Earth Protect Blog

By Judith Kohler

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Larry and Mary Bosaw, who live near Fort Lupton, have something in common with municipal officials and landowners in Frederick and Dacono as well as state regulators: They want K.P. Kauffman Co. to take care of the problems created by its oil and gas operations.

The way the state tackles the problems under new rules mandated by a sweeping redo of oil and gas regulations could shape how the industry is governed going forward.

Larry, who recently retired from his construction business, said K.P. Kauffman, or KPK, responded when he called in July 2022 about an oil spill on the nearly 6-acre property where he and his wife live. The company found the problem with the pipeline, dug up and removed contaminated soil, tested the couple’s well water and dug more dirt.

More than a year later, the Bosaws have a pit more than 10 feet deep and about 40 feet by 50 feet. What they don’t have is an idea of when the gaping hole will be filled in or when they can let their neighbors use their pasture for their cattle.

“We rent the pasture and we haven’t had any income since they started doing this,” Mary said.

In a Sept. 12 email to KPK, Larry alluded to the long list of well sites the state says the company needs to clean up. He said the work on his property “would take far less effort and then you could scratch it off your list.”

While the Bosaws wait for the next steps by KPK, the company is getting even more scrutiny from state regulators and communities where it has wells.

The Denver-based, family-owned business might seem like a special case after being declared out of compliance with state regulations and threatened with losing its ability to operate. However, KPK is also considered a microcosm and a test of the system as regulators implement new rules for companies and new oil and gas wells continue to be drilled along the Front Range.

The Colorado Energy and Carbon Management Commission, which regulates oil and gas, is scrutinizing KPK’s proposal detailing its financial wherewithal to meet all its obligations under the law, a requirement for all companies. Ahead of an Oct. 24 hearing, the ECMC staff filed comments saying the company needs to allocate another $24 million to cover cleaning up 146 sites.

The communities of Frederick and Dacono, which have several KPK wells within their boundaries, want the state to make the company put more money behind its proposal or be ordered to close non-productive, uneconomical wells.

The ECMC didn’t address the cities’ request on closing the wells in an August hearing after determining it wasn’t the right forum. But Jeff Robbins, ECMC chairman, said new rules passed as part of a major overhaul of oil and gas regulations allow local governments to petition to force the closure of wells deemed no longer useful and a threat to the public or environment.

If Fredrick and Dacono invoke the rule, they would be the first local governments in Colorado to do so. Frederick Mayor Tracie Crites said the town is urging the ECMC to reject KPK’s financial plan because its proposed budget for closing wells and reclaiming well sites is considerably lower than the staff’s estimate of what it costs: roughly $130,000 per well.

In an updated proposal, KPK projects its per-well cost to plug and abandon a well, or close a well and reclaim the site, will be $42,181.

“KPK acknowledges the right of Dacono and Frederick to participate in financial assurance proceedings under ECMC rules but believes they do not have the right to demand that KPK plug and abandon wells as part of financial assurance. A separate set of ECMC rules governs plug and abandonment demands, and KPK is prepared to address their claims separately,” spokesman Paul Raab said in an email.

Depending on what happens in the Oct. 24 hearing on KPK’s plan, Frederick might petition the state to force KPK to shut down some of its wells. Crites said the town has determined that 95 of KPK’s wells in town are low-producing, meaning they yield fewer than two barrels of oil a day.

The company also has a history of spills and releases from its well sites in Frederick, the town said in a statement to the ECMC. The latest information suggests there are 17 open remediation sites in Frederick. An ongoing matter is the cleanup of a well site and tanks near Legacy Elementary School.

Crites said the town hears from developers and landowners wanting to build on their land that KPK refuses to plug old wells or wants $250,000 per well to do the work. There are at least 400 more wells owned by other companies within the town, but KPK’s sites are of top concern.

“From the town of Frederick’s perspective, in order to uphold the well- being of our community and our public health, our safety and welfare and prevent any undue financial strain to our taxpayers,” Crites said, “we’re advocating for the state of Colorado and the ECMC to reject any of KPK’s proposed financial assurance plans and mandate a plan that provides more security and protection for the welfare of our community.”

KPK has about 70 wells in Dacono and 59 of those are low producers and, in the opinion of city oil and gas experts, should all be plugged, said Steven Louis-Prescott, an attorney representing the city. About 22% of the 59 wells have had leaks or spills, based on the available data, he added.

Louis-Prescott said the city has talked to KPK about closing the wells and the company responded it would cost $250,000 for each well. Dacono is waiting to see what the ECMC will require KPK to do.

Under state regulations, smaller companies with lower-yield wells can pay over time into a fund to cover cleanup costs. Louis-Prescott said Dacono wants KPK to pay the full amount upfront so the city isn’t stuck with a bunch of abandoned wells down the road and no money to shut them down.

“The city’s big concerns are health and safety. A bond is not going to protect a spill tomorrow,” Louis-Prescott said.

Zombie, orphan wells

All oil and gas companies operating in Colorado must have financial plans. A 2019 law mandating an overhaul of state oil and gas regulations included strengthening the bonds and other financial assurances that companies must provide to cover shutting down wells and restoring sites.

The concern is the public will end up paying if companies go bankrupt or walk away, leaving what’s called orphan wells. Another worry is so-called “zombie wells” — ones that produce little or no oil or gas and whose owners don’t have the money to properly maintain or close them.

The state has an orphan well program, which uses fees paid by the industry to pay to close wells when the owner can’t or won’t. Colorado got $25 million from the federal infrastructure bill in 2022 to help cover costs.

And the ECMC approved new financial requirements in 2022 that are meant to ensure every oil and gas company can meet all its obligations under the law. The agency and supporters hailed them as some of the toughest in the country.

The rules vary, depending on a company’s size, number of wells, well depth and oil and gas production rates. Producers can put up large, multimillion-dollar blanket bonds; pay a standard per-well cost, approximately $130,000; or submit a financial plan justifying the company’s proposed expenses and bond and analyzing each well site.

KPK chose the so-called demonstrated-cost plan, and that’s the problem, critics said. Those objecting to the proposal contend the projected costs are too low. Written comments from the town of Frederick said the company didn’t follow the rules requiring a site-by-site analysis.

The ECMC said KPK has to include what it will cost to remediate several sites and will hear from the company in the Oct. 24 hearing.

Matt Sura, an attorney representing the town of Frederick, said in an August ECMC hearing that while the rules allow a company to show it can plug wells for less than the staff’s estimated cost, KPK’s plan fails to make that case.

“When the financial assurance rules were passed, the commission was right to be proud. They were truly the strongest rules in the nation,” Sura said. “However, they need to be implemented properly.”

The proposal by KPK will be the commission’s first opportunity to demonstrate what is expected if a company wants to diverge from ECMC’s cost estimates for closing and reclaiming wells, Sura said.

What does it cost to plug a well?

As KPK defends its financial plan before the ECMC, it is defending its existence in the courts. A Denver District judge granted the company’s request in June to put on hold the ECMC’s order that KPK comply with all state regulations or halt operations.

Earlier this year, regulators determined KPK had not complied with a 2021 plan requiring it to clean up sites and resolve what the ECMC staff said were multiple violations over several years. KPK had until Aug. 1 to fix the problems or face losing its license to operate in Colorado.

A June 30 ruling in Denver District Court said the company couldn’t safely shut down all its wells by the deadline and stayed the ECMC’s until KPK’s appeal of the state’s order is decided.

KPK has roughly 1,200 wells in the Denver-Julesburg basin of northeastern Colorado. The majority of the wells are low-producing.

Meanwhile, questions about KPK’s old, low- producing wells in various communities remain unresolved, too. Frederick Mayor Crites said although KPK is telling regulators it can close its well sites for thousands of dollars, it is quoting developers and landowners prices of $150,000 to $250,000 to plug one well.

“And then typically we’ll get that call from the developer or landowner to say, ‘Hey, it’s already really expensive to develop anything in the town of Frederick with your limited water resources,’ ” Crites said. “It certainly slows down development for us.”

Louis Conrad, general manager of BCL Colorado LP, knows the drill. His company is developing the subdivision Clearview Villages on 103 acres near Legacy Elementary School in Frederick and asked KPK to close two wells on the property. The development company owns the surface, but KPK has the right to mine the minerals.

“They said we can do it, but there’s a cost,” Conrad recalled.

The cost was $500,000 for each well and more money to remove some tanks. Talks continued.

“We got to $250,000 per well plus the tank,” Conrad said. “It can be even lower if you keep negotiating, but the thing is, it takes a lot of time.”

The wells are on the edge of the property, so the developer decided to leave the wells and add more green space. Construction on the 301-home project is set to start next year. Conrad figures losing the spaces occupied by the wells will result in four fewer homes.

“No big deal, but what is a big deal is that, ethically speaking, I feel it’s my duty to make sure the site looks the best for the school, the kids and our future residents,” Conrad said.

Two subdivisions developed by Community Development Group in Frederick have wells peppered through the neighborhoods. Jon Lee, the company’s executive vice president, said some of the wells in the Wyndham Hill and Silverstone developments belong to KPK. The oil and gas producer has closed some of the wells, but others are still in production.

“We have had some success at working with KPK,” Lee said. “We are working with them to try and plug as many of the old ones as we can.”

Lee acknowledged that KPK’s opening price was high, but he kept negotiating. Where the two sides couldn’t agree on closing the wells, new flowlines were installed to improve safety.

“It can be frustrating because you’re basically asking them to shut down a business that they have. They would like to get as much money as they possibly can for that business,” Lee said.

All the while, Lee understands that the barely producing wells would have never made the kind of money being paid to shut them down. But he also believes that the bigger the spaces that communities require between new homes and wells, the more incentive oil and gas companies will have to ask for more money to close up and walk away.

“We share the town’s vision that it would be nice just not to have these wells there. They’re not going to get better. They may become an environmental issue,” Lee said.

KPK spokesman Raab said the roughly $40,000 for the company to close its wells reflects internal costs. When the company plugs a well at a landowner’s request, KPK seeks market-rate compensation for the sources of economic values it gives up. Raab said the fee includes the removal of flowlines, decommissioning of tanks in some cases and environmental sampling and engineering expenses.

In the case of the Bosaws, the Fort Lupton couple, Raab said KPK is ready to fill in the hole once additional soil samples are collected.

He said the couple’s property is one of several sites KPK has been ready to backfill pending the ECMC’s approval, which he called “unreasonably delayed” by questions about levels of naturally occurring metals in the soil.

For its part, the ECMC sent KPK a notice Sept. 29 saying its remediation plan for the Bosaws’ land doesn’t comply with state rules.

The Bosaws left for vacation in September not knowing what they would return to.

“They were just supposed do one hole. Before you know it, it was big,” Mary said. “And I know it’s going to get bigger. That’s what really bothers me.”