Performance audit, Oil and Gas Conservation Commission

              PERFORMANCE AUDIT
OIL AND GAS
CONSERVATION COMMISSION
A Report to the Arizona Legislature
By the Auditor General
September 1984
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
September 19, 1984
Members o f the Arizona Legislature
The Honorable Bruce Babbitt, Governor
Mr. A. K. Doss, Executive Director
O i l and Gas Conservation Comission
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the O i l and Gas Conservation Commission. This report i s i n
response to an A p r i l 27, 1983, resolution of the J o i n t Legislative
Oversight Committee. The performance audit was conducted as a part of the
Sunset Review set f o r t h i n A. R. S. § § 41- 2351 through 41- 2379.
This performance audit report i s submitted t o the Arizona Stale
Legislature f o r use i n determining whether t o continue the O i l and Gas
Conservation Commission beyond i t s scheduled termination date of
July 1, 1986. The report addresses the Commission's effectiveness i n
regulating o i l and gas operations i n Arizona and makes recommendations to:
1 ) improve the information available f o r issuing permits, 2) c l a r i f y
p o l i c i e s f o r protecting groundwater, and 3) increase bond requirements.
My s t a f f and I w i l l be pleased t o discuss or c l a r i f y items i n the report.
Respectful ly submitted,
~ bucajl y ~ . N orton
Auditor General
Staff: W i 11 i am Thomson
Mark Fleming
Cheryl Fruchter
P a t r i c i a Krueger
Encl osure
The Office of the Auditor General has conducted a performance audit of the
Arizona Oil and Gas Conservation Commission i n response to a resolution of
the Joint Legislative Budget Committee. Thi s performance audit was
conducted as part of the Sunset Review s e t forth i n Arizona Revised
Statutes ( A. R. S. ) § § 41- 2351 through 41 - 2379.
The Oil and Gas Conservation Commission ( OGCC) regulates a l l o i l , gas,
he1 i u m , and geothermal wells, and oil and gas storage wells i n Arizona.
A. R. S. $ 27- 502 establishes a s t a t e policy to conserve o i l , gas and other
natural resources, protect ownership rights and safeguard public health.
OGCC executes this pol icy by reviewing and issuing permits to d r i l l we1 1 s
and monitoring drilling activity. In addition, OGCC maintains information
on a1 1 we1 1 s under its jurisdiction and a s s i s t s individual s seeking
information on Arizona's petroleum resources.
The Oil and Gas Conservation Commission Does Not
Obtain The Necessary Additional Information
Before Issuing Drilling Permits ( see page 13)
The O i l and Gas Conservation Commission does not obtain needed information
on proposed drilling operations and groundwater location before approving
appl i c a t i ons for permits to d r i l I . The Commission does not require a1 1
appl icants to provide sufficient information on proposed operations, nor
does i t notify the Department of Water Resources ( DWR) of proposed
drilling until after the permits have been issued. Lack of sufficient
information on proposed drilling operations and groundwater location and
qua1 i ty may reduce OGCC ' s effectiveness i n ensuring safety and protecting
groundwater and other natural resources.
OGCC should require all operators applying for d r i l l i n g permits to submit
drill ing programs that provide specific information on drill i n g
conditions, anticipated problems, and d r i l l ing operations and procedures.
The Commission should a1 so review information from DWR on water location
and qua1 i ty before issuing any permits to d r i l l exploratory we1 1 s.
Pol i c i e s For Protecting Groundwater
Are Not Well Defined ( see Daae 231
A1 though groundwater i s an important resource i n Arizona's a r i d c l imate,
OGCC rules and procedures do not provide clear guidance f o r making
decisions on requirements t o protect groundwater during o i l and gas
operations. Commission regulations s t i p u l a t e the use of surface casing t o
protect water, but the Commission does not always enforce t h i s
requirement. Instead, OGCC r e l i e s on other methods, which may not be
equally e f f e c t i v e i n protecting v i t a l groundwater resources. The
Commission needs t o review i t s r e g u l a t i o n r e q u i r i n g surface casing and
e i t h e r enforce it consistently or revise it based on c l e a r d e f i n i t i o n s of
fresh water and consistent c r i t e r i a f o r evaluating a l t e r n a t i v e means of
protection.
Bond Requirements For Single O i l and Gas
We1 1 s I n Arizona Are Inadequate ( see page 31 )
Arizona's bonds requirements f o r single o i l and gas wells are not adequate
t o ensure t h a t wells are properly closed off when a l l operations are
completed. We1 1 s d r i l led f o r expl oration and production can pose
s i g n i f i c a n t harm t o groundwater, minerals and other natural resources i f
wells are not properly closed o f f and the area around a we1 1 s i t e i s not
restored. A1 though bond requirements for mu1 t i p l e we1 1 s i n Arizona appear
t o be adequate, current bond amounts do not cover the costs o f closing o f f
individual we1 1 s and restoring d r i l l ing sites deserted by owners.
Increasing the individual bond requirement t o $ 1 0,000 would ensure
adequate funds to close - most we1 1 s without discouraging expl oratory
d r i l l i n g i n Arizona.
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . . . 1
SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINDING I : THE OIL AND GAS CONSERVATION COMMISSION DOES NOT
OBTAIN NECESSARY INFORMATION BEFORE ISSUING DRILLING PERMITS . . . 13
Information On D r i l l ing Operations And Groundwater I s Limited . . . 13
Lack O f Information May L i m i t Regulatory Effectiveness . . . . . . 17
Additional Requirements Would Not Burden Industry . . . . . . . . . 19
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINDING 11: POLICIES FOR PROTECTING GROUNDWATER ARE
NOT WELL DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . 23
OGCC Does Not Consistently Enforce Casing Requirements . . . . . . 23
A1 ternatives To Surface Casing May Not Be Adequate . . . . . . . . 26
New Regulations May Be Needed To Ensure Groundwater Protection . . 28
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FINDING 111: BOND REQUIREMENTS FOR SINGLE OIL AND GAS WELLS IN ARIZONA ARE INADEQUATE . . . . . . . . . . . . . . . . . . . . . . 31
Bonding I s Necessary To Protect Natural Resources . . . . . . . . . 31
Current Bond Levels For Single Wells Are Too Low . . . . . . . . . 33
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 36
OTHER PERTINENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . 37
AREAS FOR FURTHER AUDIT WORK . . . . . . . . . . . . . . . . . . . . . 39
AGENCY RESPONSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
LIST OF TABLES
Page
d
TABLE 1 - O i l And Gas Leases I n Arizona, 1982 Estimate. . . . . . . . 3
TABLE 2 - O i l And Gas Exploration I n Arizona, 1980 Through 1983 . . . 3
TABLE 3 - O i l And Gas Conservation Commission Revenue And
Expenditures, Fiscal Years 1979- 80 Through 1983- 84. . . . . 5 9
TABLE 4 - Bonding Requirements For O i l and Gas Wells I n
Selected States. . . . . . . . . . . . . . . . . . . . . . 41
LIST OF FIGURES •
Page
FIGURE 1 - Arizona O i l And Gas Production, 1963 Through 1983 . . . . . 2
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the
Arizona Oil and Gas Conservation Commission i n response to a resolution of
the Joint Legi sl ative Budget Committee. Thi s performance audit was
conducted as part of the Sunset Review s e t forth i n Arizona Revised
Statutes ( A. R. S. ) § § 41- 2351 through 41 - 2379.
The Oil and Gas Conservation Commission ( OGCC) regulates a l l o i l , gas,
helium, and geothermal wells, and oil and gas storage wells i n Arizona.
A. R. S. $ 27- 502 establishes a s t a t e policy to conserve o i l , gas, water and
other natural resources, protect ownership rights and safeguard public
health. OGCC executes this policy by reviewing and issuing drilling
permits and monitoring d r i l l ing activity. In addition, OGCC maintains
information on a1 1 we1 1 s under i t s jurisdiction and a s s i s t s individuals
seeking information on Arizona's petroleum resources.
Oil and Gas Activity i n Arizona
Arizona has been a s i t e f o r o i l and gas exploration since 1903, when the
f i r s t exploratory hole was drilled i n the Chino Valley area north of
Prescott. More than 120 exploratory we1 1 s were drilled i n Arizona before
the f i r s t oil was discovered on the Navajo Indian Reservation i n
northeastern Arizona i n 1954. A1 1 subsequent oi 1 production i n Arizona
has occurred on the Navajo Reservation. Altogether, 731 oil and gas wells
have been drilled i n ~ r i z o n a . Seventy- four wells have produced oil from
13 separate fie1 ds.
Arizona wells produced 18.6 million barrels of oil through the end of
1983. However, Arizona's annual oil production has never exceeded 1
percent of total U. S. production. Almost 90 percent of Arizona's
production has come from the Dineh- bi- Keyah f i e l d , discovered on the
Navajo Reservation i n 1967. In 1968 this field produced almost 3.4
mill ion barrels of oil , Arizona's highest annual yield. Annual production
from the field decreased to 196,883 barrels in 1983. Total annual
production i n Arizona has declined to 239,613 barrels in 1983 ( Figure 1 ).
FIGURE 1
ARIZONA OIL AND GAS PRODUCTION
1963 THROUGH 1983
1965 1970 1975 1980
Source: Compiled from Oil and Gas Conservation Cornrni ssion data
Despite the decl ining production, approximately 18 mil 1 ion acres,
one- fourth of Arizona's total land area, are under oil and gas leases on
federal, Indian, state and private lands ( Table 1 ). t4ost leases are on
federal or Indian land. A11 production is located on Indian land.
Several federal agencies have primary responsibi 1 i ty for regulating we1 1 s
drilled on federal and Indian lands. However, OGCC also has some
responsibil ity for regulating these we1 1 s, in cooperation with federal
authorities.
TABLE 1
OIL AND GAS LEASES IN ARIZONA
1982 ESTIMATE
Federal
Acres
10,500,000
Percent
58%
State 2,500,000 14
Private
Total 18,000.000 J- OJl%
Source: I n t e r s t a t e O i l Compact Commission
Because Arizona has r e l a t i v e l y few proven o i l f i e l d s and 1 i t t l e
production, most o i l d r i l l i n g i n the state i s exploratory. An exploratory
well i s one d r i l l e d i n an area t h a t has no known o i l production.
Exploratory a c t i v i t y i n Arizona has varied widely i n recent years ( Table
2). None o f the 65 wells d r i l l e d since 1980 have i d e n t i f i e d new o i l
f i e l d s . The l a s t new f i e l d was discovered i n 1971. I n contrast t o
Arizona, most d r i l l i n g i n major o i l producing states such as Texas or
C a l i f o r n i a takes place on known o i l f i e l d s .
TABLE 2
OIL AND GAS EXPLORATION I N ARIZONA
1980 THROUGH 1983
D r i 11 i ng permits i ssued 11 27 3 0 15
Wells d r i l l e d 9 18 26 12
Producing we1 1 s o 6 ( 1) 1 ( 1) 1 ( 1)
( 1) Wells d r i l l e d on e x i s t i n g f i e l d s
Source: O i l and Gas Conservation Commission
Development o f OGCC
OGCC was established i n 1959. The Commission consists o f f i v e members
appointed by the Governor for 5- year terms. A. R. S. $ 27- 514 requires t h a t
members be U. S. c i t i z e n s and residents o f Arizona f o r 5 years p r i o r t o
t h e i r appointment. No more than three members may be o f the same
p o l i t i c a l party. I n a d d i t i o n t o the appointed members, the s t a t e land
commissioner i s an ex o f f i c i o member o f OGCC. Before 1959, the State Land
Department regul ated o i l and gas operations i n Arizona.
The Commission's r o l e has changed since it was f i r s t established i n 1959.
O r i g i n a l l y , OGCC f e l t i t s purpose was l a r g e l y t o promote the development
o f a petroleum industry i n Arizona. More recently the Commission has
emphasized regulation o f c r i t i c a l a c t i v i t i e s and conservation. Revised
r u l es added regul atory responsi b i 1 i t i e s i n 1965 and 1971 . Currently, OGCC
s t a f f s t a t e s t h a t protecting p u b l i c health and natural resources are among
i t s primary goal s.
Growth of OGCC's regulatory r o l e r e f l e c t s the increased awareness o f
p o t e n t i a l problems i n o i l and gas operations. A1 though the industry has
existed since the l a t e 19th century, o i l and gas d r i l l i n g and production
technology has not always been equal t o modern techniques. As a r e s u l t ,
some of the early d r i l l i n g resulted i n problems i n several states, such as
1 eaki ng we1 1 s and groundwater contamination. Thus, some regulation i s
necessary t o ensure t h a t t h e i n d u s t r y f o l l o w s proper procedures i n seeking
and producing o i l and gas.
Personnel and Budget
OGCC has a staff of four f u l l - t i m e employees who c a r r y o u t the d a i l y
operation o f the Commission. The s t a f f consists o f an executive director,
a d i r e c t o r o f enforcement, an administrative assistant and a secretary.
The Commission' s operating budget i s appropriated from the general fund.
A 5- year summary o f revenues and expenditures i s provided i n Tab1 e 3.
TABLE 3
OIL AND GAS CONSERVATION COMMISSION REVENUE AND EXPENDITURES
FISCAL YEARS 1 97 9- 80 THROUGH 1 983- 84
Actual
1979- 80
Actual
1980- 81
Actual
1981 - 82
Actual Estimated
1982- 83 1983- 84
F u l l - time equivalency
positions 5
Revenues:
Permit fees $ 175
Expenditures:
Personal services 96,100
Employee related
expenses 17,400
Professional and
outside services 600
Travel
I n state 6,400
Out o f state 1,500
Other operating
expenses 16,200
Total $ 1 38.200 $ 146.400 $ 1 35.1 61 $ 1 39,600 $ 136.200
Source: OGCC budget requests, 1979- 80 through 1983- 84
Audit Scope and Purpose
The purpose o f t h i s audit i s t o evaluate the need f o r and adequacy of
regulation by the O i l and Gas Conservation Commission, as required by
A. R. S. SS41- 2351 through 41 - 2379. I n addition, we examined three specific
categories o f Commission a c t i v i t i e s - issuing d r i l l i n g permits, monitoring
a c t i v i t y and enforcing regul a t i ons.
Our audit work suggests that, given the r e l a t i v e l y small amount of
expl oration and production i n Arizona, OGCC hand1 es the on- si t e monitoring
of o i l and gas operations as well as any o f the 12 other states we
surveyed. Moreover, recent administrative changes have strengthened the
Commission's a b i l i t y t o monitor d r i l l i n g a c t i v i t y . With the exception o f
bond requirements ( see Finding 111, page 31), we found no major
enforcement problems. However, our audit work indicates the need t o
improve information avai 1 abl e before d r i 11 i ng permits are issued and t o
review Commission requirements f o r casing we1 1 s.
The a u d i t r e p o r t presents findings i n three specific areas.
e The adequacy o f information available t o OGCC f o r making
decisions t o issue d r i l l ing permits.
e The need t o review OGCC regulations on groundwater protection.
e The adequacy o f OGCC bond requirements.
I n addition, we devel oped information on OGCC professional salaries. The
section Other Pertinent Information presents t h i s information.
Due t o time constraints, we were unable t o address one p o t e n t i a l issue
i d e n t i f i e d during our preliminary audit work. The section Areas f o r
Further Audit Work describes t h i s potenti a1 issue.
The Auditor General and s t a f f express appreciation t o the members o f the
O i l and Gas Conservation Commission, the executive d i r e c t o r and s t a f f f o r
t h e i r cooperati on and assistance during the audit.
SUNSET FACTORS
I n accordance with Arizona Revised Statutes ( A. R. S. ) S41- 2354, the
Legislature shoul d consider the f o l 1 owing 12 factors i n determining
whether t o continue or terminate the O i l and Gas Conservation Commission
( OGCC).
1. Obiecti ve and DurDose i n establ i shi nq the Commi ssion.
OGCC's objectives encompass both regulation and promotion of o i l , gas,
he1 ium and geothermal operations i n Arizona. A. R. S. S27- 502
establ i shes the Commission' s basic functions. Generally these
functions include:
e Conserving o i l and gas resources,
e Protecting and adjusting ownership r i g h t s ,
a Promoting the development of o i l and gas resources,
Encouraging a continuous and economical supply o f o i l and gas
resources, and
Safeguarding the health, property and public welfare of c i t i z e n s
o f the state.
2. Effectiveness with which the Commission has met i t s objective and
purpose and the efficiency with which the Commission has operated.
The Commission has been generally effective and e f f i c i e n t i n meeting
i t s objectives and purpose, but it needs t o improve coordination with
the Department o f Water Resources. OGCC promptly reviews appl i c a t i o n s
for d r i l l ing permits and c l osely monitors d r i 11 i ng operations. OGCC
strengthened i t s procedures i n 1982 t o more e f f e c t i v e l y monitor
c r i t i c a l aspects o f d r i 11 i ng operations. Our exami nation of recent
years' records found no evidence t o indicate t h a t Arizona's natural
resources have been harmed by o i l and gas operations. However, the
Commi ssion has not adequately coordinated the review o f d r i 11 i ng
applications with the Department o f Water Resources t o ensure t h a t it
has complete data on groundwater 1 ocation before issuing permits ( see
page 15).
3. The extent to which the Commission has operated within the public
interest.
OGCC has operated within the publ i c i n t e r e s t by protecting Ari zonal s
subsurface resources from hazards associated with drilling and
production activities. OGCC ' s permit review and enforcement
activities appear to reduce the likelihood of major environmental or
public health threats i n the development of o i l , gas, helium and
geothermal resources. However, the Commi ssi on needs to improve
coordination with the Department of Water Resources ( see page 13), and
review i t s requirements for casing wells ( see page 28).
4. The extent to which rules and regulations promulgated by the
Commission are consi stent w i t h the 1 egi sl ative mandate.
OGCC rules and regulations appear to be consistent w i t h the
Commission' s 1 egi sl ative mandate. The current rul es and regulations
were reviewed and approved by the Attorney General in 1982.
5. The extent to which the Commission has encouraged input from the
publ ic before promulgating i t s rules and regulations and the extent to
which i t has informed the public as to i t s actions and their expected
im~ act on the ~ u b l i c .
The Commission has properly informed the publ ic about scheduled
hearings i n recent years. The Commission has held 57 hearings since
1957, all of which were properly publicized. However, OGCC has not
prepared specific agendas for i t s regularly scheduled bimonthly
meetings, thus 1 imiting public awareness of the business before the
Commi ssi on. OGCC ' s Attorney General representative informed the
Commission i n March 1984 that the Arizona open meeting law requires
public agencies t o identify specific business items on their meeting
agendas. OGCC appears to be taking steps to comply with these
requirements for i t s next meeting.
6. The extent to which the Commission has been able to investiaate and
resolve compl aints which are w i t h i n i t s jurisdiction.
OGCC receives virtual ly no complaints from outside sources. Most
problems are identified through the Cornrni ssion' s monitoring program.
A. R. S. $ 27- 524. C requires the Commission t o take action on violations
w i t h i n 10 days of their discovery. In most cases OGCC resolves
problems before they become major. Our audit work disclosed only one
apparent violation out of 214 permits issued since 1975 that continued
beyond the 10 days allowed by law.
7. The extent to which the Attorney General or other applicable agency of
the state government has the authority to prosecute actions under
enabl i ng 1 egi sl ati on.
Under A. R. S. $ 27- 521 the Attorney General i s the attorney for the
Commission and has f u l l authority to prosecute actions under its
enabl ing 1 egis1 ation. In emergencies, the Commission may obtain
additional counsel w i t h the Attorney General ' s consent. The Attorney
General has the authority to use local sheriff and superior court
personnel when vi 01 a t i ons necessitate such action.
8. The extent to which the Commission has addressed deficiencies i n the
enabl ing statutes which prevent i t from ful f i l l ing i t s statutory
mandate.
OGCC has addressed deficiencies i n i t s enabl ing statutes that prevent
i t from f u l f i l l i n g i t s duties. According to the executive director,
i n 1982 the Commission supported House Bill 2350, which gave OGCC full
responsi bil i ty for regul sting oi 1 , gas, he1 i um and geothermal we1 1 s by
excluding these wells from ~ r i z o n a ' s Groundwater Act. Senate Bill
1348, passed in 1981 w i t h Commission support, authorized the
Commission t o appoint an executive director. OGCC staff do not
currently forsee any need for additional statutory changes.
9. The extent to which changes are necessary i n the laws of the
Commission to adequately comply w i t h factors l i s t e d i n the subsection.
Our audit work d i d not identify any necessary changes i n the
Commission's enabl ing legislation.
10. Extent to which termination of the Commission would significantly harm
the public health, safety or welfare.
Terminating the O i 1 and Gas Conservation Commi ssion would jeopardize
pub1 i c health and safety by eliminating a necessary control over
d r i 11 i ng operations i n Arizona. A1 though federal agencies woul d
continue to regulate such activity on Arizona 1 and control led by the
federal government, terminating OGCC would 1 eave s t a t e and private
lands without adequate protection from the potential hazards of oil
and gas operations and would eliminate a strong state voice i n federal
agency decisions. Other agencies, such as the Department of Health
Services, Department of Water Resources or the Arizona Game and Fish
Department, may be able t o supply some of the oversight now provided
by OGCC, b u t none of these agencies have sufficient expertise i n oil
and gas operations to ensure responsible development of Arizona's oil
and gas resources.
The extent to which the level of regulation exercised by the
Commission is appropriate and whether less or more stringent levels of
-- ~ - --
regul a t i on woul d be appropriate.
Although the overall level of OGCC regulation is appropriate, the
regulation requiring surface casing to protect fresh water may not be
appropriate. Usable fresh water is often located i n deep aquifers
( be1 ow 400 feet) i n Arizona, and surface casing to protect this water
may be prohibitively expensive compared w i t h other methods. OGCC
should review this regulation to determine i f i t is still valid ( see
page 28).
12. The extent to which the Commission has used private contractors i n the
performance of i t s duties and how effective use of private contractors
coul d be accompl i shed.
OGCC has not used outside private consultants in recent years. The
Commission does not usually hire private consultants in the
performance of i t s duties. OGCC ' s executive director did not idenfi ty
any cases i n which consultants were used. Private petroleum engineers
could be used part time if oil activity increased so that OGCC staff
could no longer handle the work load. According to the executive
director, OGCC's enabling statutes allow the Commission to hire
outside consul tants.
FINDING I
THE OIL AND GAS CONSERVATION COMMISSION DOES NOT OBTAIN NECESSARY
INFORMATION BEFORE ISSUING DRILLING PERMITS
The Oil and Gas Conservation Commission ( OGCC) does not obtain a l l the
necessary information on proposed drilling operations and groundwater
location from operators and the Department of Water Resources ( DWR) before
approving applications for permits to d r i l l . The Commission does not
require applicants to provide sufficient information on proposed
operations, nor does i t notify DWR of proposed drilling until after the
permits have been issued. Lack of sufficient information on proposed
d r i l l i ng operations and groundwater 1 ocation and qua1 i ty may reduce OGCC ' s
effectiveness i n ensuring safety and protecting groundwater and other
natural resources. Requiring operators to submit drilling programs and
obtaining groundwater information from DWR before issuing permits would
increase OGCC' s regulatory effectiveness without discouraging exploratory
d r i l l i n g i n Arizona.
One of OGCC's major functions is issuing permits to d r i l l o i l , gas, he1 ium
and geothermal wells. Any operator intending to d r i l l i n Arizona must
submit an application for permit to d r i l l to OGCC for approval. Each
application identifies: 1 ) the type of well to be drilled, 2) location, 3)
proposed depth, and 4) casing program. OGCC must determine if the
proposed specifications, especial ly the casing program, are adequate to
meet Arizona requirements for conservation, environmental and natural
resource protection, ownership rights and safety a t the specific
location. If the proposal is not adequate, OGCC can add permit
requirements to address any anticipated problems.
Information On Drill ing Operations
And Groundwater Is Limited
Ensuring safe operations and protecting groundwater are two of OGCC ' s
primary objectives, b u t the Commission often lacks the information
necessary to ensure that d r i l l ing operations meet these objectives.
Applicants are required to submit only minimal data on proposed drilling
operations. In addition, OGCC does not allow the Department of Water
Resources ( DWR) sufficient time to review applications for permits to
d r i l l and provide groundwater information before permits are issued. As a
resul t, OGCC may 1 ack essenti a1 information about proposed dri 11 ing
operations and groundwater location and qua1 ity.
Application Information Inadequate - OGCC currently receives only limited
information on proposed d r i l l ing operations. The Commission does not
require a1 1 operators to submit d r i l l ing programs that provide specific
information. Without specific details on an operator's plans, i t i s
d i f f i c u l t to ful ly assess the plan's adequacy. Obtaining this information
woul d a1 1 ow OGCC to more effectively set necessary stipul ations before
d r i l l ing begins.
OGCC only requires operators to provide the limited information requested
on the appl ication for permit to d r i l l - we1 1 location, proposed depth,
casing program, and drilling method. This information i s usually
sufficient i n areas where previous d r i l l ing has taken place, because OGCC
can use existing well records to evaluate drilling conditions and
potential problems. However, most d r i l l ing i n Arizona i s exploratory and
takes place i n areas where 1 imited or no records exist. As a result,
assessing the adequacy of d r i l l ing proposal s w i t h the 1 imi ted information
on the applications is often d i f f i c u l t . T h i s problem occurs only for
exploratory we1 1 s d r i l l ed on s t a t e and private land, because a1 1 operators
d r i l l i n g on federal land m u s t submit detailed drilling programs to ttie
Bureau of Land Management, which forwards them to OGCC. Some operators
a1 so vol untarily submit detailed plans for operations on nonfederal 1 and.*
* Drilling programs are prepared by operators and contain much greater
detail on expected drilling conditions and proposed operations than
applications for permits to d r i l l . Although drilling programs vary i n
detail, each generally provides an analysis of wells within a
specified radius of the proposed 1 ocation and other i nforrnation
gathered from 1 ocal sources. Dri 11 i ng programs a1 so provide diagrams
of bl owout prevention equipment. Diagrams are essential for
eval uatjng the adequacy of thi s equipment. The equipment i s general ly
categorized by cl ass b u t the different cl asses are not standardized.
Without requi ring detail ed dri 11 ins programs from operators OGCC may 1 ack
the information needed to ensure safety and resource protection during
d r i l l i n g . OGCC does not always receive from operators important
information t y p i c a l l y contained in d r i l l ing programs, such as analyses of
potential problems, how the operator will attempt to m i t i g a t e t h e s e
problems, and proposed weight and content of d r i l l i n g f l u i d s . OGCC has
some information i n its f i l e s , y e t requiring the information from
operators would guarantee a1 1 known pertinent information is examined.
For example, OGCC needs to obtain a l i s t of the d r i l l ing f l u i d s so the
chemicals in the f l u i d can be anlayzed. OGCC should carefully review
appl i c a t i o n s f o r permits t o d r i l l w i t h f l u i d s t h a t contain asbestos,
chromates or o t h e r p o t e n t i a l l y toxic material s.*
Groundwater Information Not Requested - Although OGCC declares protection
of groundwater t o be a primary regulatory goal, i t does not obtain needed
groundwater information from DWR before issuing permits. OGCC has some
information on groundwater 1 ocation and qual i t y , but has not a1 1 owed DWR
s u f f i c i e n t time t o comrrrent on proposals and provide groundwater
information before issuing permits f o r expl oratory we1 1 s. Information on
groundwater location and qual i ty is crucial for e f f e c t i v e protection of
this v i t a l resource during exploratory d r i l l ing. Groundwater information
is a1 so helpful i n ensuring safety and can aid the operator during
d r i l l ing operations.
Protecting groundwater is very important in Arizona ' s desert cl imate.
Approximately 60 percent of the s t a t e ' s drinking water comes from
groundwater, and in many areas groundwater is the sole source of drinking
water. However, water location is often d i f f i c u l t to estimate because
major freshwater aquifers are not a t uniform depths throughout the s t a t e .
Knowledge of water location, geology and quality prior t o d r i l l i n g
* DliR prohi'bi ts chrome and asbestos additives i n f l u i d s used f o r
d r i l l i n g water wells in Arizona. Washington, Oregon and some counties
i n California also prohibit the use of toxic substances by o i l well
d r i l l e r s .
would allow OGCC to ensure that an operator's d r i l l i n g plan is sufficient
to prevent contamination of important freshwater aquifers.
OGCC issues permits to d r i l l before DWR has an opportunity to review and
comment on the proposals. As Arizona's lead agency for water management,
DWR has information on groundwater location and quality for more than 85
percent of the s t a t e ' s land area. OGCC sends copies of a l l applications
for permits to d r i l l to DWR, b u t does not wait for DWR i n p u t before
issuing d r i l l i n g permits. Instead, OGCC obtains most of i t s information
from its previous experience and other sources. OGCC records show that
some d r i l l e r s have found water unexpectedly. In contrast, a l l eight
western s t a t e s surveyed and the federal government obtain groundwater
information from the appropriate s t a t e agency before approving permits for
exploratory wells i n areas where groundwater location is not firmly
establ i shed.
Without accurate information on groundwater location and quality, OGCC
cannot assess the adequacy of a proposed surface casing program.
Determining proper surface casing depth is one of the most important
decisions OGCC s t a f f makes during the application review process.
Adequate surface casing is important because i t prevents contamination of
fresh water, oil and gas during and a f t e r d r i l l i n g , and anchors the well's
safety equipment. The depth of surface casing necessarily varies w i t h
area conditions, especially groundwater location.
Surface casing protects groundwater by preventing substances from
different geologic formations from commingl ing through the we1 1 bore. Any
fluids, such as water, located i n formations above the lowest level of the
surface casing will be effectively and permanently sealed off. All fresh
water can be protected by requiring surface casing to be deeper than the
water. Without surface casing or other preventive measures, poor qua1 i ty
water i n deep aquifers can be forced up the well bore under high pressures
and contaminate shallower freshwater aquifers.
Lack Of Information May L i m i t
Regul atory Effectiveness
Limited i nformati on on d r i 11 ing operations and groundwater 1 ocati on may
hinder OGCC's ability to effectively regulate oil and gas activity w i t h i n
Arizona. Without complete, accurate information OGCC cannot adequately
review applications for permits to d r i l l or identify and rectify potential
probl ems before issuing permits. OGCC Is i nabil i ty to establ i sh adequate
preventive measures may also reduce the effectiveness of recent
improvements i n i t s monitoring program. A1 though no major dri 11 i ng
problems have occurred i n Arizona due to oil and gas operations, current
activity i s relatively low and future expansion would significantly
increase the need for comprehensive review before permits are issued.
Lack of Effective Preventive Measures - Without accurate, complete
information OGCC cannot effectively establ ish specific standards to
prevent major problems. Preventive measures provide more effective
protection to natural resources and d r i l l ing crews than actions taken
after the f a c t . However, Arizona laws and regulations do not specify
preventive requirements and d r i l l i n g conditions are too varied to permit
OGCC to establish general or statewide preventive requirements.
The seriousness of potential problems and the high cost of drilling
operations indicate that i t i s more effective to address potential
problems w i t h preventive regulation than to respond to emergencies or
problems as they occur. Damage to natural resources or the environment
caused by improper drilling procedures may be undetected for many year. s
and may be irreversible. Other potential drilling problems, such as
blowouts, can be disastrous and costly. In addition, preventive
regul ations a1 1 ow dri 11 ers to more accurately assess their costs before
beginning operations.
Arizona's o i l and gas statutes, rules and regulations are very broad t o
a1 low OGCC t o t a i l o r d r i l l i n g requirements for each l o c a t i o n ' s specific
conditions. D r i 11 i ng requirements cannot apply statewide because
conditions vary greatly throughout Arizona. To ensure e f f e c t i v e
regul a t i on, OGCC must review each d r i 11 i ng proposal individual ly and
assess the adequacy o f the specifications based on available information
about area conditions and the proposed operation. OGCC approves exact
specifications f o r various d r i l l i n g requirements such as surface casing,
blowout prevention equipment and we1 1 closure. I n addition, the
Commission may establ ish requirements f o r s i t e restoration, plugging,
d r i l l ing f l u i d content and viscosity, and d r i 11 ing methods.
Obtaining and eval u a t i ng information from a1 1 sources i s a1 so important
because Arizona i s an exploratory state without an established information
base or complete well record information. Therefore, thorough review of
a l l information available from the operator and other governmental and
local sources i s more c r i t i c a l than i n producing states where most permit
requests are f o r known f i e l d s . I n these states t h e a p p l i c a t i o n review i s
routine, since area conditions such as water location and pressures can be
calculated with much greater certainty and general standards can be
developed. I n expl oratory states such as Arizona, the appl i c a t i o n review
process i s more complex and crucial since conditions are unknown and must
be eval uated separately f o r most we1 1 s.
Impact on Monitoring - F a i l u r e t o obtain d r i l l i n g programs and groundwater
i nformati on may reduce the effectiveness o f OGCC ' s monitoring program
improvements. OGCC monitors surface casing and pl uggi ng operations ( both
crucial t o groundwater protection) and has recently begun issuing reports
on proposed operations t o operators. However, 1 ack o f s u f f i c i e n t
information may reduce the overall effectiveness o f both actions i n
preventing groundwater contamination and ensuring safety.
Monitoring casing and plugging of a l l wells d r i l l e d i n Arizona i s c r i t i c a l
t o protecting groundwater. However, i f OGCC does not obtain adequate
groundwater information before issuing permits and does not know water
location, the effectiveness o f monitoring i s greatly reduced. For
example, i f surface casing were approved t o a depth o f 300 f e e t b u t fresh
water extended t o 500 feet, ensuring t h a t 300 f e e t of casing were l a i d
would not protect groundwater. The same i s true f o r plugging operations.
Each step i n regulation builds upon the previous steps. Compliance with
i n c o r r e c t s t i p u l a t i o n s based on f a u l t y information l i m i t s e f f e c t i v e
regul a t i on.
OGCC recently began issuing a report on proposed operations along with
each d r i l l i n g permit. T h i s r e p o r t states the conditions upon which the
permit lias been i ssued, and can increase OGCC ' s regul atory capabi 1 i ty.
This report allows OGCC t o impose any additional s t i p u l a t i o n s it deems
necessary f o r each operation. However, the worth o f these reports has
been 1 i m i ted by the incomplete information evaluated during permit
application review. Thus far, t h e s t i p u l a t i o n s o f t h e r e p o r t s have been
very general. For example, operators are instructed t o use ". . . heavy
and s u f f i c i e n t d r i l l i n g mud." Without a l l available information on
groundwater and proposed operations oGCC cannot establ i sh more specific
conditions t o properly regulate each well d r i l l e d i n the state.
Additional Requirements Woul d
Not Burden Industry
Requi ri ng operators t o submit d r i 11 ing programs and 1 engtheni ng the permit
review process t o obtain groundwater information would improve regulatory
effectiveness without deterring exploratory d r i l l i n g i n Arizona. D r i l l i n g
programs are now required by the federal government and many states.
Although obtaining groundwater information may lengthen permit review, the
additional review time would not burden applicants because OGCC's current
review time i s exceptionally short. I n addition, increased i nforrnation
may a i d t h e i n d u s t r y by helping operators better plan d r i l l i n g a c t i v i t i e s .
Requiring operators to submit d r i l l i n g programs i s not a burden to the oil
and gas industry. Approximately half the states and the federal
government require some type of drilling program. Most operators must
a1 ready prepare d r i l l ing programs so out- of- state d r i l l ing contractors who
are unfamil i a r w i t h Arizoria's geology will know what d r i l l ing
specifications and procedures to follow. Most companies surveyed that
recently drilled i n Arizona do not feel that preparing d r i l l ing programs
i s a deterrent to exploratory activity.
Increasing the permit review time to allow DWR to comment on proposals and
provide information on groundwater location would not discourage
exploratory dri 11 i ng. OGCC currently issues most dri 1 1 i ng permi t s w i t h i n
1 day. However, many western states and the federal government have
longer permit review periods, which do not appear to impede drilling. All
the eight western states surveyed and the federal government obtain water
information before issuing permits, to ensure that permit requirements are
adequate. Much drilling i n Arizona is done on federal land, where
operators must wait up to 30 days for permits. Increasing OGCC's permit
review time would not increase industry d r i l l i n g costs as long as d r i l l e r s
were aware of the review period before submitting applications.
In addition, knowledge of water location can aid the operators. Fluid
viscosity must be increased i f major water aquifers are encountered during
drilling. If water location i s unknown, operators use heavier fluids to
prevent uncontrolled flows i f water i s suddenly found. If operators are
aware of the depth a t which water will be encountered they can use lighter
drilling fluids and s t i l l protect groundwater. Drill ing w i t h heavy fluid
i s more expensive, more time consuming, and can cause 1 oss of circulation
and increase dri 11 i ng costs.
CONCLUSION
OGCC has issued d r i l l ing permits b e f o r e o b t a i n i n g complete d r i l l ing
programs from o p e r a t o r s o r r e c e i v i n g groundwater information from DWR.
This information is necessary t o he1 p OGCC develop adequate requirements
t o ensure groundwater p r o t e c t i o n and s a f e t y during d r i l l i n g . F a i l u r e t o
review this information before i s s u i n g permits may reduce the
e f f e c t i v e n e s s of OGCC ' s monitoring program. Obtaining groundwater
information from DWR and d r i 11 ing programs from o p e r a t o r s would i n c r e a s e
OGCC's r e g u l a t o r y e f f e c t i v e n e s s and would not be a d e t e r r e n t t o
e x p l o r a t o r y d r i 11 ing i n Arizona.
RECOMME~~ DATIONS
1. OGCC should r e q u i r e a l l o p e r a t o r s applying f o r permits t o d r i l l
expl o r a t o r y we1 1 s t o submit d r i l l ing programs, which should include a t
minimum:
review of nearby we1 1 s,
0 p o t e n t i a l d r i l l i n g problems i n t h e proposal a r e a and how t h e s e
wi 1 1 be addressed,
m d r i l l i n g f l u i d s program,
casing program, and
0 blowout prevention equipment s p e c i f i c a t i o n s and method of
i n s t a l 1 a t i o n , i ncl uding a diagram.
2. OGCC should coordinate w i t h DWR t o devise a procedure whereby OGCC can
o b t a i n and review information on water l o c a t i o n and q u a l i t y before
i s s u i n g any permits t o d r i 11 exploratory we1 1 s.
FINDING I 1
POLICIES FOR PROTECTING GROUNDWATER ARE NOT WELL DEFINED
O i l and Gas Conservation Commission ( OGCC) rules and procedures do not
provide clear guide1 ines f o r decisions on requirements t o protect
groundwater during o i l and gas operations. Although Commission
regulations specify use o f surface casing t o protect groundwater, OGCC
does not always enforce t h i s requirement. Instead, the Commission re1 ies
on other methods, which may not be equally e f f e c t i v e i n protecting v i t a l
groundwater resources. OGCC needs t o review i t s regulations t o determine
what constitutes adequate groundwater protection.
OGCC Does Not Consistently
Enforce Casina Reauirements
OGCC does not always require d r i l l e r s t o case wells i n accordance with i t s
regulations. Commission regulations specify t h a t d r i l l e r s must use
surface casing t o protect groundwater. However, the Commission allowed
three operators t o d r i l l through major freshwater aquifers i n recent years
without the required casing. According t o OGCC, the casing regulation i s
overly broad and woul d deter o i 1 expl oration by unnecessarily increasing
d r i l l ing costs.*
Casing Requirement - Both Commission regul ations and the conditions
included with the d r i l l i n g permits specify t h a t surface casing be used t o
ensure safety and protect groundwater. When operators f i l e applications
f o r permits t o d r i l l they must specify the depth t o which they w i l l cement
the surface casing pipe. The amount of casing needed t o ensure safety and
protect groundwater depends on the c h a r a c t e r i s t i c s o f the d r i l l site. As
stated i n OGCC regulation R 12- 7- 110:
* See page 16 f o r an explanation o f surface casing.
" I n areas where pressures and formations are unknown,
s u f f i c i e n t surface casing shall be run t o reach a depth
be1 ow a1 1 known or reasonably estimated fresh water
l e v e l s t o prevent blowouts or uncontrolled flows . . .
I n areas where subsurface c- on- dit- ion. s ha. v e. been
establ i shed by d r i 11 ing experience, surface
casing . . . shall be set and cemented . . . a t a depth
s u f f i c i e n t t o protect a l l fresh water and t o insure
against blowouts and uncontrol I ed flows." ( emphasis
added)
OGCC also includes a general casing requirement i n the report on proposed
operations issued with each d r i l l ing permit. The report sets f o r t h the
conditions under which OGCC authorizes the d r i l l i n g t o take place and
states ( i n part) t h a t " the proposal i s approved provided the well i s cased
and cemented . . . i n such a manner as t o protect a l l zones t h a t contain
o i l , gas, or fresh water, and t o provide w e l l c o n t r o l during operations."
( emphasis added)
Requirement Not A1 ways Enforced - A1 though OGCC has consistently required
enough surface casing t o ensure safe d r i l l i n g operations, the Commission
has not required a l l operators t o case wells t o the depth needed t o
protect fresh water. I n exploratory areas where d r i l l ing conditions and
water 1 eve1 s are unknown, the casing regulation ensures safety during
d r i l l i n g operations. Surface casing anchors the we1 1 ' s safety equipment
and ensures that subsurface pressure encountered during d r i 11 ing does not
r e s u l t i n dangerous and costly blowouts. OGCC usually requires operators
t o surface case 10 percent o f the we1 1 I s proposed t o t a l depth t o ensure
safe operations. This p o l i c y seems effective. No major o i l and gas
re1 ated accidents have occurred i n Arizona since OGCC ' s inception.
However, OGCC does not always require operators t o set enough casing t o
protect freshwater aquifers. OGCC a1 1 owed three operators t o d r i l l
exploratory wells between 1981 and 1983 without s e t t i n g enough casing t o
protect fresh water. Two o f these wells passed through the Coconino
aquifer, which i s more than 1,000 feet deep. Because the area's shallower
groundwater sources have been polluted by septic tank discharges, the
Coconino aquifer i s and w i l l continue t o be a major supplier of the area's
drinking water.
When OGCC issued the f i r s t of the permits to drill through the Coconino
aquifer, the Commission approved the application based on safety
requirements and called for only 200 feet of surface casing. Upon
receiving a copy of the application, the Department of Water Resources
( DWR) informed OGCC of the aquifer's location and importance and requested
the Commission to require sufficient casing to ensure water protection.
A1 though OGCC to1 d DWR that it informed the operators that 1,500 feet of
surface casing m i g h t be required, the Commission did not formally change
the casing requirement. Consequently, the operator dri 11 ed to 2 , I 32 feet
b u t only cased 330 feet of the well, despite the f a c t t h a t fresh water was
known to exist below 1,000 feet.*
Reasons For Nonenforcement - OGCC cites two reasons for not enforcing its
casing regul ati on. According to OGCC , the surface casing regul ation i s
overly broad and increases drilling costs. OGCC does not always enforce
the regul ation because i t woul d mean protecting a1 1 fresh groundwater,
regardless of i t s importance. OGCC also feels that requiring surface
casing to protect all water i s an unnecessary expense because advanced
drill i n g technology a1 lows drillers to protect groundwater effectively
w i t h less costly methods.
OGCC does not enforce i t s surface casing requirement because i t feels the
regulation does not clearly define what water should be protected. OGCC
appears correct in i t s belief that requiring surface casing sufficient to
protect - all fresh water can be unnecessarily expensive. Some fresh water
may not be usable, for example, because of i t s remote location, extreme
depth, poor aquifer permeabi 1 i ty , 1 imi ted quantity or poor qua1 i ty .
Requiring operators to set surface casing to protect these aquifers would
be unnecessarily burdensome. On the other hand, DWR also appears correct
in insisting that defined water supplies that are critical for current or
future use be fully protected during oil and gas operations.
* The well found no oil and was fully plugged with cement at the end of
drill i n g operations.
Unlike federal and other states' agencies, OGCC does not define what water
should be protected. The federal government and many states define fresh
water more s p e c i f i c a l l y , based on i t s actual or potential use. For
example, the federal government only requires protection of fresh water
t h a t i s not too saline and therefore economically accessible. Other
states specify t h a t c e r t a i n water q u a l i t y l e v e l s must be maintained or
require only the top fresh water aquifer i n an area t o be surface cased.
Adopting more precise c r i t e r i a f o r p r o t e c t i n g f r e s h water i n Arizona would
be helpful, but widely varying groundwater conditions throughout the state
necessitate fl exi b l e standards t o meet 1 ocal conditions.
According t o OGCC, deep surface casing i s unnecessary because other, less
expensive methods are available t o protect groundwater." The primary
a1 ternative method i s using heavy d r i l l i n g f l u i d s , which act as a b a r r i e r
t o keep substances confined t o t h e i r respective s t r a t a during d r i l l i n g .
Other methods include using production casing i f o i l i s found and plugging
water- beari ng zones when we1 1 s are abandoned. By requiring operators t o
use these other techniques, OGCC feels t h a t it can adequately protect
groundwater while minimizing the costs o f d r i l l i n g f o r o i l and gas i n
Arizona.
Alternatives To Surface
Casing May Not Be Adequate
A1 though OGCC has re1 ied on a1 ternative methods t o protect groundwater,
these methods may not be as effective as surface casing. Professionals i n
hydro1 ogy and exploration engineering disagree on the need f o r casing and
the effectiveness of a1 ternatives t o surface casing. Even if the
a1 ternatives t o casing were universally accepted as effective, OGCC would
often lack the c r i t e r i o n and information needed t o ensure t h e i r e f f e c t i v e
imp1 ementation.
* Surface casing costs vary with the economy, d r i l l i n g location and the
type of casing used, but generally are thousands o f dollars. For
example, a t $ 7 per foot, 1,500 feet o f surface casing w i l l cost
$ 10,500 f o r the pipe alone. Other costs include labor, equipment and
cement. This additional expense may impede expl oratory d r i 11 i ng
because few expl oratory we1 1 s produce p r o f i tab1 e quantities o f o i 1 .
No Agreement on Effectiveness - Professionals i n o i l and gas exploration
and water management disagree on how t o balance the need f o r water
protection against d r i 11 ing costs. While surface casing i s recognized as
the most e f f e c t i v e means o f ensuring f u l l protection, OGCC s t a f f contends
t h a t it i s not needed below the depth required f o r well safety during
d r i l l i n g . The Commission feels t h a t d r i l l ing technology has advanced
enough so t h a t other, less expensive methods can e f f e c t i v e l y protect
groundwater. DWR hydro1 ogi sts a1 so feel t h a t a1 ternate methods are often
adequate, and agree with the vast majority o f OGCC casing decisions.
However, DWR feels t h a t s u f f i c i e n t surface casing should be used ( as
required by OGCC ' s current regul a t i on) when we1 1 s are d r i 11 ed through
well- defined, major aquifers, such as the Coconino, which provide or w i l l
provide much of an area's drinking water.
OGCC has not f o l l owed consistent c r i t e r i a for determining which methods of
groundwater protection should be used t o protect d i f f e r e n t categories o f
water. A1 though OGCC claims i t s c u r r e n t r e g u l a t i o n i s unnecessarily
expensive t o d r i l l e r s , the Commission has never determined the amount o f
surface casing t h a t can be reasonably required based on aquifer
importance, d r i l l ing costs, s i t e 1 ocation, or other c r i t i c a l factors. The
10 percent r u l e t h a t OGCC uses t o ensure safety does not ensure
groundwater protection because many major aquifers i n Arizona are very
deep. OGCC has not used economic a c c e s s i b i l i t y o f groundwater as the
c r i t e r i o n f o r determining surface casing depth. This c r i t e r i o n woul d have
required approximately 1,500 feet of surface casing t o protect the
Coconino aquifer. OGCC claims t h a t requiring t h i s much surface casing
could deter d r i l l i n g , but it has not designated how much casing an
operator can reasonably be expected t o set when d r i l l i n g an exploratory
well. OGCC claims t h a t it would require 400 feet o f casing on a 1,500
foot well ( 27 percent) t o protect known groundwater, but no c r i t e r i a e x i s t
f o r ensuring t h a t casing requirements are consistent between permits.
Although OGCC feels t h a t 1,500 feet of casing would be excessive, some
wells d r i l l e d i n Arizona have had more than 1,000 f e e t o f surface casing.
Lack o f C r i t i c a l Information and Requirements - Even i f alternatives t o
surface casing, such as use o f heavy d r i l l i n g fluids, were considered
equal ly e f f e c t i v e i n protecting groundwater, OGCC cannot ensure t h e i r
e f f e c t i v e implementation. As noted i n Finding I ( page 13), OGCC does not
always obtain s u f f i c i e n t information on groundwater and d r i 11 ing
specifications. I n addition, OGCC does not establ i sh specific standards
t o ensure t h a t operators use d r i l l i n g f l u i d s correctly, i n a way most
conducive t o groundwater protection.
New Regulations May Be Needed
70 Ensure Groundwater Protection
OGCC needs t o review i t s regulations and p o l i c i e s on groundwater
protection during o i l and gas operations. If current regulations are
overly broad and impose unnecessarily high costs on d r i l l e r s , OGCC should
r e v i s e t h e regulations t o define the extent t o which groundwater must be
protected and the appropriate procedures f o r doing so. A1 though
professionals do not agree on a l l the technical questions involved, OGCC
could s o l i c i t input from the various p a r t i e s and establish c r i t e r i a for
ensuring adequate groundwater protection i n each case. The Commission
should then develop: 1 ) a d e f i n i t i o n o f fresh water based on i t s
importance and use i n Arizona, 2) appropriate procedures f o r protecting
water f o r current and future use, and 3) c r i t e r i a f o r determining what
means are appropriate t o protect the various categories o f groundwater.
CONCLUSION
OGCC's pol i c i e s f o r protecting groundwater during o i l and gas operations
are not well defined. OGCC does not consistently enforce i t s current
Water protection regul a t i ons, and re1 ies on a1 ternative methods of
protection t h a t may not be as effective as surface casing. The Commission
needs t o review i t s regulation requiring surface casing and e i t h e r enforce
it consistently or revise it based on c l e a r d e f i n i t i o n s of fresh water and
consistent c r i t e r i a f o r eval u a t i ng a1 t e r n a t i ve means o f protection.
RECOMMENDATIONS
1. OGCC should review its current regulation ( R 12- 7- 110) requiring
surface casing to protect groundwater, to determine i f i t is
unnecessarily expensive compared w i t h alternative methods. As part of
its review, OGCC should consult w i t h other public agencies that share
responsibility for protecting groundwater, and representatives of the
oil and gas industry.
2. If OGCC determines that regulation R 12- 7- 1 10 is no longer
appropriate, the Commission shoul d promul gate new regul ations that: 1 )
clearly define fresh water to be protected, 2 ) identify the most
effective procedures for ensuring protection, and 3) specify the
c r i t e r i a for selecting the appropriate procedures.
3. If OGCC determines that regulation R 12- 7- 110 is appropriate, the
Commission should obtain the information recommended i n Finding I to
determine the amount of casing needed to protect fresh water and
include the specific depth of casing required i n each operator's
report on proposed operations.
FINDING I11
BOND REQUIREMENTS FOR SINGLE OIL AND GAS WELLS IN ARIZONA ARE INADEQUATE
Arizona's bond requirement for sing1 e oil and gas we1 1 are not adequate to
ensure that wells are properly closed off when operations cease. Wells
drilled for exploration and production can pose significant harm to
groundwater, minerals and other natural resources i f well s are not
properly closed off and the area around the well s i t e not restored.
Current bond amounts in Arizona do not cover the costs of closing off
we1 1 s and restoring deserted d r i l l s i t e s .
State law requires owners to close off or plug and abandon wells a t the
end of operations. A well owner must plug the well hole and abandon the
well s i t e a f t e r d r i l l i n g or production. Plugging a well consists of
f i l l i n g the well hole w i t h cement and other very heavy materials to
prevent pollution of subsurface resources. To ensure that plugging
occurs, O i 1 and Gas Conservation Commi ssion ( OGCC) rules and regulations
and Arizona statutes require a l l companies to submit bonds before drilling
wells i n Arizona. OGCC regulations require a bond of $ 5,000 for each
individual o i l , gas, or helium well or a $ 25,000 blanket bond to cover all
such wells a company d r i l l s i n Arizona. Arizona Revised Statutes ( A. R. S.)
$ 27- 654 also requires individual well bonds of a t l e a s t $ 5,000 or blanket
bonds of a t l e a s t $ 25,000 for a l l geothermal wells.
Bonding Is Necessary To
Protect Natural Resources
Requiring dri 11 ers to post bonds before dri 11 i ng oi 1 , gas or geothermal
wells i n Arizona is intended to ensure that OGCC will be able to protect
natural resources. Well owners must properly close off and plug wells to
prevent contamination of subsurface resources. However, proper plugging
is expensive and the oil industry i n Arizona is highly speculative. As a
r e s u l t , we1 1 owners may 1 ack the funds to pl ug t h e i r we1 1 s.
Proper Plugging Necessary - Contamination of groundwater, o i l , gas and
other natural resources can r e s u l t i f well s are l e f t unplugged. When a
we1 1 is dri 11 ed i t passes through various geol ogical 1 ayers. Water,
minerals, o i l o r gas may be located a t different layers under the
surface. If a well is not properly plugged, substances can move among
layers. For example, poor qua1 i t y water or small amounts of oil and gas
may travel through a well hole under pressure and contaminate resources,
particularly fresh water.
States w i t h histories of oil and gas production such as California, Texas
and New York have experienced problems w i t h older wells. The problems
result partly from the lack of knowledge about groundwater location i n the
early 1900s, and partly from poor plugging. Consequently, some older
wells i n these s t a t e s now leak. According to o f f i c i a l s who have worked i n
California, the s t a t e has had to demolish houses to stop contamination
from wells located under these properties. Texas and New York have also
had problems w i t h resources from older we1 1 s leaking into groundwater.
For example, i n !. Jew York gas from old, shallow wells is leaking into
shall ow groundwater aquifers. Both s t a t e s have establ i shed emergency
funds to plug these we1 1s.
Bonds Needed to Ensure Plugging - Bonds are necessary to prevent pollution
problems. Because oil exploration is speculative, a company may go
bankrupt before closing off a we1 1. Unless the state can immediately plug
a well, the well may remain a potential hazard during administrative or
court proceedings to obtain needed funds.
Oil and gas exploration is a speculative business, especially in Arizona
where few known oil fields exist. Companies can spend hundreds of
thousands of dollars to d r i l l wells and discover no o i l o r gas. For
smaller companies the costs of drilling may result i n severe monetary
problems or bankruptcy, leaving them w i t h no funds to properly close the
well. Even i n s t a t e s w i t h substantial oil production, companies may
encounter serious financial difficulties. For exarnpl e, i n 1983, 80
percent of the 1,465 bankruptcies i n Oklahoma were oil and gas related
companies. A1 though most d r i l l ers p l ug we1 1 s immediately a f t e r completing
operations, a t l e a s t one Arizona we1 1 owner i s currently out o f money and
therefore cannot afford t o plug a well. According t o OGCC s t a f f , the well
poses no immediate danger so the Commission has not invoked the owner's
bond t o plug t h e well.
Bonding i s p a r t i c u l a r l y important on state and p r i v a t e 1 and i n Arizona.
The federal government requires i t s own bonds on federal lands i n addition
t o OGCC bonds. Thus, funds would be available f o r c l o s i n g w e l l s on
federal lands even i f Arizona required no bond. On state and private
lands, however, the OGCC bond i s the only funding available i f a d r i l l e r
f a i l s t o properly plug and abandon a well.
Current Bond Levels For
Single We1 l s Are Too Low
The cost of plugging the average well i n Arizona i s more than the current
state requirement for an i n d i v i d u a l w e l l bond. Although companies are
required t o post a bond o f $ 5,000 for each i n d i v i d u a l we1 1, pl uggi ng an
average well i n Arizona may cost considerably more. Arizona bond
requirements are among the lowest i n the United States. Arizona could
increase t h e i n d i v i d u a l bond requirements t o meet pl ugging costs without
discouraging most prospective d r i l l ers.
Bonds Not Adequate t o Meet Plugging Cost - The $ 5,000 bond requirement for
i n d i v i d u a l w e l l s i s less than the cost t o plug t h e average we1 1 i n
Arizona. The current amount was set i n 1965, but OGCC s t a f f estimated i n
1981 t h a t the cost t o plug an average well ( 5,000 f e e t deep) was
approximately $ 10,000. However a 5,865 foot well i n Apache County
recently cost over $ 20,000 t o plug and abandon. Thus, the $ 5,000 bond
available t o OGCC may not be adequate t o close o f f a well and restore the
s i t e i f the owner f a i l s t o do so.
Other Bonds Higher - The federal government and several other states
require higher bonds than Arizona. The federal government has variable
bond rates f o r individual wells depending on depth. The variable rate for
a t y p i c a l well i s between $ 5,000 and $ 10,000. The federal government
usually requires the maximum bond o f $ 10,000. Bond requirements i n about
h a l f the I n t e r s t a t e O i l Compact Commission* states are also higher than
Arizona's requirement f o r s i n g l e wells. Many states also have an
emergency fund, derived e i t h e r from some form o f production tax on o i l
operators or money received from the state. This money i s used t o plug
we1 1 s t h a t would otherwise be l e f t unplugged. •
TABLE 4
BONDING REQUIREMENTS FOR
OIL AND GAS WELLS IN SELECTED STATES
State
Arizona
Arkansas
Cal i f o r n i a
Col orado
Louisiana
Nevada
New Mexico
New York
Oklahoma
Oregon
Texas
Utah
Washington
Bond Requirement
Single Well
$ 5,000
15,000
10,000 - 25,000
5,000 )
none
10,000
5,000 - 12,500
2,000 (' )
none
100,000
none
10,000
50,000
Statewide Bond
$ 25,000
none
100,000
30,000
200,000 maximum
50,000
50,000
8,000 (' )
25,000
100,000
none
50,000
250,000
Emergency
Fund 0
No
Yes
Yes
N 0
No
No
Yes
Yes
Yes
N 0
Yes
No
No
( 1 ) O f f i c i a l s contacted indicated t h a t t h i s requirement i s not adequate.
Source: Auditor General state survey
* The I n t e r s t a t e O i l Compact Commission was created i n 1935 t o improve
the conservation of domestic o i l and gas. The Commission advises i t s
36 member states on o i l and gas matters taking place a t both the 0
federal and state 1 eve1 s.
A11 the states surveyed by Auditor General s t a f f offered a greater degree
of protection than Arizona. All 12 of the s t a t e s surveyed have higher
individual or blanket bond requirements, or have established an emergency
fund. *
Six of the 12 states surveyed require individual well bonds that exceed
Arizona's requirement. Of the remaining six, one s t a t e requires a
variable bond between $ 5,000 and $ 12,500, two s t a t e s rely on statewide
rather than individual we1 1 bonds, and one s t a t e re1 ies on an emergency
fund. Only two states, New York and Colorado, have bonds lower than or
equal to Arizona's. However, New York has an emergency fund and Colorado
requires a higher statewide bond than Arizona.
Higher Bond Will Not Discourage Exploration - Increasing the individual
well bond to a minimum of $ 10,000 is necessary t o meet plugging costs.
Since the cost of obtaining a higher bond is small, increasing the bond
would not have an adverse effect on oil exploration i n Arizona.
Because drilling an o i l or gas well i n Arizona is very expensive, the
minimal additional cost of the $ 10,000 bond is not 1 ikely to discourage
most d r i l l e r s . One company spent over $ 400,000 to drill a well i n
Arizona. Another company spent $ 30,000,000 on a l l of i t s d r i l l i n g
activity i n Arizona. In contrast, the additional bonding cost to most
companies surveyed by Auditor General staff would be only a few hundred
do1 1 ars.
* Auditor General staff contacted o f f i c i a l s responsible for oil and gas
regulation i n 12 states. States were selected to represent different
levels and histories of drilling and production, and varying
geography, geology , and regul a t i on.
3 5
Higher bond requirements have not discouraged d r i l l i n g on the Navajo
Indian Reservation, where most d r i l l ing i n Arizona takes place. Owners
are required t o pay f o r an OGCC bond, a federal bond of a t l e a s t $ 10,000,
as well as pay permit fees t o both the federal government and OGCC. The
higher cost of d r i l l i n g on the Navajo Indian Reservation has not c u r t a i l e d
d r i l l i n g operations. Therefore, a reasonable increase i n the state bond
requirement woul d not hamper exploratory d r i 11 i ng.
CONCLUSION
Bond l e v e l s i n Arizona f o r o i l , gas, helium and geothermal wells are
inadequate. Unpl ugged we1 1 s can pol 1 ute groundwater, mineral s and other
resources. Failure t o restore a well s i t e may cause erosion. Current
bond requirements f o r individual wells do not ensure t h a t OGCC w i l l have
s u f f i c i e n t funds, i f necessary, t o close wells and protect natural
resources from contamination. Increasing t h e i n d i v i d u a l bond requirement
t o $ 10,000 would ensure adequate funds t o close w e l l s b u t would not
discourage expl oratory d r i 11 i ng i n Arizona.
RECOMMENDATIONS
1. OGCC should revise i t s rules and regulations t o increase individual
we1 1 bonds f o r a1 1 we1 1 s under i t s j u r i s d i c t i o n t o $ 10,000.
2. OGCC should p e r i o d i c a l l y review i t s bond requirements t o ensure t h a t
bonds are adequate t o cover the costs of closing wells.
OTHER PERTINENT INFORMATION
OIL AND GAS CONSERVATION COMMISSION PROFESSIONAL SALARIES
The s a l a r i e s o f f e r e d t o professional s t a f f a t the O i l and Gas Conservation
Commission ( OGCC) may not be adequate t o a t t r a c t and r e t a i n q u a l i f i e d
personnel. Salaries appear low compared with o t h e r s t a t e s and the p r i v a t e
sector. Such conditions could preclude Arizona from a t t r a c t i n g q u a l i f i e d
people i n the future.
The Auditor General s t a f f conducted a survey o f 12 o i l producing states i n
1984 and found t h a t most o f those states pay o i l and gas employees higher
salaries than Arizona offers. O f the ten states t h a t provided salary
informati on, eight pay thei r supervisory s t a f f and directors more than
Arizona pays OGCC personnel. Only two states surveyed, Oklahoma and
Oregon, pay t h e i r state o i l and gas personnel less than Arizona.
C a l i f o r n i a pays i t s supervisory f i e l d inspectors up t o $ 15,000 more than
Arizona. Louisiana and New Mexico pay t h e i r supervisory s t a f f up t o
$ 10,000 more than Arizona pays i t s enforcement director. Nevada and Texas
pay t h e i r executive directors approximately $ 8,000 more than Arizona
offers, while New York, Colorado and Utah pay t h e i r directors $ 14,000 more
than Arizona pays i t s executive director.
Arizona OGCC salaries are also less than those offered f o r comparable
experience i n the p r i v a t e sector. I n 1982 the I n t e r s t a t e O i l Compact
Commission conducted a salary survey o f f i v e states, and found substantial
differences i n 1981 salaries between the public and p r i v a t e sectors f o r
o i l and gas professionals. For example, s t a r t i n g s a l a r i e s f o r state
personnel were between $ 1 8,000 and $ 29,000 f o r recent col 1 ege graduates,
and p r i v a t e i n d u s t r y s a l a r i e s began a t $ 29,000. A f t e r 5 years of
employment, state salaries ranged from $ 22,000 t o $ 34,000, while p r i v a t e
companies offered an average o f $ 42,000. The p r i v a t e sector paid
professionals with 20 years of experience average salaries of $ 69,000. I n
contrast, OGCC salaries f o r both i t s professionals, each with more than 20
years o f experience, are less than $ 38,000.
Currently the s t a f f a t OGCC consists o f two knowledgeable i n d i v i d u a l s with
many years of o i l industry experience. However, a t t r a c t i n g these
q u a l i f i e d personnel was d i f f i c u l t . OGCC had only two applicants f o r i t s
executive d i r e c t o r ' s position when it became vacant i n 1981. The position
of enforcement d i r e c t o r remained open f o r 9 months before being f i l l e d .
Both OGCC s t a f f members assumed t h e i r c u r r e n t p o s i t i o n s a f t e r r e t i r i n g
from other employment.
Should a need arise, OGCC may have d i f f i c u l t y replacing i t s professional
s t a f f . Furthermore, i f o i l and gas related a c t i v i t y increases
s i g n i f i c a n t l y i n Arizona, OGCC may need additional s t a f f t o handle the
additional work load. Should a surge i n d r i l l i n g ventures increase
nationwide, OGCC may be competing with private industry f o r the needed
personnel. Since Arizona's OGCC salaries are considerably less than
private industry salaries, OGCC may not be able t o a t t r a c t the necessary
qua1 i f i ed personnel .
AREAS FOR FURTHER AUDIT WORK
During the course o f the audit we i d e n t i f i e d one p o t e n t i a l issue t h a t we
were unable t o complete due t o time constraints. This issue i s an area
f o r f u r t h e r audit work.
r Are d r i l l i n g permit fees adequate?
The O i l and Gas Conservation Commission ( OGCC) charges a $ 25
permit fee f o r each application for permit t o d r i l l . Our
preliminary a u d i t work indicates t h a t the $ 25 fee, which has not
changed since 1952, may not always cover a l l costs o f monitoring
a w e l l as it i s d r i l l e d . O f the 36 states t h a t are members o f
the I n t e r s t a t e O i l Compact Commission, 25 have higher permit fees
than Arizona. Further audit work i s needed t o f u l l y document the
costs of OGCC's monitoring a c t i v i t i e s and compare these costs t o
receipts from permit fees.
September 17, 1984
OFFICE OF
CBw ~ anltr~ ruat€ nQn Tantntirretn
STATE OF ARIZONA
1646 WEST JEFFERSON, SUITE 420
PHOENIX, ARIZONA 85007
PHONE: ( 602) 255- 5161
TO: Auditor General
FROM: A. K. Doss
Executive Director
SUBJECT: Audit of the Oil and Gas Conservation Commission
Please find enclosed copies of the Oil and Gas Conservation Com-mission's
responses to the Auditor General's . second draft report
on the audit of the Oil and Gas Conservation Commission.
lit A. K Doss
Executive Director
Enclosures
OFFICE OF
mil anh CBrta Qlnns~ ruatfnnG lnattniaatun
STATE OF ARIZONA
1645 WEST JEFFERSON, SUITE 420
PHOENIX, ARIZONA 85007
PHONE: ( 602) 255- 5161
S e p t e m b e r 1 7 , 1984
RESPONSE TO AUDITOR GENERAL'S DRAFT 112
R e f e r t o t h e f i r s t p a r a g r a p h of t h e l e t t e r o f t r a n s m i t t a l , s e c o n d
s e n t e n c e . " Our u n d e r s t a n d i n g o f c h a n g e s a g r e e d t o " d i d n o t g e t
c h a n g e d a l l t h a t much. I n many i n s t a n c e s , t h e c h a n g e s were o n l y
a r e a r r a n g e m e n t of words i n a s e n t e n c e and no c h a n g e i n s u b s t a n c e .
The s e c o n d d r a f t s t i l l f a i l e d t o a d d r e s s many of t h e p o i n t s f i l e d
i n t h e i n i t i a l r e s p o n s e and e x c e p t f o r t h o s e s e v e r a l d e l e t i o n s
and c h a n g e s i n s u b s t a n c e , t h e i n i t i a l r e s p o n s e s t i l l s t a n d s .
I n t h e o p i n i o n of t h e e x e c u t i v e d i r e c t o r , most of t h o s e p e r s o n s
who w i l l r e a d t h i s r e p o r t w i l l b e i m p r e s s e d m o s t l y on t h r e e p o i n t s :
( 1 ) t h e r e p o r t s b e i n g o v e r r e p e t i t i o u s ; ( 2 ) t h e e x c e s s i v e r e f e r e n c e s
t o t h e D e p a r t m e n t of Water R e s o u r c e s ; ( 3 ) t h a t t h e mud l a d e n f l u i d s
u s e d i n d r i l l i n g o i l a n d g a s e x p l o r a t i o n w e l l s w i l l i n v a d e a q u i f e r s
f o r g r e a t d i s t a n c e s , p e r h a p s e v e n m i l e s . What do t h e a u d i t o r s
t h i n k ? T h u s , t h i s l a c k of knowledge and t h e manner i n which t h e
r e p o r t t r e a t s t h e p o l l u t i o n o r c o n t a m i n a t i o n p o t e n t i a l w i l l c r e a t e
an e r r o n e o u s i m p r e s s i o n f o r t h o s e r e a d e r s a l s o n o t k n o w l e d g e a b l e
i n t h e b u s i n e s s . T h e r e a r e numerous t e c h n i c a l a r t i c l e s on t h e
s u b j e c t o f i n v a s i o n by d r i l l i n g f l u i d s which c i t e t h a t i n v a s i o n is
p r o b a b l y no more t h a n a few i n c h e s e v e n i n p o r o u s and p e r m e a b l e
f o r m a t i o n s .
It i s o f i n t e r e s t t o n o t e t h a t no r e s p o n s e was made t o t h e l a s t
p a r a g r a p h of t h e i n i t i a l OGCC's r e p l y .
P e r h a p s one o f t h e b i g g e s t p r o b l e m s c o n n e c t e d w i t h an a u d i t o f
t h i s k i n d i n v o l v i n g a h i g h l y t e c h n i c a l i n d u s t r y i s t h e A u d i t o r
G e n e r a l ' s i n a b i l i t y t o o b t a i n t h e s e r v i c e s of k n o w l e d g e a b l e p e r -
s o n n e l w i t h a b a c k g r o u n d i n t h e i n d u s t r y . Thus t h e f i r s t p r o b l e m ,
b u t s u r e l y n o t t h e o n l y o n e , i s c o m m u n i c a t i o n o r n o t b e i n g a b l e t o
" s p e a k t h e l a n g u a g e 1 ' .
R . A . YBARRA
The purpose of these additional comments is to make sure that
the audit team and other readers of the audit report understand more
clearly the basic function of a drilling mud system used in well drill-ing
operations and therefore, better understand our ( OGCC) position m
alternative methods of protecting groundwaters.
When a well is drilled through reservoirs ( or aquifers), oil-
&
or water- bearing, the equilibrium in the reservoir in the immediate
vicinity of the bore hole is upset. The bore hole represents an artffi-cia1
pressure low and fluids in the formation will flow in the direction
of this low pressure. To neutralize this flow a circulating medium
( drilling mud) of sufficient strength ( hydrostatic pressure) is used,
and once the hydrostatic pressure of the drilling mud equals that of the
formation, no fluid movement in either direction can take place. However,
as a safety precaution while drilling through unknown subsurface condi-tions,
the driller will condition the mud with proper additives calculated
to exert more pressure than that in the formation. The action of the
drilling mud, which is composed in part of many micro- sized sand grains
and other sediments, causes bridging ( plugging) of the numerous pores and
passageways in the walls of the bore hole, and when the bridging action is
completed, an impervious filter cake ( 2- 3 inches thick) is formed on the
walls of the bore hole. The fluid expelled from the filter cake forming
process is forced ahead into the formation a few inches. This small pene-tration
is especially true in saturated oil- or water- bearing reservoirs
because of the incompressible , characteristic of these fluids. This action
in itself protects against contamination in all but an extremely small
radius measured radially from the bore hole.
Reference: Society of Petroleum Engineers, Petroleum Transactions Series
No. 5
To my knowledge there is no documentation, even in the large
producing states, of water contamination as the result of drilling
operations using a drilling mud system.
Rd Z- f-
R. A. YBARRA
A* K* OSS