Less than half, or 46%, of the 169,000 oil and natural gas leases in Texas were not inspected for five years, and there is a troubling lack of rules governing inspectors' relationships with well operators, according to an audit of the Railroad Commission of Texas (RRC).

The RRC regulates the state's oil and gas industry, gas utilities and pipeline safety.

The Texas State Auditor's Office (SAO) reviewed the RRC's inspection and enforcement activities from Sept. 1, 2005 to March 31 to determine whether the inspection process was designed and operated to minimize pollution associated with oil and gas activities and to determine whether its enforcement ensured that violations were corrected and sanctions properly administered.

The lack of inspections, which was determined through October 2006, has reduced the RRC's chances of preventing environmental problems, said state Auditor John Keel in his 32-page report (07-046).

"While the commission has a policy for prioritizing on-site inspections that result from complaints and notices, in fiscal year 2006 these types of inspections accounted for about 25% of all inspections performed...The remaining 75% were routine, usually unannounced, inspections of facilities."

In a review of five years of data through March 31, the RRC conducted 566,062 on-site inspections, averaging more than 113,000 inspections a year. The RRC also conducted at least one inspection on 90,724 (53.4%) of the 169,770 oil and gas leases that were active as of Oct. 1, 2006. Leases may have as many has 100 or more wells each, which require multiple inspections.

The Field Operations Section of the RRC's Oil and Gas Division comprises 12 districts that are governed by nine district offices. These districts were responsible for regulating more than 367,000 oil and gs wells in fiscal 2006. The RRC employed 87 inspectors who performed more than 118,000 inspections in 2006, finding more than 90,000 violations.

The auditor recommended a formal approach for scheduling periodic inspections to ensure "that all of the state's leases are inspected at least every five years" and "encourage compliance by operators by making it certain that a commission inspector may show up at any time."

"Although the commission has a process for prioritizing complaints and notices received, it lacks a formal approach for ensuring that all oil and gas facilities are inspected regularly," the audit stated. The district offices also "are inconsistent in how they notify operators of violations. Requiring districts to provide formal, written notification of all violations to operators, and requiring operators to correct similar violations within similar time frames, would give greater assurance that all operators are treated in an equitable way across the state."

The RRC also needs to strengthen its enforcement process, the auditor said.

"The commission is able to properly account for penalties it collects on settled cases, but it does not reconcile penalties collected on its behalf by the [Texas] Office of the Attorney General against the outstanding penalties owed on each case. This increases the risk that the commission will not know when an oil and gas operator still owes outstanding penalties to the state."

The auditor also reported few rules to govern inspectors' relationships with well operators. With such a large amount of land to inspect, many of the RRC's inspectors work out of their homes with minimal supervision, and the RRC does not require employees to periodically disclose actual or perceived conflicts of interest that may impair their ability to objectively carry out their duties.

"Impairments that may create a conflict include accepting gifts offered by operators, holding outside employment, having immediate family members employed by the industry and holding personal investments such as royalty or working interests in oil or gas properties," the audit noted. "This lack of disclosure inhibits management's ability to monitor the objectivity of its employees."

The RRC has a policy in place that does not allow employees to accept any gifts "as long as the employee knows or should know that it was offered with the intent to influence the employee in the discharge of his or her official duties." However, the policy does not give employees "clear guidance" or monetary limits, the audit noted.

"In the three districts visited, employees reported that they accept meals, caps, gift baskets and other small gifts from oil and gas operators that they regulate," the report noted. "While this may not violate the commission's policies, any acceptance of gifts by district employees from industry may create a public perception that the employee is not objective."

The RRC concurred with many of the auditor's recommendations, and it is updating many of its procedures and policies. Among other things, the policy regarding gifts will be changed to comply with applicable laws for other state employees, which provide a $50 limit, as stipulated by the Texas Penal Code, Section 36.08.

To ensure that the more active leases are monitored, the RRC has increased the number of inspectors in the district offices that monitor the Barnett Shale play, which covers most of Denton, Parker and Tarrant counties and includes parts of 13 other counties. Those three district offices, which cover 86 counties, have 32 inspectors. There also are a total of 13 well pluggers and five clean-up coordinators who also inspect wells for that region.

The audit may be downloaded at www.sao.state.tx.us/Reports/report.cfm/report/07-046.

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