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State on the hook to clean up orphan oil and gas wells in La Plata County

Project is one of largest in Colorado

Two oil and gas companies that abandoned more than 50 wells in La Plata County have put Colorado regulators on the hook for one of the largest cleanup projects in the state.

“This is a fairly unusually large abandoned set of wells to be inheriting, and as far as the number of wells, it’s currently our largest project,” said Todd Hartman, spokesman for the Colorado Oil and Gas Conservation Commission.

Recently, the Colorado Oil and Gas Commission revoked the bond of Atom Petroleum LLC, a Texas-based company with a long history of running into trouble with the state agency responsible for regulating the oil and gas industry.

However, the $60,000 bond the state revoked from Atom will cover only a fraction of the cleanup cost, leaving uncertainty about where the money will come from to “plug and abandon” the wells, the term for a complete remediation.

“What we are doing is trying to focus on the most urgent needs and taking care of those first,” said Dave Andrews, COGCC’s engineering supervisor for the Western region. “But we’re running out of funding.”

An abrupt bankruptcy

The first well searching for oil in Redmesa was drilled in 1924 in the dispersed community on a sprawling mesa near the Colorado-New Mexico border about 30 miles southwest of Durango.

While some oil and gas development occurred in the mid-1950s, the majority of wells in the Redmesa field were drilled and completed in the early 1980s, according to state documents.

However, this most recent conflict began in 2006, when now Greenwood Village-based Madison Companies sought to take over the field from its previous owner, paying an estimated $11 million for the company’s assets.

In 2007, Madison Companies named Red Mesa Holdings LCC as its operator for the field, which quickly hired about 10 local employees and set up a small office in the unincorporated community of Marvel, central to the Redmesa field.

Representatives with Madison Companies and Red Mesa Holdings declined to comment for this story.

According to state documents, an inspection in fall 2014 prompted the COGCC to send a warning notice and a list of corrective actions to Red Mesa Holdings after it found 17 wells had fallen into a state of disrepair.

Over the ensuing months, state regulators and Red Mesa Holdings battled over the number of wells that actually needed a fix, with the COGCC ultimately ordering the company to provide about $250,000 to pay for the cleanup.

On March 13, 2015, Red Mesa Holdings abruptly declared Chapter 7 bankruptcy, a fast track to bankruptcy wherein a company’s assets are sold off in an effort to compensate debtors, rather than setting up a repayment plan.

For the state of Colorado, that meant it would likely have only Red Mesa Holdings’ estimated $70,000 bond to address the company’s 60-plus ownerless wells in an oil field considered, at best, antiquated.

In filings to the state, Red Mesa Holdings claimed a “draconian drop in oil prices” hurt its ability to stay financially afloat. The state’s demands only levied an “insurmountable burden,” it claimed.

According to financial statements to the state, Red Mesa Holdings did see a significant drop in its profits from oil extracted in the Redmesa field. In the first quarter of 2011, the company sold nearly $243,000 worth of oil.

Yet in the third quarter of 2014 – Red Mesa Holdings’ last financial filing with the state – the company reported it sold only $110,219 of oil.

Failed follow-through

In spring 2015, the COGCC revoked Red Mesa Holdings’ approximately $70,000 bond. But not too long after that, the state received word from another operator that was interested in taking over operations at the Redmesa field, Andrews said.

The state granted Texas-based Atom Petroleum LLC limited ability to start work in the oil field, essentially to allow the company to see if it actually wanted to take over an oil field past its heyday.

“But Atom ended up not holding up their end of the bargain,” Andrews said. “We asked them to do some things that they didn’t get done, and that change of operator never occurred.”

In fact, investigations found Atom began operating and extracting oil from the wells without first getting permission from the state.

When called out on the illegal operations, Atom representative Tom Stover assured state officials that all wells had been closed. That same day, the COGCC sent Stover video of one of his company’s wells in operation.

Representatives for Atom did not return calls seeking comment for this story. A “Hoshi Energy LCC” is also implicated in the matter, yet the COGCC did not have information about the company, which is not a registered operator with the state. Attempts to track down representatives with Hoshi Energy were unsuccessful.

“The gravity of Atom’s failure to cease operation of the pumping unit was severe,” the state said at that time.

The COGCC sent a “cease and desist order” to Atom to shut down all its operations, and it ultimately fined the company nearly $240,000 for neglecting the state order.

To date, Atom has failed to pay the remaining $90,000 of the fine, which caused the state last year to revoke the company’s right to operate in Colorado. Hartman said some of the money Atom did pay goes to addressing orphan wells, but the funds also go to other environmental matters.

For the most part, the state has to rely on a $60,000 bond Atom had posted, nowhere near what it would take to clean up the oil field, Andrews said.

“We have a lot of wells out there and limited resources,” he said.

‘Plug and abandon’

When an oil and gas operator defaults, such as the case in Redmesa, the state inherits its assets and is required to “plug and abandon” the site if there is no viable company to take over.

Yet the state’s ability to complete these actions has been chronically underfunded and a source of statewide debate after an unrefined petroleum industry gas line leaked near a house in Firestone, causing it to explode and kill two people. The incident sparked a call for tighter safety regulations on the oil and gas industry.

Every year, the Colorado Legislature allocates about $445,000 to plug what are known as orphan wells – wells that have no known operator, or simply owners who do not have the means to plug the well.

But that amount can cover only about 10 projects a year. And with up to 800 orphan wells throughout the state, many have called for a new source of funding to address the widespread issue.

“Whether it is contaminated water and soil, methane and other emissions from unplugged well bores, reclamation of the well site or simply removing the abandoned junk left by bankrupt operators, the impacts are both to our environment and to our pocketbooks,” said Bruce Baizel, energy program director with Earthworks, an environmental nonprofit.

In response to the Firestone explosion, Gov. John Hickenlooper proposed seven directives to address risks associated with oil and gas operations, one of which was the “creation of a nonprofit orphan well fund to plug” orphan wells.

Hartman said discussions are ongoing about how this fund may work, and that it is too early to provide details. It may be a hard-to-come-by consensus because many oil and gas operators already feel the pinch from regulations.

“It’d be nice if the money paid for fines comes back to communities where they have orphan wells,” said Christi Zeller, executive director of Energy Council, a nonprofit trade organization that represents the oil and gas industry.

Future work

In the meantime, the COGCC can work only within its means. Andrews said the sites in Redmesa have been prioritized, and the commission will continue to chip away at the list as funding becomes available.

This fall, the COGCC hopes to plug and abandon a well tucked deep in the remote Third Canyon and then temporarily seal another well that is leaking gas near Fort Lewis Elementary School.

After that, Andrews said bond money left by Red Mesa Holdings and Atom will be used entirely, and the COGCC will have to depend on that state-allocated fund, which is already spread thin among other sites throughout the state.

Throughout the Redmesa field, oil and gas regulators found methane leaks, possible threats to ground water, and evidence that nearby landowners are tapping into wells, a risky endeavor.

“Just like an abandoned building, if you don’t take care of it, other issues can arise,” Andrews said. “And for a situation like this, where you essentially have an idle operation, we don’t want it going on forever.”

jromeo@durangoherald.com

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