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

Profit-based fines sting water-permit violators in Oil Patch by Patrick Springer, August 10, 2013, INFORUM
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.

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. 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.

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

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