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 MARALEX RESOURCES, INC, GARFIELD & LA PLATA COUNTIES, COLORADO

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CAUSE NO. 1V

DOCKET NO. 150500158

ORDER NO. 1V-524

TYPE: ENFORCEMENT

ORDER FINDING VIOLATION

The Colorado Oil and Gas Conservation Commission (“Commission”), having reviewed the administrative record and being fully advised on the premises, 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:

I. Procedural History

At the May 18, 2015 hearing (“May hearing”), the Commission entered Order No. 1V-509 addressing multiple enforcement issues presented under Docket No. 150500158. The Commission also heard evidence, testimony and argument about whether Maralex Resources, Inc. (“Maralex”) violated Rule 319.b.(1) at the Rifle Walton 25-2 Well and determined that further proceedings at the July 20-21, 2015 hearing (“July hearing”) were required to address the Well’s current conditions.

The Commission directed Maralex to develop an alternative plan to stop the water flow at the Rifle Walton 25-2 Well and reserved judgment on the issue of liability and penalty for the alleged Rule 319.b.(1) violation at the Well. The Commission further directed Maralex and Staff to present information regarding their respective plans at the July hearing. The administrative record of the May hearing regarding these issues is incorporated herein.

On July 20, 2015, Maralex and Staff jointly proposed an amended Order No. 1V-509 to incorporate a payment plan and a waiver of Maralex’s right to appeal the Original or Amended Order No. 1V-509. The Commission entered Amended Order No. 1V-509 on July 20, 2015.

II. Background

A. Rule 319.b.(1) (Temporary Abandonment)

Maralex is the operator of the Rifle Walton 25-2 Well in Garfield County. (Stip. Fact 19). The Rifle Walton 25-2 Well did not produce from July 2012 to June 2014 and the Well’s last recorded production was in September 2014. (Stip. Fact 22 & Ex. 12).

Maralex removed the separator from the Rifle Walton 25-2 Well on October 24, 2014. (Stip. Fact 23). Staff inspected the well on November 7, 2014 and December 8, 2014 and did not observe a separator on the location. (Exs. 6 & 8).

In both inspection reports, Staff directed Maralex to submit a Form 4 requesting Temporary Abandonment status and perform a Mechanical Integrity Test (“MIT”) on the Well. (Exs. 6 & 8). On December 11, 2014, Staff issued Notice of Alleged Violation No. 200419079 for a violation of Rule 319.b.(1). (Stip. Facts 26-27).

On January 20, 2015, Maralex performed a MIT on the Rifle Walton 25-2 Well, which failed due to a casing leak at 5,675 feet. (Stip. Fact 29, Ex. 9). Maralex performed a successful MIT on the Rifle Walton 25-2 Well on April 1, 2015. (Stip. Fact 22).

B. Annular Flow Remediation

The Rifle Walton 25-2 Well has an uncemented annulus from 309 to 5,120 feet. (Exs. 3, 14, & 15). The Well is near East Divide Creek and several water wells. (Exs. 1 & 2). Water has been flowing out of the bradenhead annulus of the Well at a rate of 8 to 13 barrels per day since 2011 and, as of June 3, 2015, at a rate of 9 barrels of water per day. (Maralex’s Rifle Walton Plan 25-2 Bradenhead Fluid Flow, pp. 3-5).

Order 1-107 designates the area where the Rifle Walton 25-2 Well is located as a bradenhead monitoring area. It requires operators to test all wells for pressure and flow on an annual basis and specifies that remedial requirements will be determined based on the results of the annual tests. (Stip. Fact 21, Ex. 4).

Staff first became aware of the bradenhead flow and excessive pressure at this Well in 2011. Staff advised Maralex to run a cement bond log (“CBL”) on the Rifle Walton 25-2 Well to propose a remediation procedure. Maralex informed Staff that the remediation would be too costly and would force Maralex to plug and abandon the Well. Staff permitted Maralex to try an alternative mitigation method: the continuous or intermittent (as necessary) discharge of annular fluids to a tank to keep the bradenhead annulus blown down. (Ex. 5, Stip. Fact 20).

During November 7, 2014 and December 8, 2014 inspections, Staff observed that the water flow and high bradenhead pressures were ongoing. (Exs. 6 & 8).

On January 21 and March 12, 2015, Staff advised Maralex to perform cement remediation to eliminate the water flow and protect the existing cement and the formation from high bradenhead pressures. Staff also suggested that Maralex could propose an alternative remediation strategy. (Exs. F & 5).

On March 17, 2015, Staff approved a casing repair procedure for the failed MIT, required Maralex to run a CBL, and reserved the right to require control of the water flow based on the CBL results. (Ex. 9, Stip. Fact 30). On April 2, 2015, Staff rescinded approval of Maralex’s Form 4 requesting Temporary Abandonment status, because the CBL demonstrated that additional remediation was still required to stop the water flow. (Exs. 10 & 11).

Staff required Maralex to perform cement remediation to target potential sources of the water flow. (Ex. 11, Stip. Fact 32). Maralex did not perform this remediation.

III. The Commission’s Findings

The Commission considered the following issues regarding the Rifle Walton 25-2 Well: (1) whether Maralex violated Rule 319.b.(1) by failing to request Staff approval and perform a MIT prior to temporary abandonment; and (2) whether to approve Maralex’s water flow remediation plan or Staff’s remediation plan.

A. Maralex violated Rule 319.b.(1) (Temporary Abandonment) at the Rifle Walton 25-2 Well

Rule 319.b.(1) requires operators to obtain Staff approval and perform a successful MIT before temporarily abandoning a well. A temporarily abandoned well is defined in the 100-Series Rules as “a well which is incapable of production or injection without the addition of one or more pieces of wellhead, or other equipment, including valves, tubing, rods, pumps, heater-treaters, separators, dehydrators, compressors, piping or tanks.” (emphasis added).

The Rifle Walton 25-2 Well was temporarily abandoned from November 7, 2014 until February 26, 2015. It is undisputed that the Rifle Walton 25-2 Well’s separator was removed on October 24, 2014. (Stip. Fact 23). Staff did not observe it on the location during the November 7, 2014 and December 8, 2014 inspections. (Exs. 6 & 8). At the May hearing, Craig Burger, the Commission’s Northwest Engineer, testified that the separator was returned to the site on February 26, 2015. Maralex did not produce any evidence or argument that the separator was returned to the site prior to this date. Maralex did not request prior approval or perform a successful MIT before removing the separator. (Stip. Fact 22, 23, 25, & 29).

The Commission imposes a penalty of $47,600 for this violation ($2,500 per day for a Class 2, Minor violation for 111 days followed by application of the Violation Duration Matrix from the Commission’s Enforcement and Penalty Policy).

B. Maralex is required to perform Staff’s proposed remediation at the Rifle Walton 25-2 Well

Water is migrating up through the bradenhead annulus and out of the wellbore of the Rifle Walton 25-2 Well. (Ex. 14). This is a wellbore integrity failure that requires remediation. Due to Maralex’s failure to provide a viable alternative to Staff’s plan, Maralex is required to implement Staff’s proposed remediation procedure.

The Rifle Walton 25-2 Well lacks zonal isolation and is a risk to the environment. These risks include the following: formation breakdown at the casing shoe (Ex. 14); production of usable water that may require other state agencies’ involvement (Ex. 16); and shallow casing leaks, which have already occurred at the Well (Ex. 9).

The Commission is charged with fostering responsible, balanced development in a manner consistent with protection of public welfare and the environment. Oil and Gas Conservation Act (“Act”), §34-60-106(1)(a)(I), C.R.S. The Commission has broad authority to regulate “the drilling, producing, and plugging of wells and all other operations for the production of oil and gas.” §34-60-106(2)(a), C.R.S. Order 1-107 states that if there is “a continuous flow of liquid at any pressure” remediation is required. (Ex. 4). The principles of groundwater protection and prevention of fluid migration are also found throughout Commission rules. See, e.g., Rule 317.e. (“Casing and cement program to protect hydrocarbon formations and ground water. The casing and cement program for each well must prevent oil, gas, and water from migrating from one formation to another behind the casing. Ground water bearing zones penetrated during drilling must be protected from the infiltration of hydrocarbons or water from other formations penetrated by the well.”); see also §34-60-106(1)(c), C.R.S.

The Commission gave Maralex the opportunity to submit an alternative plan to stop the water flow prior to the July hearing. The Commission noted that, if the Commission then determined Maralex’s alternative plan was inadequate, it would accept Staff’s remediation plan as presented at the May hearing.

On July 10, 2015, Maralex submitted its alternative proposal to Staff. Maralex’s proposal was to continue to allow the water to flow, monitor and analyze it further, and only after “long-term testing,” potentially perform a bradenhead squeeze. Commissioner Hawkins pointed out that even if cement was squeezed in the top, there would still be groundwater formations exposed in the wellbore below that cement. The Commission determined that this would not stop the source of the water flow and would eliminate access to the wellbore below the cement to address potential future issues.

Staff’s required remediation is the result of careful analysis of the available information and observations of a continuing problem over a period of four years. (See Exs. 1, 2, 5, 10, & 14). Staff recommended the following cement remediation at the May hearing and again at the July hearing: place a minimum of 100 feet of cement in the annulus from approximately 2,650 to 2,550 feet and 910 to 810 feet, as well as place cement in the annulus from 400 feet or deeper to the surface. (Exs. 3 & 15).

Mr. Burger testified that Staff chose these cement locations to provide zonal isolation, prevent loss of cement into more permeable sandstones, and ensure well control. Cement remediation has been successful in nearby wells with similar issues and previous cement squeezes have held at the Rifle Walton 25-2 Well. (Exs. 15 & 17). Stuart Ellsworth, the Commission’s Engineering Manager, testified that Staff had considered all possible alternatives to stop the water flow. The Commission finds Staff’s opinion testimony credible and persuasive.

The Commission finds that Staff’s proposed remediation is the best possible solution to stop the water flow without delay and directs Maralex as set forth below.

ORDER

NOW, THEREFORE, the COMMISSION ORDERS:

1. Maralex is found in violation of Rule 319.b.(1) at the Rifle Walton 25-2 Well, as described above.

2. Maralex is assessed a penalty of $47,600 for this violation. Maralex will this penalty within 30 days after this Order is mailed by the Commission. Failure to pay the penalty by the deadline is an independent violation that may be subject to additional penalties.

3. If Maralex decides not to plug and abandon the Rifle Walton 25-2 Well, Maralex will perform the following annular flow remediation at the Well within 30 days of approval of this Order by:

a. Placing a minimum 100 feet of cement in the annulus from about 2,650 to 2,550 feet;

b. Placing a minimum 100 feet of cement in the annulus from about 910 to 810 feet; and

c. Placing cement in the annulus from 400 feet or deeper to surface.

4. If Maralex decides to plug and abandon the Rifle Walton 25-2 Well, Maralex will perform the following plugging procedure at the Well within 30 days of approval of this Order by:

a. Placing CIBP or squeeze cement below a CICR at about 7700 feet. 300 feet of cement on top required to cover squeezed (abandoned) perforations.

b. Placing casing stabilization plug across squeezed HIC’s from 5700 to 5500 feet.

c. Placing a minimum 100 feet of cement in the annulus from about 2650 to 2550 feet;

d. Placing a minimum 100 feet of cement in the annulus from about 910 to 810 feet; and

e. Placing cement in the annulus from 400 feet or deeper to surface. Placing a minimum of 100 feet of cement in casing from 50 feet below surface casing shoe to 50 feet above. Placing cement in casing from a minimum of 50 feet to surface.

5. Compliance dates specified in this Order may be extended only for good cause, as determined at the Director’s sole discretion. A request for extension must be made, in writing, at least 14 days prior to the pertinent compliance deadline or as soon as possible if 14 days prior notice is not feasible. Failure to receive an extension prior to the compliance deadline or the failure to meet a compliance deadline may constitute a new violation subject to additional penalties.

6. Entry of this Order constitutes final agency action for purposes of judicial review as of the date this Order is mailed by the Commission. For all other purposes, this Order is effective as of the date of the Commission’s approval.

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

ENTERED this _____ day of August, 2015 as of the 20^th day of July, 2015.

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

Julie Murphy, Secretary