Storm Water Pollution: Information Needed on the Implications of 
Permitting Oil and Gas Construction Activities (09-FEB-05,	 
GAO-05-240).							 
                                                                 
To prevent pollutants from entering storm water runoff, the Clean
Water Act's National Pollutant Discharge Elimination System Storm
Water Program requires controls for construction activities that 
disturb land. Phase I of this program requires permitting for	 
construction activities that disturb 5 acres or more, while Phase
II requires permitting for activities disturbing between 1 and 5 
acres. The Environmental Protection Agency (EPA) extended the	 
Phase II compliance date for discharges associated with oil and  
gas construction activities until March 2005 to analyze the	 
impact of Phase II on the oil and gas industry. GAO was asked to 
provide information about oil and gas construction		 
activities--such as well drilling and pipeline			 
construction--affected by Phase I and likely to be affected by	 
Phase II, as well as Phase II's financial and environmental	 
implications.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-240 					        
    ACCNO:   A17276						        
  TITLE:     Storm Water Pollution: Information Needed on the	      
Implications of Permitting Oil and Gas Construction Activities	 
     DATE:   02/09/2005 
  SUBJECT:   Endangered species 				 
	     Environmental monitoring				 
	     Industrial pollution				 
	     Oil drilling					 
	     Pollution control					 
	     Pollution monitoring				 
	     Program management 				 
	     Water pollution					 
	     Water pollution control				 
	     Wildlife conservation				 
	     Land management					 
	     Natural gas					 
	     Environmental policies				 
	     Federal regulations				 
	     Construction (process)				 
	     Policies and procedures				 
	     EPA National Pollutant Discharge			 
	     Elimination System Storm Water Program		 
                                                                 
	     Texas						 
	     Oklahoma						 
	     Louisiana						 

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GAO-05-240

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

February 2005

STORM WATER POLLUTION

 Information Needed on the Implications of Permitting Oil and Gas Construction
                                   Activities

                                       a

GAO-05-240

[IMG]

February 2005

STORM WATER POLLUTION

Information Needed on the Implications of Permitting Oil and Gas Construction
Activities

                                 What GAO Found

A small fraction of total oil and gas construction activities have been
permitted under Phase I of EPA's storm water program. Phase I storm water
permit data for three of the six largest oil and gas producing states-
Louisiana, Oklahoma, and Texas-showed that 433 construction activities
were permitted under Phase I over the most recent 12 months for which data
were available. About 70 percent, 304 of the 433, were oil and gas
pipeline activities, most of which were much larger than the 5 acre
criterion under Phase I. About 17 percent, 72 of the 433, were drilling
activities. In comparison, these three states reported drilling an average
of about 10,000 wells for each of the past 3 years. Industry must decide
whether to seek permit coverage, and it has sought to have its drilling
activities permitted on few occasions because it has determined that most
drilling activity involves distinct projects that disturb less than 5
acres each. In states we reviewed, there were few reported compliance
problems associated with oil and gas construction activities.

While it appears that most oil and gas construction activities may have to
be permitted under Phase II, the actual number of activities that could be
affected is uncertain, and the financial and environmental implications
are difficult to quantify. The oil and gas construction activities
affected by the rule may lead to increased financial costs for the oil and
gas industry and federal agencies implementing the rule. Many of the
potential costs stem from meeting permit requirements to review the impact
of construction activities on endangered species, although this impact
would be site specific and difficult to quantify. Potentially offsetting
these costs, the rule may lead to additional environmental protections
that are difficult to quantify, such as decreased levels of sediment in
water and benefits for endangered species and their habitat. After
delaying implementation of this rule for oil and gas construction
activities for 2 years to study the impact of Phase II, EPA is analyzing
the impact but, as yet, has not quantified the number of activities
affected or the potential financial and environmental implications.

Gas Well Construction Site in Wise County, Texas United States Government
                             Accountability Office

Contents

  Letter

Results in Brief
Background
Permit Coverage under Phase I Has Been Obtained by a Small

Fraction of Total Oil and Gas Activities

Most Oil and Gas Construction Activity Will Likely Be Affected by Phase
II, but the Financial and Environmental Implications of Phase II Are
Difficult to Quantify

Conclusions
Recommendation for Executive Action
Agency Comments and Our Evaluation

1 3 4

11

16 22 22 22

Appendixes                                                              
               Appendix I:       Objectives, Scope, and Methodology        24 
              Appendix II:     GAO Contacts and Staff Acknowledgments      27 
                                            GAO Contacts                   27 
                                           Acknowledgments                 27 
                           Table 1: Oil and Gas Activities for Which Storm 
     Tables                              Water Construction                
                               Permit Coverage Was Obtained, by State      12 
                           Table 2: Oil and Gas Activities for Which Storm 
                                            Water Permit                   
                                 Coverage Was Obtained, by State and       
                                            Construction                   
                                              Activity                     12 
                               Table 3: Onshore Well Completions from      13 
                                         2001-2003, by State               
    Figures                Figure 1: Activities Covered under Phase I and     
                                 II of the NPDES Storm Water Program        7
                           Figure 2: Steps to Obtain Coverage under EPA's  
                                            Construction                   
                                           General Permit                   9 
                             Figure 3: A Texas Gas Construction Location   
                                           Including Three                 
                                    Adjacent Drilling Operations           14 

Contents

Abbreviations

DOE Department of Energy
EPA Environmental Protection Agency
FWS Fish and Wildlife Service
NMFS National Marine Fisheries Service
NPDES National Pollutant Discharge Elimination System
LADEQ Louisiana Department of Environmental Quality

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

February 9, 2004

The Honorable James M. Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable James L. Oberstar
Ranking Democratic Member
Committee on Transportation and Infrastructure
House of Representatives

Polluted storm water runoff can lead to U.S. surface water degradation.
Runoff from sites where the ground has been disturbed-in particular,
construction sites-can deposit sediment and other harmful pollutants into
rivers, lakes, and streams. Sediment-the primary environmental concern
associated with construction activities-clouds water, decreases
photosynthetic activity; reduces the viability of aquatic plants and
animals;
and, ultimately, destroys organisms and their habitat. According to the
Environmental Protection Agency (EPA), sediment runoff rates from
cleared and graded construction sites are typically 10 to 20 times greater
than those from agricultural lands and one-thousand to two-thousand times
greater than those from forest lands.

Storm water discharges from certain construction activities, as well as
from other defined industrial sources and municipal storm water sewer
systems, are subject to the Clean Water Act's National Pollutant Discharge
Elimination System (NPDES) Storm Water Program. This program is
designed to reduce the impact of storm water by requiring the
implementation of controls designed to reduce harmful pollutants from
being washed by storm water runoff into local water bodies. The NPDES
program regulates a variety of municipal, industrial, and construction
activities, such as oil and gas construction activities.1 Oil and gas
construction activity includes clearing, grading, and excavating2
activities
associated with oil and gas exploration and production, processing and
treatment operations, and transmission facilities. These activities are
often

1Some oil and gas industry groups are asserting in litigation that the
Clean Water Act does not authorize EPA to regulate most oil and gas
construction activities under the storm water program.

240 C.F.R. S: 122.26(b)(14)(x) and 40 C.F.R. S: 122.26(b)(15).

associated with oil and gas well drilling and pipeline construction, as
well as other oil and gas construction.

Phase I of this program, which became effective in 1990, regulates storm
water discharges from construction activities that disturb 5 acres or more
of land, as well as smaller construction activities that are part of a
common plan of development that disturbs 5 acres or more.3 Phase II of the
storm water program applies to construction activity disturbing between 1
and 5 acres of land.4 EPA published the Phase II rule in December 1999 and
set a March 2003 compliance date for permit coverage for discharges from
small construction sites. EPA had originally assumed that few oil and gas
construction activities would be affected by Phase II; but subsequent to
rule promulgation, EPA became aware that as many as thirty-thousand oil
and gas sites per year might be affected. So that EPA could perform
further analysis of key issues, including the likely impact of Phase II's
permitting requirements on the oil and gas industry, EPA postponed the
Phase II compliance date for storm water discharges from small oil and gas
construction sites until March 10, 2005.

Both phases of the rule allow oil and gas companies to obtain storm water
permit coverage for their discharges under a general permit. In many other
environmental programs, regulated entities obtain individual permits
tailored to site-specific conditions. Though oil and gas companies may
obtain individual storm water discharge permits, they almost always elect
to obtain coverage under an NPDES general permit that contains general
conditions applicable to a large number of sites. To obtain coverage,
companies file a Notice of Intent to be covered under a general permit.
This generally informs the permitting authority-EPA or the state,
depending on the type of entity and its location-of planned activities
that might involve storm water discharges and requires the operator to
develop a plan to manage storm water pollution caused by these activities.
The operator must also evaluate other potential impacts, including whether
the construction activity is likely to adversely affect endangered or
threatened species or their habitats before seeking coverage under EPA's
Construction General Permit.

3Phase I also regulates storm water discharges from medium and large
municipal storm water sewer systems and other sources of industrial
discharges.

4Phase II also regulates storm water discharges from small municipal storm
sewer systems.

This report provides information about (1) oil and gas construction
activities that have obtained permit coverage under Phase I and (2) oil
and gas construction activities that are likely to be affected by Phase II
and its financial and environmental implications.

To gather information about the oil and gas construction activities that
have sought permit coverage under Phase I, we spoke to oil and gas
industry associations representing both large and small companies, and
government representatives, to get a national perspective on the number
and types of sites affected. Because there is no centralized database that
tracks nationwide oil and gas construction activities subject to Phase I,
we reviewed the storm water permitting history of Louisiana, Oklahoma, and
Texas-three of the nation's six largest oil and gas producing states. EPA
administers the permitting process for oil-and gas-related projects in
Oklahoma and Texas, while Louisiana administers the entire NPDES Storm
Water Program for its state.5 We reviewed EPA's and Louisiana's storm
water databases and spoke with the administrators of these databases to
assess the reliability of these data, which we found to be sufficiently
reliable for our purposes. In addition, in order to gather information
about the characteristics of oil and gas construction activities, we
visited oil and gas construction sites in Louisiana, Oklahoma, and Texas.
To obtain information about the number of oil and gas construction
activities potentially affected by Phase II, we spoke with industry and
government representatives. We discussed the financial and environmental
implications of Phase II with storm water stakeholders, including
representatives of various federal agencies, an environmental group, and
oil and gas associations and member companies. A more detailed description
of our scope and methodology is presented in appendix I. We conducted our
review between August 2004 and January 2005 in accordance with generally
accepted government auditing standards.

Results in Brief	A small fraction of total oil and gas construction
activities have obtained permit coverage under Phase I of EPA's Storm
Water Program. Although there is currently no centralized, nationwide
storm water permit database, our review of Phase I storm water permit data
for three of the six largest oil and gas producing states-Louisiana,
Oklahoma, and Texas-identified 433

5Oklahoma and Texas administer the NPDES programs in their respective
states for most nonoil- and nongas-related projects with EPA oversight of
those activities. EPA oversees Louisiana's administration of its program.

oil and gas construction activities that obtained Phase I permit coverage
in these states over the most recent 12 months. About 70 percent of these
activities were oil and gas pipelines, which were generally much larger
than the 5-acre threshold, while about 17 percent were drilling
activities. In comparison, these three states reported drilling an average
of over ten thousand wells for each of the past 3 years. Industry
officials must decide whether they should seek permit coverage, and they
have sought to have their drilling activities permitted on few occasions
because they concluded that most drilling activity involved distinct
projects that disturbed less than 5 acres each. Neither EPA nor state
officials reported many compliance problems associated with oil and gas
construction activities in states we reviewed, although actual compliance
rates are not known.

EPA, industry and state officials believe that most oil and gas
construction activities involve between 1 and 5 acres of land and will
need permit coverage under Phase II of the NPDES Storm Water Program,
although the actual number of activities this rule will affect is
uncertain. Furthermore, the financial and environmental implications of
implementing Phase II for oil and gas construction activities are
difficult to quantify. The additional oil and gas construction activities
affected by the rule may lead to increased financial costs to the oil and
gas industry and to implementing federal agencies. Many of the potential
costs that have been identified relate to EPA's permit requirements to
review construction activities' impact on endangered species. However,
this impact is site specific and difficult to quantify, given that not all
sites will have to perform the same level of review. Potentially
offsetting these costs, additional environmental protections may result
from a greater number of oil and gas construction activities covered by
Phase II, including decreased levels of sediment in water and benefits for
endangered species and their habitat. Similar to the potential costs,
potential environmental benefits are difficult to quantify. After delaying
implementation of this rule for oil and gas construction activities for
almost 2 years to study the impact of Phase II, EPA has not yet completed
its analysis of the Phase II rule, quantified the number of activities
affected, or determined the potential financial and environmental
implications. We are recommending that EPA's Administrator complete the
agency's analysis of the Phase II program before making a final decision
on its implementation.

Background	According to EPA, polluted storm water runoff is a leading
cause of impairment to the nearly 40 percent of surveyed U.S. water bodies
that do not meet water quality standards. Pollutants in storm water can

significantly impact the environmental quality of U.S. waters by
destroying aquatic habitat and elevating pollutant concentrations and
loadings. Storm water discharges from construction activities can increase
pollutants and sediment amounts to levels above those found in undisturbed
watersheds.

The NPDES Program was created in 1972 under the Clean Water Act to control
water pollution from point sources-any discernible, confined, and discrete
conveyance.6 Though EPA has had authority since 1972 to regulate storm
water discharges, it declined to require permits for most of these
discharges for over 15 years. However, in 1987, Congress passed the Water
Quality Act, which amended the Clean Water Act to require the regulation
of storm water discharges.7 Accordingly, EPA established the NPDES Storm
Water Program, which requires certain municipal, industrial, and
construction sources to obtain permit coverage for storm water discharges.

The storm water program was implemented in two phases:

1.	Phase I, adopted in 1990, which applies to medium and large municipal
separate storm sewer systems and 11 categories of industrial activity
(including large construction activity disturbing 5 or more acres of
land);8 and

2.	Phase II, adopted in 1999, which applies to small municipal separate
storm sewer systems and small construction activity disturbing between 1
and 5 acres of land.9

The Phase II final rule was published on December 8, 1999, and required
storm water dischargers to obtain permit coverage by March 10, 2003. When
promulgated, EPA assumed that few, if any, oil and gas sites would be
impacted by the construction component of the Phase II rule. Subsequent to
rule promulgation, EPA decided to reevaluate how many oil and gas
construction sites would be subject to the rule and postponed the deadline
for seeking coverage to March 10, 2005, for oil and gas construction

633 U.S.C. S: 1342(p).

733 U.S.C. S: 1362(14).

8NPDES Permit Application Regulations for Storm Water Discharges, 55 Fed.
Reg. 47,990 (Nov. 16, 1990).

9NPDES -Regulations for Revision of the Water Pollution Control Program
Addressing Storm Water Discharges, 64 Fed. Reg. 68,722 (Dec. 8, 1999).

activities disturbing between 1 and 5 acres of land.10 The postponement
was designed to allow EPA enough time to analyze and better evaluate the
impact of the permit requirements on the oil and gas industry and to
reconsider how key elements of the Phase II regulations would apply to
small oil and gas sites.11

Analyzing the impact of storm water permitting on oil and gas construction
activities is important because this type of construction requires
companies to undertake a number of earth disturbing activities. These
activities include clearing, grading, and excavating,12 associated with
oil and gas exploration and production; processing and treatment
operations; and transmission facilities. For example, to prepare a site
for drilling, operators must create a pad to support the drilling
equipment, such as the derrick. Creating the pad generally requires
clearing and grading-or leveling-an area and then placing rock, concrete,
or other materials on it to stabilize the surface. If necessary, companies
may also construct access roads to transport equipment and other materials
to the site as well as additional pipelines to connect the site to
existing pipelines. As with other construction activities, storm water
runoff containing sediment from oil and gas construction can lead to the
degradation of nearby waters if not properly managed. Figure 1 identifies
activities, including oil and gas construction, covered under Phase I and
II of the NPDES Storm Water Program.

10Modification of National Pollutant Discharge Elimination System (NPDES)
Permit Deadline for Storm Water Discharges for Oil and Gas Construction
Activity That Disturbs One to Five Acres of Land, 68 Fed. Reg. 11325-01.

11The NPDES Storm Water Program does not apply to storm water runoff from
operational oil and gas sites, as long as the runoff does not come into
contact with any raw material or product of any kind. Clean Water Act S:
402(l)(2). EPA has asserted that Clean Water Act section 402(l)(2) does
not bar EPA from regulating most storm water discharges from construction
activities at oil and gas sites. Some industry groups disagree, asserting
that section 402(l)(2) bars such regulations. The issue has been raised by
industry in a case currently pending in the U.S. Court of Appeals for the
Fifth Circuit. Tex. Indep. Producers and Royalty Owners Ass'n v. U.S. EPA,
No. 03-60506 (filed Jun. 19, 2003).

1240 C.F.R. S: 122.26(b)(14)(x) and 40 C.F.R. S: 122.26(b)(14).

Figure 1: Activities Covered under Phase I and II of the NPDES Storm Water
Program

Indicates a category that includes major oil and gas activities

Phase I

Phase II

Source: GAO analysis of EPA documentation.

aIndustry categories I, II, and VIII also include some minor oil and gas
activities: I includes petroleum refining, II includes petroleum products,
and VIII includes bulk stations and terminals.

bFacilities subject to storm water effluent limitations guidelines, new
source performance standards, or toxic pollutant effluent standards under
40 C.F.R. subchapter N.

cOil and gas site operators must obtain storm water permit coverage if
their storm water discharges come into contact with raw material or
product of any kind.

NPDES storm water programs are administered at both the federal and state
level. Under the Clean Water Act, states whose programs EPA has

approved may manage their state's programs. Forty-five states,13 including
Louisiana, are responsible for administering their own NPDES program,
including its storm water component; and EPA is responsible for
administering and enforcing the NPDES Storm Water Program in five
states.14 In addition, EPA is the NPDES storm water permitting authority
for oil and gas activities in Oklahoma and Texas.

In many environmental programs, regulated entities obtain individual
permits. In contrast, under the storm water program, regulated entities
may seek coverage under a single document called a general permit. A
general permit is issued by EPA or by the state environmental regulator
and is available to all eligible operators in the EPA or state program.15
With respect to regulated discharges of storm water associated with
construction activity, EPA's general permit is called the Construction
General Permit. Each general permit, whether it is issued by EPA or by a
state program, sets forth many steps that regulated entities must take to
ensure the minimization of storm water pollution.

To obtain coverage under the EPA Construction General Permit, regulated
entities must file a complete and accurate Notice of Intent to be covered
under the general permit prior to initiating the construction activities.
The Notice of Intent includes a signed certification statement from a
company official acknowledging that the operator has met all eligibility
conditions of the permit, including development and implementation of a
plan to control the discharge of pollutants from the site. Examples of
types of sediment and erosion controls that can be included in the plan
consist of vegetative cover, rocks, and hay bales to filter storm water,
or terracing slopes to divert and slow runoff. Figure 2 diagrams the steps
that must be completed to obtain coverage under EPA's Construction General
Permit.

13The Virgin Islands are also authorized to administer their own NPDES
program.

14These five states include Alaska, Idaho, Massachusetts, New Hampshire,
and New Mexico plus the District of Columbia and most U.S. Territories.
EPA is also the permitting authority on all Indian lands and for federal
facilities in Colorado, Delaware, Vermont, and Washington.

15Though states may implement the storm water program without issuing
general permits, all states with a storm water program have authority to
issue general permits. In addition, regulated entities may apply for
individual storm water discharge permits (40 C.F.R. S: 122.28(b)(3)(iii));
however, regulated entities typically apply for general permit coverage.

Figure 2: Steps to Obtain Coverage under EPA's Construction General
Permita

Source: GAO analysis of EPA documentation.

Note: Construction activities must comply with applicable state, tribal,
and local provisions. Additionally, construction site operators must
determine if their construction activity has the potential to discharge
storm water into a water with a total maximum daily load (TMDL)
established-a state limit required by the Clean Water Act on the amount of
pollutants that may enter that body of water. If so, additional steps may
be needed to ensure discharges from the site are consistent with any
applicable limits established by the TMDL.

aState programs must have requirements that are at least as stringent as
those in the EPA program. 40 C.F.R. S: 123.25.

bOperators may submit an application for coverage under an individual
permit.

One of the steps operators must complete when filing a Notice of Intent
involves determining whether the construction activity meets the permit's
eligibility conditions that address endangered species. The purpose of the
Endangered Species Act is to conserve endangered and threatened species
and the ecosystems upon which they depend. The act prohibits the
"taking"16 of any endangered fish or wildlife. Under the act and
implementing regulations, federal agencies, including EPA, must determine
whether their activities might affect a listed species or habitat
identified as critical. If effects are likely, the agencies, including
EPA, must consult with the Fish and Wildlife Service (FWS) or the National
Marine Fisheries Service (NMFS) to ensure that the activities, such as
issuing permits, will not jeopardize a species' continued existence or
adversely modify its designated critical habitat.17

In an effort to satisfy its responsibilities under the Endangered Species
Act, EPA consulted with FWS and NMFS to create language for its
Construction General Permit that requires operators to self-certify that
they have examined their project's potential effects on endangered
species. Specifically, language in appendix C of EPA's Construction
General Permit sets out the procedures operators are to follow in meeting
permit conditions that address endangered species for coverage under the
permit. Briefly, the procedures in the permit require companies to

o 	determine if federally listed threatened or endangered species or their
critical habitats are present on or near the project area,

o 	determine if the construction activity's storm water discharges or
related activities are likely to affect any threatened or endangered
species or designated critical habitat on or near the project area,

o  determine if measures can be implemented to avoid adverse effects, and

16The term "take" is defined as "to harass, harm, pursue, hunt, shoot,
wound, kill, trap, capture, or collect, or attempt to engage in any such
conduct." 16 U.S.C. S: 1532(15).

17FWS is the agency in the Department of the Interior to which the
Secretary has delegated authority for implementing the Endangered Species
Act for all terrestrial species as well as most aquatic, nonmarine
species. Similarly, NMFS is the agency to which the Department of Commerce
has delegated authority for protecting ocean-dwelling and anadromous
species, such as salmon.

o 	if adverse effects are likely, work with FWS or NMFS to modify the
project and/or take other actions to gain authorization for the activity.

  Permit Coverage under Phase I Has Been Obtained by a Small Fraction of Total
  Oil and Gas Activities

A small fraction of total oil and gas construction activities have sought
permit coverage under Phase I of EPA's storm water program. Industry and
state officials we spoke with confirmed that few of their sites obtained
permit coverage under the Phase I rule, since their activities rarely
exceeded Phase I's 5-acre size threshold. However, EPA clarified that
since industry decides whether to seek permit coverage for their oil and
gas construction activities, the total number of activities for which
permit coverage should have been obtained is unknown. EPA representatives
told us they expect that pipeline projects are more likely to obtain
permit coverage than individual drilling sites due to the higher
visibility of pipelines, additional preconstruction approval processes
under other laws, and the higher likelihood of pipeline construction being
conducted by larger companies with more experienced legal and
environmental staff.

Although there is currently no centralized storm water permit database
that tracks storm water permit coverage nationwide, our review of Phase I
storm water permit data for three major oil and gas producing states-
Louisiana, Oklahoma, and Texas-confirmed that permit coverage has been
obtained for only a small number of oil and gas construction activities,
compared with the thousands of drilling activities occurring in those
states.18 Our review found 433 sites in Louisiana, Oklahoma, and Texas
that have obtained construction storm water permit coverage for their oil
and gas activities in the most recent 12-month period for which data were
available. Table 1 shows the breakdown of permit coverage by state for the
most recent 12 months that data were available.

18Storm water permit data reflects the number of sites that obtained
permit coverage. It does not necessarily represent the number of sites
that should have obtained coverage.

Table 1: Oil and Gas Activities for Which Storm Water Construction Permit
Coverage Was Obtained, by State

                     State Number obtaining permit coverage

Louisiana

                                  Oklahoma 119

                                   Texas 292

                                   Total 433

Sources: Louisiana Department of Environmental Quality for Louisiana and
EPA's Office of Water for Oklahoma and Texas.

Note: For Oklahoma and Texas, these data covered December 2003 through
November 2004. For Louisiana, the data covered November 2003 to October
2004.

Further analysis of Phase I storm water permitting data showed that the
principal activity for which oil and gas companies sought storm water
permit coverage in these states was for pipeline construction. Three
hundred four of the 433 activities for which permit coverage was obtained
in the most recent 12-month period-about 70 percent-were for pipeline
construction activities. Table 2 shows the breakdown of permit coverage by
state and activity.

Table 2: Oil and Gas Activities for Which Storm Water Permit Coverage Was
Obtained, by State and Construction Activity

                             Construction activity

                  State       Pipelines    Drilling      Othera         Total 
              Louisiana              12              2      8      
               Oklahoma             104              3     12             119 
                  Texas             188       67           37             292 
                  Total             304       72           57             433 

Sources: Louisiana Department of Environmental Quality for Louisiana and
EPA's Office of Water for Oklahoma and Texas.

aOther activities include the construction of refineries, compressor
stations, tank batteries, etc.

Note: For Texas and Oklahoma, these data covered December 2003 through
November 2004. For Louisiana, the data covered November 2003 to October
2004.

Fifty-four percent of the 304 pipeline activities in these states
disturbed more than 10 acres of land. Eighty-seven pipeline
activities-almost 30 percent of all the pipeline permittees-exceeded 20
acres in size.

Another key oil and gas construction activity in these states was oil and
gas well drilling, with 72 of the 433 permits-about 17 percent-involving
drilling activities. Fifty-six percent of these drilling activities
disturbed between 5 and 8 acres of land. The drilling activities for which
storm water permit coverage was sought represents a small portion of the
total number of oil and gas drilling activities occurring in these three
states. We reviewed onshore well completion data for Louisiana, Oklahoma,
and Texas and found that between 2001 and 2003, an average of ten-thousand
wells was completed each year.19 Table 3 provides data on the number of
wells completed in these three states between 2001 and 2003 and the
average number of wells completed each year over the 3-year period.

Table 3: Onshore Well Completions from 2001-2003, by State

                                                                      Average 
                   State         2001    2002         2003           per year 
              Louisianaa          877     556         699                 711 
                Oklahoma        2,348    2,339       2,117              2,268 
                   Texas        7,478    5,973       7,622              7,024 
                   Total       10,703    8,868       10,438            10,003 

Sources: Louisiana Office of Conservation, Oklahoma Corporation
Commission, and Railroad Commission of Texas.

aDue to the structure of the Louisiana Office of Conservation's database,
this figure may contain a small number of offshore wells.

Industry officials must decide whether or not they will apply for permit
coverage, and some may have applied for storm water permit coverage on few
occasions because they broke their construction activities-which taken
together would exceed 5 acres-into what they believed were distinct
projects that disturbed less than 5 acres each. During our site visit to a
Texas gas construction location, we observed three drilling sites

19Operators typically file completion reports with state oil and gas
agencies upon termination of drilling a well. Although the number of
completion reports filed does not translate exactly to the number of
construction activities subject to EPA's Phase I and II storm water rules,
completion numbers do provide context for understanding the magnitude of
oil and gas drilling activities occurring in different states. Depending
on how a state manages its completion records, completion data may include
modifications to wells that do not require significant amounts of
construction and therefore may not be subject to EPA's storm water rules.
Additionally, because completion data pertains to wells drilled, it does
not reflect other construction activities, such as pipeline construction,
that may be subject to the storm water rules.

land. Neither the drilling company nor the pipeline company constructing
these activities obtained a permit under Phase I, although each of the
four activities would require permitting under Phase II after the
postponement period passes and small oil and gas sites are required to
comply with the Phase II rules.

EPA's Phase I rule requires that activities disturbing 5 acres or more of
land-as well as smaller construction activities that are part of a common
plan of development that disturbs 5 acres or more-obtain permit coverage.
EPA guidance defines a common plan of development as a contiguous area
where multiple separate and distinct construction activities occur under a
single plan. As this definition relates to oil and gas activities, EPA
guidance considers lease roads, pipeline activities, and drilling pads to
be a single "common" activity if they are under construction at the same
time-provided there is an interconnecting road, pipeline or utility
project, or if the activities are within one-fourth mile of each other.
EPA headquarters officials said that the aforementioned example highlights
a unique situation in which the definition of the common plan is difficult
to interpret without more information from the site operator(s). They said
that depending on the operator's reasons for drilling the second and third
wells, permit coverage may or may not have been required in this example.
Many oil and gas industry groups assert that EPA's definition of "common
plan" is confusing and illegal because it does not adequately consider oil
and gas industry practices. These oil and gas groups have raised the issue
of EPA's definition of "common plan" in two lawsuits pending against EPA
in federal courts.20

Although actual compliance rates in the field are unknown, neither EPA nor
state officials reported many compliance problems associated with oil and
gas construction activities that are 5 acres or more in size in Louisiana,
Oklahoma, and Texas. Currently, EPA's Region 6-responsible for
administering the Oklahoma and Texas storm water programs for oil and gas
activities-has not completed any enforcement actions against oil and gas
construction companies for violations of the storm water program, although
it currently has one enforcement action under way. Region 6 enforcement
officials told us they primarily depend on citizen complaints

20Wisc. Builders Ass'n v. U.S. EPA, No. 03-2908 (7th Cir. filed Jul. 16,
2003); Tex. Indep. Producers and Royalty Owners Ass'n v. U.S. EPA, No.
03-60506 (5th Cir. filed Jun. 19, 2003). Among the industry groups'
assertions is that EPA's definition of "common plan" fails to adequately
consider oil and gas industry practices: according to the industry groups,
drillers do not know at the onset of drilling activity how much land they
will ultimately disturb.

and state referrals to identify oil and gas construction activities that
may adversely impact water quality. Similar to EPA Region 6's program, the
Louisiana Department of Environmental Quality's (LADEQ) construction storm
water inspections are complaint driven. A Louisiana inspections
representative whom we spoke with said that due to the traditionally short
time frames for completing oil and gas construction activities, LADEQ
found including these activities in the state's annual compliance
monitoring strategy to be impractical. As a result, the state relies on
citizen complaints and routine surveillance to provide cause for
conducting storm water inspections of construction activities. Although
LADEQ does not track storm water enforcement actions for oil and gas
construction separately from those of other types of construction
activities, Louisiana officials with whom we spoke said they did not
believe the state had carried out any storm water enforcement actions
against oil and gas construction activities.

  Most Oil and Gas Construction Activity Will Likely Be Affected by Phase II,
  but the Financial and Environmental Implications of Phase II Are Difficult to
  Quantify

EPA, industry and state government representatives agree that Phase II
permit coverage will be required for most oil and gas construction
activities, but the actual number of activities that will be affected by
the rule is unknown. In addition, the financial and environmental
implications of implementing Phase II for oil and gas construction
activities are difficult to quantify. Phase II may lead to increased costs
for federal agencies with a role in the storm water permitting process, as
well as for members of the oil and gas industry who obtain permit
coverage. However, Phase II may also lead to environmental benefits for
local waters and endangered species and their habitats, even though these
benefits are difficult to quantify. As EPA approaches the end of a 2-year
period to study the impact of Phase II on oil and gas construction
activities, EPA has not yet quantified the number of sites impacted or the
financial and environmental implications of the Phase II rule's
implementation.

    Most Oil and Gas Construction Activities Will Likely Be Required to Obtain
    Storm Water Permit Coverage under Phase II, but the Actual Number of
    Activities That Will Be Affected by the Rule Is Unknown

EPA, industry and state government representatives agree that most oil and
gas construction activities will disturb 1 acre or more of land and, as
such, will have to obtain permit coverage under the Phase II rule.
However, the precise number of oil and gas construction activities that
will require storm water permit coverage under the Phase II rule is
unknown, and estimating the specific number of sites that will be affected
by Phase II is problematical because there is no data source that
comprehensively identifies the disparate oil and gas construction
activities subject to the rule and categorizes them by size. Industry
representatives that we spoke with said most, if not all, of their oil and
gas construction activities not covered by Phase I would be required to
seek permit coverage under Phase

II. These representatives said that their typical drilling construction
site disturbs more than 1 acre but less than 5 acres of land. Similarly,
representatives from the Oklahoma Corporation Commission and Railroad
Commission of Texas indicated that almost all of the oil and gas well
construction in their states would disturb over 1 acre of land and would
have to obtain storm water permit coverage. Furthermore, EPA officials
generally concurred that most oil and gas construction activities would
need to obtain coverage, or seek a waiver, under Phase II. A company may
receive an optional waiver from permit coverage in more arid areas where
there is low rainfall. EPA officials told us that in arid areas, such as
western Oklahoma and Texas, most operators could qualify for waivers with
expeditious construction schedules and careful timing.

    Phase II May Lead to Additional Costs that Are Difficult to Quantify

The Phase II rule may lead to additional costs for industry and federal
agencies, but these costs are difficult to quantify. For example, the EPA
Construction General Permit requires companies to implement erosion and
sediment controls to minimize pollutants in storm water discharges, which
will lead to additional costs for operators. Industry representatives we
spoke with were less concerned with these particular costs, however,
because they said that the oil and gas industry routinely takes similar
preventative measures. These officials did express concerns about the
costs associated with storm water inspections required by the permit.
These inspections are designed to ensure companies properly implement
practices to minimize storm water pollution and require that sites be
inspected (1) at least once every 7 days or (2) at least once every 14
days and within 24 hours of certain storm events. Industry officials
explained that oil and gas activities typically occur in remote, rural
areas, which makes it costly for them to inspect sites as required by the
permit. Furthermore, since sites may not always have personnel present,
these

representatives said it can be difficult to determine when a storm event
has occurred. EPA maintains that it has reduced the inspection burden by
allowing less difficult pipeline inspections and authorizing monthly
inspections under certain circumstances, such as when a site is
temporarily stabilized or when winter conditions make runoff unlikely.

The Phase II storm water rule may also lead to additional costs for
federal agencies and the oil and gas industry associated with the
endangered species requirements of the storm water permit. The EPA Storm
Water Construction General Permit provides coverage under the permit only
if the storm water discharges are not likely to jeopardize the continued
existence of any species that is listed as endangered or threatened,
pursuant to the Endangered Species Act, or result in the adverse
modification or destruction of critical habitat. Because companies seeking
storm water permit coverage must evaluate the impact their construction
activities might have on endangered species, the workload of agencies such
as the U.S. Fish and Wildlife Service (FWS) and National Marine Fisheries
Service (NMFS), which are the regulatory agencies for the Endangered
Species Act, could increase if a significantly larger number of sites
initiated communications or consultation requests. NMFS headquarters
representatives and FWS field representatives we spoke with indicated that
the increased workload from a greater number of Phase II consultation
requests could exceed staff capabilities. However, they also said they
were unsure what impact Phase II would have on their activities, because
they did not know how many additional oil and gas construction sites would
be affected by the rule.

Oil and gas industry representatives were most concerned about costs that
stem from delays companies may face when identifying a construction
activity's impact on endangered species. These representatives said that
endangered species reviews are often extremely time intensive and require
interactions with federal agencies that introduce delays into the
construction process and lead to increased costs. Various forms of
interactions with FWS and NMFS (the Services) may be used to ensure that
provisions of the storm water permit concerning endangered species are
met-including the more common informal consultations and less frequent

formal consultations.21 Informal consultation can be used to determine
whether an activity will adversely affect endangered or threatened species
or critical habitat. If during informal consultation the action agency-in
this case EPA-determines that no adverse impact is likely and FWS and NMFS
agree, the consultation process is terminated with the written concurrence
of the Services. Although there is no regulatory deadline for completing
an informal consultation, the Services' policy is to respond to informal
consultations about endangered species within 30 days. Formal
consultations are necessary if an activity is likely to adversely affect a
listed species. The Endangered Species Act requires most formal
consultations to be conducted within 90 days. In addition, the
implementing regulations require the Services to document in a biological
opinion, within 45 days after the conclusion of the consultation, whether
the activity is likely to jeopardize the listed species' continued
existence or adversely modify its designated critical habitat. If
necessary, the biological opinion may also provide reasonable and prudent
alternatives that, if taken, would avoid jeopardizing a species or
adversely modifying its critical habitat. However, the Services may
postpone the start of any of these time frames until they have the best
available information on which to base their opinions.

The total time needed to consult with the Services is difficult to
quantify, given that not all sites will have to perform the same level of
review and because not all construction activities occur in areas where
endangered species are present. In a March 2004 report on the overall
consultation process, we identified concerns from federal agencies and
nonfederal entities about the time it takes to complete the consultative
process. In one limited review that we conducted of 1,550 consultations,
about 40 percent exceeded established time frames. However, we found that
FWS and NMFS needed more complete and reliable information about the level
of effort devoted to the process. Specifically, these time frames did not
capture sometimes significant amounts of preconsultation time spent
discussing a project before the consultation officially was considered to
have begun.22 Even without the requirements of EPA's Construction General
Permit and

21The Endangered Species Act requires federal agencies such as EPA-not
regulated entities such as individual construction site operators-to
consult with the Services regarding endangered species. However, EPA's
Construction General Permit requires applicants to self-certify that they
have examined their project's potential effects on endangered species. In
doing so, the Construction General Permit specifies that operators must
satisfy certain criteria, two of which are entering into formal and
informal consultations with the Services.

22U.S. GAO, Endangered Species: More Federal Management Attention Is
Needed to Improve the Consultation Process, GAO-04-93 (Washington, D.C.:
Mar. 19, 2004).

associated consultations under the Endangered Species Act, operators of
oil and gas construction activities would still have to spend time
complying with the act by ensuring that their activities do not result in
a "take" of an endangered species.

    Phase II May Lead to Additional Benefits that Are Difficult to Quantify

The Phase II storm water rule may lead to additional environmental
benefits, although these benefits can be difficult to quantify. Officials
from EPA's Office of Water indicated that while it is difficult to
quantify all the benefits associated with the rule, the principal benefits
are based on decreased quantities of sediment in water. These officials
told us that excess amounts of sediment in water can affect aquatic
habitat, water quality, waters' use as a source of drinking water and
water supply reservoir capacity, navigation, and recreational activities.
According to FWS officials, construction activities may affect listed
species in both direct and indirect ways. Direct effects may include
killing or injuring members of listed species. Indirect effects may
include changing essential behavior patterns like feeding, breeding, or
sheltering, as a result of modifications to the species' habitat.
Additionally, the NMFS acknowledged that land disturbance activities that
increase the amount of sediment in water and turbidity can indirectly
influence endangered species' productivity and ultimately cause changes in
migratory behavior, reduce prey abundance, reduce the survival and
emergence of larvae, and contribute to increased temperatures and chemical
pollutants that can cause habitat loss.

An environmental group representative we spoke with said that voluntary
initiatives are not a viable method for resolving storm water pollution
issues and that the permit process provides a mechanism for ensuring that
practices to mitigate water pollution from construction activities are
implemented. This representative also commented that EPA has not provided
any evidence that the environmental consequences of oil and gas
construction activities are different from those of other types of
construction activities or that the oil and gas industry's controls are
any better. Finally, this representative said that a single industry
should not be exempted from regulations with which other industries must
comply and added that the large number of oil and gas activities
potentially subject to the rule shows the significant amount of
environmental damage that could occur if these activities went
unregulated. EPA is currently studying the environmental impact of oil and
gas construction activities but has not completed its analysis.

Industry representatives, however, believe that the Phase II storm water
rule provides only negligible environmental benefits and that the current
system of regulation encourages environmentally friendly construction
practices. For example, one industry representative stated that with only
the Phase I rule in effect, companies have an incentive to keep
construction activity to less than 5 acres-thus minimizing the land
disturbance and associated environmental effects. If the Phase II rule
were implemented as written, this representative maintained the industry
would have no incentive to minimize the acreage used in order to keep the
site under 5 acres.

    EPA Has Not Completed Its Assessment of the Number of Oil and Gas Sites
    Impacted by Phase II or Its Financial and Environmental Implications

Almost 2 years after delaying the implementation of Phase II for oil and
gas activities in order to study and evaluate the impact on the industry,
EPA initiated an analysis of the rule but has not completed the study,
quantified the number of activities affected, or determined its potential
financial and environmental implications. In March 2003, EPA extended the
deadline for operators to obtain Phase II permits for oil and gas
activities in order to allow itself additional time to analyze and better
evaluate the impact of the rule on the oil and gas industry. This 2-year
extended deadline will expire on March 10, 2005. However, as we performed
audit work for this engagement, EPA had not issued any analysis of the
rule's impact; nor could EPA management representatives provide a specific
estimate of when its analysis would be completed or when a final decision
would be reached. We provided a draft of this report with our
recommendation to EPA. Subsequently, on January 18, 2005, the agency
proposed a further extension of the compliance date to June 12, 2006, to
complete its review and take final action. Within 6 months of a final
action on the January 18, 2005, proposal, EPA intends to propose
rulemaking to address storm water discharges from oil and gas sites and
invite public comment. Separate from EPA's efforts, oil and gas industry
representatives informed us of a Department of Energy (DOE) study to
evaluate the impact of the Phase II rule on the oil and gas industry.
During our study, officials from DOE's Office of Fossil Energy told us
that DOE's study was still in draft form. These officials would not
provide an explanation of the purpose, costs, or estimated completion date
of the study.23

23As we finalized our report, DOE completed and posted its economic
analysis study on its Web site at
http://www.fossil.energy.gov/programs/oilgas/publications/storm_water_analysis/Storm_Wa
ter_Analysis.html.

Conclusions	Our review indicated that it is probable that substantially
more oil and gas activities will be impacted by Phase II of the NPDES
storm water rule than by Phase I. Given that EPA has not been able to
quantify the number of oil and gas activities required to obtain storm
water permit coverage under either rule, it remains important that EPA
identify the universe of oil and gas activities that would most likely be
affected. This analysis would provide the necessary foundation for
understanding the implications that the rule may have for the environment
and the oil and gas industry and determine the overall effectiveness of
the NPDES storm water program.

  Recommendation for Executive Action

So that EPA may fully understand the implications of Phase II of its storm
water rule prior to deciding whether the oil and gas industry should be
subject to it, we recommend that EPA complete its Phase II analysis before
making any final decision. Furthermore, as a part of this analysis, we
recommend that EPA assess

o  the number of oil and gas sites impacted by the Phase II rule;

o 	the costs to industry of compliance with the rule and whether these
costs are solely attributable to the storm water rule; and

o 	the environmental implications and benefits of the storm water rule,
including, but not limited to, potential benefits for endangered species.

Agency Comments and 	We requested comments on a draft of this report from
the Administrator of the Environmental Protection Agency (EPA). EPA
provided oral comments

Our Evaluation 	and agreed with our findings and recommendation. In
addition, EPA included technical and clarifying comments, which we
included in our report as appropriate.

As agreed with your staffs, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of the report to the
EPA Administrator and other interested parties. We will also provide
copies to others on request. In addition, the report will be available at
no charge at GAO's Web site at http://www.gao.gov.

Questions about this report should be directed to me at (202) 512-3841.
Other key contributors to this report are listed in appendix II.

John Stephenson Director, Natural Resources and Environment

Appendix I

                       Objectives, Scope, and Methodology

This report provides information about (1) oil and gas construction
activities for which permits have been obtained under Phase I and (2) oil
and gas construction activities that are likely to be affected by Phase II
and its financial and environmental implications.

To address the number of oil and gas activities for which permits have
been obtained under Phase I, we limited our analysis to three of the top
five natural gas producing states and three of the top six crude oil
producing states in 2003, according to available data from the Energy
Information Administration. We chose states with storm water programs
implemented by both state and federal authorities. Louisiana's Department
of Environmental Quality administers the National Pollutant Discharge
Elimination System's Storm Water Program (NPDES) for its state, while
Oklahoma's and Texas' storm water programs for oil and gas activities are
administered by the Environmental Protection Agency's (EPA) Region 6.
Additionally, Oklahoma and Texas are unique in that only the oil and gas
portions of their storm water program are administered by EPA; the
remainder of their storm water program is administered by the state.1

To determine the number of oil and gas construction activities requesting
storm water permit coverage under Phase I in those three states and to get
a national perspective on the number and types of sites affected, we spoke
with oil and gas industry and government representatives. We also reviewed
EPA's (for Oklahoma and Texas) and Louisiana's storm water database that
contains information about Notices of Intent filed with the program
authority to indicate a company's plan to begin a construction activity
that disturbs 5 acres or more of land. We reviewed the most recent
12-month period of data available: EPA's information for Oklahoma and
Texas from December 2003 to November 2004 and Louisiana's information from
November 2003 to October 2004. Because the database contained more than
just oil and gas construction information, we isolated data for those
companies within the oil and gas industry and reviewed relevant
characteristics of those Notices of Intent. While this data provides
information about the number of companies that requested storm water
permit coverage for their oil and gas construction activities, it does not
indicate the universe of companies that should have filed. Furthermore,
these data are not generalizible to the nation as a whole. We spoke with
the administrator of this database to assess the reliability of this data
and

1EPA also administers the storm water program for certain agricultural
activities in Oklahoma.

Appendix I
Objectives, Scope, and Methodology

found the data from 2003 and 2004 to be sufficiently reliable for our
purposes. Additionally, to provide us with context for understanding how
the number of drilling activities covered by Phase I compares with the
total number of oil and gas drilling activities being carried out, we
reviewed oil and gas well completion data from Louisiana, Oklahoma, and
Texas. These data provided us with an additional perspective about the
magnitude of oil and gas activities occurring in these states and proved
sufficiently reliable for our purposes. We gathered these data from the
Louisiana Office of Conservation, Oklahoma Corporation Commission, and
Railroad Commission of Texas. In order to gather information about the
characteristics of oil and gas construction activities, we visited oil and
gas construction sites in Louisiana, Oklahoma, and Texas and viewed
pollution control measures implemented in various terrains. In Louisiana
and Texas, we were accompanied by industry representatives who were
members of the Domestic Petroleum Council; in Oklahoma, we were
accompanied by EPA and oil and gas industry representatives. Both EPA and
industry officials provided perspectives on the choice of pollution
control measures implemented. We spoke with the storm water enforcement
coordinator for oil and gas activities in EPA's Region 6, as well as the
state official responsible for storm water program permitting at the
Louisiana Department of Environmental Quality. We discussed their
respective storm water programs and strategies for enforcing the storm
water regulations. When possible, their offices provided data about
enforcement actions and inspections.

To determine the number of oil and gas activities that may be affected by
Phase II and the financial and environmental implications of implementing
Phase II for oil and gas construction activities, we spoke with storm
water stakeholders, including the Natural Resources Defense Council.
Finally, we spoke with oil and gas industry representatives, including the
Domestic Petroleum Council, the American Petroleum Institute, and the
International Petroleum Association of America and representatives from
some of these organizations' members. These stakeholders offered
contrasting views about the environmental benefits and economic costs of
these regulations. We also reviewed written comments that environmental
groups and oil and gas industry groups provided to EPA when the agency
first proposed postponing the Phase II deadline for oil and gas
activities.

To formulate a more thorough understanding of federal agencies with a role
in implementing the Storm Water Program and level of interagency
coordination, we spoke with U.S. Fish and Wildlife and National Marine
Fisheries officials responsible for carrying out section 7 of the
Endangered

Appendix I
Objectives, Scope, and Methodology

Species Act, which requires federal cooperation to protect endangered
species. Specifically, we spoke with representatives from the U.S. Fish
and Wildlife Service's headquarters, Arlington, TX and Tulsa, OK offices,
as well as with the National Marine Fisheries Service's headquarters and
southeast regional offices.

We conducted our review between August 2004 and January 2005 in accordance
with generally accepted government auditing standards.

Appendix II

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	John Stephenson (202) 512-3841 or [email protected] Mark
Gaffigan (202) 512-3168 or [email protected]

Acknowledgments	In addition to the individuals above, James W. Turkett,
Paige Gilbreath, Omari Norman, Carol Bray and Nancy Crothers made key
contributions to this report.

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