Oilmen: Feds are Killing Us

By Kyle Walker / Originally published July 2, 2015 in The Bigheart Times

BARNSDALL, Okla.—Five miles west of Pawhuska, a blue water tower rises incongruously from the prairie. Beside it is a gate just wide enough for a large pickup truck to pass, its posts topped with the tri-cone drill bits emblematic of the oil and gas industry.

Mark Helmer exits his truck, opens the gate and drives through on this way to check a number of oil wells drilled on this lease.

The first well, along with several others, was drilled the same year that Helmer was born: 1956. It still pumps some oil to the surface, but not like it used to.

“All of these wells made 100-150 barrels a day when they were new,” he says. Some now produce as little as a half barrel a day, but producers still squeeze profit out of them. “Osage County is an old, worn out county. We’re just trying to get what’s left and get it economically.”

But Helmer and other producers like him say they will have a hard time doing even that in the face of new regulations set to go into effect on July 11. The new rules came out of a years-long process and include provisions that have local producers up in arms.

Helmer has been working in the oil and gas business for years and has co-owned Helmer Oil Company with his brother Richie for two-and-a-half decades. During those years he’s seen booms and busts. He says there was a four or five-year span in the late 70s and 80s when there were so many rigs operating in the area west of Pawhuska that you could drive around with your lights off.

But he also saw the damage that the oil crisis wrought on area oil production. Are things going to be as bad as that when these rules go into effect?

“It could be worse. We’re not just fighting the price of oil,” he says. “It’s so bad we don’t even know what to do.”

On May 11, the Federal Register published a raft of changes to Part 226 of the Code of Federal Regulations. Part 226 governs oil and gas production in Osage County and is administered by the Bureau of Indian Affairs, which holds the county’s considerable below ground mineral estate in trust for the Osage Nation. Producers have until July 11 to come into compliance.

Of all the changes, on in particular stands out in the minds of producers. A new bonding requirement obliges lessees to put up a $5,000 bond for every well on a lease—even those they did not drill.

This may not sound particularly onerous: a surety bond usually costs no more than a monthly premium. But producers say that companies will not issue bonds for Osage County drilling operations unless the operator can put up collateral equal in value to the value of the bond.

“The biggest hardship of the [new rules] is the new bonding requirement and how unfair it is to make us come up with all this capital in such a short time period—for wells we didn’t drill,” said Paul Revard, whose family has been involved with oil and gas in Osage County since at least the 1960s.

One effect of the bonding requirement is to dramatically increase the bonding cost for some existing leases. For example, Mark Helmer’s lease a few miles west of Pawhuska once cost $15,000 to bond. It will now cost $45,000.

Revard faces a much more dramatic change.

“I bought a least with 26 abandoned wells on it,” he said. “I started putting them into operation one by one. I got six going. And now I’ve got to bond 20 more wells,” which comes out to $100,000.

That’s because the rules don’t make any distinction between active wells that are in production and temporarily abandoned wells that could conceivably produce but may have been untouched for years.

Just the bonding costs are enough to give some producers pause.

“If I could just walk away, I would,” Revard said. “But I’ve got a partner whose got a lot of money invested in these leases that I operate. And he’s going to come up with the cash to do the bonds … If my partner didn’t volunteer to come up with the extra cash I need, I’d have to file for bankruptcy.”

“If they enforce the regulations—and they go sued for $380 million for not enforcing the regs, so I can think of 380 million reasons why they want to enforce them—it’ll be fatal,” said Osage Producers Association board member Jamie Sicking. “It’s death by a thousand cuts.”

Besides the bonding rules, producers are also required to comply with new site security regulations. They are required to use a specific kind of valve for all lines entering or leaving oil storage tanks.

“We have to change the valves on the tank batteries so they can lock,” Sicking said. He estimated that replacing valves could cost $8,000 to $10,000 per tank battery.

“The tank batteries we’re talking about, the majority of them are over 30 years old,” Sicking said. “The problem is, you’re not just going to pop up there with your wrench and unscrew [the valves]. They’re going to pop. It’s just held together by rust now. So now you’re looking at having to replace a tank battery, and that’s $50,000.”

The BIA requires these valves because they can be “sealed.” They are build so that a thin, uniquely numbered metal band can be attached to the valve in such a manner that it must be destroyed for the valve to be moved. This is ostensibly an anti-theft provision.

Lessees must also maintain for six years a record of the seal numbers used on which valves.

“It’s not that expensive” to change the valves, according to Paul Revard, “it’s just one more hoop for us to jump through. And the other thing is, just given five weeks to do this, it’s making us have to scramble. And it’s subject to a $500 penalty if you get it wrong!”

Most violations of the new regulations are punishable by a fine of up to $500 for each day of non-compliance.

Producers can ask for leniency on the July 11 deadline and on other provisions of the rules, but they must do so in writing to the Osage Agency Superintendent, Robin Phillips. Phillips decline to comment for this story. An attorney for the BIA’s parent agency, the Department of the Interior, said that producers will not be fined if they submit a plan to come into compliance.

These written requests are supposed to include the reasons a producer will be unable to come into compliance by the deadline. That bothers Jamie Sicking.

“They want us to self-report,” he said. “That’s like the prosecutor asking you to come in and write a full confession, and then they’ll decide what punishment you receive.”

“Part of what they’re telling us makes sense,” Helmer said, “if you imagine you’re in the Dakotas.” but Osage County oil production is not the high volume affair that one associates with the Bakken oil boom.

“The Osage Mineral Estate is a stripper production,” Sicking said, “meaning that most of the wells make less than 10 barrels a day. It has 14,00 producing wells that produce 13,000 barrels a day. When you factor that in with the regulations, how much it costs to try to bring your well and tank battery up to code …you start thinking, ‘Well, this will never work.’”