In October 2023, the Railroad Commission of Texas (the “RRC,” or the “Commission”) announced that for the first time in nearly 40 years, 16 Texas Administrative Code (TAC) §3.8 (relating to Water Protection), also known as Statewide Rule 8 (“Rule 8”), would undergo a significant overhaul.

Rule 8, the State’s primary rule for water protection and regulating oil and gas waste, had not seen any major revisions since 1984.  As a result, many stakeholders regard Rule 8 as outdated in the context of current environmental standards and oil and gas industry practices.

The RRC itself noted in its reasoning for undertaking the overhaul effort that “the content and requirements of SWR 8 are dated. Expectations for environmental protection have evolved considerably over the past 40 years, and routine industry practices have changed significantly since the onset of shale extraction in the early 2000’s.”

Containment (Pits)

In its current form, Rule 8 addresses pollution of ground and surface waters and regulates surface containment (pits), oilfield waste recycling, exempt oil and gas waste disposal methods, and oil and gas waste hauling, in addition to prescribing certain recordkeeping regarding the transportation of oil and gas wastes.  However, particular attention is directed to the area of the containment pits that are used to store a variety of potentially toxic, as well as non-hazardous, liquid and solid wastes associated with oil and gas development and production activities.

Notably, over 2/3^rds of the RCC’s Summary of State Rule 8 addresses matters related to containment pits.

The pit types addressed in the summary include saltwater disposal pits, collecting pits, emergency saltwater storage pits, skimming pits, washout pits, brine pits, gas plant evaporation/retention pits, brine mining pits, drilling fluid storage pits, and drilling fluid disposal pits.

What’s Changing?

The RCC’s October 2023 proposed changes include “streamlining of Statewide Rule 8 into the Commission’s existing Chapter 4 regulations concerning environmental protection, updating requirements on the design, construction, operation, monitoring, and closure of waste management units” (containment pits), and improvements in the Commission’s ability to track and collect data regarding the transport of oilfield waste.

More specifically, the proposed changes would create a new subchapter of 16 Texas Administrative Code Chapter 4 titled Oil and Gas Waste Management.

Westlaw Today’s summary of the proposed changes indicates that the new subchapter would include most of the existing content of Statewide Rules 8 and 57 (Reclaiming Tank Bottoms, Other Hydrocarbon Wastes, and Other Waste Materials), in addition to many new provisions.

As proposed, the new provisions would require that exploration and production companies perform studies of groundwater supplies near containment pits and limit permits and sites for new containment pits.

Likely Implications

To some extent, the proposed rules would simply update prior rules to the existing RCC practices. However, some (such as the Energy Workforce & Technology Council) specifically reference the “aim to introduce new environmental standards and limit the locations of waste pits” on the part of the RCC.

Ed Longanecker, President of the Texas Independent Producers and Royalty Owners Association (TIPRO), was referenced by National Gas Intel (NGI) as expecting exploration and production (E&P) economics to be impacted by the rules.  According to Longanecker, “Based on feedback from members of TIPRO, these changes could significantly impact the economics of oil and gas drilling projects in Texas, especially for smaller operators and low producing wells.” He additionally noted that TIPRO strongly encourages “all Texas operators to closely review the rule changes” and participate in the public comment period.

Impact on Oilfield Waste Disposal Operators

The potential rule changes offer a mixed bag of likely consequences for Texas oilfield waste disposal operators.

As noted, the enhanced rules may inhibit E&P activity for smaller operators and low-production wells.  Oilfield waste disposal operations serving areas with a greater presence of smaller operators and/or low-production wells could see a reduction in disposal volumes.

On the other hand, more stringent regulations regarding existing and planned future pits at well sites may increase demand for oilfield waste disposal services.  Recent Mercer Capital interviews with oilfield waste disposal service providers included discussions of potential disposal volume increases of 30% to 50% for some disposal service locations.

Going Forward

The public comment period regarding the proposed changes ended in November 2023.  The Commission is now in the process of reviewing the input received during the public comment period, which will inform the Commission’s decision-making process and may lead to additional changes to the coming formal rulemaking proposal.

The formal rulemaking proposal is anticipated before mid-2024, after which there will be a second opportunity for public comment.

Conclusion

As with so many aspects of the upstream industry, the future of the proposed Rule 8 changes brings uncertainty.  There’s certainly an intent by the Commission to strike a reasonable balance between the need for reliable sources of oil and gas and the need to protect ground and surface water supplies.  How close to that desired balance the final rules “land” is yet to be seen, but it will undoubtedly have a material impact on the E&P industry and the OFS providers that serve the E&Ps — notably the oilfield waste disposal operators.

Through a unique combination of industry expertise and valuation specialization, Mercer Capital offers a holistic approach that caters to the multifaceted needs of the oil & gas sector, positioning itself as a preferred partner in this dynamic industry.  Contact one of our professionals to discuss your valuation issue in confidence.