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 $20,000 certificate of deposit that was supposed to serve as a bond for 40 idled natural gas wells in northwestern South Dakota was cashed out because company officials did not remember what the money was for, according to one of the officials.

March Kimmel, general partner of Spyglass Cedar Creek LP in San Antonio, Texas, offered the explanation Friday in a petition to oppose the revocation of the company’s permits for its natural gas wells near Buffalo. His intervention in the revocation action will trigger a hearing on the matter by the Board of Minerals and Environment at 10:15 a.m. Central time Oct. 18 at the Matthews Training Center in the Joe Foss Building in Pierre.

The state Department of Environment and Natural Resources initiated the revocation action last month and cited numerous examples of the project’s non-compliance with state rules and regulations, including some leaky wells.

According to the DENR, it learned last month that Kimmel’s former business partner, Kevin Sellers, cashed out the $20,000 CD in 2015. The CD was supposed to serve as a plugging and performance bond for the project, to help state government pay for plugging the wells if Spyglass Cedar Creek could not do the work.

Spyglass Cedar Creek began the project in 2006 with a reported $22 million in financing but has recently been mired in financial woes. The company’s natural gas wells are now idled and the $20,000 CD is gone, leaving state regulators with only $9,850 from a separate surface restoration bond to deal with the 40 wells.

Meanwhile, the DENR has estimated it could cost at least $855,150 to plug the wells.

It’s unclear exactly when the $20,000 CD was purchased, but Kimmel’s petition says he has received documentation from the South Dakota Attorney General’s office showing that the CD dates to at least 2008.

In 2015, according to Kimmel, a bank issued a notice that the state of Texas was attempting to “escheat” the CD — in other words, claim it as abandoned property.

“At the time the Bank insisted that the account(s) be closed; neither Mr. Kimmel nor Mr. Seller has any personal recollection of the documentation to the effect that the certificate served as collateral for any obligations to the State,” Kimmel wrote in his petition. “The Bank’s correspondence did not indicate that it was being held for such purpose, nor did it indicate there was any requirement that DENR agree to termination of the account.”

Kimmel gave an indication later in the petition that his company might not be able repay the $20,000, let alone come up with the nearly $900,000 that the state says it could cost to plug the 40 wells. That indication came in the form of Kimmel’s request to be represented telephonically at next month’s revocation hearing by a Texas-based attorney, rather than a South Dakota attorney, because “Spyglass does not have the resources at this stage to engage local counsel.”

Kimmel blamed the project’s current status on another company, New Frontier Energy Inc., of Denver, which joined the project in 2011 after Spyglass was sued by its lender, CIT Group. The lawsuit was settled with an agreement that New Frontier would take over the project’s debt and primary ownership, and would work with Spyglass to keep the project running.

But the partnership between New Frontier and Spyglass disintegrated, and they sued each other. While those lawsuits were active, New Frontier CEO Samyak Veera, of Singapore, was indicted in 2013 with four other defendants by a federal grand jury in Pennsylvania for allegedly evading $200 million worth of corporate taxes. The criminal case against Veera is still pending, according to the U.S. Attorney’s Office for the Eastern District of Pennsylvania.

In Kimmel’s petition, he wrote that Spyglass was handcuffed by New Frontier, which Kimmel referred to as “NFEI.”

“NFEI assumed control of the wells and of the field, and then forcibly retained that control after breaching all of its agreements with Spyglass as to operations, accounting, data and maintenance,” Kimmel wrote.

Kimmel still hopes to resurrect the project. He wrote in his petition that Spyglass is working with at least two sets of partner-investors who have expressed interest in providing funding to rehabilitate the well field, fix the wells and bring the project back into production.

But, he wrote, the DENR’s attempt to revoke the project’s permits equates to a “death sentence.”

“Essentially Spyglass cannot give any potential equity partners the assurance they need without assistance and assurance of cooperation or a stay of action against the project from the State,” Kimmel wrote.

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Contact Seth Tupper at seth.tupper@rapidcityjournal.com

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