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Colorado drops a record fine on bankrupt operator for abandoned gas wells

Colorado oil and gas regulators are poised to set a dubious record next week when nearly $1 million in fines will be levied against a company for essentially abandoning eight gas wells in Rio Blanco County. But state officials never expect to see a penny from the now-bankrupt operator.

The board of the Colorado Oil and Gas Conservation Commission (COGCC) — the state agency that oversees drilling operations in Colorado – next week will consider a staff recommendation of $940,000 in fines against West Hawk Energy, an Englewood, Colo.-based company that filed for Chapter 11 bankruptcy protection in 2008.

“We found that the wells had been drilled but not completed and they hadn’t been shut in or temporarily abandoned according to our rules,” said COGCC Field Inspections Manager Margaret Ash. “Interim reclamation hadn’t occurred, so there were multiple violations there. A couple of the sites had drilling pits that remained … unused equipment, chemical storage. There was a whole list of violations.”

If the COGCC board signs off on the $940,000 fine amount at its monthly hearing in Broomfield Sept. 19-20, it will shatter by a wide margin the old record for the highest fine ever levied in an oil and gas enforcement case in Colorado. The old record was $423,000 assessed to Williams Companies Inc. in the infamous case of an outfitter who guzzled benzene-tainted well water.

In the Rio Blanco County case, COGCC Director David Neslin said the mineral owner Puckett Land Company and its lessee Encana Oil and Gas have agreed to plug the wells and do all the surface reclamation, so the state will incur no costs. Neslin added it’s important to resolve the West Hawk case to get some closure and to guard against future violations.

“We will ask for an order that essentially precludes [West Hawk] and their principals from getting additional permits from the commission in the future,” Neslin said. “It’s unlikely that we’ll receive payment of this fine, either from West Hawk or from a bankruptcy court.”

Had the mineral rights owner and another operator not agreed to pay for reclamation, Neslin said there’s a dedicated mill levy that all oil and gas operators in the state pay that funds such cleanup efforts. Operators also post a bond that would be forfeited, and then the mill levy fund covers any additional costs.

The COGCC works with operators, first to get them to pay for cleanup costs and then to negotiate settlement agreements if the staff determines fines are in order. The process can be very time consuming as field inspectors conduct sometimes lengthy investigations to determine fault.

Calgary-based Encana, which initially farmed out the wells to West Hawk in 2006, for years was the record-holder for the highest fine amount in the state. The company in 2004 was hit with a $378,000 fine for a faulty well that leaked highly flammable compounds into West Divide Creek in Garfield County.

Neslin said that besides ensuring West Hawk or its principals never drill in Colorado again unless they resolve outstanding fines, it’s also important for the state to work through its backlog of old enforcement cases – a top priority since the beginning of last year.

At the beginning of July in 2010, the COGCC had 48 enforcement cases that were more than a year old – some of them dating back to 2006. After its May hearing this year, the agency had reduced that number to just a dozen outstanding cases dating back to before 2010.

Heading into next week’s hearing, the COGCC is down to just one old enforcement case.

“We’ve made a lot of progress,” Neslin said. “We’re down to one matter that predates 2010 at this point, and it dates from 2008.”

But catching up on old fines is one thing, levying new ones is an entirely different matter. A Denver Post analysis this week found that the recent uptick in drilling operations across the state has “resulted in spills at the rate of seven every five days — releasing more than 2 million gallons this year of diesel, oil, drilling wastewater and chemicals that contaminated land and water.”

The Post also reported companies have admitted 343 new spills so far this year and more than 1,000 since August of 2009. Statewide that’s more in the last two years than a sportsmen’s group uncovered in the Piceance Basin of northwest Colorado over the course of a decade. Some have compared spills and leaks in Colorado to a slower, steadier onshore version of BP’s Gulf Horizon spill in the Gulf of Mexico last year – a situation that apparently is being repeated.

And critics complain that the COGCC does a poor job of publicizing its enforcement actions in Colorado, posting the information on its website but not putting out press releases in the case of significant fines. The West Hawk fine, despite its eye-popping size, was not disclosed in a press release.

Follow David O. Williams on Twitter.

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