Sunday, October 17, 2010
Jackpot in the Oil Patch
By Mike Gallagher
Copyright © 2010 Albuquerque Journal
Journal Investigative Reporter
State regulatory changes helped transform a small company owned by a pair of Richardson administration insiders into the biggest "cradle to grave" oil field waste disposal company in the Oil Patch of southeast New Mexico.
Hobbs businessmen Johnny Cope and Ken Marsh — both major Richardson campaign contributors and appointees — sold Controlled Recovery Inc. in 2006 to Texas investment bankers Blue Sage Capital of Austin and Atriedes Capital of Houston for at least $10 million. Part of the $10 million came from the State Investment Council.
The company sold again recently for a rumored $50 million.
That's a far cry from 1996 when TransAmerican Waste, which had purchased the company from Cope and Marsh four years earlier, returned it to them for virtually nothing.
A lot had changed, especially on the state regulatory front, in ways that would benefit CRI — a company that went from four employees to an operation with a fleet of trucks and round-the-clock operations.
And the record shows that Cope and Marsh, through contact with Richardson administration officials, strived to make it happen.
Some competitors were eliminated by new state rules and others were subjected to tough regulations from which CRI was exempt.
The out-of-state buyers who purchased the company from Cope and Marsh in December 2006 also had some extra cash to invest.
Private equity company Blue Sage Capital of Austin drew on a $10 million commitment the State Investment Council had approved for Blue Sage in 2002, at the end of Gary Johnson's administration, to be used for various unspecified investments.
The company had promised to find investments in New Mexico and after much prodding from the SIC — by then chaired by Richardson — fulfilled that promise in 2006 by using $350,000 of the SIC money as part of the Controlled Recovery purchase price.
The CRI purchase was the only Blue Sage investment in New Mexico.
The regulatory changes didn't happen overnight.
It took a series of new regulations and administrative orders based on thousands of pages of technical and often contradictory testimony at the state's Oil Conservation Division and the commission that oversees it to create the business environment that helped fuel the growth of Controlled Recovery Inc.
Controlled Recovery was an "intervenor" in the hearings and pushed for stricter regulations either through the company attorneys or through Marsh, according to state Oil Conservation Division files.
One of the ironies was that while Controlled Recovery was involved in pushing for the new regulations, it wasn't subject to them. The company's landfill was grandfathered in by a court-approved settlement reached in early 2004 before the tougher regulations were introduced.
Among the regulatory changes:
• The 2005 "salt rule" restricted the volume of oil field drill waste contaminated by salt that could be disposed of at so-called "land farms" that competed with Controlled Recovery. That resulted in a significant increase in business for Controlled Recovery.
• New Surface Waste Management rules required competitors of CRI to line disposal cells and install leak detection among other regulations from which Controlled Recovery Inc. was exempt.
• The state adopted the so-called "Pit Rule," which restricts oil companies from disposing of drilling waste at their drill sites and in most cases requires disposal of the drill cuttings (solids including dirt, rock, gravel and other material brought up in the drilling process) and other waste at permitted landfills.
The Pit Rule, which was adopted after the sale of CRI, has been extremely controversial.
Environmental groups say it is needed to protect groundwater. Oil and natural gas drillers who face higher costs because of the rule say it goes further than needed and that it makes them more likely to do business in other states.
But for those drilling in New Mexico, it made CRI one of the few repositories for oil field waste.
Cope and Marsh have been partners for more than 20 years in various businesses but were most closely linked through Controlled Recovery Inc., which is known in the Oil Patch around Hobbs as CRI.
Richardson appointed Cope to the State Transportation Commission in 2003 and appointed Marsh to the state Environmental Improvement Board in 2004. Marsh resigned in 2007, while Cope now serves as chairman of the Transportation Commission.
Cope contributed more than $100,000 personally and through his companies to Richardson and more than $35,000 to Lt. Gov. Diane Denish in the 2006 election cycle. He also helped raise millions of dollars for Richardson's presidential campaign. Marsh was also a contributor but not on the same scale as Cope.
Cope said in a recent telephone interview that he sold all his CRI stock in 2006 and "in hindsight I should have hung onto the company for a few more years."
Marsh, who couldn't be reached for comment, also sold his stock, but stayed on as a consultant to CRI after the sale and has since retired to Texas. He continued to list CRI as his employer on campaign contributions through 2007.
The company was sold again in July to another investment group for an undisclosed amount. According to records filed with the Lea County Clerk in July, the company's assets and future earnings secure a $200 million mortgage and line of credit.
State steps in
Land farms had been around for some time, but were first subjected to the permit process in the early 1990s by the Oil Conservation Division.
The farms disposed of oil-contaminated soils through remediation — tilling the contaminated soil into the ground and spreading fertilizer and microbes that break down the oil.
In early 2005, Marsh contacted Mark Fesmire, director of the Oil Conservation Division, complaining that land farms were receiving oil field waste with high concentrations of salt.
A week later, Fesmire sent all land farms in the state a letter prohibiting them from accepting oil field waste contaminated with salts.
The state's concerns were that high concentrations of salts in the waste would prevent the breakdown of the oil and that the salts could contaminate groundwater and kill surrounding plant life.
The order posed a major problem for drilling operators in the southeastern part of the state, because they not only use salt water while drilling but also drill through salt formations to get to oil and gas.
Many land farms just closed, but one company, Gandy-Marley Inc. in Chaves County appealed Fesmire's ruling to the Oil Conservation Commission. It obtained an emergency order allowing it to continue to receive waste.
The appeal led to a series of hearings in which Controlled Recovery was allowed to intervene.
At a hearing in May 2005 before Oil Conservation Commission — the division's governing body — Marsh took credit for Fesmire's letter.
"It was only after I kept raising concerns with the division about this practice ... and only after Mr. Fesmire became director, that the division finally sent letters to stop this practice," Marsh told the commission.
Fesmire, who was appointed by Richardson to head the Oil Conservation Division in 2004, spearheaded many of the changes in oil field waste management.
"The only direction I received from the Governor's office was to clean up the problems we were having with contamination of groundwater," Fesmire said.
Fesmire said that, prior to his appointment, the oil industry was the only group with input into proposed regulations.
"We expanded that to include local governments, agricultural and environmental interests," Fesmire said. "They (oil and gas industry) were no longer the only people at the table" when it came to rule making.
Earlier this year, Fesmire moved from an exempt job as head of the Oil Conservation Division at the energy department into a classified attorney position, which means he can't automatically be replaced when Richardson leaves office.
He still serves as acting head of the division but took a pay cut from more than $101,000 a year to about $88,000.
Winners and losers
It became apparent during the Oil Conservation Commission hearings that the state didn't have any specific information that Gandy-Marley's operation had contaminated groundwater or caused other problems.
However, the commission noted in its order that it was authorized to protect against potential contamination and used that logic to approve tighter environmental supervision of the land farms.
Marsh testified during an earlier hearing that stopping the flow of salt contaminated oil field waste had increased the volume of waste going to CRI by 20 percent in the first few months after Fesmire's letter. Gandy-Marley Inc. sought a permit to open a landfill, which can accept a wider array of oil field waste and bury it instead of just the oil tainted soils that are tilled into the ground.
Again, CRI intervened, seeking to force Gandy-Marley Inc. to meet tough environmental standards.
In August 2005, Marsh wrote Fesmire's boss, Secretary of the Energy, Minerals and Natural Resources Department Joanna Prukop, a letter that began "Johnny asked that I send to you CRI's position on Gandy-Marley site permit application."
The letter asked that Gandy-Marley be required to line waste disposal cells, install a "leacate" collection system and not apply for any new permits or modifications for three years.
Prukop appointed two of the three members of the Oil Conservation Commission hearing the Gandy-Marley appeal.
After much legal wrangling and refiled applications, Gandy-Marley was granted a landfill permit by the Oil Conservation Division, but it had to install liners and leacate system to collect any water in the waste disposal cells that could help contaminates move into the groundwater beneath the landfill.
By December 2005, the flow of solid oil field waste to CRI had increased to a level that the facility had to be redesigned to handle the flow.
Based on the Gandy-Marley hearings, the Oil Conservation Commission issued tougher regulations for oil field landfills to meet.
Controlled Recovery's landfill, however, was not subject to those regulations.
Why CRI was exempt
In 2000, the Oil Conservation Division under Johnson was concerned about a waste stream from the Navajo Refinery in Artesia going to CRI's disposal site located at Halfway, N.M., between Hobbs and Carlsbad.
Unlike oil field waste, much of the waste from refineries is considered hazardous by the federal Environmental Protection Agency and can't be disposed of at facilities like CRI.
The state "repermitted" Controlled Recovery in 2000 and the company filed a lawsuit in 2001 against the state alleging that regulators had overstepped their authority in requiring new conditions that included an increased bond to cover costs of closing the facility at the end of its "life."
While the lawsuit was pending in 2003, Gov. Bill Richardson appointed Cope to the state Transportation Commission.
The Richardson administration then settled the lawsuit in January 2004, shortly before Cope's appointment was approved by the state Senate. The settlement "grandfathered" Controlled Recovery's permit as an oil field waste landfill and oil sludge recovery facility.
Many, but not all, of the requirements sought by the state on paperwork and safety were in the settlement agreement.
CRI did not have to post an increased bond, and the settlement exempted the facility from changes in landfill regulations unless it expanded beyond its 260 acres.
On several occasions, the Oil Conservation Division has asked Controlled Recovery to discuss a new permit. The division files do not show any response to those overtures.
Fesmire said the lawsuit settlement continues to be "a concern" for the division, which would like to open a dialogue with CRI.
The current CEO of Controlled Recovery, John Barnidge, said the facility meets the highest standards for environmental regulation.
"We are lining our waste disposal cells and have leak detection systems in place," Barnidge said in a telephone interview.
He said the waste disposal site exceeds current state standards.
"Some of the largest oil companies in the world audit and inspect our facility each year," he said. "They wouldn't bring their waste here if we were not meeting the highest standards."
He would not discuss the former owners of the facility.
The Pit Rule
CRI has been a cheerleader for the controversial Pit Rule since its inception in 2006.
Prior to the current rule, oil and gas drilling companies were allowed to bury drilling waste in liners at the drilling site with some exceptions.
The new rule — called Pit Rule 17 in the industry — made onsite burial in liners the exception and, in most cases, means drilling waste must be hauled to landfills.
As drafted in 2006, the rule only applied to drilling sites within a 100-mile radius of a permitted oil field waste landfill. That covered most of the Permian Basin in Southeastern New Mexico because that's where the permitted landfills are located.
There are no permitted oil waste landfills in the San Juan Basin in Northwestern New Mexico.
Controlled Recovery recommended that the Oil Conservation Commission drop that 100-mile exemption among other suggestions — all of which were eventually incorporated into the new Pit Rule.
The rule does not require the use of mechanical "closed loop" systems at all drilling sites. But if groundwater is less than 100 feet from the surface, drilling companies use the systems.
A "closed loop" system avoids the use of earthen pits to circulate drilling "mud" and store the drill cuttings by using metal containers that can be loaded onto trucks for delivery to a landfill.
Today, Controlled Recovery is the largest supplier of "closed loop" systems in Southeastern New Mexico with a fleet of more than 25 trucks and 140 metal vats.