United States: North Dakota Saltwater Disposal Enforcement Actions Highlight Key Legal And Social License Risks

Spills or improper disposal of oilfield produced water—which can be more than 10 times saltier than seawater and may also contain heavy metals and other chemicals—can turn even staunchly pro-oil and gas residents against drilling in their area.[1] Improper disposal and spills also can attract serious civil, and in some cases, criminal penalties. Several recent enforcement actions by state and federal authorities in North Dakota suggest a more aggressive regulatory stance toward oil and gas activities that the government believes could threaten groundwater supplies.

Cases Involving Serious Criminal Charges

Nathan Garber, who deceived inspectors by illegally resetting the packer in a saltwater disposal well to make it appear compliant with the law, pled guilty in September 2013 to a Class C felony charge brought by the state of North Dakota.[2] The well illegally disposed of approximately 800,000 gallons of produced water despite the state never clearing it for operation.[3]

Federal charges followed, and Garber pled guilty in September 2014 to 11 federal felony counts related to the well's operation: one count of conspiracy to violate the Safe Drinking Water Act and defraud the United States, five counts of violating the Safe Drinking Water Act, two counts of making false statements, two counts of falsification of records, and one count of concealment or cover-up of a tangible object.[4]

In addition, on April 15, 2014, the North Dakota Attorney General's Office filed criminal charges against truck driver Leo Slemin after a Department of Mineral Resources inspector witnessed him illegally dumping a load of oilfield wastewater on a roadway in February 2014.[5] Slemin subsequently accepted a plea deal that resulted in his being sentenced to three years of probation, plus fines and costs.[6] His employer, Black Hills Trucking, settled for $200,000, after originally facing fines of as much as $2 million.[7]

On August 24, 2015, the federal court in Bismarck, North Dakota, indicted Nathan Garber's former business associate, Jason Halek, on 13 felony charges related to improper and illegal operation of the Halek 5-22 saltwater disposal well near Dickinson, North Dakota.[8] Halek allegedly conspired to inject produced water into the well without first having the state of North Dakota witness a test of the well's integrity, and continued injecting produced water after the well failed a February 2, 2012, pressure test.[9]

Halek also allegedly violated the Safe Drinking Water Act by injecting fluids down the "annulus" or "back side" of the well, in violation of the well's permit, which required that fluids be injected through the tubing. Finally, Halek allegedly instructed Nathan Garber to move the "packer" up the wellbore without first getting approval from the state, after which Garber allegedly gave false information to a state inspector regarding the depth of the packer.

Halek is charged with one count of conspiracy to violate the Safe Drinking Water Act and defraud the United States, four counts of violating the Safe Drinking Water Act, four counts of making false statements, and four counts of obstructing grand jury proceedings.[10]

Putting North Dakota Brine Spills in Context

Bakken produced water typically contains from 150,000 to 300,000 milligrams per liter (mg/l) of total dissolved solids ("TDS"), a rough proxy for salinity.[11] As such, through early September 2015, brine spill volumes reported to the North Dakota Health Department likely contained the equivalent of between 1,900 and 3,800 tonnes of salt (Exhibit 1). The range for 2014 was between 1,500 and 3,000 tonnes. These numbers sound large until one considers that the average amount of salt applied to North Dakota roadways each winter is approximately 27,000 tonnes.[12] Moreover, the amount of brine lost for each unit of oil and gas produced has declined steadily since 2006, reflecting operators' attention to health and safety considerations.

Exhibit 1: North Dakota Oilfield Brine Spills in Perspective

North Dakota average daily oil production, thousand bpd (left axis)

Estimated salt emissions, tonnes (right axis)

Source: EIA, North Dakota Health Department, SPE

However, even if the aggregate amounts spilled pale in comparison to what is put on the roads each winter in North Dakota, oilfield brine losses tend to have a concentrated local impact. Three counties—Bowman, McKenzie, and Williams—account for only 9 percent of North Dakota's landmass, but suffered 67 percent of oilfield brine losses between January 2006 and September 2015. In addition to this, since January 2006, only 20 spills (out of the more than 3,500 reported) have accounted for roughly 50 percent of all brine spilled in North Dakota during that nearly nine-year period. Such focused impacts ultimately drive local perceptions—as well as legal and regulatory backlash that can hinder the industry's ability to operate.

Evolving Brine Spill Risks

In the past 12 months, the reported number of oilfield brine spills in North Dakota has meaningfully diminished (Exhibit 2). This likely stems from a combination of improved operational practices and a move toward centralized produced water gathering systems that use pipelines to link oil and gas wells to disposal facilities. The average spill size has increased, because when produced water pipelines suffer problems, more water tends to be lost. Indeed, 11 of the 20 largest brine spills since January 2006 have involved pipeline leaks. And the largest spill—which occurred in early January 2015—involved 2.9 million gallons of brine: approximately 20 percent of the entire brine volume spilled in North Dakota since January 2006.

Exhibit 2: North Dakota Brine Spills

Gallons

Source: New York Times, North Dakota Department of Health

Yet this concentration also creates opportunities for reducing spill risk. Pipelines reduce the ultimate number of potential spill points, can be more effectively monitored in a systematic way, and can be maintained using various types of predictive tools that help operators repair weak areas before a spill can occur.

Using pipeline systems to handle produced water should continue meaningfully reducing the frequency of spills, but operators will need to find ways of catching leaks earlier in order to prevent big-volume events that can threaten water supplies and alienate landowners and communities in the North Dakota oilfield. The oil and gas industry's reputation and social license to operate in many areas will increasingly hinge upon its ability to reduce destructive externalities such as brine spills. Fortunately, there are a wide range of evolving technical and procedural solutions, and the use of them will likely proliferate rapidly, to the benefit of industry and its neighbors in the oilfields.

Legal Risks to Oil and Gas Producers

Operators who emphasize compliance generally will not face criminal liability for produced water spills or injection activities. To face criminal liability, a party needs to willfully violate federal and state water protection laws—or at the very least, inject fluids without a viable permit.[13] Misleading regulators or falsifying records can also create federal criminal liability.

One important legal risk assessment question is, "Can an oil and gas producer potentially face liability for third parties' improper disposal of its produced water?" For third-party pipeline gathering systems, once the pipeline operator accepts delivery of the produced water at the designated receipt point, it generally takes full custody and control.[14] Obviously, what the contract says between the parties can play a significant role in which party assumes long-term disposal liabilities.

This very likely reduces an operator's potential liability for spills or improper disposal of that water. Indeed, the Eighth Circuit Court of Appeals—which covers a circuit including North Dakota—notes that to determine disposal-related pollution liability, it will closely examine ownership transfers of the substance in question, as well as who controlled handling and disposal of a hazardous substance.[15] Second, pipeline gathering systems may often comingle water flows from dozens of wells operated by many different producers.

As such, determining the origin of any single producer's water will be virtually impossible. The fact that attribution of fault may be impossible potentially precludes a claim under North Dakota law, because "when two or more parties are found to have contributed to the injury, the liability of each party is several only, and is not joint, and each party is liable only for the amount of damages attributable to the percentage of fault of that party." N.D. Cent. Code Ann. § 32-03.2-02 (West). Joint liability would only apply in the event parties acted together to commit or encourage the commission of a purposeful tort—which is very unlikely in the context of an oilfield produced water spill.

Operators using midstream gathering operations to collect their produced water can further insulate themselves in at least two ways. First, they can include indemnification clauses in produced water gathering agreements. Consider the following indemnity language from a large environmental services provider's agreement with a large E&P to provide produced water gathering services in North Dakota:

Subject to Producer's delivery of Produced Water that conforms to the specifications set forth on Exhibit D, attached hereto and made a part hereof, at and after delivery by Producer to Gatherer of Produced Water at the Produced Water Receipt Points, Gatherer shall be deemed to be in exclusive control and custody thereof and shall be responsible for, and shall indemnify and hold harmless Producer and its Affiliates from and against, any claims relating to, or arising out of, any injury or damage caused thereby.[16]

Second, oil and gas producers should consider engaging in thorough and regular due diligence of their produced water gathering and disposal contractors. This helps preempt disruptive and costly operational problems in disposal infrastructure networks. It also helps burnish the industry's "social license" to operate in an area, which as a large operator puts it, is "earned through the trust and acceptance of our shareholders, royalty owners, neighbors, policymakers, and other stakeholders."[17] A brine spill that contaminates groundwater could jeopardize the industry's social license to operate in that area for many years, but is relatively easily prevented by encouraging gathering companies to use the latest, most effective leak anticipation and detection systems.

Finally, federal environmental laws—such as the Comprehensive Environmental Response, Compensation and Liability Act, aka Superfund—could be used to impose liability on oil and gas producers, without fault, in the event of a brine spill or other contamination if their gathering and disposal vendors lacked the financial wherewithal to address the contamination. Accordingly, oil and gas producers should consider evaluating the financial condition of their produced water gathering and disposal contractors prior to selection, and should also monitor the financial conditions and insurance coverage levels of these vendors on a going forward basis.

Footnotes

[1] Pam Boschee, "Produced and Flowback Water Recycling and Reuse," SPE, February 2014, ftp://ftp.consrv.ca.gov/pub/oil/SB4DEIR/docs/08_Boschee_2014.pdf

[2] Jessica Holdman, "Montana man sentenced and fined for illegal dumping," Bismarck Tribune, 30 September 2013, http://bismarcktribune.com/bakken/montana-man-sentenced-and-fined-for-illegal-dumping/article_f69b551a-2a1c-11e3-9950-001a4bcf887a.html

[3] Id.

[4] "Saltwater Disposal Well Operator Pleads Guilty to Multiple Felony Charges in Connection with Operation of Well," Department of Justice, 26 September 2014, http://www.justice.gov/opa/pr/saltwater-disposal-well-operator-pleads-guilty-multiple-felony-charges-connection-operation

[5] "CRIMINAL CHARGES FILED AGAINST TRUCK DRIVER FOR ILLEGAL SALT WATER DUMP," North Dakota Attorney General, 15 April 2014, https://www.ag.nd.gov/NewsReleases/2014/04-15-14.pdf

[6] Kathleen J. Bryan, "Trucker agrees to plea deal in illegal dumping case," The Dickinson Press, 11 October 2014, http://www.thedickinsonpress.com/content/trucker-agrees-plea-deal-illegal-dumping-case-0

[7]Zack Nelson, "Oil Patch trucking company, state agree to reduced fine," The Dickinson Press, 5 December 2014, http://www.thedickinsonpress.com/content/oil-patch-trucking-company-state-agree-reduced-fine

[8] "Former Saltwater Disposal Well Operator Indicted in North Dakota on Multiple Felony Charges," Department of Justice, 24 August 2014, http://www.justice.gov/opa/pr/former-saltwater-disposal-well-operator-indicted-north-dakota-multiple-felony-charges

[9] Id.

[10] Id.

[11] Boschee at 18.

[12] "2012-2013 D.O.T SALT PRICE COMPARISON & 5 YEAR AVERAGE USE," Washington State Department of Transportation, http://www.wsdot.wa.gov/NR/rdonlyres/DFEBFA2B-5A42-49BA-82A9-3FBF4AEF258F/0/Saltcompmap.pdf (accessed 18 September 2015)

[13] United States v. King, 660 F.3d 1071, 1076 (9th Cir. 2011)

[14] See, for instance, Nuverra 10-K, http://ir.nuverra.com/phoenix.zhtml?c=217286&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMjc2NzEyJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

[15] United States v. Ne. Pharm. & Chem. Co., Inc., 810 F.2d 726, 743 (8th Cir. 1986)

[16] Nuverra Environmental Solutions, Inc., 10-K, filed 14 May 2015, http://ir.nuverra.com/phoenix.zhtml?c=217286&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMjc2NzEyJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

[17] Devon Energy 10-K, http://www.devonenergy.com/documents/Overview/DVN-2014-10-K-Letter-to-Shareholders.pdf (accessed on 18 September 2015)

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