BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

IN THE MATTER OF ALLEGED VIOLATIONS OF THE RULES AND REGULATIONS OF THE COLORADO OIL AND GAS CONSERVATION COMMISSION BY RED MESA HOLDINGS/O&G LLC, LA PLATA COUNTY, COLORADO

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CAUSE NO. 1V

DOCKET NO. 150500338

TYPE: ENFORCEMENT

ORDER NO. 1V-508

STIPULATED ORDER FINDING VIOLATION

 

            The Colorado Oil and Gas Conservation Commission (“Commission”) enters this Order Finding Violation (“OFV”) pursuant to the Rules and Regulations of the Colorado Oil and Gas Conservation Commission, 2 CCR 404-1(“Rule” or “Rules”), and states as follows:

 

  1. Background

1.            Red Mesa Holdings/O&G LLC (“Red Mesa”) (Operator No. 10254) is the operator of record of the following wells, located in La Plata County, Colorado: Compton 2 (API #05-067-06242), Compton 3 (API #05-067-09774), Dudley 1 (API #05-067-05766), Dudley 2 (API #05-067-05346), Dudley 3 (API #05-067-05811), Ferguson 2 F-12Y (API #05-067-09337), Greer 34-3 (API #05-067-09864), Harris 5 (API #05-067-09710 ), J C K 3 (API #05-067-06033), J C K 4 (API #05-067-06511), Macy 2 (API #05-067-09783), Red Mesa Deep 1 (API #05-067-06620), Suzanne Jumbo 1 (API #05-067-07829), Taylor 2 33-2 (API #05-067-06394), Taylor 2 32-1 (API #05-067-06542), Taylor TW 1 21-1 (API #05-067-06301), and Turner 2 (API #05-067-60012) (the “Wells”). 

2.            Three of the Wells are shallower than 3,000 feet in total measured depth and the remaining 14 are deeper than 3,000 feet in total measured depth.

3.            Each of the Wells has been shut-in or temporarily abandoned for longer than one year and, therefore, are considered inactive by the COGCC.  Seven of the Wells have never produced, and one of those seven Wells was never completed.

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”). 

7.            On March 13, 2015, Red Mesa filed for Chapter 7 bankruptcy protection.  On March 15, 2015, Alfred T. Giuliano was been appointed as the Chapter 7 trustee (the “Chapter 7 Trustee”) of the Red Mesa bankruptcy estate (the “Estate”).

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

9.            On April 8, 2015, Commission Staff issued a Notice of Alleged Violation (“NOAV”) (No. 2559011) to Red Mesa for violations of Rule 707.a (Inactive Wells).  

10.         On April 9, 2015, the NOAV and Notice and Application for Hearing in this matter were served on Red Mesa. 

11.         On April 13, 2015, the Application was denied by the Commission.  (Order No. 1-190).

12.         On April 21, 2015, an Amended Notice and Application for Hearing was served on Red Mesa. 

  1. Findings

Jurisdictional Findings

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

14.         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.

Liability, Corrective Action and Penalty Amount

15.         Rule 707.a requires operators of “inactive wells” to post additional financial assurance in the amount of $10,000 for inactive wells less than 3,000 feet in total measured depth or $20,000 for inactive wells greater than or equal to 3,000 feet in total measured depth, less existing financial assurance.  An “inactive well” is defined in the 100-Series to include “any shut-in well from which no production has been sold for a period of twelve (12) consecutive months; [or] any well which has been temporarily abandoned for a period of six (6) consecutive months.”   

16.         The 17 Wells described above are “inactive wells” as that term is defined in the Rules. 

17.         Red Mesa has posted $60,000 in financial assurance with the Commission pursuant to Rule 706. 

18.         The Commission applied the following formula to Red Mesa’s inventory of inactive wells in order to determine the amount of additional financial assurance required by Rule 707.a:

3 Inactive Wells < 3,000 Ft. x $10,000                  =  $30,000

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14 Inactive Wells > 3,000 Ft. x $20,000              =  $280,000

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Existing Financial Assurance                               =  $60,000

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Required Additional Financial Assurance          =  $250,000

19.         To date, Red Mesa has failed to provide additional financial assurance to the COGCC or otherwise comply with the Notice of Alleged Violation (No. 2559011) issued to Red Mesa for violations of Rule 707.a (Inactive Wells).  

20.         Based on the foregoing, the Commission finds that Red Mesa has committed the following violation:

Rule Violation

Penalty Act and Class/Impact

Base Penalty

Start Date

Penalty End Date

Gross Penalty

Duration Adjusted Violation

707.a.

New

Class 2/Minor

$2,500

6/6/2014

5/18/2015

$867,500

$59,800

 

21.         Pursuant to Rule 523 and the Commission’s Enforcement and Penalty Policy (“EPP”), the Commission calculates a penalty of $867,500 for this violation.  After applying the Violation Duration Matrix from the EPP, the Penalty amount decreases to $59,800.  The penalty calculation is based on the following:

a.            The Rule violation began prior to the June 6, 2014, effective date of HB 14-1356 and is ongoing.  The penalty for these violations have been calculated pursuant to the current version of § 34-60-121, C.R.S., with reference to the revised Rules 522 and 523 for guidance.  A penalty was not sought under the penalty structure in place prior to the effective date of HB 14-1356;

b.            The start date for penalty calculation is June 6, 2014, the effective date of HB 14-1356.  While the violation is ongoing until Red Mesa complies with Rule 707.a for purposes of calculating a penalty end date in this OFV the hearing date (May 18, 2015) was used.  This results in a total of 346 days;

c.            No aggravating factors apply;

d.            No pattern of violation exists; and

e.            No gross negligence or knowing and willful misconduct exists.

22.         Given Red Mesa’s bankruptcy filing, its limited resources and the difficulties it will have in actively managing its assets, in the event Red Mesa fails to post the required financial assurance and pay the penalty, the Commission authorizes COGCC Staff to:

a.            foreclose Red Mesa’s existing financial assurance and claim both the principal and any accrued, but undisbursed, interest that may exist, 

b.            remediate conditions that threaten to cause, or that actually cause, environmental impacts at oil and gas locations operated by Red Mesa,

c.            plug and abandon any wells operated by Red Mesa, if doing so is deemed necessary to remediate conditions that threaten to cause, or that actually cause, environmental impacts,

d.            reclaim all well sites and associated facilities operated by Red Mesa, if doing so is deemed necessary to remediate conditions that threaten to cause, or that actually cause, environmental impacts, and

e.            utilize funds from the Oil and Gas Conservation and Environmental Response Fund as may be necessary to complete the above work.

23.         Determining whether to take any of the actions described in the prior paragraph lies wholly within the discretion of the Director.  In the event the Director determines not to take any of the actions described in the prior paragraph, the Director shall provide written approval for release of Red Mesa’s financial assurance. 

ORDER

 

NOW, THEREFORE, the COMMISSION ORDERS:

 

1.            Red Mesa is in violation of Rule 707.a for the reasons described above.  This violation is ongoing until Red Mesa complies with Rule 707.a. 

 

2.            Red Mesa will post an additional $250,000 in financial assurance within 30 days after this Order is mailed by the Commission.

 

3.            Red Mesa is assessed a total penalty of $59,800 for this violation. Red Mesa will pay $59,800 within 30 days after this Order is mailed by the Commission.

 

4.            In the event Red Mesa fails to post the required additional financial assurance and pay the penalty as per paragraphs 2 and 3 above, the Commission authorizes COGCC Staff to:

 

a.            foreclose Red Mesa’s existing financial assurance and claim both the principal and any accrued, but undisbursed, interest that may exist, 

b.            remediate conditions that threaten to cause, or that actually cause, environmental impacts at oil and gas locations operated by Red Mesa,

c.            plug and abandon any wells operated by Red Mesa, if doing so is deemed necessary to remediate conditions that threaten to cause, or that actually cause, environmental impacts,

d.            reclaim all well sites and associated facilities operated by Red Mesa, if doing so is deemed necessary to remediate conditions that threaten to cause, or that actually cause, environmental impacts, and

e.            utilize funds from the Oil and Gas Conservation and Environmental Response Fund as may be necessary to complete the above work.

5.            Determining whether to take any of the actions described in the prior paragraph lies wholly within the discretion of the Director.  In the event the Director determines not to take any of the actions described in the prior paragraph, the Director shall provide written approval for release of Red Mesa’s financial assurance. 

 

6.            In no event shall the Chapter 7 Trustee have any personal liability for the additional financial assurance or penalty assessed above.  Nothing herein is intended to nor shall it be deemed an admission by the Chapter 7 Trustee or the Estate that the Commission has any administrative expense claim against the Estate for any reason, including the additional financial assurance and penalty assessed above.  To the extent that the Commission believes it has an administrative expense claim against the Estate, it shall file a request for payment of an administrative expense consistent with 11 U.S.C. § 503(a).  The Chapter 7 Trustee’s and the Estate’s rights to object to any such request on any basis are fully preserved.

 

7.            Entry of this Order constitutes final agency action for purposes of judicial review as of the date this Order is mailed by the Commission.  Otherwise, it is effective upon approval.

 

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

 

 

Stipulated and agreed to this 8th day of May, 2015.

 

 

 

 

 

By                                                                       

Alfred T. Giuliano, Red Mesa Holdings/O&G, LLC’s Bankruptcy Estate

 

 

 

 

 

 

By                                                                       

Jeremy I Ferrin, COGCC Enforcement Officer 

 

 

 

 

 

ENTERED this _____ day of May, 2015 as of the 18th day of May, 2015.

           

                                                            OIL AND GAS CONSERVATION COMMISSION

            OF THE STATE OF COLORADO

 

 

            By                                                                                          

                                                                                    Julie Murphy, Secretary