In a move regulators said shows they are serious about making the oil and gas industry clean up after itself, the Colorado Energy and Carbon Management Commission rejected a company’s plan for financing its cleanup costs as inadequate.
The ECMC unanimously voted against the plan by K.P. Kauffman Co. Thursday after several hours of testimony stretching over three days. The company originally proposed putting up $10.3 million to ensure it will take care of all its wells. ECMC members voted to require the company to provide roughly $133 million over 10 years.
A so-called financial assurance plan is required of all oil and gas companies under new rules approved in 2022 and are intended to ensure that operators have enough money to cover the cost of closing wells and reclaiming well sites.
Previous required bonds were seen as too low, making it easier for some companies to walk away rather than pay to plug a well, clean up the site and restore surrounding land.
“In order for us to make a statement that we have some of the strongest financial assurance requirements in the country, it is our responsibility to apply the rules in the way they were intended to be applied,” said John Messner, a commission member.
Opponents of the plan by K.P. Kauffman, or KPK, saw the commission’s decision as a test of how the rules, part of a sweeping revamp of state regulations, would be implemented. Critics, including the communities of Frederick and Dacono, argued KPK’s plan didn’t meet the requirements and was grossly underfinanced.
The ECMC staff accepted KPK’s financial plan but the commission said the company needed to post a bigger bond to clean up leaks and contamination at several sites. KPK proposed upping the bond by $2.9 million, but the staff said an additional $24 million was necessary.
In the end, the ECMC rejected both approaches after finding the analyses failed to show the proposed bonds would be enough. The commission required KPK to pay a standard per-well cost: $30,000 to close each well and $100,000 to reclaim each well site. The bond will cover a little over 1,000 wells. The company will have 90 days after an order is issued to post 10% of the overall bond.
As of Sept. 26, the ECMC had approved 151 financial assurance plans, covering nearly 38,000 wells and providing $570 million. The industry has paid fees for several years into an orphan well fund to help pay to close wells when the owner can’t or won’t or isn’t known.
K.P. Kauffman said it’s disappointed by the commission’s decision and is exploring all administrative and judicial options for relief.
“Yesterday’s decision by the commissioners is the latest in a series of rulings in which KPK has been treated differently and more harshly than other operators,” the company said in a statement. “If the commissioners’ order were to stand, KPK would be the highest-bonded oil and gas operator in the U.S.”
The ECMC has approved financial plans similar to KPK’s for other operators, the company said.
However, Jeff Robbins, commission chairman, said the decision was not influenced by the state’s enforcement actions against KPK or any legal disputes. “This is its own ball of wax.”
The company has been under state scrutiny for a while because of complaints that it has violated state regulations and not cleaned up spills and contamination. After finding KPK out of compliance with a plan to resolve the complaints, the ECMC gave the company until Aug. 1 to comply with state rules or face losing its license.
A June 30 ruling in Denver District Court put the ECMC’s order on hold until KPK’s appeal is decided. A trial is scheduled for 2024.
Municipal officials in Dacono and Frederick urged the commission to require KPK to post a much larger bond or order the company to close its low-producing, older wells in their communities. There have been spills and leaks at several well sites, they said. The wells have hindered development and posed hazards to public health and the environment, city officials told the ECMC.
“I do appreciate the relevant local governments taking the time to hire counsel and be involved in this,” Robbins said. “It’s important because they are the boots on the ground that are dealing with some of these things.”
Dacono was proud to have participated in the process and believes it helped ensure continued protection of residents of the city and the state, said Steven Louis-Prescott, an attorney representing the city. He said questions remain about KPK’s plans to close its aging wells and its ability to pay the required bond
Frederick town officials said 95 of KPK’s wells in the town are low-producing, which means they generate fewer than two barrels of oil a day. They have said the company has 17 open remediation sites in the town.
“The Town of Frederick was involved in this issue because it is uniquely impacted by legacy oil and gas wells that are now owned by KPK,” Mayor Tracie Crites said in an email. “These wells have had numerous issues, including leaks causing contamination of both soil and water.
“We hope the decision in this case will lead operators to commit to stronger financial assurance planning and fewer orphaned wells throughout the state of Colorado,” she added.
Updated Oct. 29, 2003, with information on the number of financial assurance plans approved.
Get more business news by signing up for our Economy Now newsletter.
