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Should Oil Patch water be monitored? Some state officials believe violations warrant the need

Editor's Note: This is Part 2 of a two-part story on North Dakota water and oil.

FARGO -- An offhand comment prompted state officials to dispatch an inspector who discovered a remote depot was selling industrial water without a permit.

The tank, located in a field a mile away from an abandoned radar base in Divide County in the extreme northeast part of the state, was capable of pumping 900 gallons per minute.

Although a permit application for the Oil Patch depot had been filed, state regulators hadn't yet approved the project. Discovered on July 22, 2010, records indicate it started delivering water days earlier, on July 13.

The violation, which resulted in payment of a $20,000 fine, is one of a handful of cases cited by officials calling for more stringent monitoring of water sales to the booming petroleum industry, which needs large volumes of water to pump oil out of the ground.

The state Legislature overwhelmingly passed legislation last year to require the installation of meters that can be monitored remotely to track industrial water depots.

Meters are required for industrial water tanks, but users are allowed under the "honor system" to file paper reports showing how much water they pumped, subject to spot checks by field inspectors. Irrigators were exempted from the remote metering requirement.

Rep. Bob Skarphol, R-Tioga, who pushed for the remote metering requirement, said the temptations to cheat are too great given the profits to be made from commercial water sales, which he estimates is an industry with annual sales of $45 million to $100 million.

"I view this as something that is important for the water resource that we have, to be adequately protected and monitored," Skarphol said at a legislative committee meeting.

Skarphol suspects that cheating in reporting water deployment is a problem in the Oil Patch.

"I believe that suspicion to be well-founded," he said.

Gov. Jack Dalrymple vetoed the provision, citing concerns it was an "unworkable scheme" and could become too costly to implement over time.

Instead, the state started a pilot study to test several remote meters, and is working to devise a method to allow a central-only repository for data.

The estimated cost of the remote meters ranges from $5,000 to $10,000. Monthly data costs of $30 or more also would apply. The legislation provided up to $500,000 in state funds to pay for half the cost of installing the meters.

State water officials estimated that 90 water permits would require the remote monitors.

Dalrymple's office referred questions about his veto to Todd Sando, the state engineer, at the State Water Commission. Staffing is a critical issue in light of demands on staff, given water needs in the Oil Patch and issues statewide, he said.

"We are very, very overworked regarding what's going on out there," Sando said. "I think we're doing a very good job with our level of staff."

Bob Shaver, a hydrologist who oversees water appropriations for the state, said staffing levels are stretched thin, and he has only one technician to oversee the monitoring initiative.

The state maintains a network of 4,000 observation wells to track groundwater supplies around the state, and does routine samplings of about 1,200 observation wells each year.

More than 850 municipal and industrial users submit annual water use forms, with a return rate of about 97 percent, state figures show. The return rate for 2,200 irrigation users is 93 percent.

Because of legislative concerns that the self-reporting system could be "compromised by greed," state water officials this year began to require monthly reports and have stepped up spot checks of meters.

"To date we don't see anybody trying to cook the books," Shaver said.

The handful of known violations in the last few years have not compromised any aquifers or hurt other water users, he added.

"For those who do violate, it's very small amounts that they go over," Shaver said.

Nonetheless, Skarphol wants to see verification. "There's a need for additional scrutiny and metering," he said.

The interim legislative audit committee, a panel he serves on, has asked the state auditor's office for a performance audit of the state's industrial water monitoring program.

The scope of the audit will evaluate procedures for monitoring aquifers and for issuing temporary permits allowing irrigators to sell water for industrial use.

Auditors also will test compliance with monitoring requirements and whether the State Water Commission oversight is adequate.

Auditors will also examine policies and penalties to determine if they have been "strictly and consistently enforced," and to determine if regulators have "sufficient processes and procedures in place to uncover violations in the normal course of business."

If any deficiencies are found, the auditors will recommend improvements in a report to the 2013 North Dakota Legislature.

"The performance audit should give us some idea of the accuracy of what's being reported," Skarphol said of the water industry's self-reporting.

Evaluating groundwater monitoring requires hydrogeological expertise, Sando said. "Really, an accounting firm could not do a proper job," he said, adding that the auditors probably would find it necessary to hire technical consultants.

To find examples of the need for vigilant water monitoring, Skarphol didn't have to go far from home to find unauthorized sale of water to the thirsty oil industry.

The city of Tioga, one of a number of cities that sell surplus water to the oil industry, violated its permit in 2010 by exceeding its allocation, selling 3.3 times the authorized amount.

As a penalty, the city was fined $20,000, with all but $5,000 suspended, and Tioga's allocation of water was reduced until the amount of the unauthorized volume, almost 64 acre-feet, is "repaid." (One acre-foot of water equals 325,851 gallons, enough to cover an acre one-foot deep.)

As a result, the city of Tioga will not be able to pump its full allocation until 2014.

A similar water usage penalty was assessed in the case of the Divide County water depot that started selling water without a permit.

One of the partners in that water depot, Mike Ames, a former state water commissioner from Williston, said his partner, who had an irrigation water permit, had offered to swap part of that allocation to cover sales from the water depot, with an annual capacity of 100 acre feet.

"We thought we were in the right," Ames said, though he agreed to pay the civil penalty. "We got the cart before the horse and had to pay the penalty."

State officials estimate that 100 acre-feet of water sell for about $488,775, based on an average price of 1.5 cents per gallon.

The water supply industry, growing along with the oil boom, can be profitable, Skarphol and Shaver said. Unlike oil and gas, water sales are not subject to taxes or royalties.

State oil and gas regulators predict the development of North Dakota's Bakken Formation will take 15 to 25 years, and require from 20 million to 30 million gallons of water daily.

Since the boom accelerated in the Bakken around 2008-09, water demand has spiked in the Oil Patch. Industrial water demand increased three-fold from 2008 to 2011 in McKenzie County, which includes Watford City, and 10-fold in Mountrail County, which includes Stanley.

Although North Dakota runs an extensive network of groundwater monitoring wells, a system established in the 1970s, state water officials acknowledge they cannot predict whether aquifers can continue to safely meet demand over the long term.

Underground water supplies called aquifers often originated from melted glaciers, and can take long periods of time, depending upon weather conditions, to replenish when drawn down.

"We are not depleting aquifers of glacial origin in northwestern North Dakota," a State Water Commission report issued last October said.

But the report also concluded, "We do not know how much additional water is available on a sustainable basis from aquifers in northwestern North Dakota."

For instance, officials have observed that water levels in the West Wildrose and Ray aquifers in northwest North Dakota "may indicate long-term depletion."

In light of the uncertainties, as well as the risk of long-term depletion, water officials are taking an "incremental approach" to allocating additional groundwater, gradually increasing allotments over time to protect the sustainability of water supplies.

In the short term, officials also have granted temporary access to surface water sources, including ponds and streams, and temporary permission for irrigators to convert water for industrial use.

Ideally, Sando said, the state would not have to tap aquifers for oil development, but would be able to rely on the Missouri River and other surface sources.

"Our management goal is to maintain long-term sustainability," Shaver said of the state's water resources. So far, he added, "We're not seeing any indication of long-term depletions."