BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

ORDER FINDING VIOLATION

FINDINGS

1.     On February 12, 2002, the Colorado Oil and Gas Conservation Commission (“COGCC” or “Commission”) approved an Application for Permit-to-Drill (“APD”) submitted by Kilo Energy Group, LLC (“Kilo”) for the Keg #1 Well (API No. 05-067-08690) (the “Well”), located in the NW¼ NW¼ of Section 22, Township 33 North, Range 12 West, N.M.P.M., which was subsequently completed.  The Well pad contains an unlined reserve pit that has been used as a production pit. 

2.     On March 20, 2006, the COGCC Staff issued a Notice of Alleged Violation (“NOAV”) #200086868 to Kilo, which contained alleged violations of the following COGCC rules then in place:

a.   Rule 308A., which requires the operator to submit a Drilling and Completion Report, Form 5, within 30 days of the setting of the production casing;

b.   Rule 308B., which requires the operator to submit a Completed Interval Report, Form 5A, within 30 days of completing a formation;

c.   Rule 309., which provides that an operator shall file with the Commission a report on Operator’s Monthly Production Report, Form 7, within 45 day after the month in which production occurs;

d.   Rule 316B., which provides the results of mechanical integrity tests (“MITs”) shall be submitted on Form 21 within 30 days after the test for shut-in wells;

e.   Rule 319.b., which provides that a well may be shut-in or temporarily abandoned when completed for a period not to exceed 6 months, and that an operator requesting shut-in or temporary abandonment status in excess of 6 months shall submit a Sundry Notice, Form 4, annually to the Director stating the status of the well and plans for future operation;

f.    Rule 326.b., which provides that an MIT shall be performed on each shut-in well within 2 years of the initial shut-in date and on 5 year intervals from the date the initial MIT was performed; and

g.   Rule 903.a.(2)B., which provides that unlined production pits outside sensitive areas receiving produced water at an average daily rate of 5 or less barrels per day shall be permitted by submission of a Pit Construction Report/Permit, Form 15.  

The NOAV required certain abatement or corrective actions to be taken by the operator by April 21, 2006. 

3.     On May 25, 2007, the COGCC Staff issued NOAV #200111762 to Kilo, which reiterated the rule violations above and set forth an abatement/corrective action deadline of July 2, 2007.

4.     Further, Rule 703. provides that an operator shall provide financial assurance to the Commission in the amount of $2,000 per well for non-irrigated land, or $5,000 per well for irrigated land to protect certain surface owners from unreasonable crop loss or land damage caused by oil and gas operations.  Kilo has posted a $5,000 bond for surface owner protection, and it is alleged that the surface estate has been subjected to unreasonable land damage resulting from the oil and gas operations.

5.     Rule 706.a. provides that financial assurance shall be in the amount of $10,000 per well for wells less than 3,000 feet to ensure the protection of the soil, the proper plugging and abandonment of the well, and the reclamation of the site in accordance with COGCC rules.  Kilo has posted a $5,000 bond for plugging and abandonment and reclamation of the site.

6.     Rule 523. specifies a base fine of Five Hundred dollars ($500) for each day of violation of Rules 308A., 308B., and 309., and a base fine of One Thousand dollars ($1,000) for each day of violation of Rules 316.B., 319.b., 326.b., and 903.a.(2)B.  Rule 523.a.(3) specifies that “the maximum penalty for any single violation shall not exceed Ten Thousand dollars ($10,000) regardless of the number of days of such violation,” unless the violation results in significant waste of oil and gas resources, damage to correlative rights, or a significant adverse impact on public health, safety or welfare or the environment.

7.     Kilo should be found in violation of Rules 308A., 308B., 309., 316B., 319.b., 326.b., and 903.a.(2)B., for its oil and gas operations at the Well and ordered to pay fines as prescribed by Rule 523.  Further, the financial assurance posted by Kilo, in accordance with Rules 703. and 706.a., should be claimed by the COGCC Staff to defray any costs incurred by the oil and gas operations due to land damage and the plugging and abandonment of the Well and reclamation of the site. 

8.     Kilo violated Rule 308A. because it failed to file a completed Drilling Completion Report, Form 5, for the Well.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 308A. under these circumstances.

9.     Kilo violated Rule 308B. because it failed to timely file a Completed Interval Report, Form 5A, for the Well.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 308A. under these circumstances.

10.   Kilo violated Rule 309. because it failed shall file with the Commission a report on Operator’s Monthly Production Report, Form 7, for the Well.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 309. under these circumstances.

11.   Kilo violated Rule 316B. because it failed to submit the results of a mechanical integrity test (“MIT”), Form 21, for the Well, within 30 days after the test for shut-in wells.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 319.b.(1) under these circumstances.

12.  Kilo violated Rule 319.b. because it has temporarily abandoned the Well and not filed a Sundry Notice, Form 4, or other approved form stating the method the well is closed to the atmosphere and plans for the future operation of the well.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 319.b. under these circumstances.

13.   Kilo violated Rule 326.b. because it has failed to obtain a successful MIT on the Well in a timely manner.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 326.b. under these circumstances.

14.   Kilo violated Rule 903.a.(2)B. because it has failed to obtain a successful MIT on the Well in a timely manner.  In accordance with Rule 523., the base fine is Ten Thousand dollars ($10,000) for the violation of Rule 326.b.(1) under these circumstances.

15.   Base fines attributable to the Rule violations at the Well are set forth below, based on the maximum penalty per rule violation:

16.   Kilo violated Rule 706. because it has not posted the required financial assurance for the Well.  The $5,000 bond posted by Kilo for the Well should be claimed and the funds used to plug and abandon the Well and reclaim the Well site.

17.   Furthermore, Rule 525.b. provides that whenever the Commission or the Director has evidence that an operator is responsible for a pattern of violation of any provision of the Oil and Gas Conservation Act (§34-60-101, et seq.) (the “Act”), or of any rule, permit or order of the Commission, the Director shall issue a notice to the operator to appear for a hearing before the Commission.  If the Commission finds after such hearing, that a knowing and willful pattern of violation exists, it may issue an order which shall prohibit the issuance of any new permits to the operator.

18.   That a knowing and willful pattern of violation exists because Kilo has failed, for more than one year, to perform the abatement and corrective actions required by the NOAVs.  Until any fine assessed under this action is paid in full and all required abatement and corrective actions are performed by Kilo for the Well, the Director should not approve any application for permit-to-drill, any Certificate of Clearance and/or Change of Operator, Form 10, or other permit for conducting oil and gas operations for Kilo or any entity of which Daniel Morris is a principal, majority owner, operational or general manager, or in which Mr. Morris otherwise exercises control.

19. Payment of the fine pursuant to this Order should not relieve the operator from its obligations to complete corrective actions set forth in the NOAV, as may be amended or modified by COGCC Staff.

20.   Kilo, or its successors or assigns, should be required to remain responsible for complying with this Order, in the event of any subsequent sale of property.

21.   On May 16, 2011, this matter was considered by the Commission.

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

23.  The Commission has jurisdiction over the subject matter embraced in said Notice, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act.

24.   At hearing, COGCC Staff made an offer of proof in support of the proposed Order Finding Violation, summarizing the key factual findings described above, and proposing a total base fine of $70,000 payable within 30 days of the entry of the order.

25.  A representative from Kilo, namely, Daniel Morris, acknowledged receipt of the Notice of Order Finding Violation, and expressly waived any jurisdictional objection based on the Commission’s consideration of this matter on May 16, 2011.

26.   The Commission should accept the recommendation of the COGCC Staff in this matter.

ORDER

NOW, THEREFORE, IT IS ORDERED, that Kilo should be found in violation of Rules 308A., 308B., 309., 316B., 319.b., 326.b., 706., and 903.a.(2)B., for oil and gas operations at the Keg #1 Well, located in the NW¼ NW¼ of Section 22, Township 33 North, Range 12 West, N.M.P.M., for those acts alleged in this Order.

IT IS FURTHER ORDERED, that Kilo shall be assessed a total fine of Seventy Thousand dollars ($70,000) for the Rule violations set forth above, which shall be payable within thirty (30) days of the date the order is approved by the Commission.

IT IS FURTHER ORDERED, that a knowing and willful pattern of violation exists because Kilo has failed, for more than one year, to perform the abatement and corrective actions required by the NOAVs.  Until any fine assessed under this action is paid in full and all required abatement and corrective actions are performed by Kilo for the Well, the Director shall not approve any application for permit-to-drill, any Certificate of Clearance and/or Change of Operator, Form 10, or other permit for conducting oil and gas operations for Kilo or any entity of which Daniel Morris is a principal, majority owner, operational or general manager, or in which Mr. Morris otherwise exercises control.

IT IS FURTHER ORDERED, that this Order does not relieve the operator from undertaking and completing abatement or corrective actions that may be required by the Notice of Alleged Violation described above, or any amendments or modifications thereto specified by the COGCC Staff.

IT IS FURTHER ORDERED, that the COGCC Staff is authorized to claim $5,000 plugging/abandonment and reclamation bond posted by Kilo to defray the expenses associated with plugging, abandoning and reclaiming the Keg #1 Well and well site.

IT IS FURTHER ORDERED, that the COGCC Staff shall plug and abandon the Keg #1 Well and perform any necessary reclamation of the well site, and supplement those costs associated with the plugging with funds from the Oil and Gas Conservation and Environmental Response Fund as may be necessary.

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 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   25th   day of May, 2011, as of May 16, 2011.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                                    OF THE STATE OF COLORADO

                                        By                                                                            

                                                                                                Robert A. Willis, Acting Secretary

Dated at Suite 801

1120 Lincoln St.

Denver, Colorado 80203

May 25, 2011