Independent producers appeal oil, gas pit rules

New Mexico Business Weekly - July 28, 2008 http://albuquerque.bizjournals.com/albuquerque/stories/2008/07/28/story2.html

Friday, July 25, 2008

New Mexico Business Weekly - by Kevin Robinson-Avila NMBW Staff

Unity in New Mexico's oil and gas industry has fractured somewhat over new state rules on oil and gas pits.

The Independent Petroleum Association is appealing the rules in Santa Fe District Court. That action is supported by an industry committee of 16 large producers -- including ConocoPhillips and Occidental Petroleum Corp. -- which filed a separate but complementary appeal.

Nevertheless, the New Mexico Oil and Gas Association -- which in May praised the new regulations as an acceptable compromise between industry and government -- firmly opposes the litigation, said President Bob Gallagher.

"I was surprised and disappointed by the appeal," Gallagher said. "Maybe we can't term our compromise with the government 'good,' but I believe it was reasonable and something we could work with."

The state Oil Conservation Commission approved the pit rules in June, following more than a year of stakeholder discussion and public hearings organized by the Oil Conservation Division.

The rules obligate operators to use heavy-duty liners in all pits to protect against seepage of contaminated materials. It also prohibits pits that are too close to water wells, and it requires operators to haul much of the contaminated water, soil and other materials to permanent disposal sites.

Still, industry negotiated a number of key compromises, such as significantly raising toxicity standards to allow more waste to be buried on-site in deep trenches rather than being hauled away, Gallagher said.

"My recommendation to our members was to allow the rule to shake out in the field for a few months and then collectively address any concerns with the Oil Conservation Division," Gallagher said. "I believe the litigation serves to alienate the regulatory authorities and may damage the good work accomplished over a 10-month period."

Karin Foster, director of government affairs for the Independent Petroleum Association, said her group disagrees.

"Bob believes we can still resolve this problem through negotiations, but we believe it's time to appeal it in the courts," Foster said. "We represent a lot of the same companies in our membership, but our organizations have a difference of opinion on this issue."

Independent Petroleum Association President John Byrom said that the cost of complying with the rules is just too much for small independent operators.

"It will cost an additional $50,000 to $250,000 to comply for each new well drilled, and that doesn't include costs to retrofit existing wells," Byrom said. "We're not looking for a battle, but our view on this is different from the Oil and Gas Association. Small independent operators will have a very tough time complying."

In its appeal, the association argues that no economic impact study was done as required by the state Small Business Regulators Relief Act and no transitional provisions were included to ease the conversion from old to new standards.

But state officials dispute the association's cost estimates. During pit rule hearings, independent operators testified that the costs for compliance would range from $35,000 in shallow wells to $150,000 in deep wells, said Oil Conservation Division spokeswoman Jodi Porter.

"Their numbers are off," Porter said. "Our estimates come right from the transcripts of testimony by operators at the hearings."

Porter said it would be far more costly for operators to clean up contaminated sites.

Division Director Mark Fesmire said he believes the appeal will fail.

krobinson-avila@bizjournals.com | 348-8302

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