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

 

IN THE MATTER OF THE APPLICATION OF RED MESA HOLDINGS/O&G LLC. FOR AN INACTIVE WELL FINANCIAL ASSURANCE VARIANCE, LA PLATA COUNTY, COLORADO

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CAUSE NO. 1

 

DOCKET NO. 150300176

 

TYPE: GENERAL ADMINISTRATIVE

 

ORDER NO. 1-190

 

REPORT OF THE COMMISSION

 

The Commission heard this matter on April 13, 2015, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application filed by Red Mesa Holdings/O&G LLC. (Operator No. 10254) (“Red Mesa”) requesting a Variance from Rule 707.a. for its inactive wells and requesting a waiver from the Oil and Gas Conservation Commission of the additional bonding requirements.

 

FINDINGS

 

Jurisdictional Findings:

 

1.            Red Mesa 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 this Application, and of the interested parties, and jurisdiction to promulgate the following order pursuant to the Oil and Gas Conservation Act.

Procedural History:

 

4.            On October 7, 2014, Commission Staff issued a warning letter to Red Mesa (Document No. 2540879) notifying Red Mesa that it had failed to comply with COGCC Rules of Practice and Procedure, 2 CCR 404-1 (“Rule” or “Rules”), Rule 707.a (Inactive Wells).

5.            Following receipt of the warning letter, Red Mesa representatives and Staff discussed a plan to return Red Mesa to compliance with Rule 707.a.  Red Mesa was unable to propose a plan that was acceptable to Staff. 

6.            On January 2, 2015, Red Mesa filed its Application for Waiver of Rule 707(a) Requirement for Additional Financial Assurance (“Application”).  The Application was docketed for hearing on March 2-3, 2015.

7.            On February 19, 2014, the Application was continued to the April 13-14, 2015, hearing so Red Mesa could publish notice of the hearing, as required by Rule 507.

8.            On March 13, 2015, Red Mesa filed for Chapter 7 bankruptcy. 

9.            On March 30, 2015, Staff filed a Request for Hearing Officer Order (“Request”) that argued that granting the Application after Red Mesa’s bankruptcy filing was inappropriate. 

10.          On April 2, 2015, David W. Carickhoff, Jr., counsel for the Chapter 7 Trustee, Alfred T. Giuliano, emailed the Hearing Officer and stated that the Trustee was not in a position to respond to the Request.  He requested a continuance which was subsequently denied.  Ivan London, counsel of record for Red Mesa, also emailed indicating that he was not authorized to take any actions with respect to the Application at this time.

11.          On April 8, 2015, the Hearing Officer denied Staff’s Request.  

12.          On April 8, 2015, Staff filed an Objection to the Application. 

Testimony:

 

13.          Testimony began with opening remarks by Mr. Carickhoff on behalf of the Chapter 7 Trustee.  Mr. Carickhoff stated that the estate would not be able to increase financial assurance as required by Rule 707.a, that the Commission’s goals are aligned with the estate and both sides would like the properties to be purchased by a buyer who could assume the regulatory obligations.  Mr. Carickhoff mentioned that ordering compliance with Rule 707.a could chill the bankruptcy estate’s ability to attract a buyer.  He stated that at least four of the wells should not be part of the increased bonding requirement.  Mr. Carickhoff noted that there have been recent inspections at the subject wells, that a representative of the Chapter 7 Trustee flew out to Colorado to review the wells and that the estate was planning on working with the Commission to address immediate concerns at the wells, as best as possible.   

14.          Jeremy I. Ferrin, COGCC Enforcement Officer acting on behalf of Staff, made a presentation summarizing staff’s objections to the application.  Mr. Ferrin stated that because of Red Mesa’s declaration of bankruptcy, there was no reason to grant the application.  Mr. Ferrin stated that the enforcement group at the Commission treads a fine line and tries not to force an operator into bankruptcy but because the filing has already occurred here there was nothing the Commission could do that would make matters worse.  Mr. Ferrin argued that there was no need for the Commission to be cautious and consider the Application.  Instead, the Commission should simply deny it.  Mr. Ferrin argued that Rule 707 is operator-specific, not well-specific, and therefore whatever the Commission orders will not impact any potential future buyers of these wells.  Mr. Ferrin, citing Section 106 of the Act, further argued that the Commission might not have the authority to grant the Application, on the facts presented.  Mr. Ferrin discussed the fact that a non-producing well in the State of Colorado is either a shut-in well or a temporarily abandoned well, as defined in the 100 Series Rules.  Mr. Ferrin concluded his remarks without going into the substance of Staff’s Objection. 

15.          Commissioner Spielman asked Mr. Carickhoff to describe his representative capacity before the Commission.  Mr. Carickhoff answered that he was appearing on behalf of the Chapter 7 Trustee and described the bankruptcy trustee system generally. 

16.          Commissioner Craig asked counsel for the Commission, Assistant Attorney General Jake Matter, whether the producing wells in the bankruptcy estate could be separated from the non-producing wells and whether denying the Application would make separation harder or notify buyers of the need to comply with Rule 707.a. 

17.          Mr. Matter answered that while the Chapter 7 Trustee may have the ability to abandon less desirable properties, it was his belief based on conversations with Mr. Carickhoff that the Trustee does not intend to do so.  Mr. Matter also stated that the potential buyer would need to post a bond commensurate with the Rules, including Rule 707.a, and he could not speculate whether that would chill a potential acquisition.

18.          Chairman Compton reiterated his belief that the Commission actions today would not impact the potential buyer.

19.          Mr. Ferrin stated that a potential buyer could always apply to the Commission for a variance from Rule 707.a and with a more compelling case it might succeed.  However, it might be immediately out of compliance with Rule 707.a once it purchased these inactive wells. 

20.          The Commission closed the record.

Commission Deliberation Comments:

 

21.          Commissioner Benton stated that it was his understanding that there was a staff recommendation to deny the application for the variance.  Chairman Compton confirmed his understanding.

22.          Commissioner Benton made a motion to deny the application for the variance, Commissioner Alward seconded the motion. 

23.          The motion to deny the requested variance was approved unanimously.

 

ORDER

 

1.            The Application for Waiver of Rule 707(a) Requirement for Additional Financial Assurance filed by Red Mesa Holdings/O&G LLC is denied. 

2.            This Order is effective immediately.

3.            The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above Orders.

4.            Under the State Administrative Procedure Act, the Commission considers this Order to be final agency action for purposes of judicial review within 35 days after the date this Order is mailed by the Commission.

5.            An application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

 

ENTERED this ___ day of April, 2015, as of April 13, 2015.            

           

 

OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

 

 

By: ____________________________________     

     Julie Murphy, Secretary