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Forty natural gas wells were drilled from 2006 to 2010 among the grassy plains and buttes in the vicinity of Buffalo. Small huts surrounded by cattle fences stand atop the wells.

A state regulatory board revoked a company’s permits Thursday for 40 natural gas wells near Buffalo that have been idle for the past seven years while the company has struggled financially.

The state Board of Minerals and Environment, a nine-member citizen panel appointed by the governor, took the action during a meeting in Pierre.

The board also directed the state Department of Environment and Natural Resources to calculate and make a report at the board’s next meeting on Feb. 21 on the maximum civil penalty that may be assessed against the company, Spyglass Cedar Creek LP, of Houston, Texas.

The maximum penalty could be in the millions of dollars. Discussion at the meeting indicated that the board may legally assess penalties of up to $500 per day, starting from the issuance of a notice of violation on July 10, for each regulatory violation at every one of the 40 wells.

The violations include unproductive and unplugged wells, inadequate signage, missing reports and logs, missing or inadequate well gauges, and insufficient reclamation at well sites. 

Board Chairman Rex Hagg, of Rapid City, expressed preliminary support for a maximum penalty.

“I think when you look at the record in its entirety on this matter, I don’t think it gets much more egregious, absent some major environmental leak or problem,” Hagg said.

Mike Lees, of the Department of Environment and Natural Resources, said at least two of the wells have leaked but were repaired with minor adjustments to the wellheads. He said steel and cement casing around the underground portions of the wells should prevent any gas leaks that might otherwise pollute aquifers.

“There is no overarching environmental concern for contamination of groundwater due to these 40 wells,” Lees said.

The wells were drilled beginning in 2006. The current condition of 10 to 15 of the wells is such that they may need to be permanently plugged, Lees said. The department hopes the rest of the wells will be acquired by some other company and put back into production, thereby protecting state government from the estimated $887,700 cost to plug all 40 of the wells.

It could be difficult for another company to take over the wells, Lees said, because of the varied ownership of the land and minerals, and because of clauses in some of the mineral leases that allow the owner of the mineral rights to take ownership of the wells and equipment if Spyglass defaults on the leases.

“It’s a complex, convoluted scenario,” Lees said.

Recouping any plugging costs from Spyglass, or collecting any penalty assessed against the company, will be a challenge. Although Spyglass boasted of $22 million in financing in 2007, the company has since suffered calamities including a lender’s bankruptcy, multiple lawsuits and a tax-fraud indictment against one of its business partners.

Most recently, Spyglass was given until Jan. 15 by the Board of Minerals and Environment to avoid permit revocations by posting a $200,000 cash or bond surety, which the company failed to do.

The $200,000 surety was sought because the only bond money from Spyglass that is currently held by state government is $9,850. A further bond of $20,000, which had existed as a certificate of deposit with a Texas bank, was cashed out by a Spyglass official in 2015.

Lees, of the DENR, said trying to obtain any further money from the company might be akin to “squeezing blood from a turnip,” but the board directed the department and officials from the Attorney General’s Office to investigate not only Spyglass but also its partner entity, Xanthus Capital LLC, with an eye toward recovering money.

There was also discussion during the board meeting about whether bonding requirements in state law should be raised. Lees said he will present information at the next board meeting regarding the current bonding requirements and past efforts to change those requirements.

The board also directed the DENR to notify affected landowners of the permit revocations and to work with landowners on any concerns they have.

The land and mineral rights where the wells are located are a mix of public and private ownership, with the state’s Office of School and Public Lands owning all or part of the mineral rights at 27 of the 40 wells. While some of the wells were producing from 2009 to 2012, the Office of School and Public Lands received $799,423.96 in royalty payments, all of which was earmarked to fund education.

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Contact Seth Tupper at seth.tupper@rapidcityjournal.com

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