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Patrick Springer, Published August 10 2013

Profit-based fines sting water-permit violators in Oil Patch

FARGO – North Dakota regulators recently collected $1.7 million in fines from companies that violated permit requirements for selling water to the oil industry under a policy shift aimed at denying profits for breaking the law.

The fines were levied in 14 cases for violations in 2012. So far this year, no violations of permits for the sale of water for industrial use have been documented by the state.

“There shouldn’t be a profit for violating the law,” said Jon Patch, who oversees water appropriations granted by the North Dakota State Water Commission.

The fines for 2012 violations year ranged from about $600 to almost $800,000, he said, illustrating the wide variation in severity of violations, most of which involved exceeding the amount of water allowed by permit.

“We realized that you can’t have a one-size fits all” approach, Patch said.

By examining records, officials can determine the profits for illegal water sales and use that figure as the fine. For many violators, the penalties were a “double whammy,” since they were forced to forgo income from sales the following year equal to the volume of water sold illegally.

Big fines

Large volumes of water are required to drill oil wells in the booming Bakken Formation, and to free oil embedded in tight shale stone layers deep underground through a process called hydraulic fracturing, or “fracking.”

Enforcement of monitoring of industrial water sales in the Oil Patch has received increased attention in recent months, including legislative scrutiny of a sector with sales last year estimated between $45 million and $100 million.

Before basing fines on profits from illegal sales, a stiff penalty would have been $20,000, the amount imposed in a 2010 case, as previously reported by The Forum.

Two large administrative cases, totaling $1.4 million, comprised the lion’s share of the 2012 fines. Both were concluded by settlements in which the violators agreed to sanctions imposed by regulators.

The largest case involved a water depot in McKenzie County located a few miles northeast of Watford City.

Mark Johnsrud had an irrigation permit that was temporarily converted to industrial use. Inspectors determined that the water depot exceeded its authorized 202 allocation by almost 164 acre-feet. One acre-foot equals 325,851 gallons, the volume that would cover an acre a foot deep in water.

Johnsrud’s permit authorized pumping up to 279 acre-feet of water for industrial use, and sold almost 443 acre-feet, according to state records.

Inspectors discovered the discrepancy last August when checking water meter readings.

Johnsrud, the chief executive for Power Fuels, a firm based in Watford City that hauls water to service the Bakken oil industry, said the violation was an oversight.

His temporary permit to sell water for industrial use in lieu of irrigation allowed Johnsrud to use 54 percent of his normal water allocation, Johnsrud said. In that sense, he believes he didn’t exceed his allowance.

Still, Johnsrud said he agreed to settle with the state. He had lost track of the volume of water in the midst of a busy summer, which included preparations to merge with another company.

“It’s my error,” he said. “At the end of the day, I was embarrassed this came up. We sure didn’t intend to do anything wrong.”

Power Fuels has grown from about 60 employees seven years ago to 1,200 today, and operates a fleet of 500 to 550 trucks.

In another major case, Tervita agreed this spring to pay a fine of $601,134 for selling water from a location 15 miles northwest of Parshall in Mountrail County without a permit.

Brett Williamson, a manager for Tervita based in Williston, said the violation occurred when it repeated a practice begun by a predecessor company.

Tervita, based in Calgary, is a conglomerate formed early this year through consolidation of several firms providing environmental services for the energy industry.

It acquired the former Crude Processing Inc., of Williston, which owned the industrial water terminal.

Tervita was entitled to use the water, but not to sell the water to other firms, a stipulation it was unaware of until contacted by water regulators last year, Williamson said.

“It was something that our due diligence on the purchase didn’t catch,” he said. “It was not for resale, and we did not know that.”

Once notified of the violation, Tervita cooperated by providing information and paying the fine, Williamson added.

Tervita no longer sells water to the oil industry in North Dakota, a service outside its focus on environmental services, he said.

Meters welcomed

Industrial water sellers that have violated their permits were required to install meters equipped with devices that automatically report the volume of water sold.

The meters equipped to enable remote reading on a computer screen now are installed on about 50 of the 150 to 200 active water depots in the Oil Patch, according to state figures.

All water depots in a firm’s system are subject to the remote monitoring, even those that did not involve violations, Patch said.

“We’ve really stepped up our monitoring activity,” he said.

The water industry actually is welcoming the monitors as an efficient way to have convenient, real-time information about the volume of water sold from a depot, he said.

Meters cost from $1,500 to $2,000, and the system enabling remote readings costs less than $2,000. The data service typically costs $20 or less per month for each unit, Patch said.

“It’s not hugely expensive,” he added, especially when compared to the amount of some of the larger fines.

The cumulative amount of water involved in the 14 cases was not large, totaling about 350 acre-feet, Patch said.

That compares to the approximately 17,000 acre-feet of water sold for industrial use in western North Dakota last year.

Meters are required on all commercial water depots, but most must be read manually, on site. For many years, the state required the permit holders to submit annual reports.

Now, permit holders must submit monthly reports, and are subject to spot checks by field inspectors.

An audit conducted earlier this year for the North Dakota Legislature concluded that the state’s water monitoring system relied heavily on the “honor system” through self-reporting.

Auditors found seven violations during a 2½-year review period, five that exceeded the permitted water amounts and two cases where water was taken without a permit.

Also, in a sampling of 60 permits, auditors found 11 instances where users pumped more water than allowed in the permit. Most of the overages were small, with the largest at 26.8 acre-feet, according to the legislative report.

A pilot project to test the cost and results of remote meter monitoring systems has shown good results, said Michael Hove, senior water resource manager for the State Water Commission.

“This telemetry is as much for the permit holder as it is for us, so they can manage their water,” he said, referring to the remote monitoring technology.

So far, firms that supply water for the oil industry have embraced the remote monitors, Hove said.

“Everybody that I’m talking with is on board with this,” he said. “They see this as a big tool for them.”

Johnsrud agrees. He expects to have remote reading capability on his water meters installed within a month.

Readers can reach Forum reporter Patrick Springer at (701) 241-5522