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Lawsuit accuses oil, gas companies of fraud after bankruptcy results in 200 “orphan” wells in Colorado

The land Cindy and Ronald McCormick bought for their “forever” home in the rolling hills of eastern Adams County came with a stunning view of the Front Range. It also came with an out-of-service oil well, an open pit, aging storage tanks, a dilapidated shed and a broken promise from a company to clean it all up.

After learning that the company, Painted Pegasus Petroleum, went bankrupt, leaving nearly 200 wells across the county for others to take care of, the McCormicks decided to join a lawsuit seeking damages.

The lawsuit filed by Denver attorney Christopher Carrington and attorney Camille Sippel of ClientEarth USA, an environmental law organization, accuses Painted Pegasus and HRM Resources, a Denver company that sold the wells to Painted Pegasus, of “massive fraud.”

The fraud, the lawsuit claims, consists of offloading “defunct and uneconomic” oil and gas wells and the accompanying cleanup costs to smaller companies, which many times don’t have the wherewithal to do the work. That puts public agencies and taxpayers on the hook.

HRM Resources bought the wells from Noble Energy in 2014, according to the lawsuit. Chevron bought Noble Energy in 2020.

The transfer of low-producing or inactive wells to smaller companies is part of a pattern, according to the complaint. As of June 30, 2023, over 40% of the wells in the state’s orphan well program passed through HRM’s hands, the lawsuit said.

HRM Resources didn’t respond to emails and phone messages.

Ronald McCormick met with five people from Painted Pegasus, based in Houston, in early 2020 on the land he and his wife had just bought. He said they assured him all the equipment would be removed in plenty of time for the McCormicks to build their house.

The couple never heard from the company again. Painted Pegasus filed for bankruptcy in November 2021, leaving behind 196 well sites. The sites, 188 of them in Adams County, are designated as “orphans,” meaning there’s no one but the public left to pay to cover the bill.

A 2022 memo by the Adams County administrator said the bankruptcy had resulted in “the largest single operator well orphaning in state history.” The county estimated the cleanup could cost $17 million or more, based on state estimates of what it takes to shut down well sites.

The state of Colorado has long had an orphan-well program that gets some of its money from fees on the industry. As part of an overhaul of oil and gas rules, the state Energy and Carbon Management Commission, which regulates oil and gas, created a fund that currently has $18 million and is projected to grow by about $9.5 million annually as companies pay the fees.

Colorado is expected to receive at least $79 million in grants and formula funding over the next few years through a $4.7 billion federal orphan well program.

However, the McCormicks believe the responsibility for cleaning up oil and gas wells should lie with the owners.

State rules approved in 2022 are intended to strengthen bonds and other financing paid by companies to ensure that wells will be properly shut. Critics contend the rules have too many loopholes to prevent more instances of what happened to the McCormicks.

Megan Castle, spokeswoman for the state commission, said the new rules are stringent and are designed to make sure companies fulfill their obligations.

The sale of the well on the McCormicks’ property, though, occurred before the new rules kicked in.

“How can the companies just walk away? It doesn’t make sense to me,” said Ronald, walking through the tall, dry grasses growing around the old tanks and pumpjack.

“It’s amazing how much this is happening, not just in the state of Colorado but throughout the U.S.,” Cindy said.

The couple joined the lawsuit against the companies to protect themselves and others, she said. “It should be their responsibility to cap these wells, to clean them up and not do what they have done.”

Toxic zombie wells

The lawsuit on behalf of the McCormicks and Trupp Land Management, another family in Adams County was filed in February in Adams County District Court. The attorneys are seeking to have the case certified as a class-action lawsuit and are talking to other interested landowners.

The case could dramatically shift the responsibility for the country’s more than 2 million unplugged, non-producing wells, ClientEarth said in a statement. The organization referred to “toxic zombie wells,” ones that produce little or no oil and gas but haven’t been plugged, or closed. The equipment hasn’t been dismantled and the land hasn’t been restored.

Defunct oil and gas wells can impede landowners’ ability to farm and ranch, harm wildlife, pose risks to the public and environment and can be the source of underground oil and gas leaks and air pollution, the lawsuit said.

Although the lawsuit against HRM and Painted Pegasus raises several questions, the relief sought by the plaintiffs is simple, Carrington said.

“We ask only that the oil and gas companies who come into Colorado respect the same principles that every Coloradan knows and follows when we camp, hike, and explore our beautiful state – if you pack it in, pack it out,” Carrington said in a statement.

Colorado isn’t the only oil- and gas-producing state with orphan well sites. A 2023 U.S. Geological Survey report said based on information from states, there were between 310,000 and 800,000 well sites across the U.S., but added the total is probably higher.

Carbon Tracker, a London-based nonprofit that analyzes financial issues around climate change and fossil fuels, said in a 2020 analysis the number of unplugged onshore wells nationwide totaled 2.6 million. The cost of plugging them all would be about $280 billion, the report said.

There are 1,411 orphan oil and gas sites in Colorado and 649 wells on the sites that have to be plugged according to the Energy and Carbon Management Commission. There are 111 sites on federal and tribal lands that are considered orphaned under the ECMC’s rules.

The ECMC updated financial requirements as part of a 2019 law that overhauled Colorado oil and gas regulations. The new rules took effect in April 2022 and were described by state officials as the strongest in the country.

The transfer of wells from HRM to Painted Pegasus took place before the new rules were in effect. Michael Freeman, an attorney with the environmental organization Earthjustice, isn’t sure the rules would have made a difference or will prevent similar situations going forward.

“Those rules are a regulatory Rube Goldberg machine, with numerous loopholes and many different tracks allowing companies to minimize the bonds they have to post,” Freeman said in an email.

Carbon Tracker released a report in February saying the rules made marginal improvements and while likely leading to increased financial assurances, they won’t come close to full protection for Colorado taxpayers. Rob Schuwerk, the report’s co-author and Carbon Tracker’s executive director, said the rules have too many loopholes and give the state too much discretion when reviewing companies’ financial assurance plans.

“We have seen some very, very low and unsupported proposals that the commission staff has rejected. That’s good,” Schuwerk said.

But Schuwerk contended the rules, which set different requirements based on companies’ production rates, won’t necessarily prevent the transfer of wells to an underfunded company.

Castle of the ECMC said the new rules stipulate that any transfer of wells from one operator to another will be approved only when the new owner shows that it will provide the required financial assurances.

“Similarly, ECMC will also review the financial assurance for the selling operator to ensure, even after the sale, the operator will have appropriate financial assurance,” Castle said in an email.

The commission passed the rules “to ensure that operators are responsible for the lifecycle of the well — from development to plugging and abandonment,” Castle said.

“You don’t know what’s underground”

Cindy McCormick said she and her husband didn’t hear anything about what would happen to the well and other equipment on their land until she contacted Adams County, which told her Painted Pegasus had filed for bankruptcy.

The well, which they were told hadn’t produced in years, is right on their property line. The four storage tanks are just over their property line and on their neighbor’s land. The open pit, which has wire mesh over part of it, a shed with tanks and a tower that uses heat to separate the oil and water are all on their land.

So are the tires somebody left by the equipment. Cindy said people have dumped couches, mattresses, even a foosball table near the pumpjack.

“They see all the old oil stuff and just dump it right by it,” Cindy said.

The McCormicks had to build their house near the border of their 37-acre parcel instead of near the middle like they wanted to. They wanted the house as far away as possible from the well site.

The couple had to build a longer driveway and extend their line for power farther, which increased expenses. The people putting in the power line cut a pipeline, which wasn’t on records for the property.

“You don’t know what’s underground, what kind of leakage and material are under there. From an environmental standpoint and a safety standpoint, it makes me very nervous,” Cindy said.

The McCormicks, who built their house in 2023, said they’ve been told it could be five years or longer before the oil well is plugged and the equipment removed.

“We asked the right questions and thought we were doing our due diligence,” Cindy said. “There needs to be protection, not just for us now but for the future.”

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