BEFORE THE OIL AND
GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
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IN THE MATTER OF THE APPLICATION OF SOVEREIGN OPERATING COMPANY LLC. FOR AN INACTIVE WELL FINANCIAL ASSURANCE VARIANCE, BACA COUNTY, COLORADO |
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CAUSE NO. 1
DOCKET NO. 150300177
TYPE: GENERAL ADMINISTRATIVE
ORDER NO. 1-191 |
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 Sovereign Operating Company LLC[1] (Operator No. 10383) (“Sovereign”), 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. Sovereign 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 September 16, 2014, Commission Staff issued a Warning Letter (Document No. 2540846) alleging that Sovereign was in violation of Rule 707.a concerning additional financial assurance for certain "Inactive Wells” in Baca County, Colorado.
5. Following receipt of the warning letter, Sovereign representatives and Staff discussed a plan to return Sovereign to compliance with Rule 707.a. Despite diligent effort by both parties, Sovereign was unable to propose a plan that was acceptable to Staff.
6. On December 31, 2014, Sovereign, pro se, filed an Application requesting a variance from Rule 707.a and submitted a compliance plan. The Application was docketed for hearing on March 2-3, 2015.
7. On January 21, 2015, Sovereign, through counsel, amended its Application.
8. On February 18, 2015, Sovereign filed an updated compliance plan.
9. On February 19, 2015, the Application was continued to the April 13-14, 2015, hearing so Sovereign could publish notice of the hearing, as required by Rule 507.
10. On April 3, 2015, Staff filed an Objection to the Application.
11. On April 10, 2015, Sovereign amended its Application.
Testimony:
12. Testimony began with an opening statement by Thomas W. Niebrugge, Sovereign’s attorney. Mr. Niebrugge described the Application, Sovereign’s operations in Baca County and Rule 707.a.
13. Mr. Niebrugge called Sovereign’s only witness, Mr. Tom Metzger, Sovereign’s Chief Operating Officer, who was sworn in by Jake Matter, Assistant Attorney General. Mr. Metzger testified about Sovereign’s operational and bonding history, stating that he was not aware of the requirement for increased financial assurance for inactive wells. Mr. Metzger stated that Sovereign is a contract operator and that the wells in question are owned by special purpose entities and that Mr. Metzger owns an interest in those entities. Sovereign took over operations of these wells in 2011 from the prior operator. Sovereign acquired these leases knowing there were numerous shut-in wells but hoping to retain the leases for future exploitation of a deeper play. Sovereign has reworked 19 wells, plugged and abandoned six wells, and performed MITs on 17 wells in the field. Mr. Metzger described his conversations with Commission Staff, field inspection notices, details regarding production in the field and outlined Sovereign’s latest proposal for returning to compliance. Sovereign’s proposes to return to compliance at 11 wells by August, an additional 11 wells by December, and the final 11 wells by April of 2016. Sovereign’s plan includes the flexibility to select which wells to include in each group. Mr. Metzger mentioned that Sovereign has a rig in the field currently and has returned three wells to production. Mr. Metzger described financial assurance held by Colton, LLC (“Colton”) and his plan to transfer that financial assurance for the benefit of Sovereign.
14. Jeremy I. Ferrin, COGCC Enforcement Officer acting on behalf of Staff, asked questions regarding the contingencies that must be satisfied before the financial assurance held by Colton, LLC could be used to benefit Sovereign and also that the proposed plan lacked specificity as to which wells would be returned to compliance first.
15. Sovereign closed its presentation by requesting that the variance be granted.
16. Next, Mr. Ferrin made a presentation summarizing Staff’s objections to the application. Mr. Ferrin stated that Sovereign owns 33 inactive wells, as indicated by COGCC records, and stated that Staff is preparing a related enforcement action should the Commission deny the Application. Rule 707.a. lays out a very specific process for seeking a variance and Staff did not believe that Sovereign met its burden for a variance. Mr. Ferrin next summarized information contained in Staff’s Objection, as filed in this matter. Mr. Ferrin described the requirement of Rule 707.a, summarized the production history of the subject wells, discussed the costs to plug and reclaim the subject wells, and outlined the environmental conditions at certain wells (including potential produced water impacts). Mr. Ferrin summarized the variance factors found in Rule 707.a, stated that the prior bond in place for the benefit of the prior operator did not relieve Sovereign of its obligation to comply with the rule, and requested that the Application be denied.
17. Mr. Niebrugge responded to the staff presentation stating that produced water spills at the subject wells occurred prior to Sovereign’s ownership, that Sovereign is working to remedy those impacts, that Sovereign is incented to return the wells to production and that Sovereign is interested in working toward an agreement with Staff and avoiding an NOAV.
18. Director Lepore expressed his opinion on the matter, mentioned that he was not fundamentally opposed to Sovereign’s approach, expressed his concern that if Sovereign were to declare bankruptcy that these 33 wells could total one million dollars of liability to the Commission, but stated that the matter could be resolved via an Administrative Order on Consent with many of the elements of Sovereign’s current plan. Mr. Lepore mentioned his desire to see an immediate increase in financial assurance and provisions that address what happens if Sovereign fails to follow the plan.
19. Martha Ramos, Financial Assurance Supervisor, explained that in order for the Colton financial assurance to be moved to the Sovereign wells, all of Colton obligations must first be met and resolved. Sovereign could also add Sovereign as a rider to Colton’s bond, or bond up via a payment plan.
20. Commissioner Craig stated that there should be some middle ground between $60,000 and $600,000, perhaps as suggested by Director Lepore, and that a negotiated resolution might be the best result. Ms. Craig stated that she understood the balancing act between posting the additional financial assurance and putting money to use in the field.
21. Mr. Matter advised the Commission that their option was to either grant the variance and adopt the plan, or not. The Commission would not immediately order the posting of $600,000 at this hearing.
22. Commissioner Benton summarized his understanding of the Commission’s options as potentially denying the application and hearing the enforcement matter at the next hearing where the plan as proposed may be adopted with potential penalties used as additional incentive to encourage compliance.
23. Mr. Niebrugge waived the right to respond to comments made by Director Lepore
24. The Commission closed the record.
Commission Deliberation Comments:
25. Chairman Compton summarized the question to be decided as whether to approve the request for a variance.
26. Commissioner Spielman made a motion to deny the requested variance, Commissioner Benton seconded.
27. The Commission deliberated on the motion. Commissioner Benton stated that there should be some way to encourage Sovereign to continue down the path toward compliance and also satisfy Staff’s concerns. Sovereign has addressed non-compliance at five wells so far and three have been returned to production. Commissioner Benton was reluctant to impose a financial burden on the operator when that money could best be put into returning wells to production and remedying environmental damage.
28. Chairman Compton agreed, stating that Sovereign had demonstrated progress but that Director Lepore’s suggested approach sounded like an approach that was in everyone’s interest because wells would be returned to production and plugged and abandoned on an acceptable schedule.
29. Commissioner Spielman mentioned that he did not disagree with the Chairman’s comments but that was a question for another day. The question before the Commission at present was whether Sovereign met their burden. Commissioner Spielman stated that Sovereign had not satisfied its burden.
30. Commissioner Alward agreed with the prior comments and Director Lepore’s suggested approach but mentioned that idle well bonding is important because without it we are imposing risks onto the people of the State of Colorado.
31. Commissioner Holton called the question while Chairman Compton directed the Commissioner’s attention to the Staff Report and the discussion of orphaned wells and the need to avoid adding more wells to that list.
32. 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 Sovereign Operating Company 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
[1] This matter was mistakenly captioned as an application by Sovereign Energy, LLC, instead of Sovereign Operating Company LLC. The mistake was immaterial but has been corrected in this order.