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When gas wells are sold to small companies, can new owners afford the cleanup costs?

Some fear the transfer of wells to smaller operators increases the risk they will be orphaned
Oil and gas activity in Rio Blanco County on Feb. 23, 2020. (William Woody/Special to The Colorado Sun)

While a bunch of aging Rio Blanco County wells haven’t moved a whit, or produced much oil and gas, their corporate address has jumped in the last six years from Kansas to Texas to Highlands Ranch.

Owner 1: Koch Exploration was located on the sprawling Wichita, Kansas, campus of Koch Industries, the privately-held conglomerate with an estimated $115 billion in annual revenue.

Owner 2: 31 Operating, a small company that has run afoul of Colorado oil and gas regulators, has a registered address in a Rockwall, Texas, strip mall that counts as tenants a mailbox rental center, a coin dealer and a smoothie shop.

Owner 3: KT Resources, incorporated in Colorado in 2021, is seeking to obtain the wells from 31 Operating. Its registered address is a home on the 16th green of the Highlands Ranch Golf Club.

The shuffling of old and low-producing wells, such as those in Rio Blanco County, increases the risk that they will eventually be orphaned and left for the state to clean up, state regulators and environmental groups worry.

“It starts to look less like a legitimate transfer and it looks more like an attempt to insulate the wealthier company from future environmental liability,” said Kate Merlin, an attorney with the environmental group WildEarth Guardians.

A 2018 Colorado Oil and Gas Conservation Commission task force, for example, looked into two companies – Benchmark Energy and Red Mesa Holdings – whose wells ended up in the state’s orphaned-well program, which cleans up abandoned well sites that have no solvent owner. The program is funded by industry fines and fees.

The group found that the performance of the companies “illustrated a pattern of transfers from larger, well-capitalized operators to those with fewer financial resources as production from the wells tapered off.”

Benchmark left the state with more than 40 wells to clean up; Red Mesa left 52.

Still, the oil and gas commission does not get involved in private transactions between companies, COGCC director Julie Murphy said. “I don’t know that we could, quote unquote, reject a transfer.”

It can just set financial assurance conditions, that the operator meet state bonding requirements to set aside money to cover well cleanup costs, she said.

The commission has spent a year trying to strengthen those rules and to increase the scrutiny of transfers involving low-producing wells. The latest draft rules are the focus of hearings now underway.

Of the 52,000 total wells in Colorado, 20,349, based on state data, produced less than the equivalent of 2 barrels (BOE) of oil and gas per day in 2020 – an amount considered uneconomical to operate.

The commission has used production of 5 BOE a day as a marker for “relatively unprofitable assets” that pose a heightened risk of becoming orphaned if transferred in large volumes.

It is these wells that are the target of the COGCC’s rule overhaul – wells like 31 Operating’s, none of which have produced oil or gas in more than a year.

From Koch Exploration to 31 Operating to KT Resources

31 Operating was incorporated in Delaware in May 2016, soon registering in Louisiana, Wyoming, Texas and North Dakota – where it is not in good standing.

It registered in Colorado in February 2017. Eight months later, it acquired Koch Exploration’s Colorado assets, 274 properties that include pits, a tank battery and 151 gas wells that dotted shrubland and forest in the northwest corner of Colorado, according to state records.

Most of the wells were drilled in the late 1990s and early 2000s, although some date back as far back as 1970.

That 50-year-old well, Government #1, rarely produced more than 2 BOE a day in its lifetime. Its last production, in September 2020, averaged 0.85 BOE a day. Since then it has produced no gas.

All but one of 31 Operating’s wells proposed for transfer are now shut in, meaning not producing but capable of producing if valves were opened. One well has already been officially plugged and abandoned.

At their peak around 2011 and 2012, the wells produced more than 400,000 BOE. But production declined starting around 2015. All the wells stopped producing at all after oil and natural gas prices plunged in 2020.

In November 2021, state oil and gas inspector Scott Ramsey made his way to a 31 Operating well named Wildlife 3-1. The well, drilled in 1992, sat at the edge of the Piceance State Wildlife Area, high priority wildlife habitat, home to black bears and northern spotted owls.

Ramsey found it littered with weeds and debris and the soil was eroding.

Although the well was listed as “temporarily abandoned,” it hasn’t produced any gas in more than 20 years, according to COGCC records.

In December 2020, Ramsey met a former 31 Operating worker who said wells on the site being inspected were shut, but that flow lines of fluid had not been drained.

“He also stated that all of their phone numbers had been disconnected. I called the emergency phone number at approx. 1300 hours and got NO answer,” Ramsey wrote of the worker, identified as Leven.

Oil and gas inspectors visiting 31 Operating sites found other alleged violations, including gas leaking from a master valve, holes in a water tank, gaps in the secondary containment for tanks, a liner with more than 15 holes in it, and a leak at a fluid separator and the ground beneath it stained. Debris and erosion problems were found at multiple sites.

In March 2021, another inspector, Rick Moran, found a crude oil spill at a well northwest of Meeker accompanied by an odor of hydrocarbons in the soil. The following month, Moran wrote that there was a “<<SIGNIFICANT>> gas leak” at a well nearby.

And in November 2021, Ramsey was inspecting two shut-in wells where he saw a chemical tank was not labeled and a site strewn with dead weeds.

He noticed that some labels onsite listed a new operator: KT Resources.

The registered agent for KT Resources is Karen Adams, who is listed in LinkedIn as the owner of energy consultant Roan Energy. In an email exchange with the Sun, Adams declined to comment.

31 Operating also did not respond to emails and voicemails.

31 Operating wells confiscated in North Dakota

About the same time 31 Operating acquired Koch Exploration’s Colorado assets, it began accumulating more than 100 wells in North Dakota – where state regulators took a much tougher tack.

Some of the wells had individual bonds as high as $180,000 and $200,000. In Colorado, 31 Operating has posted a total of $125,000 in bonds to cover its 151 wells.

Colorado requires a bond of $10,000 or $20,000 for a single well or a blanket bond of $60,000 for up to 100 wells. Operators with more than 100 wells can post a $100,000 blanket bond, plus a $25,000 surface cleanup bond.

The COGCC estimates it costs on average $92,700 to properly plug and abandon a well in its orphaned-well program.

Since June 2020, North Dakota has confiscated at least 39 of 31 Operating’s wells, and plugged and reclaimed them using $3.1 million in federal CARES Act funding and $1.3 million from a state orphan-well fund.

It has also received $3.6 million from 31 Operating’s insurer, the Argonaut Insurance Co. Argonaut sued 31 Operating for its losses in a Texas court. The case is pending on appeal.

The average cost to plug the company’s wells in North Dakota is $80,000 and site reclamation is another $60,000, said Katie Haarsager, spokeswoman for that state’s oil and gas regulator.

In a June 2020 hearing before the Industrial Commission of North Dakota, 31 Operating representative Kris Freeman said the company was not opposed to having some of its wells plugged but did not understand the consequences of not plugging them themselves.

“We do our best to try to keep up with and we’ve tried to comply,” he said. “We’re a small company. We’re not a mega company.”

Some of the wells 31 Operating acquired in North Dakota had been abandoned for several years and the company had not moved to put them back into production, David Tabor, a field supervisor for the state’s oil and gas division, said at the hearing.

Freeman said 31 Operating had returned several abandoned wells to production and was in the process of renting a rig just as the pandemic hit. Faced with economic uncertainty, he said, the company was not planning to plug its North Dakota wells in 2020.

Another surety company, Westchester Fire Insurance Co., sued 31 Operating in a New York court in February, alleging it had failed to pay premiums, deposit collateral and provide other information on bonds, including for assets in Colorado.

In a court filing, Cody VanderBusch, a North Dakota oil and gas representative, said the state was considering asserting a claim against 31 Operating’s bonds, adding that the company had been “generally nonresponsive with respect to its business activities,” and was not paying electrical bills.

VanderBusch told a Westchester executive he believed a “majority of 31 Operating’s wells are old, not generating oil and/or not capable of producing revenue,” according to the declaration signed by Westchester vice president Douglas Wills.

31 Operating disputed the lawsuit’s allegations in a court filing. The case is pending.

Problems in Colorado

The company is now facing problems in Colorado.

31 Operating is planning to transfer about 110 of its wells to KT Resources and filed the paperwork to do so with the oil and gas commission last year.

In September, however, the COGCC staff asked the commission to issue fines and order 31 Operating to comply with violation notices that date back as far as 2018.

If the company doesn’t respond, the staff asked that the commission bar 31 Operating from working in Colorado.

Another step would be to seize 31 Operating’s $125,000 in bonds, declare the company’s wells orphaned and sell its equipment to help pay for plugging costs.

A hearing is scheduled for March.

The transfer to KT Resources, which has already posted $235,000 in bonds, remains an option.

Megan Castle, a COGCC spokeswoman, said the commission could end up with two bonds if the wells are transferred and 31 Operating loses its right to operate in Colorado. KT Resources has posted a bond for the transfer and 31 Operating would forfeit its bond if it’s kicked out of the state.

“If one operator is in a situation where they may ... be losing their license,” Castle said, “then there is a benefit in the sense that these (wells) are going to be transferred to an operator that can maintain them versus something else.”

She added, “There’s a positive.”

The Colorado Sun is a reader-supported, nonpartisan news organization dedicated to covering Colorado issues. To learn more, go to coloradosun.com.

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