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 ATOM PETROLEUM LLC, LA PLATA AND MONTEZUMA COUNTIES, COLORADO

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CAUSE NO. 1V DOCKET NO. 160400073 TYPE:  ENFORCEMENT ORDER: 1V-586

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 finds and states as follows:

I. Undisputed Issues

Atom Petroleum LLC (“Atom”) and Commission Staff (“Staff”) have agreed on liability for the violations of Rules 308A, 308B, 309, 319.b., 326.c., 210.d., 605.a., 804, 906.a., and 907 (“Undisputed Violations”); the $149,469 penalty for those violations as calculated in this Order’s Exhibit A; the required corrective actions; and the consequences for Atom’s failure to perform the corrective actions. See May 24, 2016 “Agreement on the Undisputed Issues.”

On May 23 and May 24, 2016, Atom provided Staff with cashier’s checks totaling $149,469 as payment of the penalty for the Undisputed Violations.

The Commission hereby approves the May 24, 2016 “Agreement on the Undisputed Issues,” including the $149,469 penalty, and incorporates Exhibit A into this Order.

II. Background for the Disputed Issues

The only disputed issues before the Commission are the liability and penalty for the violation of Cease & Desist Order 1C-10 (“Cease & Desist Order”).

1. Atom (Operator No. 10434) is the operator of the Taylor 3 Well (API No. 05-067-06777) (“Taylor 3 Well”) in La Plata County. (Stip. Fact 7).

2. On October 9, 2015, the Commission, Atom, and Hoshi Energy LLC (“Hoshi”) entered into a Memorandum of Understanding (“MOU”). Atom and Hoshi agreed to provide the Commission with $360,000 in financial assurance by November 12, 2015, upon the provision of which the Commission would approve a Form 10, Change of Operator, giving Atom the right to operate wells and locations formerly owned by Red Mesa (“Red Mesa Wells”). (Staff Ex. 1; Stip. Fact 11).

3. Atom and Hoshi have not provided the financial assurance required under the MOU and the Commission has not approved a Form 10 giving Hoshi or Atom the right to operate the Red Mesa Wells. (Stip. Fact 15).

4. On February 23, 2016, the Director issued the Cease & Desist Order to Atom due to evidence of numerous violations and unauthorized operations at the Taylor 3 Well and Red Mesa Wells. (Joint Ex. 3, p. 1-3).

5. In the Cease & Desist Order, the Director determined that “absent a complete cessation” of Atom’s operations at the Taylor 3 Well and Red Mesa Wells, “there remains an ongoing risk of continued significant adverse environmental impacts to public health, safety, and welfare, including the environment and wildlife resources.” (Joint Ex. 3, p. 3 at ¶16).

6. The Cease & Desist Order was emailed to Tom Stover, Atom’s Oil and Gas Properties Manager and registered agent, and was served on February 28, 2016. (Stip. Facts 6 & 17; Joint Exs. 3 & 4).

7. The Cease & Desist Order mandated that Atom “immediately cease all oil and gas operations” at the Taylor 3 Well, including, but not limited to, immediately ceasing all surface operations at the Taylor 3 Well. (Joint Ex. 3, p. 3 at ¶1; Stip. Fact 18).

8. On March 1, 2016, Steve Labowskie, Commission Region 180 Field Inspection Supervisor (“Labowskie”), first observed that the Taylor 3 Well was still operating. (Joint Exs. 5-6; Staff Exs. 7-8).

9. On March 8 and 11, 2016, Mr. Labowskie observed that the Taylor 3 Well pumping unit was still operating and took videos of the continued operations. (Joint Exs. 9-12; Stip. Fact 19).

10. On March 11, 2016, Mr. Stover confirmed that he had received these videos in email communications with Jeremy Ferrin, COGCC Enforcement Officer, but the Taylor 3 Well continued to operate until March 14, 2016. (Joint Exs. 13 & 14; Stip. Fact 20).

11. On March 23, 2016, Staff issued Notice of Alleged Violation 401005448 to Atom for a violation of Section 34-60-121(1), C.R.S., of the Oil and Gas Conservation Act (“Act”), for the failure to comply with the Cease & Desist Order. (Joint Ex. 15).

12. At the OFV Hearing, Atom adopted Staff’s Proposed OFV subject to any modifications necessary as a result of the events at hearing.

III. Commission Findings on the Disputed Issues

If an operator fails to take corrective action to remedy a violation, under circumstances deemed to be an emergency situation, the Director may issue a cease and desist order. §34-60-121(5), C.R.S.

The Director determined that Atom’s oil and gas operations were a danger to public welfare and the environment and directed Atom to cease operations in the Cease & Desist Order. The Cease & Desist Order mandated that Atom “immediately cease all oil and gas operations” at the Taylor 3 Well, including, but not limited to, immediately ceasing all surface operations. (Joint Ex. 3, p. 3 at ¶1).

The operation of the pumping unit at the Taylor 3 Well is documented by video. (Joint Exs. 5, 6, 9 & 11). Staff sent Atom the Cease & Desist Order by email on February 23, 2016, served Atom with the order on February 28, 2016, and provided Atom with video evidence of the continued operations at the Well on March 11, 2016. (Stip. Facts 6 & 17; Joint Exs. 3, 4, & 13). Atom did not comply with the order until March 14, 2016. (Joint Ex. 14).

A. Atom violated the Cease & Desist Order by operating the pumping unit at the Taylor 3 Well.

It is undisputed that Atom operated the pumping unit at the Taylor 3 Well from at least March 8, 2016 to March 16, 2016. Staff has alleged that this constituted a violation of the Cease & Desist Order. Atom has alleged that the Cease & Desist Order did not provide reasonable notice and therefore the violation should be dismissed.

Pursuant to the Act, a cease and desist order is required to state: “the provision alleged to have been violated, the facts alleged to constitute the violation, the time by which the acts or practices cited are required to cease, and any corrective action the commission or the director elects to require of the operator.” §34-60-121(5), C.R.S. The Cease & Desist Order met these requirements.

The Cease & Desist Order mandated that Atom “immediately cease all oil and gas operations” at the Taylor 3 Well, including, but not limited to, immediately ceasing all surface operations. (Joint Ex. 3, p. 3 at ¶1) (emphasis added). “Oil and gas operations” is broadly defined in the Act and Commission rules as the “exploration for oil and gas,” including “production operations.” §34-60-103(6.5), C.R.S. The Commission has the 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. (emphasis added). The definition of “production facility” in the 100-Series Rules includes “pumping.”

An activity does not need to result in actual production or impacts to the public or the environment in order to qualify as an oil and gas operation. If Atom had any confusion regarding the definitions of these terms, it could have requested clarification from Staff. Instead of requesting this clarification in multiple communications with Staff, Mr. Stover insisted that Atom had ceased operations without questioning whether it was required based on the language of the Cease & Desist Order.

The Commission finds that the Cease & Desist Order provided reasonable notice that the operation of the pumping unit was prohibited and that it required Atom to cease the operation of the pumping unit at the Taylor 3 Well.

B. Staff’s requested penalty of $90,000 is appropriate.

An operator that violates a cease and desist order is subject to a penalty for each day that such violation continues. §34-60-121(1), C.R.S. Staff has requested a $90,000 penalty for the operation of the pumping unit from March 8, 2016 to March 14, 2016. Atom has alleged that this penalty is disproportionate due to the lack of actual impacts from the operation of the pumping unit.

The gravity of Atom’s failure to cease operation of the pumping unit was severe. Director Lepore testified that Staff issues cease and desist orders as a means of last resort. An operator’s immediate compliance with cease and desist orders is essential to ensure that public welfare and the environment are protected in the State of Colorado. Mr. Labowskie testified regarding actual impacts: the presence of crude oil in the Taylor 3 Well’s cellar and methane at the wellhead. Atom’s disregard of the Cease & Desist Order significantly impacts this Commission’s ability to fulfill its statutory mandate. This is an actual significant adverse impact from a Class 3 violation, which is subject to a $15,000 per day penalty. See Rule 523.c.

The Commission may also increase the penalty up to the statutory maximum if it finds that aggravating factors exist, such as where an operator is recalcitrant. Rule 523.c.(3). Atom violated ten different Commission rules, many for more than a year. These violations, in combination with several other factors, prompted the issuance of a Cease & Desist Order – a serious remedy reserved for threats to public welfare and the environment. Atom then violated the Cease & Desist Order. Mr. Stover testified at hearing that he called Atom field personnel and directed them to cease operating the Taylor 3 Well on February 23, 2016, but provided no evidence of any follow-up. Moreover, all Atom personnel were responsible for ensuring compliance with the Cease & Desist Order. Atom’s repeated failure to comply with Commission requirements is recalcitrance deserving of the maximum penalty.

Atom did not provide any evidence that the Taylor 3 Well had stopped pumping immediately on February 23, 2016 and Staff did not allege more than six days of violation. However, the Well could have been pumping from February 23, 2016 to March 14, 2016. The Parties’ agreement that the Taylor 3 Well was pumping from March 8, 2016 to March 14, 2016 resulted in a reasonable penalty in light of the circumstances. (Stip. Facts 6, 17, & 20).

The Commission finds that Staff’s requested penalty of $90,000 is appropriate for the violation of the Cease & Desist Order, because it was a Class 3 violation with actual significant impacts and demonstrated Atom’s recalcitrance.

ORDER

NOW, THEREFORE, the COMMISSION ORDERS:

1. The Commission approves all Hearing Officer Orders entered in Docket No. 160400073.

2. Atom is found in violation of Section 34-60-121(1), C.R.S., of the Act, as described above, and Rules 308A, 308B, 309, 319.b., 326.c., 210.d., 605.a., 804, 906.a., and 907.

3. The Commission approves the $149,469 penalty agreed upon by the Parties for the violations of Rules 308A, 308B, 309, 319.b., 326.c., 210.d., 605.a., 804, 906.a., and 907. Within 30 days after this Order is mailed by the Commission, Atom will pay the remaining $90,000 penalty for the violation of Section 34-60-121(1), C.R.S., of the Act. The total penalty for these violations is $239,496.

4. Within 45 days of the approval of this Order, Atom will do the following:

a. Remove all trash, weeds, and unused equipment from the well location and access road at the Taylor 3 Well;

b. Submit a plan to the Commission for remediating the vegetation kill areas on the location at the Taylor 3 Well;

c. Install a synthetic or engineered liner per Rule 605.A(4) for the silver horizontal crude oil tank at the Taylor 3 Well, or in the alternative, remove the silver horizontal crude oil tank from the Taylor 3 Well site;

d. Demonstrate the need for the well cellar on a Form 4, Sundry Notice, and keep it free of oil, or close the well cellar at the Taylor 3 Well;

e. Remove all weeds from inside the tank berms and in the area between the tanks and the wells at the Doerfer 1-5 and Doerfer 2 Wells;

f. Remediate, remove and replace any oil-impacted soils comprising the combined tank berm at the Doerfer 1-5 and Doerfer 2 Wells; and

g. Paint the crude oil tank per Rule 804 at the Doerfer 1-5 and Doerfer 2 Wells.

5. Within 60 days of the approval of this Order, Atom will do the following:

a. Perform passing Mechanical Integrity Tests on the Taylor 3 Well, Doerfer 1-5 Well, and Doerfer 2 Well;

b. Paint all equipment a non-contrasting, non-reflective color per Rule 804 at the Taylor 3 Well; and

c. Improve the access road by repairing the deep ruts at the Taylor 3 Well.

6. If Atom fails to perform any of the corrective actions in Paragraph 4 and Paragraph 5 by the applicable deadlines or pay the $90,000 penalty pursuant to Paragraph 3, COGCC Staff may take the following actions:

a. Suspend Atom’s Form 10, Certification of Clearance, as to all of Atom’s wells, and withhold the issuance of any new drilling or oil and gas location permits, until Atom demonstrates to the satisfaction of the Director that the operator has brought all violations cited in the Order into compliance and that any penalty assessed has been paid;

b. Terminate Atom’s Operator Number (Operator No. 10434), rescind Atom’s Form 1 (Doc. No. 0253875), and revoke Atom’s right to conduct oil and gas operations in Colorado, until Atom demonstrates at a Commission hearing that Atom has brought all violations cited in the Order into compliance, any penalty assessed has been paid, and that re-instating Atom’s Form 1 will not threaten to or actually create significant adverse impacts to public welfare or the environment;

c. Foreclose Atom’s existing financial assurance and claim both the principal and any accrued, but undisbursed, interest that may exist;

d. Require Mr. Stover to notify the Commission if: (1) he or any entity of which he is a principal, majority owner, operational or general manager, or otherwise controls applies for a permit or submits a Certificate of Clearance for the Commission’s approval; or (2) he joins an existing entity and becomes the principal, majority owner, operational or general manager, or otherwise controls the existing entity. If Mr. Stover or such an entity applies for a permit or submits a Certificate of Clearance, the Director may not approve the request. The request must come before the Commission at a hearing, at which it may determine whether to grant the application, require a higher amount of financial assurance before granting the application, or deny the application.

e. Use funds from the Oil and Gas Conservation and Environmental Response Fund to investigate, prevent, monitor, or mitigate conditions that threaten to cause, or that actually cause, significant adverse environmental impacts at all oil and gas locations formerly operated by Atom, including the plugging and abandonment of wells;

f. Require Atom, and its successors or assigns, to comply with the OFV and repay any funds expended by the Commission from the Oil and Gas Conservation and Environmental Response Fund for any work undertaken by COGCC Staff; and

g. Claim all equipment, saleable product, and appurtenances related to Atom’s oil and gas operations as property of the Commission, provided that any proceeds from the disposition of the assets will be applied to any work undertaken by the Commission.

7. This Order has no impact on Cease & Desist Order 1C-10 or the October 9, 2015 Memorandum of Understanding between the Commission, Atom, and Hoshi Energy LLC (“MOU”). Any penalty payment in Docket No. 160400073 does not impact, reduce, or provide credit towards the $360,000 financial assurance that Atom was required to post with the Commission under the MOU.

8. Entry of this Order constitutes final agency action. This Order is effective as of the date it is mailed by the Commission.

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

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ENTERED this ___ day of June, 2016 as of the 6^th day of June, 2016.

                                                OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

By 

                                                                          Julie Murphy, Secretary

CERTIFICATE OF MAILING

On June ___, 2016, a true and accurate copy of Commission Order 1V-586 was mailed by first-class mail, return receipt requested to the following:

Atom Petroleum LLC
Attn: Tom Stover

P.O. Box 630425

Littleton, CO 80163

Atom Petroleum LLC
Attn: Tom Stover

3323 N. Midland Dr. #113

Midland, TX 79707

                                                            Signature: __________________________________

                                                            Print Name: _________________________________