House Committee on Energy Resources – March 7, 2016 Hearing

The House Committee on Energy Resources met to take up the following interim charges:

Study enforcement policies of the Railroad Commission of Texas. Consider effectiveness of maximum fines as a deterrent of violation, the economic benefit of non-compliance, and greater accessibility to enforcement and complaint data for the public.

Conduct legislative oversight and monitoring of the agencies and programs under the committee's jurisdiction and the implementation of relevant legislation passed by the 84th Legislature.

Invited Testimony
Chairman David Porter, Railroad Commission of Texas

Not seeking another term and gave an overview of his time in office
Highlighted the success of information technology modernization program
He was vocal with concerns of changing agency to self-funding model before– now questions if under current funding structure they will be able to meet legislative mandates
Argues Oil and Gas industry already pays it way and covers many important needs for the State of Texas – industry pays its way to cover most obligations
Need to do some things to help relieve financial pressures
- $250 permitting – $300k increase a month for groundwater
- Permit fees for disposal wells are much lower than it cost to regulate – recommends focusing on this area for fee increases
- Budgeted for 820 FTEs but only have 725 now and declining – safety staff does not need to be reduced in order to fulfill agency critical function
Need to discuss how should RRC be funded going forward – especially for critical functions

Commissioner Ryan Sitton, Railroad Commission of Texas

Started talking about first year on the commission – both Porter and Craddick have been very welcoming and singled out Porter and really appreciated his time
Impressed with staff level of knowledge – growth of industry has gone from producing 1m barrels a day to 3m a day
Funding is needed to cover required activities that the commission must take on
Presented 11,500 survey responses from a February survey
- 68% said regulatory burdens and low oil prices are biggest concerns
- 80% support changing the name of the RRC
- 60% of people were interested in what is happening at RRC – updates
- People are aware of issues and challenges facing the industry
Still continue to support name change – people are confused about what the agency is doing
Outreach was funded out his campaign – will give entire data set to members per request
Chairman Darby – what safeguards are in place for well plugging?
- Staff is assessing highest risk and assessing for those so they can keep unplugged and prioritizing the ones
- $14m a year to plug wells
Rep. Anchia – how is risk categorized?
- What is likelihood that if there was a problem it could impact a community or waterway
- There is a scoring mechanism
- Look at consequence, etc so there is a methodology in place to give risk number
Bonds cover 17% of cost to plug the well, need to look at certain groups to see if bonding is sufficient
- Member says that may be bonding issue

Commissioner Christi Craddick, Railroad Commission of Texas

Agrees with Porter’s comments on funding needs and staffing needs
Challenge on how to grow agency
As of Feb 2016 –275k active rigs and produce about 30% of the oil in the country
Takes about 1.5 days to get a permit out for expedited and 3 days for regular
Pipeline safety inspections – completed 121 inspections in first 6 weeks of the year, down from avg. but have changed some processes but they expect it to go back up
Overall have strengthen gas and oil inspections – violations have dropped and rise in enforcement actions
Communications dept. has 8 people – had only 2 when she started out
Amended rules and included fees and truth in cost initiatives and rules aimed to simplify hearing process (field technology rules)
Member asked question about need for increase commission oversight for protection of landowners – how is commission going to respond?
- 9500 abandoned wells – if some do not get remediated could go as high as 12000 but that is not unusual and happens every cycle
- Prioritizing enforcement and inspections
Rep. King – why having trouble staffing?
- Trying to do more with less, leaving those positions vacant
- About 50% of the budget is staff
Kimberley Corely (RRC, Executive Director)– hiring of inspectors have not slowed down and being very careful of how they make new hires, in what areas and what areas can have attrition
Corely – expect to see some realignments in budget with staffing
Craddick – have a new inspection system which should improve the process but since they are upgrading it is why they are behind in pipelines but inspections n will continue to be a priority
Rep. Keffer – asked for clarifications on the numbers – field offices (9) anything else you want to put in? Have in past lost RRC staff to other agencies – have been able to increase salaries?
- Field office does not mean there is not an inspector – feels they have the area covered
- Defers to new ED
Rep. Canales – increased more than 20+k wells but lost inspectors, where do we need to be to compensate for additional growth?
- Have 275k active wells
- Inspectors – priority to add inspectors to portfolio, down as far as total number but looking to hire more
- 63 positions for inspectors/41 filled, allocated 15 pipeline safety inspectors and filled 4, etc
- We’re not given the ability to hire more in oil and gas from legislature, would like some and will work with Canales to make sure those figures are available as they go through the budget process.
Bonding specifics reviewed – they are set in statute by the legislature and have not changed in 2001
Craddick has not asked for that as has not seen it as a priority
- 9500 is old wells and saying over 1million drilled so percentage is small
King – who pays the rest? If Bond only covers 17%?
- State funds are given a specific amount to plug wells and will prioritize those well that are plugged
About $15k a well is total cost to plug wells

Kimberly Corley, Executive Director, Railroad Commission of Texas

Commissioners have put things in place to respond to downturn of economy
Have to continue to invest so they can move the agency forward and need to invest in outreach
Darby welcomed her to the agency
Keffer – did you answer on staffing
- Staff is leaving for retiring, another agency or personal sector
- Goal is to stop agency creep
In response to a question on if they have upped salaries, yes to the extent they have been able to and have also built in merit pay/bonus
Plan to do a salary survey
Keffer hopes the commissioners will go out and ask for and demand what people want, personnel out there is needed
Anchia – Talking about same issues six years later, goal of self-levelling to serve as effective regulator and there was previous concern they were losing institutional knowledge, hoping to hear the RRC is starting to harvest all this human capitol

More panel discussion

Anchia continues on staffing discussion and curious why agency did not ask
Sitton said they will be bolder with their ask this time around for personnel needs
Keffer said he can’t imagine that RRC is in the position of being subservient to other agencies – as far as salaries
Members ask if it is publicly available the classification of the wells – yes
HB 40 one of the important measures of the state – Darby if state is going to regulate below ground and in order to keep faith with public they need a commission that is able to do that monetary, staff to be responsive and transparent
Darby challenges each one to tell budget needs and challenges facing 9500 wells that need to be plugged in the state

Wei Wang, Chief Financial Officer RRC

Saw decrease in revenue in 2015 and monitoring closely in 2016
Revenue in permitting activity is decreasing
- In Sept. $5.8 million but in previous years it has been around $6-6.5 million – so there have been reductions
LAR process is starting
Darby – any information to share with regard to the bonding process and plugging obligation
Amounts are statutorily set but would work closely with the legislature to change that
The cost for well plugging has reduced in the last two years- so hoping to plug more with the $14million they have
On avg. about $15k cost to plug the well
Rep. Landgraff – is there substantial difference for agency to plug versus when industry does it
- Defers to someone else in agency to answer
Rep. Herrero – inquired about who to ask on the bidding process to plug wells

Charge 4: Enforcement policies at the RRC
Clay Woodul, Oil & Gas Division Field Operations

Gave overview of ICE – power point and video
- A paperless inspection system
Darby asked Woodul to give a current overview of bonding in statute
- Woodul is not the expert but will have someone available to address those questions
Anchia – thinks RRC has come a long way, where does data go and is data searchable
- Brandon Harris (CIO), provision of data to public has been on mind
- Initial goal of project is now complete – making data available to staff
- 2 longer terms goal which is to consolidate information holdings, add all inspections & to make data searchable and accessible to public
Anchia – how can you put some things online but not other things?
- Some items are put in Excel spreadsheet and are manually inputted
Anchia – how expensive is it to migrate the data?
- $1.8 million
Herrero – how is bid process set up to plug wells, response?
- Wells are grouped by likeness and typically contain more than one well at a time
- Response depends on district and can be requested multiple times during a fiscal year
- Higher priority wells are encouraged to be plugged first
Anchia asked more about details on what makes a well a high priority
- Have a high priority system they use that uses 4 primary categories
Keffer – how many priority 1 wells do we have in state right now?
- Thinks it is less than 10 but will get numbers to members – later said it is 7 on the books
- Time frame is ASAP to plug those wells and does not have an avg. time frame to provide committee but analysis will be done and provided to committee
753 priority 2 wells, 314 priority 3 wells
- Priority 2 is combination of priority 2 and 2H
Anchia asked if there are more than 200 priority 2H wells
- Yes and less than 500; they are slightly more serious based upon the fluid level; it means they pose a threat but not that there is actually a threat
Darby asked how the inspector analyzes that; is the leak comingling with surface water
- Priority 1 is a well that is visibly leaking fluids at the surface; if it is a well bore that was drilled and completed or plugged years ago, requirements of drilling past surface water depth may not apply; not necessarily comingling with water supply
Canales asked what the qualifications are to plug wells
- Must be an approved cementer; must have the equipment and must prove to the commission that the equipment is capable of mixing cement at standard levels and the people doing the job know the proper calculations
Canales asked if there is bond they must put up
- Yes; if there is a contractor plugging for the State of Texas they must have insurance
Herrero asked if the plugging requirements for the state are identical to that of private industry
- Yes; require contractors to plug wells the same way industry is required to
Keffer noted in 2000 there were around 19,000 wells that need to be plugged; need to keep working on this and the agency has been taking it very seriously
- Since 1992, 31,095 wells have been plugged with state funds which cost around $32 million
Keffer asked about priorities when the IT program at the agency was started; the agency came back to the legislature last session for more money; what goals still need to be fulfilled
- The initial purpose of the program was to increase online abilities and make information more transparent to the public; the system is getting better and there is still some work to be done; there is still a multi-year approach with a steady appropriation necessary to accomplish all the goals
Dale asked about cybersecurity; what percentage of the budget is allocated to that end
- Not sure
Herrero asked if there are repeat offenders failing to plug wells
- Yes; they are generally entities that do not renew their permit and just walk away
Herrero asked if there is a process for increasing penalties on repeat offenders
- If an operator continues to abandon a well and not satisfy the RRC’s enforcement order, the well comes under the purview of the state
Anchia asked if there is a sense of how quickly the remaining 9,500 wells could be taken care of
- The problem is that plugging companies do not just work for the commission; RRC is competing for those companies with private industry
Anchia asked if an operator has problems following commission order can they get additional permits
- No; operators will be flagged if they do not comply with enforcement orders and must satisfy existing orders before they can receive a new permit

Tina Beck, Legislative Budget Board
Mark Wiles, Legislative Budget Board

Darby asked for some background on the oil and gas cleanup fund
- Revenues to the oil and gas cleanup account declined from about $73 million in 2014 to $56 million in 2015
- This is a self-leveling account and when the balances get above a certain amount certain fees and surcharges turn off and turn on again when the balance reaches a certain low point
Darby asked if the agency will not meet revenue estimates necessary to fund the agency
- They will have account balances available to them; their current revenue stream shows about $69 million for FY16 and operating expenses of around $67 million
Darby asked if fees are turned on or off right now
- Do not believe account balances have reached the bottom level so fees should still be the same
Darby asked how the $14 million relates to prior year expenditures for well plugging expenses
- Will bring that back for the committee
Darby asked how third party bonding payments work
- At the end of August 31, 2015, there was $72 million in the oil and gas cleanup account but a big portion of that is escrow accounts from operators pledging to plug wells; not sure how much of the balance is tied up in escrow
Darby asked if the operator puts up cash balances or if it is all letter of credit and bonding
- Not sure; there must be at least some cash balances or the $72 million balance would not be that high

Cyrus Reed, Sierra Club

Over the past 4-5 years the RRC has started to publish aggregate information on enforcement; not as good as some would like but it is a start
They also have adopted penalty guidelines which could be more robust but at least it is improving
There is quite a bit of information available online but it does not show specifics; no way the public could determine if operators are doing a good job or if they are having problems
Either in statute or in the budgetary process there need to be requirements for more enforcement data to be made public; the same should be said for pipeline safety data
- There are models that exist in Texas such as TCEQ where the public can get this information
Statute for the RRC was set back in 1993; total maximum fine per day was $10,000; nearly every other agency since then has updated their maximum fines
- EPA is at $25,000
- Texas updated pipeline safety fines to $200,000 with a cap
These fines are too low and need to be updated
RRC could use some more inspectors for oil and gas; may need to set some ratios for inspectors to wells and update budgets

Laura Buchanan, Texas Land and Mineral Owners Association

Bust cycles are when landowners have the most concerns; when operators go out of business they tend to walk away and leave wells
Bonds for well plugging are not enough to cover the cost of plugging inactive wells
Reclassification of wells from oil wells to gas wells is happening a lot right now; mass reclassification can have serious repercussions on royalty owners
- Operators can hold acreage that would have otherwise been released back to the landowner; in a gas well lease an operator can have fewer active wells and hold the same acreage
- Also, operators can take advantage of a state tax credit for gas wells
Need to have science based reclassification standards
Darby noted the reclassification issue does impact the budget; need to monitor going forward

John Tintera, Texas Alliance of Energy Producers

The RRC is very proactive; has not always been this way
Industry is well and fully regulated by RRC
The reason agency revenues are dropping is because production is dropping
Ask that RRC pay close attention to the impact on small business when promulgating new rules
Transparency efforts within the agency are ongoing and improving
Complaints from the public are taken very seriously within the agency
Requests that due process be preserved for oil and gas operators; there needs to be the ability to go through a legal process
The enforcement aspect is more than adequate
Requests no fine increases
Darby asked about the bonding issue
- Bonds are put up and taxes are paid by the industry to go toward the oil and gas cleanup fund; it isn’t just everyday taxpayer’s money going to this cleanup
- At the same time, if a well if abandoned it goes on a list and other operators can come in and work on that well if it makes sense economically
- There is a requirement for renewal of a P5 that an operator must plug a certain number of their inactive wells
- There are many checks and balances and paths for the agency to handle abandoned wells

Public Testimony
Roxanne Elder, Landowner

Lives in DeWitt County
Discussed an issue she had with an operator polluting her land
Operators cannot continue to operate as they have in the past and the penalties must be high enough to provide a disincentive for bad actors
Very few complaints at the RRC result in a fine to the oil and gas industry
There needs to be a rule for impacted landowners allowing them to be a more significant part of the complaint and settlement process
It appears to many that the RRC lacks consistent measurement for severity or repeat offenses
Requests that the committee use videoconferencing to allow impacted landowners to share their experiences in order to be more involved in developing solutions

Paul Weatherby, Middle Pecos Groundwater Conservation District

Working to attempt to get an MOU established with the RRC; many acres in the area are inundated with spills and leaks and other long term problems
Operators get angry at the involvement of the groundwater district
Want the district to be able to step up and take action when they are out of compliance and groundwater is affected; some of these problems cannot wait to be addressed
Darby asked of there should be enforcement authority for a groundwater district
- Yes
Sen. Uresti filed a bill that would give groundwater districts a copy of injection well permits; did not pass
- Sometimes operators don’t know where aquifers and they just need to be informed that an injection well could contaminate water sources; have been successful in working with operators to have them move injection wells to more satisfactory locations
- If groundwater district received the injection well permits they could be more proactive
Repetitive violators need to be more severely punished just as they are with other agencies and law enforcement
Agreed with the previous witness that the complainant needs to be more involved in the settlement process
Darby asked if there is no statutory framework for RRC to communicate with a groundwater district
- Not email to email; district must submit an open record request
Darby noted there are surely some due process and confidentiality issues but there should be some methodology that would allow for that communication

Charge 7: Review seismic research needs for UT Bureau of Economic Geology
Peter Henning & Scott Tinker, Bureau of Economic Geology

Gave to committee a compilation of monthly reports starting from last year
Update on TexNet – the new seismic monitoring network
Number of permanent stations added have been determined – 22 new added to 17 to those that currently exist = nearly 40 permanent stations
Have recruited and hired Alexandro Savvaidis as project manager for TexNet project
Design of type of sensors and installation methods complete
Scoping and bidding process is complete, vendor chosen and contract finished this week and press release will follow
Certification of TexNET network, etc are in place – how data will transfer at national level and will also be stored at UT
Seeking to contact landowners for zero cost leases – Darby asked what would site look like
- Site details explained – 10×10 ft enclosure near road
The 17 are owned by USGS and the data from them will be integrated into Tx system
Center for Integrated Seismic Research (CISR)
- Research collaboration has been formed
May 2015 an industrial associated group has been formed and kick off will occur March 24, 2016 and expect to have 10 member companies to join
- Members will share expertise, advice and data when appropriate
Look forward to working with Governors Technical Advisory group once they are established
Darby – need to have data drive the discussion and data that will allow the state to move forward and encouraged witness to continue efforts of gathering data
Anchia – thanked Darby for his efforts and wonders about seismic activity, it has been quiet in his area and curious if there will be a big enough sample size in light of decline of activity (or is that just his perspective)
- Correlation is noticeable between activity decreasing as well as seismic activity
- 36 portables will go out as well and it will help with data collection
Keffer – assuming you are discussing with the state of Oklahoma
- Yes – have followed TexNET lead a bit
All stations should be deployed by this year