In Oklahoma, $50 oil may test new quake regulations

Parts of Oklahoma oil country may be shut down due to earthquake concerns

REUTERS – Oil producers around the country enticed by crude’s jump to $50 a barrel are hoping to get production back on line, but for producers in Oklahoma, new regulatory barriers may keep key parts of the state shut due to worries about earthquakes.

Crude’s recent rebound will mark the first test of more stringent regulations recently implemented in Oklahoma – and already, companies are looking for workarounds.

Seismic activity has soared in the state in the last five years, linked to disposal of saltwater from fracking activity. Fracking is the process of drilling down into the earth and injecting liquid at high pressure in order to extract oil or gas, which has prompted environmental concerns. In Oklahoma, those concerns revolve around the increased seismic activity which is tied to the creation of wastewater wells.

Oklahoma officials were eventually forced to take action through directives – initially voluntary – that have since become hard mandates designed to limit earthquakes.

Scientists are uncertain about whether the regulations can stop the phenomenon, which has serious implications for Oklahoma, one of the top U.S. energy-producing states. Until now, low oil prices meant producers were not drilling anyway. But that might change now that crude has posted its first sustained climb to $50 in nearly a year. [O/R]

At the end of May, the state finalized plans to cut saltwater disposal from oil and gas drilling in north-central and central Oklahoma, just one month after it implemented a similar plan to cut injection in northwestern Oklahoma.

In March, oil companies began to ask the state what accommodations might be rolled out in the next year or two to help them operate under the new rules, said Mike Teague, Oklahoma’s secretary of Energy and Environment.

But a quick return to fracking in those areas should not be expected, he said. Companies are, for example, working with a coordinating council to consider longer-term plans to treat a portion of the water and use it in drought-stricken areas.

“We’ve got some work to do and some time to do it before the Mississippian Lime would ever come back,” Teague said, referring to the water-intensive formation that runs from northern Oklahoma to southern Kansas, pegged as the location of the water that triggered a bulk of the earthquakes.

WATER DISPOSAL

So far this year, the state commissioner has not approved any new applications for disposal wells in the 15,000 square-mile (38,850 square km) “area of interest” in the Arbuckle, the formation that takes waste water from the Mississippian Lime, said Matt Skinner, spokesman for the Oklahoma Corporation Commission, which oversees the state’s oil and gas industry.

In April, the OCC was granted the authority to shut wells considered a problem; prior to that, it would have had to take oil companies to court first.

Producers now will have to find alternative ways to dispose of that water, either by truck or by building new pipes or water treatment systems.

This will cost more money, so while drilling in other parts of Oklahoma may likely increase as prices surpass $50 a barrel, analysts estimate the Mississippian Lime would need crude to rise to near $60 a barrel for production to return.

“If the water handling required trucking, it would increase those break-evens between $3 and $7, depending on distance, size of the operator, and how much water they’re producing,” said Bernadette Johnson, a managing partner and director at boutique energy consulting firm Ponderosa Advisors, based in Denver.

Small drillers say that the restrictions have not been cumbersome due to the two-year price rout. But that may change.

“It’ll definitely affect business,” said Byron Neher at TNT Operating, a privately held oil company with about 25 wells near Oklahoma City. “Our disposal wells are real old – I don’t think we’re causing any of the problems but right now they’re just trying things to see if it helps or changes anything.”

Larger companies are also included in the orders. Gordon Pennoyer, director of strategic communications at Chesapeake Energy Corp, said the company is “complying with the Commission’s directives.”

TOUGHER REGULATIONS

Scientists say there is no evidence that the regulations will stop the earthquakes. Water disposal volumes have dropped significantly in the last two years, but that was in part due to the slump in oil prices which began in mid-2014.

Oklahoma earthquakes of a 3.0 magnitude or greater rose to 907 in 2015 from just 36 in 2012. So far this year they are on pace to decline, which would be the first drop since 2012.

Disposal volumes in Oklahoma’s Arbuckle play fell to 800,000 barrels per day (bpd) in January 2016, compared with roughly 1.8 million bpd in late 2014, the Oklahoma Geological Survey has said.

“I don’t think this much fluid has ever been injected into such a broad area as has occurred in Oklahoma, so I don’t think we really know what will happen over longer time frames,” said Mike Brudzinski, a professor at Miami University of Ohio.

Oklahoma’s Teague described solving the problem as akin to building an airplane while in flight.

“I don’t know if I can get earthquakes to zero in Oklahoma,” he said. “But we are trying to get them back to the naturally occurring rates, which is probably how we were in 2009 to 2010.”

(Editing by Matthew Lewis)