A subsidiary of Williams Cos. has agreed to pay Colorado officials more than $400,000 for contaminating the water supply of a spring near Parachute, CO, in the Piceance Basin.

The Colorado Oil and Gas Conservation Commission (COGCC) on Thursday is expected to approve the $423,300 penalty proposed by COGCC’s administrative staff and Williams Production RMT Co. concerning the 2008 contamination of a spring owned by Colorado resident Ned Prather and his family.

Water sampling by COGCC found benzene in the water samples collected from the spring and the kitchen faucet in the Prather cabin at concentrations that exceeded state standards.

Williams agreed to the settlement but has disputed the agency’s investigation, which said toxic hydrocarbons leaked out of a lined produced water pit at a well site north of Interstate 70. The well site is uphill from a spring that feeds the water system for the Prather cabin. In May 2008 Ned Prather had to be hospitalized after he became ill after drinking water from the spigot at a sink in his cabin.

Williams, which operates more wells in the Piceance Basin region than any other company, built the pit cited as the source of the contamination without the proper state permits, the COGCC documents indicated. Use of the pit began in October 2007, which was about seven months before Prather became sick. However, the “exact date of the release or releases of the produced water from the pit and the volume of produced water released” are not known and the causes remain under investigation, according to the COGCC.

After spending more than $1.3 million to investigate the contamination, Williams said its experts “do not believe its operations were the source of this contamination. There are at least three other natural gas operators in the vicinity of the spring.” However, as part of the settlement Williams agreed to continue monitoring and testing the spring water “until the water has returned to drinking water quality.” It also is continuing to provide water to the Prathers’ cabin.

“First of all, benzene should never be found in drinking water. We all agree on that,” Williams said. “While Williams does not agree with the findings of the COGCC, we have mutually agreed with the COGCC to settle this and move on. With the area’s difficult geologic conditions and additional time and expense required to prove a source, Williams has agreed to pay the fine in lieu of paying legal expenses to fight the allegation.”

Under the settlement with the COGCC, Williams agreed to pay $1,000/day fines for violating several state regulations, which the agency’s staff believes occurred from Oct. 1, 2007, when the pit in question went into use, to Oct. 9, 2008, when Williams submitted a belated permit application. The number of days in the settlement calculation were reduced to 122 days of “alleged violation” from 375 days (Oct. 1, 2007, to Oct. 9, 2008) “primarily because of the uncertainty about how long the fluids were leaking from the pit,” COGCC staff said.

The agreement also includes a $10,000 penalty for one violation, for a total possible fine of $498,000 based on the 122-day calculation. However, COGCC staff agreed to reduce the fine by 15% to $423,300 “because Williams demonstrated a prompt, effective and prudent response to the violations, and because Williams reportedly has spent a combined total of $9.8 million on investigating the contamination and on basinwide efforts to enhance the management of fluids, including produced water as a consequence of the incident.”

Williams still faces two lawsuits that were filed by the Prather family in U.S. District Court in Glenwood Springs, CO.

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