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Audit: Oil Patch industrial water use relies on 'honor system'

FARGO -- An audit of industrial water use in North Dakota's Oil Patch found the system primarily relies on the "honor system" and called for tighter monitoring procedures to ensure compliance.

The audit, presented Thursday to a legislative panel, recommended electronic monitoring systems instead of the self-reporting of water quantities now used by the State Water Commission, along with periodic field inspections.

Scrutiny of industrial water use is increasing because of the exponential rise in water demand from the oil industry, which mixes large volumes of water with chemicals to extract oil and gas from shale deep underground.

Officials have estimated the industrial water industry serving the Oil Patch at between $45 million and $100 million a year.

Michelle Klose, assistant state engineer, said the State Water Commission welcomes the recommendations and is evaluating whether it would be better to use electronic monitors of high-volume industrial water sites or increased field inspections.

"The appropriations division knows what needs to be done and they're very good at their job," she said, referring to water commission staff involved in water appropriation.

"We're really not seeing widespread misuse of water appropriations," she said.

Auditors found seven violations during the 2½ year review period, five that exceeded the permitted water amounts and two cases where water was taken without a permit.

Also, in a sampling of 60 permits, auditors found 11 instances where users pumped more water than allowed in the permit. Most of the overages were quite small, although the largest was 26.8 acre feet of water.

A bill passed by the 2011 North Dakota Legislature would have paid up to half of the cost of installing electronic water monitors. Gov. Jack Dalrymple vetoed the legislation, citing cost concerns and technical challenges.

Instead, a pilot project evaluating the cost and effectiveness of remote electronic monitoring of industrial water sites was passed.

Rep. Bob Skarphol, R-Tioga, a backer of that legislation and a member of the audit committee, said some of the report's recommendations could have been in place if Dalrymple hadn't vetoed the bill two years ago.

"There are a lot of suggestions and recommendations here that were part of the legislation that was vetoed by the governor," said Skarphol, who added, "I don't like picking on the governor," a fellow Republican.

The two-year pilot study of electronic metering, and a means of compiling the information into a database, was valuable in solving practical problems, Klose said.

Among the findings and recommendations from the performance audit by consulting firm KPMG:

E Water monitoring practices follow the law, but their lack of formal documentation can result in inconsistent application of policies and risks prompt identification of violations.

E Annual paper water use reports were late in more than a fifth of files reported in 2010 and more than a tenth of files in 2011.

E The reliance on paper self-reports not only rests on the "honor system," but increases the risk of data entry errors that would be eliminated by electronic monitoring.

"While the field inspections serve as a quality assurance tool, the Water Use Program still relies on the self-reporting of permit holders or an 'honor system' and is thus reliant on the permit holder to accurately represent usage amounts," the audit report said.

In addition to the reports submitted by water permit holders, field inspections are permitted at least once a year to validate meter information. Even if electronic monitors are implemented, field inspections of meters will continue, Klose said.

However, the audit report found, "No evidence of a field inspection was located for 3 percent of the sample population."

The State Water Commission, which has a staff of 23, has been straining to keep up with industrial water permitting and monitoring in recent years.

The commission is proposing a new water resource manager position to increase field inspections and to process monthly water use reports.

The performance audit said water officials should determine whether the new position is adequate to meet the needs, and consider expediting the hiring request.

The State Water Commission also is proposing a significant increase in fines for violations, from $5,000 a day to $15,000. At the suggestion of legislators encouraged water officials are considering boosting fines even higher, to $25,000, Klose said.