BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF VIOLATIONS OF THE RULES AND REGULATIONS OF THE OIL AND GAS CONSERVATION COMMISSION BY HOSHI ENERGY, LLC AND ATOM PETROLEUM, LLC, LA PLATA COUNTY, COLORADO

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CAUSE NO. 1C ORDER NO. 1C-10

CEASE AND DESIST ORDER

            This Cease and Desist Order (“Cease and Desist”) is issued by the Director of the Colorado Oil and Gas Conservation Commission (“COGCC” or “Commission”) pursuant to §34-60-121(5), C.R.S., and COGCC Rule 522.g. of the Rules and Regulations of the Colorado Oil and Gas Conservation Commission, 2 CCR 404-1(“Rule” or “Rules”).

FINDINGS

1. Red Mesa Holdings/O&G LLC (Operator No. 10254) (“Red Mesa”) is a registered Operator with the COGCC.  On March 13, 2015, Red Mesa declared bankruptcy.  Pursuant to Order No. 1V-508, entered May 18, 2015, the COGCC claimed Red Mesa’s financial assurance. 

2. Atom Petroleum, LLC (Operator No. 10434) (“Atom”) is a registered Operator with the COGCC. 

3. Atom is the operator of the Taylor 3 well (API No. 05-067-06777) located in La Plata County, Colorado (“Taylor Well”). 

4. Hoshi Energy, LLC (“Hoshi”) is not a registered Operator with the COGCC.

5. Upon information and belief, Hoshi and Atom purchased assets formerly owned by Red Mesa through the Bankruptcy Court, including, oil and gas assets located in La Plata County, Colorado. 

6. Pursuant to that certain Memorandum of Understanding (“MOU”), entered into and effective October 9, 2015, by and between the COGCC, Hoshi, and Atom, Hoshi and Atom agreed to provide the COGCC financial assurance in the aggregate amount of three hundred sixty thousand dollars, on or before November 12, 2015. 

7. Upon the provision of the additional financial assurance, and the satisfaction of other obligations specified in the MOU, the COGCC would approve a COGCC Form 10 (Change of Operator) which would have given Atom the right to operate certain wells and locations formerly owned by Red Mesa (“Red Mesa Wells”).

8. To date, Hoshi and Atom have failed to provide the required financial assurance.  These failures constituted default events pursuant to the MOU.  Therefore, Hoshi and Atom agree to execute a Stipulated Order Finding Violation holding them responsible for violations of numerous COGCC Rules at forty of the Red Mesa Wells and the imposition of such fines and penalties, commencing on the date of Default, as may be provided for in the COGCC Rules and imposed upon Hoshi and/or Atom by the COGCC. 

9. To date, the COGCC has not approved a COGCC Form 10 (Change of Operator) giving Hoshi and Atom the right to operate any of the Red Mesa Wells.

10. Commencing on or about January 23, 2016, COGCC Staff determined that Hoshi and Atom have conducted the following oil and gas operations at the Red Mesa Wells:

a. Surface construction (road grading) at numerous of the Red Mesa Wells, resulting in a citizen complaint (No. 200438864). 

b. Unauthorized pumping operations at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078).  There is no well sign, and thus no emergency contact information, at this location despite the active operations.  See Inspection No. 685200013.

c. Unauthorized venting of casing head gas to the atmosphere at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078).  See Inspection No. 685200013.

d. Unauthorized venting from crude oil storage tanks to the atmosphere (operator has removed the thief hatch) at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078).  See Inspection No. 685200013.

e. Active crude oil leaking at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078).  See Inspection No. 685200013.  

f. Equipment (tank) removal and berm elimination resulting in the exposure of oily soils, which were not properly remediated, at the Cushing C-1 well (API No. 05-067-06139). 

g. Unauthorized operations being conducted at the Red Mesa gas gathering system (Facility No. 412193).

11. Upon information and belief, Hoshi and Atom may also be conducting unauthorized pumping operations at the Kroeger-Ferguson No. 3 K-2 ( API No. 05-067-06073), the Ferguson #2 F-12 (API No. 05-067-06731), and Kroeger K-6 wells (API No. 05-067-06146).  Staff is currently investigating this matter.

12. The activities described above violate COGCC Rules 210.b; 304; 312; 324A; 605.d; 702; 912.a; 907.a, and 1002.f.

13. On February 11, 2016, COGCC Staff issued NOAV No. 400963987 to Atom for violations at the Taylor Well.  The NOAV alleges that Atom violated COGCC Rules 210.d; 309; 603.f; 605.a; 804; 906.a; and 907.  The NOAV, and the numerous inspection reports cited therein, evidence a pattern by Atom of disregarding important COGCC Rules including those requiring the construction of berms or secondary containment around storage vessels, requiring that E&P waste be properly controlled, contained, and immediately cleaned up; and requiring that oily waste be properly disposed and managed.

14. Additionally, there is not a valid COGCC Form 10 (Certificate of Clearance) at either the Red Mesa Wells or the Taylor Well and, therefore, transporting produced hydrocarbons away from either of these locations is a violation of COGCC Rule 312. 

15. The Director has determined that Hoshi’s and Atom’s continued operations at the Red Mesa and Taylor Wells constitute an emergency situation posing a significant threat of harm to public health, safety, and welfare, including the environment and wildlife resources, because Hoshi’s and Atom’s operations are unauthorized, have resulted in numerous violations of COGCC Rules, and are knowing and willful violations of the MOU.  

16. Absent a complete cessation of Hoshi’s and Atom’s operations at the Red Mesa and Taylor Wells, there remains an ongoing risk of continued significant adverse environmental impacts to public health, safety, and welfare, including the environment and wildlife resources. 

ORDER

In accordance with §34-60-121(5), C.R.S., and COGCC Rule 522.g., the DIRECTOR ORDERS that, Atom Petroleum, LLC, Hoshi Energy, LLC, and their agents immediately cease all oil and gas operations at wells or locations formerly owned by Red Mesa Holdings/O&G LLC and at the Taylor 3 well (API No. 05-067-06777), including, but not limited to:

1. Cease all surface operations, including equipment removal, at the Red Mesa and Taylor Wells. 

2. Cease pumping operations at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078). 

3. Cease venting of casing head gas to the atmosphere at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078). 

4. Cease venting from crude oil storage tanks to the atmosphere at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078). 

5. Cease active crude oil leaks at the Kroeger-Ferguson #3 K-3 well (API No. 05-067-06078). 

6. Cease oil and gas operations at the Red Mesa gas gathering system (Facility No. 412193).

Within seven days, Atom and Hoshi shall clean up the leaking oil from the tank at the Ferguson #1 F35-1 well (API No. 05-067-06111) and implement repairs and spill prevention on the tank.

This Cease and Desist Order will remain in effect until such time as Hoshi and Atom have complied with the MOU, obtained required Form 10s, ceased all venting, and are properly managing all E&P waste at the Red Mesa Wells and the Taylor Well.

Atom and Hoshi, and their Officers, Agents, and Representatives shall preserve all documents and communications pertaining to all activities at the Red Mesa and Taylor Wells.

Pursuant to Rule 205.a. and f., within three (3) business days, Atom and Hoshi will provide the Director all information in their possession related to any oil and gas operations at the Red Mesa Wells and the Taylor Well from October 1, 2015, to present, in a readily-reviewable format.  Such information shall include records of any production, transportation, or sale of hydrocarbon products at these facilities so that the COGCC can determine Atom’s and Hoshi's compliance with COGCC Rules and the Oil and Gas Conservation Act, §34-60-101 to 130, C.R.S.

The provisions contained in the above order shall become effective immediately.

The Director expressly reserves his right, after notice and hearing, to alter, amend, or repeal any and/or all of the above orders.

EXECUTED this 23^rd day of February, 2016

IN THE NAME OF THE STATE OF COLORADO

OIL AND GAS CONSERVATION COMMISSION

By

Matthew J. Lepore, Director