K.P. Kauffman faces big bond bill as Colorado regulators find $133 million is needed to properly close 1,089 wells

Original Story Published in the Colorado Sun – See it Here

K.P. Kauffman, the embattled oil and gas operator plagued by violations and threatened with a shutdown, must come up with $133 million to assure 1,089 of its wells will be properly plugged and abandoned, the Colorado Energy and Carbon Management Commission ruled Thursday.

The ECMC, formerly the Colorado Oil and Gas Conservation Commission, rejected the company’s estimates for plugging and remediation as inadequate.

“I am not sure the operator submitted an application in the spirit that we adopted the financial assurance rules,” Commissioner Karin McGowan said.

The company, known as KPK, said it will challenge the ruling. “KPK is exploring all administrative and judicial options for relief,” the company said in a statement, adding that it was disappointed in the decision.

KPK has 90 days to post 10% of the total amount, $13.3 million, adding another 10% each year for the next 10 years. The $133 million financial requirement is more than three times as much as the company proposed.

“If the commissioners’ order were to stand, KPK would be the highest-bonded oil and gas operator in the U.S.,” the operator said.

KPK’s attorney John Jacus said the company is a “cash-flow business” operating on narrow margins. It has already said it cannot afford to pay a $2 million fine levied by the ECMC, which regulates oil and gas operations.

“We have 90 days to meet it or we won’t,” Jacus said, at the outset of a three-day hearing on KPK’s financial assurance plan that ended Thursday.

Under the state rules, among the ways an operator can meet its financial assurance requirements are through a cash bond, surety bond, a letter of credit, an escrow account, or a third-party trust fund.

“We don’t have the liquidity to write a check for financial assurance in whatever your amount,” Jacus said.

If the company fails to post the required amount it will be referred for an enforcement action, ECMC spokeswoman Megan Castle said.

This is not KPK’s first go round with state regulators

KPK, which operates 1,200 mostly low-producing oil and gas wells, is no stranger to ECMC enforcement actions.

In May 2021, it was ordered to shutdown 87 wells and clean up 29 sites after a string of violations, including fouling a farm field and covering the road in front of Frederick High School with oily waste.

KPK then agreed in November 2021 to a settlement with the ECMC for a comprehensive cleanup of spills and releases from wells, tanks and flowlines at 79 sites, and resolving 20 violations. The agreement also allowed the company to pay only a fraction of a $2 million fine.

By February, the ECMC, frustrated by the lack of progress on the sites, reimposed the $2 million fine and told KPK to halt selling oil and gas. The company filed a lawsuit in Denver District Court challenging the order and was granted a stay on penalties pending a trial.

The financial assurance decision by the commissioners, the company said, “is the latest in a series of rulings in which KPK has been treated differently and more harshly than other operators.”

In its financial assurance application KPK had proposed $43 million to meet its obligation. The bulk of that came from an estimate of about $32,000 to plug each well.

The ECMC staff and municipalities of Frederick and Dacono, which had intervened in the case, agreed on that figure. The town of Frederick has 108 KPK wells and locations, the city of Dacono has 64 KPK wells.

The dispute was over how much it would cost to remediate and reclaim all of KPK’s open remediation projects.

KPK estimated it needed an extra $2.9 million to remediate 109 sites. The ECMC staff called that sum “woefully inadequate” and by its estimate $24.3 million was needed to cover 149 sites, as KPK had undercounted the number of sites.

As part of its $43 million estimate, KPK was including $7,800 for reclamation work around each well site, but expert witnesses for Frederick put the cost for the sites in town at an average of $55,000.

The state’s financial assurance rules allow an operator to avoid the more prescriptive financial requirements if it can demonstrate that its actual costs for plugging and abandonment are lower.

KPK opted for this approach, but the ECMC found the company’s numbers were more estimates than actual costs for previous plugging projects.

“These are numbers that don’t pass the smell test,” Commissioner Michael Cross said. KPK also relied on plugging costs by another operator, Helena Resources, which Cross said was “both lazy and inappropriate.”

Helena Resources also filed a letter protesting the use of its data. “Helena Resources did not authorize, and was not aware of KPK’s apparent use of our … data and information,” the letter said.

Commissioner John Messner said KPK’s assumption that it would not need topsoil in reclaiming many of its sites “doesn’t pass the red face test nor industry standard operating procedures regarding reclamation.”

The commission, however, said it did not believe that the ECMC staff or Frederick had met the burden of proof for their estimates either.

“Which is it, grossly overestimated or grossly underestimated?” Commissioner Brett Ackerman asked. “Holes could be poked into everything,” Cross said.

That left the commission going to the default, which is a standard estimate developed by the ECMC based on the costs it has incurred in its orphan well plugging program — an average of $30,000 for plugging and $100,000 for reclamation.

The plugging costs vary with the depth of the well. The KPK financial assurance plan covers 1,089 of the company’s 1,200 wells.

“The Energy and Carbon Management Commission made the right decision,” Frederick Mayor Tracie Crites said in a statement. “We hope the decision in this case will lead to operators to commit to stronger financial assurance planning and fewer orphaned wells throughout the state of Colorado.”