BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
IN THE MATTER OF ALLEGED VIOLATIONS OF THE ) CAUSE NO. 1V
RULES AND REGULATIONS OF THE COLORADO OIL )
AND GAS CONSERVATION COMMISSION BY ) ORDER NO. 1V-332
STAR ACQUISITION VIII, LLC, LA PLATA COUNTY )
COLORADO )
ORDER FINDING VIOLATION
This cause came on for hearing before the Colorado Oil and Gas Conservation Commission (“Commission” or “COGCC”) at 9:00 a.m. on September 22, 2008, at the Sabin-Cleere Conference Room in Building A at the Colorado Department of Public Health and Environment, 4300 Cherry Creek Drive South, Denver, Colorado, after giving notice of hearing as required by law on why Star Acquisition VIII, LLC (“Star”) is in violation of Rule 303.a, Rule 303.d.(1), Rule 303.d.(2), Rule 305.b.(1), Rule 306.a., Rule 306.a.(1), Rule 306.a.(3), Rule 317.c., and Rule 318. for the Dyehard #3A Well and why the Commission should invoke the provisions of C.R.S. §34-60-121 (2007), as amended, providing for penalties for violations of the Rules and Regulations of the Commission (2 CCR 404-1).
FINDINGS
1. On August 20, 1979, Pyramid Oil Company completed the Dakota Formation in the Dyehard #3 Well (API #05-067-06230), located in the NE¼ NW¼ of Section 13, Township 33 North, Range 12 West, N.M.P.M., which had been drilled between December 18, 1978 and August 15, 1979.
2. From 1979 to the present, operation of the Dyehard #3 Well has been transferred to various companies including Hathaway Company or Hathaway Operators, Inc. (November 30, 1986), Terra Exploration & Production Company (December 23, 2000), and to Star Acquisition VIII, LLC (“Star”), as of September 1, 2006. On December 13, 2007, Red Mesa Holdings/O&G LLC took over operations on the Dyehard #3 Well.
3. On April 9, 2007, the COGCC staff (“Staff”) received a complaint about dust, wildlife concerns, and mud deposited on county roads from vehicular traffic in the vicinity of the Dyehard #3 Well.
4. On April 10, 2007, Staff inspected Star’s oil and gas operations at the Dyehard #3 Well and the Dyehard #3A Well (API #05-067-09356-00), also located in the NE¼ NW¼ of Section 13, Township 33 North, Range 12 West, N.M.P.M., approximately 20 to 30 feet northeast of the Dyehard #3 Well. There was a pump jack on the Dyehard #3 Well and a centralized tank battery about 150 yards north along County Road 133. There was a drilling rig on the Dyehard #3A Well.
5. Although the drilling rig on the Dyehard #3A Well was shut down and the rig hands were conducting maintenance work, the rig was set up over a cellar of corrugated pipe (approximately six feet in diameter) and conductor pipe (13⅜-inch outside diameter) set in a wellbore. Other equipment indicative of commencement of drilling operations were a diverting head with top seals mounted on the conductor pipe and a blooie line running to an unlined and unfenced earthen pit.
6. On April 11, 2007, as a result of a landowner’s concern about protection of shallow fresh water sands and Star’s deviation from historical drilling practices, Staff attempted to examine Star’s wellbore designs in Star’s Applications for Permits-to-Drill (“APDs”), discussed with Star personnel the company’s field-wide strategic plans and individual well analyses, including recently completed remedial work that changed well construction in other wells in the Red Mesa Field, and discovered that Star had commenced drilling operations on the Dyehard #3A Well without submitting an APD and without prior COGCC approval and planned to continue drilling operations without an approved APD.
7. On April 12, 2007, Staff determined to issue a cease and desist order and that a technically safe time for halting Star’s drilling of the Dyehard #3A Well would be when Star reached the Mancos shale and installed and cemented casing, which was estimated to occur around mid-day April 12, 2007.
8. By 4:30 p.m. on April 12, 2007, drilling on the Dyehard #3A Well had reached only 930 to 960 feet, and the Mancos shale was estimated to be at 1,600 feet; Staff issued a cease and desist order at 4:45 p.m. on April 12, 2007 but allowed Star the option to run and cement casing to a depth of 880 feet (top of the Menefee coal) in order to maintain well integrity and not lose equipment downhole; deeper drilling operations ceased at 6:15 p.m.
9. On April 13, 2007, Star submitted an APD for the Dyehard #3A Well, and Mr. Tom L. Stover (“Mr. Stover”), Star’s General Manager, met with Staff in the Denver COGCC office to discuss COGCC Rules and the order issued to cease and desist drilling operations on the Dyehard #3A Well. After the discussions, the APD was reviewed by Staff and approved by the Director.
10. On April 14, 2007, Star notified Staff in COGCC’s Durango office that drilling operations would re-commence 48 hours later, i.e., on April 16 or 17, 2007.
11. On April 16, 2007, Staff issued Notice of Alleged Violation #200109042 (“NOAV”) to Star (Operator #10192) for violation of the following Rules at the Dyehard #3A Well:
a. Rule 303.a., which requires filing an APD, Form 2, prior to commencing drilling operations;
b. Rule 303.d.(1), which requires filing a Drill Site Access/Road Reclamation Form, Form 2A, as an attachment to the APD;
c. Rule 303.d.(2), which requires filing Form 2 and 2A with the local governmental designee at the same time or before the forms are filed with the COGCC;
d. Rule 305.b.(1), which requires providing written notice to the surface owner and local governmental designee of drilling operations at least 30 days prior to the estimated date of commencement of drilling operations;
e. Rule 306.a., which requires consulting in good faith with the surface owner prior to commencement of drilling operations;
f. Rule 306.a.(1), which requires providing the surface owner specific information as part of good-faith consultation efforts;
g. Rule 306.a.(3), which requires consultation with the local governmental designee prior to commencement of drilling operations;
h. Rule 317.c., which requires posting a copy of the approved APD at the drilling rig; and
i. Rule 318., which requires specific distances between wells drilled to a common source of supply.
12. The NOAV required Star to submit a copy of all drilling records, a Form 2 and Form 2A and all necessary attachments for COGCC approval by April 30, 2007.
13. Star signed the NOAV on April 16, 2007 and returned it to the COGCC on May 21, 2007.
14. Star’s response to the NOAV explained that it drilled the Dyehard #3A Well without prior filing and approval of an APD as an emergency measure to protect a fresh water zone. Star believed this process was permitted by Rule 317.d.
15. Rule 317.d., part of the general drilling rules applicable to all wells that are drilled or deepened, specifies as follows:
Casing program to protect hydrocarbon horizons and ground water. The casing program adopted for each well must be so planned and maintained as to protect any potential oil or gas bearing horizons penetrated during drilling from infiltration of injurious waters from other sources, and to prevent the migration of oil, gas or water from one (1) horizon to another, that may result in the degradation of ground water. A Sundry Notice, Form 4, including a detailed work plan and a wellbore diagram, shall be submitted and approved by the Director prior to any routine or planned casing repair operations. During well operations, prior verbal approval for unforeseen casing repairs followed by the filing of a Sundry Notice, Form 4, after completion of operations shall be acceptable.
16. Star alleged that it re-entered the Dyehard #3 Well and discovered that little to no cement was used and that the casing was corroded. Star believed that Rule 317.d. allowed it to conduct an emergency skid of the rig and drill the Dyehard #3A Well to protect a fresh water zone.
17. Rule 317.d., quoted above, does not allow an operator to skid a rig and commence drilling a new well without prior approval of the Director, irrespective of a perceived emergency to protect ground water.
18. Star responded quickly to file an APD for the Dyehard #3A Well and to meet with Staff to discuss COGCC Rules. To date, however, COGCC has not received drilling records or a Form 2A for the Dyehard #3A Well, as required by the NOAV, Rule 308A. (Drilling completion Report, Form 5), and Rule 308B. (Completed Interval Report, Form 5A).
19. On April 15, 2008, Staff attempted to deliver a proposed Administrative Order by Consent (“AOC”) to Star at Star’s business address (1099 18th Street, Suite #600, Denver, Colorado 80202) on file with the COGCC and the Colorado Secretary of State and discovered that there was no business in Suite #600 at that location. The AOC proposed to find Star in violation of the nine Rules enumerated in Finding #11, above, and to assess Star a total fine of $9,000.
20. On or about April 15 and 16, 2008, Staff attempted to contact Star by telephone and discovered that all of Star’s telephone numbers on file with the COGCC had been disconnected. Staff also attempted to contact Mr. Stover by cell phone, using a telephone number he had provided to Staff, but there was no answer at that number and no opportunity to leave a message.
21. On April 16, 2008, Staff attempted to deliver the proposed AOC and cover letters to Mr. Stover at his residential address and requested a change of address for Star for COGCC’s records. The messenger was unable to obtain a signature indicating the AOC and cover letters had been received.
22. On April 21, 2008, Staff sent the proposed AOC and cover letters to Mr. Stover at his residential address via U.S. Mail, Certified, Return Receipt Requested. On April 24, 2008, the COGCC received confirmation from J. Stover that the proposed AOC and cover letters had been delivered and received on April 22, 2008.
23. To date, Mr. Stover has not contacted the COGCC to discuss or accept the AOC.
24. At the Commission hearing on September 22, 2008, Mr. Mark Weems, COGCC’s Area Engineer for Southwest Colorado, and Ms. Carol Harmon, COGCC’s Enforcement Officer, testified about the proposed recommended order for the Dyehard #3A Well.
25. At the Commission hearing on September 22, 2008, Mr. Dennis Ahlstrand, COGCC’s Permit Group Supervisor, testified about his qualifications and provided the following written summary of current information and paperwork omissions and delinquencies at seven wells, formerly operated by Star:
a. Rowe #1A Well (no API #), NE¼ SE¼ of Section 21, Township 33 North, Range 12 West, N.M.P.M. (no APD filed or approved; the well was not drilled to total depth):
1) APD with all attachments pursuant to Rule 303.
2) Well Abandonment Report, Form 6, pursuant to Rule 311.
b. Dyehard #3A Well (API #05-067-09356), NE¼ NW¼ of Section 13, Township 33 North, Range 12 West, N.M.P.M.:
1) Signed waiver from the mineral owner or lessee because the well is less than 600 feet from the lease line, an exception location under Rule 318.
2) Drilling Completion Report, Form 5, and paper copies and digital LAS copies of all logs run pursuant to Rule 308A.
3) Completed Interval Report, Form 5A, pursuant to Rule 308B.
4) Monthly Production Reports, Form 7, pursuant to Rule 309.
5) Certificate of Clearance, Form 10. pursuant to Rule 312. with current information about the gas gatherer and the oil transporter.
6) The Dyehard #3A Well and the Dyehard #3 Well cannot produce from the Dakota Formation simultaneously; the Dakota Formation completion must be abandoned in one or the other of the wells. If the operator does not recomplete the Dyehard #3 Well or the Dyehard #3A Well in a formation other than the Dakota Formation, the operator must plug one of the wells.
c. Ferguson #2 F-12 Well (API #05-067-06731), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M.:
1) Cement bond log (“CBL”) pursuant to the Conditions of Approval on the APD.
2) Completed Interval Report, Form 5A, pursuant to Rule 308B.
d. Ferguson #2 F-12X Well (API #05-067-09331), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M. (expired permit):
1) If the well has been drilled, Drilling Completion Report, Form 5, logs and CBL or cement run tickets pursuant to Rule 308A. and the Conditions of Approval on the APD.
2) If the well was not drilled, an abandoned location notice on a Sundry Form, Form 4, pursuant to Rule 307.
e. Ferguson #2 F-12Y Well (API #05-067-09337), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M. (expired permit):
1) If the well has been drilled, Drilling Completion Report, Form 5, logs and CBL or cement run tickets pursuant to Rule 308A. and the Conditions of Approval on the APD.
2) If the well was not drilled, an abandoned location notice on a Sundry Form, Form 4, pursuant to Rule 307.
f. Jumbo #1 Well (API #05-067-06485), NE¼ NW¼ of Section 27, Township 33 North, Range 12 West, N.M.P.M.: Well Abandonment Report, Form 6, or a shut-in request on a Sundry Notice, Form 4, pursuant to Rule 319.
g. Jumbo #1A Well (API #05-067-09364), NE¼ NW¼ of Section 27, Township 33 North, Range 12 West, N.M.P.M.: Drilling Completion Report, Form 5, a Completed Interval Report, Form 5A, logs and CBL or cement run tickets pursuant to Rule 308A., Rule 308B., and the Conditions of Approval of the APD.
26. At the Commission hearing on September 22, 2008, Mr. Stover was present and accompanied by his attorney, Mr. James Kreutz. Mr. Stover testified in Star’s defense as follows:
a. Star took over operation of the Red Mesa Field in September, 2006 and inherited a mess from previous operators. Star did its best to conduct needed repairs immediately, spray weeds, and paint equipment. Star identified issues created by previous operators, such as an irregular well location, and brought them to the attention of the COGCC. Star attempted to keep the COGCC informed.
b. Star planned to re-enter the Dyehard #3 Well and the Rowe #1 Well and was told by the COGCC that an APD was not necessary. Upon re-entry Star discovered both wells were only partially cemented and had corroded casing. Star believed that an emergency situation existed because of potential contamination of ground water. Star called the state and county to advise them of the emergency situations and skidded the rig to drill the Dyehard #3A Well and the Rowe #1A Well. Star believed it was complying with what the COGCC verbally told Star to do at the Dyehard #3A Well and the Rowe #1A Well.
c. Mr. Stover described operations and issues at the Ferguson #2 F-12X Well and the Ferguson #2 F-12 Well, which also involved emergency skids of the rig.
d. Star is involved in litigation with one of its investors, Madison Capital Management, regarding operation of the Red Mesa Field. Under a court order issued November 30, 2007, Mr. Stover has been denied access to the properties and has been reluctant to respond to the COGCC’s attempted contacts for fear of being in contempt of the order. Mr. Stover testified that he first received notice of the hearing two weeks prior to September 22, 2008 through public notice, rather than by personal service.
27. Star should be found in violation of Rule 303.a.(1) for failure to file an APD, Form 2, prior to commencing drilling operations.
28. Star should be found in violation of Rule 303.d.(1) for failure to file a Drill Site Access/Road Reclamation Form, Form 2A, as an attachment to the APD, prior to commencing drilling operations.
29. Star should be found in violation of Rule 303.d.(2) for failure to file Form 2 and Form 2A with the La Plata County local governmental designee at the same time or before the forms are filed with the COGCC.
30. Star should be found in violation of Rule 305.b.(1) for failure to provide written notice to the surface owner and the La Plata County local governmental designee of its drilling operations at least 30 days prior to the estimated date of commencement of drilling operations.
31. Star should be found in violation of Rule 306.a. for failure to consult in good faith with the surface owner prior to commencement of drilling operations.
32. Star should be found in violation of Rule 306.a.(1) for failure to provide the surface owner the following specific information as part of good-faith consultation efforts: a description or diagram of the proposed drilling location, dimensions of the well site, and, if known, the location of associated production or injection facilities, pipelines, roads and any other areas to be used for oil and gas operations.
33. Star should be found in violation of Rule 306.a.(3) for failure to consult with the local governmental designee of La Plata County prior to commencement of drilling operations.
34. Star should be found in violation of Rule 317.c. for failure to post a copy of an approved APD at the drilling rig.
35. Star should be found in violation of Rule 318. for not drilling the Dyehard #3A Well at least 1,200 feet from the Dyehard #3 Well, another producing well from the common source of supply, without an order of the Commission after a hearing.
36. Rule 523. provides for the assessment of a base fine of One Thousand dollars ($1,000) per violation of each of the nine Rules cited in Findings #27 through #35, above.
37. Star should be assessed a fine of One Thousand dollars ($1,000) per violation for each of the nine Rules cited in Findings #27 through #35, above, for commencing drilling operations at the Dyehard #3A Well prior to complying with obligations set forth in Rules 303.a.(1), 303.d.(1), 303.d.(2), 305.b.(1), 306.a., 306.a.(1), 306.a.(3), 317.c., and 318., for a total fine of Nine Thousand dollars ($9,000).
38. The Commission should find that a knowing and willful pattern of violations exists because Star has failed to perform the abatement and corrective actions required by the NOAV, has failed to provide forwarding information to the COGCC, has failed to contact the COGCC with respect to the proposed AOC, and has failed to file reports required under the Rules for the wells in the Red Mesa Field identified in Finding #25, above. Until the fine assessed by this order is paid in full and all records required by the Rules are submitted to the COGCC for the Dyehard #3A Well and the other wells in the Red Mesa Field formerly operated by Star Acquisition VIII, LLC, the Director should not approve any APD, any Certificate of Clearance and/or Change of Operator, Form 10, or other permit for conducting oil and gas operations for Star or any entity of which Mr. Stover is a principal, majority owner, operational or general manager, or which Mr. Stover otherwise controls.
ORDER
NOW, THEREFORE, IT IS ORDERED, that Star Acquisition VIII, LLC shall be found in violation of the following Rules due to its operations at the Dyehard #3A Well (API #05-067-09356-00), located in the NE¼ NW¼ of Section 13, Township 33 North, Range 12 West, N.M.P.M.:
a. Rule 303.a.(1), for failure to file an Application for Permit-to-Drill, Form 2, prior to commencing drilling operations;
b. Rule 303.d.(1), for failure to file a Drill Site Access/Road Reclamation Form, Form 2A, as an attachment to the APD, prior to commencing drilling operations;
c. Rule 303.d.(2), for failure to file Form 2 and Form 2A with the La Plata County local governmental designee;
d. Rule 305.b.(1), for failure to provide written notice to the surface owner and the La Plata County local governmental designee of its drilling operations at least 30 days prior to the estimated date of commencement of drilling operations;
e. Rule 306.a., for failure to consult in good faith with the surface owner prior to commencement of drilling operations;
f. Rule 306.a.(1), for failure to provide the surface owner the following specific information as part of good-faith consultation efforts: a description or diagram of the proposed drilling location, dimensions of the well site, and, if known, the location of associated production or injection facilities, pipelines, roads and any other areas to be used for oil and gas operations;
g. Rule 306.a.(3), for failure to consult with the local governmental designee of La Plata County prior to commencement of drilling operations;
h. Rule 317.c., for failure to post a copy of an approved APD at the drilling rig; and
i. Rule 318., for failure to drill the Dyehard #3A Well at least 1,200 feet from the Dyehard #3 Well, another producing well from the common source of supply, without an order of the Commission after a hearing.
IT IS FURTHER ORDERED, that Star Acquisition VIII, LLC shall be assessed a total fine of Nine Thousand dollars ($9,000.00) for violation of the above-described Rules, which shall be payable within thirty (30) days of the date this order is approved by the Commission.
IT IS FURTHER ORDERED, that a knowing and willful pattern of violations exists because Star Acquisition VIII, LLC has failed to perform the abatement and corrective actions required by Notice of Alleged Violation #200109042, has failed to provide forwarding information to the Commission, has failed to contact the Commission staff with respect to the proposed Administrative Order by Consent, and has failed to file reports required under the Rules for the following wells in Red Mesa Field:
Rowe #1A Well (no API #), NE¼ SE¼ of Section 21, Township 33 North, Range 12 West, N.M.P.M.;
Dyehard #3A Well (API #05-067-09356), NE¼ NW¼ of Section 13, Township 33 North, Range 12 West, N.M.P.M.;
Ferguson #2 F-12 Well (API #05-067-06731), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M.;
Ferguson #2 F-12X Well (API #05-067-09331), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M.;
Ferguson #2 F-12Y Well (API #05-067-09337), NE¼ NE¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M.;
Jumbo #1 Well (API #05-067-06485), NE¼ NW¼ of Section 27, Township 33 North, Range 12 West, N.M.P.M.; and
Jumbo #1A Well. (API #05-067-09364), NE¼ NW¼ of Section 27, Township 33 North, Range 12 West, N.M.P.M.
IT IS FURTHER ORDERED, that until the fine assessed by this order is paid in full and all records required by the Rules are submitted to the COGCC for the Dyehard #3A Well and the other wells listed in this order formerly operated by Star Acquisition VIII, LLC, the Director shall not approve any Applications for Permits-to-Drill (Form 2 and Form 2A), Certificates of Clearance and/or Change of Operator (Form 10), or other permit for conducting oil and gas operations submitted by Star Acquisition VIII, LLC or any entity of which Mr. Tom L. Stover, General Manager of Star Acquisition VIII, LLC, is a principal, majority owner, operational or general manager, or which he otherwise controls.
IT IS FURTHER ORDERED, that under the State Administrative Procedure Act the Commission considers this order to be final agency action for purposes of judicial review within thirty (30) days after the date this order is mailed by the Commission.
IT IS FURTHER ORDERED, that an application for reconsideration by the Commission of this order is not required prior to the filing for judicial review.
IT IS FURTHER ORDERED, that the provisions contained in the above order shall become effective forthwith.
IT IS FURTHER ORDERED, that the Commission expressly reserves its right after notice and hearing, to alter, amend, or repeal any and/or all of the above orders.
ENTERED this day of October, 2008, as of September 22, 2008.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By_____________________________________
Patricia C. Beaver, Secretary
Dated at Suite 801
1120 Lincoln St.
Denver, Colorado 80203
October 3, 2008