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.

Environmental regulators are trying to scrape together enough money to plug a portion of 40 orphaned natural gas wells in northwest South Dakota after assessing a $15.494 million penalty — with dubious prospects for payment — against the former operator of the wells.

The wells were drilled beginning in 2006 in the Buffalo area by Spyglass Cedar Creek, a company in Houston, Texas, that initially boasted of $22 million in financing. But the wells eventually fell idle as the company’s prospects disintegrated under the strain of falling natural gas prices, a lender’s bankruptcy, at least four lawsuits, and a tax-fraud indictment against a business partner.

After several years of hoping the company would right itself and put the wells back into production, the South Dakota Board of Minerals and Environment revoked the company’s permits in January.

Because someone associated with Spyglass cashed out a $20,000 bond without the knowledge of state regulators in 2015, the only money now available to plug the orphaned wells is a separate bond for $9,850 also posted by the company. The state Department of Environment and Natural Resources has estimated that the total cost to plug the wells will be $887,700.

At a March 21 meeting in Pierre, the Board of Minerals and Environment, a nine-member citizen panel appointed by the governor, imposed a maximum civil penalty of $500 per well, per day on Spyglass for violations of state regulations related to the condition of the wells. The total penalty is $15.494 million.

Extracting any money from Spyglass could prove challenging, based on past indications. Earlier this year, for example, the company failed to stave off the revocation of its permits when it was unable to post a $200,000 cash or surety bond requested by the Board of Minerals and Environment.

To help fund the plugging of some of the Spyglass wells, the Department of Environment and Natural Resources has proposed using a $130,000 bond from a failed oil-well project near Wasta.

That project, undertaken by a company called Quartz Operations, ended shortly after it began in 2013. During drilling of the project’s first well, a 150-foot section of the drill stem got stuck 2,760 feet down the borehole. After trying and failing to remove the drill stem, the company capped the upper portion of the well with concrete.

The Board of Minerals and Environment had required Quartz Operations to post not only a minimum $20,000 bond but also an additional $110,000 bond because of concerns about the company’s plans and inexperience. After the failed drilling effort, the board captured the $130,000 in total bond money but did not spend it, in part because of expert testimony indicating that further plugging of the well could cost $2 million and might not be technologically possible.

The Department of Environment and Natural Resources has now proposed using the $130,000 Quartz bond and $9,850 Spyglass bond to plug some of the Spyglass wells, focusing on the highest-priority wells as determined by the department.

The Board of Minerals and Environment has postponed action on the plan and has asked the state Attorney General’s Office for an opinion about the legality of using the Quartz bond money to plug some of the Spyglass wells. The board anticipates having an answer and taking action next month.

Mike Lees, of the DENR, told the board that plugging some of the Spyglass wells would be a precautionary measure.

“Mr. Lees said the wells are not an environmental threat and there is no potential for groundwater contamination,” said the minutes of the board’s March 21 meeting, “but the department’s biggest concern is human health and safety in the event of future gas leaks.”

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Contact Seth Tupper at seth.tupper@rapidcityjournal.com

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