive, inactive wells, when the costs are imposed on private owners, especially considering that the wells owned by oil producers are supervised and that the abandoned wells in Allegany Park lack professional oversight. One well in Allegany Park has an opening large enough for a person to fall into.

Looking back at the history of Allegany Park, it should be noted that oil was produced there by Freeman Brothers even after the park boundaries were established. According to John P. Herrick, "Although their lease was within the boundaries of Allegany State Park, it was free of restrictions due to prior rights..."

"These wells produced a high gravity amber oil with a nominal volume of salt water. When the salt water was drawn from the oil tanks, it ran down a gully and formed pools around the roots of trees, creating a natural salt 'lick' for the large herd of wild deer in the forests of the state game preserve. As many as 40 deer at a time came over well-defined trails to their mineral mecca. Does brought their fawns to the 'licks' as soon as they were able to travel. Hunting restrictions in the park soon made the deer disregard the movements of the man who pumped the oil wells — another good example of harmony in nature." (John P. Herrick, Empire Oil - The Story of Oil in New York State, 1949, pp.62 & 63)

It would be interesting to know what risks (and their probability) are attributed by DEC to the disposal of the very low-salt water produced by oil wells described by Thomas A. Miller, and how DEC justifies its proposed regulations outlawing the current system of pit disposal.

Overview of Background Problem
Risks of small (and even infinitesimal) magnitude determine costly state policy. By this is meant not those risks with very small likelihood of occurrence but potential for great harm (3), but those risks with small likelihood of occurrence and potential for small harm.

Many of the State's costly pollution control policies are excessively conservative, dealing with matters of mere housekeeping, aesthetics, small quantities and/or micropollutant levels of discharges, and do not take into account the absorption and breakdown capacity of the property which the producer owns or the lack of any historical human or wildlife injury from the pollutant levels produced. A scientific evaluation of these issues is called risk analysis.

The State also fails to weigh the costs to the producer of the State's requirements. Some costs are so minor that they can reasonably be imposed without examination. But where regulatory costs reach the level that producers close shop, these costs have well-surpassed the point where a second classical form of analysis is essential. This is economic, or cost-benefit, analysis.(4)

State regulatory policies by their excessiveness force small producers to redirect economic resources in fruitless pursuits instead of toward meeting the intent of legislation.

In addition, the State government does not abide by its own rules and perpetuates some of the same risks for which it imposes costly controls on private producers.

Furthermore, the question arises of whether some regulators are biased against the very industries to which their departments are officially dedicated.

The problem may reach to a deeper level than that of an ivory tower bureaucracy dictating cost-ineffective remedies for imagined problems. It may be that management in certain agencies is hostile to the producer. If this is true, instead of the producer facing a good-willed agency that lacks the normal judgement capacity to be flexible to the producer while protecting the public interest, he may face an agency that simply wants to shut him and his industry down. Imagined concerns about inconsequential levels of far-fetched pollution, enforced by inflexible, unworkable rules are then a tool in the hands of a biased bureaucrat.

Structural change is desperately in order to restore the working of state regulatory agencies so that the pursuit of productive enterprise can not be unduly hampered by bureaucrats who are unable or unwilling to apply rudimentary risk analysis and cost-benefit considerations because their minds are already decided against the producer, and, in the case of the Division of Mineral Resources, the entire industry.

The State should eliminate cost-ineffective regulations and permitting requirements which serve no practical function of pollution control.

History, magnitude and probability of potential harm, and economic analysis — or what are defined as rational risk analysis, and cost-benefit analysis — not the rigid personal bias of regulators, should determine policy.

(1) The Bradford oil field still contains immense reserves. A geologist studying the oil and gas reserves in the area gave this appraisal of the reserves in the Bradford Field: "Only 7% of the oil was recovered by primary methods. An additional 20%± was recovered by re-pressuring the field with formation water or fresh water until the wells flowed. A major portion of reserve remains in the ground and could possibly be recovered by tertiary methods. 6800 Bbl/acre oil in place is estimated from core information in this field." (Sam Myers, "The General Sub - Surface Gas and Oil Geology of the Olean, N.Y. Area," Mantua, Ohio, March 1975)
(2) The economic benefit of stripper wells is great. According to the Dan Olds (Marginal Oil and Gas: Fuel for Economic Growth, Interstate Oil and Gas Compact Commission, 1997, p.17) these wells accounted for $9.2 billion in oil and gas production in 1996. The oil produced by stripper wells is almost 15% of U.S. production, or 963,000 barrels per day.
(3) This analysis does not address areas where monumental questions of public safety are raised, the most obvious involving the debates about nuclear power plants.
(4) Risk analysis and cost-benefit analysis can be done simply with "order of magnitude" solutions that are not costly to develop and will be fair as long as they are tied to history and experience, and regulators do not use the requirement for such studies to produce a conundrum for the property owner of having to do expensive studies. Basically, regulators should perform the studies that are in common to all those regulated who produce a common effluent under related production circumstances, and the producer merely contribute to the analysis the numbers related to his particular production capacity. Thus the regulations that are promulgated and the conditions imposed would flow from both risk analysis and cost-benefit analysis.

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