September 4, 2007

NDIC, Department of Mineral Resources, Oil and Gas Division
Bruce Hicks, Assistant Director
600 E Boulevard Ave.
Bismarck, ND 58505

RE: Comments on Proposed Rules

Dear Mr. Hicks:

Thank you for the opportunity to provide comments on the proposed Administrative Rules changes.  The North Dakota Petroleum Council represents more than 130 companies involved in all aspects of the oil and gas industry including oil and gas production, refining, pipeline, mineral leasing, consulting, legal work, and oil field service activities in North Dakota, South Dakota, and the Rocky Mountain Region.  Our members accounted for 80% of the oil produced in North Dakota in 2006.

We are generally pleased with the Oil and Gas Division’s (Division) proposed rules changes.  We believe that the majority of changes will improve the regulatory climate for the exploration and production of oil and gas in North Dakota.  However, we do have comments on some of the rules that we hope will be implemented.

North Dakota Petroleum Council’s comments on specific proposed rules:

43-02-03-01 DEFINITIONS
30.  “Occupied Dwelling” or “permanently occupied dwelling” means a residence which is lived in by a person at least six months throughout the year.

We believe the legislative intent was to require sufficient distance from permanently occupied dwellings and not cabins and trailers.  Living in a residence six months out of the year is not a permanently occupied residence.  Lake cabins are often frequented for six months out of the year.  We urge the Division to adopt eight months as the requirement instead of six.  This seems like a reasonable solution and more in line with the intent of the legislation. 

43-02-03-22. DEFECTIVE CASING OR CEMENTING.
The director is authorized to require a pressure test to verify casing integrity if its competence is questionable.
We are concerned that this could be a very costly procedure if not properly clarified for operators.  On a pumping well, a test would require pulling rods and pumps, pulling tubing and the tubing anchor and then have to trip in hole with a packer to pressure test the casing above the perforations. Then the operator would have to put all this equipment back in the hole and return the well to production. We question how “competence” would be determined and what would trigger a pressure test requirement.  We would support language authorizing a pressure test if there is reasonable evidence present to indicate that a threat to potable water exists.

43-02-03-28. SAFETY REGULATION.
Placement as close as 125 feet may be allowed if a flame arrestor is utilized on the equipment.
Flame arrestors mitigate the concerns related to increasing the distance between the treater and the well bore.  Waivers to 100 feet with the use of flame arrestors has become the standard request by industry and has been granted by the Division.  We encourage the adoption of a 100 feet setback when a flame arrestor is utilized.  This will encourage the use of this new high-tech equipment.  BLM also allows a 100 feet setback.  The proposed language would read “Placement as close as 100 feet will be allowed if a flame arrestor is utilized on the equipment.” 
 
43-02-03-55. ABANDONMENT OF WELLS - SUSPENSION OF DRILLING.
A fee of one hundred dollars shall be submitted with each application to temporarily abandon or extend the temporary abandonment status of any well.
We adamantly oppose this change.  This will be $100 per year tax on industry which equates to another $30,000 per year that industry will pay to the government.  The passage of HB-1060 removed the cap on the Plugging and Reclamation Fund, thereby allowing the Division to retain revenues above $250,000 instead of the funds being transferred to the general fund.  The Petroleum Council not only supported this change but offered the suggestion to the Senate Natural Resources Committee.  These are fees paid by the industry for the purpose of covering costs associated with plugging abandoned wells.
In addition, HB-1511, which was passed and was signed into law, allows the Industrial Commission to require a single well bond on wells that are not properly placed in temporarily abandoned status.  This change was intended to reduce the risks to the state by requiring bonds on single wells that are not properly administered.  

There are many reasons why oil and gas operators temporarily abandon (T&A) wells.  It allows more time to evaluate the well for a recompletion or deepening to another zone.  These wells are usually no longer economically producing and can be used for casing exits to drill horizontal wells.  This can save the operator as much as two million dollars versus drilling a new well.  Operators may be doing other work in the area to evaluate a particular zone and need additional time to fully evaluate the zone.  If a well is plugged and abandoned and the casing is cut and pulled from below the surface, the wellbore can likely never be used again.  T&A's are very simple for the Division staff to evaluate and require virtually no staff resources.  There is no evidence to support any relationship between the proposed fee and the “anticipated actual cost” of designating a T&A well, as required by Section 38-08-04(j) of the North Dakota Century Code.  Imposing an annual fee will create another reporting, payment, and monitoring structure by the Division.

The oil and gas industry paid nearly $350 million in oil and gas production taxes alone in the 2005–2007 biennium.  This is an unnecessary and burdensome tax on the most uneconomic wells.  At times of high oil prices, it’s easy to forget what happened in previous bust cycles like 1999 when the state was taking steps to encourage industry to keep wells from being plugged and abandoned.  The state should not be ramping up fees on industry, as industry pays more than its fair share of taxes.

As you can see from the figures below, in addition to existing taxes paid the state, the industry is paying a significant amount to the Division in fees; and the amount paid has increased substantially and the balance continues to grow.  The legislation passed in 2007 will build those funds quickly to amounts sufficient to cover the intent.

1.) The total fees collected by the Oil and Gas Division in the ‘05-‘07 biennium from industry that went into the Plugging and Abandonment Fund. 
’05-’07 Abandonment Well Fund fees = $134,455  
’05-’07 Cash Bond Fund fees = $55,840
 
2.) The total expenditures from these funds in the ‘05–‘07 biennium. 
’05-’07 Abandonment Well Fund expenditures = $106,035  
’05-’07 Cash Bond Fund expenditures = $4,431

3.) The total fees collected by the Oil and Gas Division in the ‘03-‘05 biennium from industry that went into the Plugging and Abandonment Fund and Cash Bond Fund. 
’03-’05 Abandonment Well Fund fees = $70,200  
’03-’05 Cash Bond Fund fees = $60,035

4.) The total expenditures from these funds in the ‘03–‘05 biennium.
’03-’05 Abandonment Well Fund expenditures = $36,245  
’03-’05 Cash Bond Fund expenditures = $50,521

5.) The balance of each fund at the end of the ‘03–‘05 biennium and at the end of the ‘05–‘07 biennium.
Abandonment Well Fund 6-30-2007 ending balance = $251,220  
Cash Bond Fund 6-30-2007 ending balance = $520,804

Abandonment Well Fund 6-30-2005 ending balance = $141,238  
Cash Bond Fund 6-30-2005 ending balance = $428,864

43-02-12-06. NOTIFICATION OF WORK PERFORMED.
The director is authorized to require the entire geophysical exploration project, or any portion thereof, to cease operations if further activity will cause excessive or irreparable damage to the surface of the land.
We understand the desire to provide additional jurisdiction in this area.  We are not opposed, but do feel that due process must be considered.  An unhappy party may file a complaint and the operator doesn’t even have knowledge of the problem and could be shut down without an opportunity to address this situation.  In addition, some landowners may not be concerned about impacts to the surface and should have the right to waive a proposed shutdown by the Division.  For example, the landowner may have harvested his crops and does not care if geophysical activity leaves a foot print, then work should be allowed to continue.  We encourage adding language such as “After notice and a reasonable opportunity to address the problem, the director is authorized to require the entire geophysical exploration project, or any portion thereof, to cease operations if further activity will cause excessive or irreparable damage to the surface of the land.  Landowners may decide to allow the operation to continue on private lands if the impacts are not of primary concern to them.
43-02-03-66. APPLICATION FOR ALLOWABLE ON NEW OIL WELLS
Proration is virtually unknown to the industry since the state hasn’t invoked proration for decades.  We support notice and hearings and stringent requirements that proration is justified if implemented and that all parties have an opportunity to present their positions.  We are concerned with language allowing new wells or discovery wells to operate unrestricted for the eighteen months until proper spacing occurs, while other wells in the pool may be restricted.  This could lead to correlative rights issues and have the potential to encourage operators to seek a separate field for every new well.

CHAPTER 43-02-04.1 GEOLOGIC STORAGE OF CARBON DIOXIDE

The Petroleum Council supports the recommendations of the Interstate Oil and Gas Compact Commission of this model act and the comments by the Energy Environment and Research Center.

Please contact me with any questions.

Sincerely,

Ron Ness
President