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A ‘convoluted train wreck’: Natural gas project goes bust in SD

State, landowners potentially saddled with 40 idled wells near Buffalo

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BUFFALO | On Ray Gilbert’s land Tuesday in northwestern South Dakota, the rainwater that was pooled up on a natural gas well was fizzing and bubbling.

Gilbert took it as a sign of leaking gas.

“This is probably not a big deal right now,” he said. “But I think it’s probably going to become a problem.”

The idled well is one of 40 that were drilled from 2006 to 2010 among the grassy plains and buttes near the town of Buffalo. The project was undertaken by a Texas company, Spyglass Cedar Creek LP, which eventually partnered with New Frontier Energy Inc., of Colorado.

When Spyglass began the project, the San Antonio company boasted $22 million in financing. But after a series of calamities including a drop in natural gas prices, a lender’s bankruptcy, at least four lawsuits and a tax-fraud indictment against a New Frontier executive, the project fell dormant. Gilbert said he has not heard from officials with either company in several years.

Meanwhile, a former Spyglass official has allegedly cashed out a $20,000 certificate of deposit that the company was required to post as a bond, leaving state regulators with only $9,850 in remaining bond funds to deal with the 40 wells, each of which could cost an estimated $30,000 — or $1.2 million in total — to plug. State government, and therefore ultimately taxpayers, could get stuck with that cost unless the project is somehow put back into production.

Any sympathy for state government might be misplaced, however, because the state has received nearly $800,000 in royalties from the project. The state's Office of School and Public Lands has mineral rights at 27 of the 40 wells, making one state office a beneficiary of a project that another state office is tasked with regulating. 

State Sen. Ryan Maher, R-Isabel, whose district includes the Harding County landowners affected by the project, worries that the state may try to shift responsibility for some of the dormant wells to landowners who possess surface rights at well sites but, in some cases, do not own the mineral rights.

"I think the state has 100 percent responsibility in this and has a responsibility to clean up and make the landowners whole," Maher said.

Last month, the state Department of Environment and Natural Resources commenced revocation proceedings against the project’s permits. The revocations will occur automatically if Spyglass does not respond by Aug. 31; or, if Spyglass responds by then, a public hearing will be conducted in October by the state Board of Minerals and Environment.

Officials with the DENR are equating the revocation proceedings to a court case and are declining to answer most questions about the project, citing a policy against commenting on pending litigation. Nobody outside the DENR seems to know what will happen to the wells after the revocation proceedings conclude.

Out in the pastures of Harding County, the wells range from 1,450 to 5,972 feet in depth. Above the surface at each well site, the pipes and other well workings are mostly concealed by small structures resembling port-a-potties. A network of underground pipes exists to collect gas from the wells and transport it to a pipeline and on to the market.

Besides the anecdotal evidence of leaking wells noted by Gilbert and other landowners, public documents show the DENR has also detected leaks during inspections. If nobody is going to operate the wells, plugging might be necessary to stop the leaks and keep the gas in the ground.

Daniel Soeder, director of the Energy Resources Initiative at the South Dakota School of Mines & Technology in Rapid City, said leaks from natural gas wells contain methane, which is flammable and is a greenhouse gas. If there are problems under the surface, he said, the gas could spread into groundwater. 

“Leaking methane is always bad,” Soeder said.

Boom before bust

The project’s current status as a bust contrasts with the boom mentality that brought it into being. In 2007, the fledgling effort received a jolt from $22 million in financing provided by CIT Group Inc. Of that amount, Spyglass used $2.75 million to buy out another company’s interest in the venture.

March Kimmel, a Texas-based founder and general partner of Spyglass, predicted a bright future for the company.

“With the successful completion of this financing,” he said in a 2007 news release, “we will take advantage of every opportunity to expand our business and position Spyglass Cedar Creek LP as a more widely recognized and prominent player in the oil and gas arena.”

Despite Kimmel’s optimism, misfortune was quick to strike. Less than a year after the financing deal was announced, the lender, CIT Group, fell victim to the nationwide financial crisis. CIT Group received a $2.3 billion bailout from taxpayers in 2008, but even that could not save the company, and it filed for and emerged from bankruptcy in 2009.

Natural gas prices were plummeting at the same time, and by 2011, Spyglass was behind on its debt. CIT Group sued Spyglass in March 2011 for $17.36 million.

The lawsuit ended in December 2011 with a settlement that brought in New Frontier Inc., of Denver, to take over the debt in exchange for primary ownership of the project while partnering with Spyglass to move the project forward.

The relationship between Spyglass and New Frontier soured quickly. By February 2013, New Frontier sued Spyglass, claiming that Spyglass owed New Frontier $17 million of the original CIT debt. That lawsuit was filed in South Dakota, and Spyglass responded two months later with its own lawsuit in Texas, accusing new Frontier of violating numerous terms of the deal between the two companies.

While those lawsuits were pending, the CEO of New Frontier, Samyak Veera, of Singapore, was indicted in October 2013 with four other defendants by a federal grand jury in Pennsylvania for allegedly evading $200 million worth of corporate taxes.

A 2013 press release from the Department of Justice said the tax scheme consisted of "purchasing companies with taxable gains and using fraudulent losses to wipe out the gains. The defendants then allegedly pocketed the corporations’ cash, filed fraudulent returns, and, in some instances, fraudulently sought and obtained refunds from the IRS for prior years.”

Although at least two defendants in the case have since been convicted and sentenced, the outcome of the charges against Veera is unclear, and repeated inquiries last week to the U.S. attorney’s office for the District of Eastern Pennsylvania were not answered by the time of this story’s publication.

In June 2014, Spyglass and New Frontier made a deal to end their lawsuits against each other and once again try to move forward on the South Dakota project.

But that deal also fell through, and by October 2015 Spyglass had filed another lawsuit against New Frontier and associated defendants. Among other things, Spyglass accused New Frontier of violating a non-compete agreement by acquiring other oil-and-gas interests, and of never officially finalizing the paperwork for the deals between the companies.

That lawsuit ended in November 2017 when both companies asked for a dismissal, without publicly disclosing the terms of any private agreement they may have struck.

Bond slips away

During the years that Spyglass and New Frontier were battling each other in court, the South Dakota Department of Environment and Natural Resources was watching and waiting. In 2014, the department agreed to temporarily suspend any enforcement actions against Spyglass and New Frontier while the companies worked to settle their disputes.

During the past several years, records disclosed by the DENR include a series of letters from the department to March Kimmel, of Spyglass, informing him of numerous compliance problems with the Spyglass wells. The letters warned Kimmel that the department could require require plugging of the wells, revoke the project’s permits, require additional bonds, levy penalties of $500 per day for each compliance violation (which the department said could add up to “tens of millions of dollars”), file a lien against Spyglass, or capture the bonds posted by Spyglass.

Kimmel and Spyglass were sometimes unresponsive, DENR records indicate, although there is a March 2017 letter from Kimmel in the DENR's files.

"Although mostly created by groups/people not under our control I do sincerely regret that this situation has caused so much trouble for everyone," Kimmel wrote. "I look forward to trying to rebuild this project and having a long-lasting, good relationship with you, and the State of South Dakota."

Last week, the DENR declined to say whether it took any of the potential actions it listed in the letters to Spyglass, other than the recently instigated permit-revocation proceedings. Public documents filed July 10 by the department say that on July 6, the South Dakota Attorney General's Office was notified that former Spyglass official Kevin Sellers, of Texas, had two years earlier cashed out a $20,000 certificate of deposit at a Texas bank that Spyglass had submitted as a plugging and performance bond.

Sellers, who spoke by phone last week with the Journal, denied cashing out the CD.

“I haven’t been involved with the company since 2009, and I have no legal authority to do something like that,” Sellers said. “There’s no way I could have cashed a bond.”

The DENR declined to answer questions about how Sellers, or anybody, could have cashed out the CD without the DENR’s consent.

The $20,000 bond was meant to help South Dakota regulators pay for plugging the Spyglass wells in the event that Spyglass could not do the work. The only other bond money posted by Spyglass was $10,000 for surface restoration, which was submitted in the form of two checks that were “escheated” — claimed as abandoned money — by the Texas comptroller in 2012. The DENR recovered $9,850 of the money in 2013 after paying a fee to the state of Texas, and that amount is the only bond money currently available to deal with the 40 Spyglass wells.

Stephen Harmon, a consultant for a Montana-based company that has tried unsuccessfully to acquire the Spyglass project, said he was shocked to learn that the CD serving as a bond had been cashed out without the state’s knowledge.

“Everyplace else I’ve operated, it’s co-signatures,” Harmon said. “You can’t just say you want the money back. You have to have the state co-sign.”

Harmon works with Remuda Energy Development and said he has asked Kimmel, of Spyglass, to sign quit-claim deeds that would turn the project over to Remuda in exchange for a small portion of project revenues.

“He basically told me to pound sand,” Harmon said.

The Rapid City Journal reached Kimmel by phone, but he declined to speak on the record.

Harmon said his other strategy for acquiring the project is predicated on the $164,000 in unpaid property taxes that Spyglass owes to Harding County, according to the county treasurer. Harmon thinks the county could put a lien on the project, foreclose it, and open the door for a company such as Remuda to acquire the project’s infrastructure. But Harmon said his suggestions to county officials have met with little response so far. 

State gets $800K in royalties

Landowners affected by the deterioration of the Spyglass project have been largely helpless to do anything about it. Several have repeatedly complained to state regulators about the deteriorating conditions of wells, associated structures, roads to the wells, and land around the wells, to no avail. Other complaints have included excessive weeds at the well sites, leaking gas, poorly maintained fences and erosion problems.

Landowner Donn Hett said the experience has been too negative to risk repeating.

“I will not lease my ground to anyone after dealing with this company,” Hett said.

In some cases, landowners had no choice but to allow wells on their property. That’s because some landowners possess only the surface rights to their land, and do not own the mineral rights under the ground. According to the law, the rights of the mineral holders trump those of the surface owners.

At 27 of the 40 Spyglass wells, the mineral rights are owned in whole or in part by the very same entity tasked with regulating the wells: the state of South Dakota. That situation arose from past sales by the state Office of School and Public Lands, which by law retains the mineral rights when it sells public land to private owners.

According to School and Public Lands Commissioner Ryan Brunner, the state of South Dakota received a total of $799,423.96 in royalties — all earmarked to fund education — while some of the Spyglass wells were in production from 2009 to 2012 (that was apparently the last year any of the project’s 40 wells were in production, according to DENR documents, which also say that nine of the 40 wells were never put into production). After the project fell dormant, Brunner’s office canceled the mineral leases.

Harmon, the oil-and-gas industry consultant, predicted it could cost $30,000 apiece, or $1.2 million in total, to plug the 40 wells and repair the surface if nobody is able to put the wells back into production. The state of South Dakota does not have a program to deal with so-called “orphaned” wells like some other states do, but if the state ends up with responsibility for the wells, Harmon’s estimate means the state could end up paying more to plug the wells than it made in royalties.

Gilbert, one of the affected landowners, did not profit as greatly from royalty payments. He owns the mineral rights for only three of the 21 wells on his land, he said, and although he did not disclose the full amount of his royalty income, he said the last monthly check he received several years ago was for $64. He also maintains that he is owed a substantial amount of money for surface damages to his property.

Gilbert said he has no idea what will happen with the wells on his land. Nor, seemingly, does anyone else.

Harmon summed up the thoughts of everyone who has knowledge of the situation.

“It’s a convoluted train wreck," he said.

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Contact Seth Tupper at seth.tupper@rapidcityjournal.com

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Enterprise Reporter

Enterprise reporter for the Rapid City Journal.