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Companies used scheme to shift liability for orphaned wells onto Colorado, lawsuit claims

Signs near an abandoned oil rig are seen on Aug. 12, 2022, in Adams County. (Olivia Sun, The Colorado Sun via Report for America)
Denver-based HRM Resources acted as a middleman, moving wells from larger companies to smaller ones that went bankrupt, lawsuit says

A rusting orphan well sits at the end of Cindy McCormick’s driveway. She passes it when she goes out and when she comes home – a horsehead pump jack, a dilapidated shed, big weather-stained tanks and a pit.

The old oil and gas site has become a dumping ground attracting mattresses, couches and an old foosball table. The sign on the well pad located in unincorporated Adams County identifies the owner as Painted Pegasus Petroleum LLC – a bankrupt Texas company.

It is just one orphan well among an estimated 1,800 in Colorado, but a lawsuit filed in Adams County District Court contends it is part of a large, fraudulent scheme to dump old, played-out wells onto the state.

Adams County leads the state in orphan wells with 318. “It is a serious concern for the county and a growing concern as the number keeps increasing incrementally,” said Gregory Dean, the county’s oil and gas administrator.

The lawsuit, in which McCormick and her husband, Ronald, are among the plaintiffs, focuses on Denver-based HRM Resources LLC, which was the recipient of hundreds of low-producing oil and gas wells from some of the state’s largest operators.

The average production for these wells was the equivalent of two barrels of oil a day or less, according to the complaint. HRM then transferred the wells to smaller companies, such as Wolverine Resources and Paint Pegasus, that went bankrupt.

“As of June 30, 2023, over 40% of all wells that were listed in Colorado’s Orphaned Well Program’s Fiscal Year 2022-2023 Annual Report had previously passed through HRM’s ownership,” the lawsuit said.

An abandoned pump jack in Adams County on Aug. 12, 2022. (Olivia Sun, The Colorado Sun via Report for America)

“The focus is on HRM because they’re the middleman company,” said Camille Sippel, an attorney with the nonprofit environmental law firm ClientEarth, which along with two other law firms, Richards Carrington and Borison Firm, is representing the plaintiffs.

“When they get these wells from the larger oil companies, they have a good idea of how much is left in the wells,” Sippel said. “They operate them for a little while and sort of figure out what to do with them next.”

“We started to look at this pattern, basically transferring wells to companies that would end up going bankrupt,” she added.

HRM Resources did not respond to email and telephone requests for comment.

In the case of Painted Pegasus, the lawsuit contends that HRM went a step further, in essence working with a shell company to accept 200 wells.

HRM transferred the wells to Painted Pegasus, which was based in Houston, in September 2018 and then Painted Pegasus filed for bankruptcy in November 2021.

The complaint contends that Painted Pegasus “was structured to go bankrupt and wash away HRM’s liabilities … Painted Pegasus was a mere dumping ground.”

When Painted Pegasus collapsed, 196 wells were added to the state’s orphan well list, 188 of them in Adams County.

In its bankruptcy proceedings Painted Pegasus attributed its financial problems to the closing of an old gas gathering system in Adams, Arapahoe and Denver counties, but the lawsuit contends the company received the HRM wells after the pipeline system was closed.

When Cindy and Ronald McCormick bought the 39-acre parcel with the Painted Pegasus well on it in 2020, they were told the well hadn’t been in production in seven years and that it was going to be plugged and the tanks and pumps removed.

When Ronald planned the driveway to the home the couple was building on the property – the house was located at the furthest well – he met with men who identified themselves as Painted Pegasus representatives. He was assured steps would be taken to clean up the site.

“And then we heard nothing, and nothing was being done,” Cindy McCormick said. She started calling the telephone number on the Painted Pegasus sign at the well, but the mailbox was full.

After a few months of trying, McCormick contacted Adams County and learned that the wells had been orphaned and that it could be years before the state’s Orphan Well Program got around to plugging the well and remediating the site.

“We thought we did our due diligence, but we never imagined this,” McCormick said. “More people need to know what is going on. It is a real eye-opener.”

For Adams County, orphan wells have been a big problem. Since July 2021 there have been 75 leaks and spills from orphan wells and 92% of the orphan well sites checked by county oil and gas inspectors were out of compliance.

The lawsuit is seeking monetary damages. HRM currently has no active wells, according to the Colorado Energy and Carbon Management database, and in the last four years produced the equivalent of 550 barrels of oil.

The company has been financed by Los Angeles-based Kayne Anderson Capital Advisors, which according to its website manages $34 billion in investments, many in niche areas including oil and gas fields. The company is mentioned but not named as a defendant.

The complaint does name John Hutson, HRM’s CEO, and John Hoffman, the former CEO of Painted Pegasus.

While two plaintiffs are named, the McCormicks and Trupp Land Management, it has been filed as a class-action lawsuit for many other landowners who have been impacted by HRM.

“We do know there are probably over 100 landowners and lessees,” Sippel said.

Read more at The Colorado Sun

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