BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO

REPORT OF COMMISSION

The Commission heard this matter on December 12, 2011, at the Weld County Administration Building, 1150 O Street, Greeley, Colorado 80631 upon application for an order to grant a variance from the financial assurance requirement of Rule 706, requiring posting a financial assurance blanket bond of $100,000, for over 100 wells, and further requesting that the Commission accept a current $30,000 bond as adequate.               

FINDINGS

The Commission finds as follows:

1.  Petron Development Company (“Petron” or “Applicant”), is an interested party in the subject matter of the above‑referenced hearing.

2.     Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

3.     The Commission has jurisdiction over the subject matter embraced in said Notice, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act.

4.  Rule 706. requires an operator to provide financial assurance to the Commission to ensure the protection of the soil, the proper plugging and abandonment of the well, and the reclamation of the site in accordance with COGCC Rules.  Rule 706.b. permits an operator to submit statewide blanket financial assurance in the amount of $100,000 for the drilling and operation of 100 or more wells. Rule 706.c. authorizes an operator to seek a variance from financial assurance requirements of Rule 706 under appropriate circumstances.

                        5.  Under Rule 502.b.(1), an operator may seek a variance from Commission rules.  Variances to any Commission rules, regulations, or orders may be granted in writing by the Director without a hearing upon written request by an operator to the Director, or by the Commission after hearing upon application. The operator or the applicant requesting the variance shall make a showing that it has made a good faith effort to comply, or is unable to comply with the specific requirements contained in the rules, regulations, or orders, from which it seeks a variance, including, without limitation, securing a waiver or an exception, if any, and that the requested variance will not violate the basic intent of the Oil and Gas Conservation Act.

6.  On October 11, 2011, Petron Development Company (“Petron” or “Applicant”), by its attorneys, filed with the Commission a verified application (“Application”) for an order granting a variance from the financial assurance requirement of Rule 706 of posting a financial assurance blanket bond of $100,000 for over 100 wells, and requesting that the Commission accept its current $30,000 bond as adequate. Applicant, among other factors, stated current market conditions require 100% cash collateral for issuance of a bond, resulting in a hardship to Applicant and its well owners.

7.  On December 12, 2011, the Commission heard this matter. Petron presented oral arguments, along with testimony and exhibits submitted in support of the Application by Jim Walker, Secretary/Treasurer for Petron.  Exhibits included: 1) Copies of Colorado Revised Statute 34-60-106(13) and Rule 706, 2) Written testimony of Jim Walker, 3) Bond Underwriter email, 4) Current Bond Premium Statement, 5) Profit & Loss Statements, and 6) Plugging Cost Summary.  These materials were admitted without objection.

8. Staff submitted a memo in opposition to the Application by Thom Kerr, COGCC Permit and Technical Services Manager, dated December 2, 2011.  This memo was offered and admitted without objection.

                        9. Petron augued that Rule 706, which requires an operator to “provide financial assurance” was in conflict with C.R.S. 34-60-106(13) requiring “every operator to provide assurance that it is financially capable of fulfilling any obligation.” Petron argued that the statute allowed an operator to provide “assurance” by means other than the posting of a financial security or cash collateral.

                        10. Petron asked the Commission to consider its current $30,000 bond, the salvage value of wellhead equipment, and its sound balance sheet as evidence of its ability to “provide assurance that it is financially capable of fulfilling” its obligation to properly plug, abandon and reclaim its wells and production facilities. 

11. In lieu of a permanent variance to Rule 706, Petron asked the Commission to consider a temporary variance, subject to periodic review of its operations and/or market conditions of the financial bond market.

12. COGCC Staff objected to the variance for the following reasons: 1) financial assurance rules were increased three years ago because prior amounts were deemed to be insufficient; 2) dividing Petron’s $30,000 bond into the 111 wells in which it is listed as the operator, results in only $270 of bonding assurance per well; 3) the COGCC is not a market operator, therefore, when it is required to undertake plugging and reclamation operations, its ability to obtain cost competitive services is limited; and 4) Petron  has operated 43 production pits which could incur significant costs to reclaim properly.

13. COGCC Staff further testified that surety bonds, certificates of deposit, and cash equivalents are currently accepted for financial assurance.  Staff noted that the Commission previously directed staff not to accept a guarantee of performance pursuant to 34-60-106 (13)(a) C.R.S., unless otherwise approved by the Commission.  Staff further testified that letters of credit are generally not accepted, based on past frustrations in attempting to foreclose or call such instruments. 

                        14.  Based on the facts presented at hearing and the totality of the record, the Commission should deny Petron’s request for a variance from the financial assurance requirement of Rule 706.

                        15.  The Commission further finds that staff should evaluate alternative means of satisfying financial assurance mandates of Section 34-60-106 (13) C.R.S. and the 700 Series rules beyond use of surety bonds and certificates of deposits, and consider such alternatives on a case by case basis.

ORDER

                        NOW, THEREFORE IT IS ORDERED, that a variance from the blanket financial assurance requirement of COGCC Rule 706.b., is hereby denied.

IT IS FURTHER ORDERED, that the provisions contained in the above order shall become effective immediately.

                        IT IS FURTHER ORDERED, that the Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

                        IT IS FURTHER ORDERED, that under the State Administrative Procedure Act the Commission considers this Order to be final agency action for purposes of judicial review within 30 days after the date this Order is mailed by the Commission.

                        IT IS FURTHER ORDERED, that an application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

                        ENTERED this   16^th  day of December, 2011, as of December 12, 2011.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Peter J. Gowen, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

December 16, 2011