STATE OF MONTANA

DEPARTMENT OF NATURAL RESOURCES AND CONSERVATION

MINUTES OF THE

BOARD OF OIL AND GAS CONSERVATION MEETING

August 13, 1992

A regular meeting of the Board of Oil and Gas Conservation was called to order by Chairman Warren H. Ross at 8:00 a.m. on Thursday August 13, 1992 in the Glacier Electric Hospitality Room, Cut Bank, Montana.

Board members present were Warren H. Ross, Chairman; Dean Swanson, Vice Chairman; Scott Gage; James Nelson; Robert B. Rhodes, Jr. and David Schaenen.

Staff members present were Thomas P. Richmond, Administrator and Petroleum Engineer; James W. Halvorson, Petroleum Geologist; Timothy C. Fox, Environmental Coordinator: Dee Rickman, Executive Secretary; Donald A. Garrity, Attorney and Steven Sasaki and Gary Klotz, Northern District Field Inspectors.

Reading of the minutes of the June 25, 1992 meeting was dispensed with Inasmuch as a copy of the minutes was sent to each Board member prior to this meeting.

MOTION: A motion was made by Mr. Schaenen, seconded by Mr. Rhodes and unanimously passed that the minutes of the June 25, 1992 meeting be approved as distributed.

BOND REPORT

Mrs. Rickman provided copies of the bond report for the period June 25 through August 11 , 1992. Eight new bonds were approved, eleven released for cancellation and one suspended.

FINANCIAL REPORT

Mrs. Rickman provided copies of financial reports for the fiscal year ending June 30, 1992 for both the regulatory account and the oil and gas production damage mitigation account. The financial report for the damage mitigation account will be submitted to the Legislative Council by September 1, 1992 as required by Sec. 82-11-161 , MCA.

GAS VENTING APPLICATIONS

Mr. Richmond presented an application from Conoco, Inc. for permission to vent gas from a well in Rattler Butte Field, Rosebud County, as an exception to Board Rule 36.22.1221 and two separate applications from Florentine Exploration and Production, Inc. for the same purpose for 2 wells in Carbon County, Montana. Documentation was submitted by each applicant to justify the need for the authorizations requested.

MOTION: A motion was made by Mr. Schaenen, seconded by Mr. Rhodes and unanimously passed granting Conoco, Inc. permission to vent gas from its Raymond #25-2 well in Section 25, Township 12 North, Range 32 East, Rosebud County, Montana, for a period of three years. Said motion also requires Conoco to install warning signs at the site and to monitor the gas every six months and report its measurements to the staff. This matter was set forth by Administrative Order No. 58-92.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Nelson and unanimously passed granting Florentine Exploration and Production, Inc. permission to vent gas from its Aetna 7-19-8-21 well in Section 19, Township 8 South, Range 21 East and from its Aetna 3-24-8-20 well in Section 24, Township 8 South, Range 21 East in amounts not to exceed 100 met per well per day for a period of six months. These

authorizations were set forth by Administrative Orders No. 59-92 and 60-92 which may be extended administratively after the six month period.

PROPOSED RULEMAKING NOTICE

At its last meeting, the Board directed the staff to combine the proposed rulemaking notices concerning bonding requirements and idle well reports for circulation to the Board members prior to the next meeting. Copies of the combined notice were prepared and sent to the Board members prior to today's meeting.

MOTION: A motion was made by Mr. Schaenen, seconded by Mr. Swanson and unanimously passed directing the staff to publish the proposed rulemaklng notice concerning bonding requirements and Idle well reports in the Montana Administrative Register. A public hearing on the proposed rules will be scheduled in conjunction with the October 8, 1992 meeting.

STATUS REPORT ON UIC PROGRAM

Chairman Ross advised the Board that he was contacted by J.R. Bacon Drilling Co. concerning substantial increases in the financial responsibility requirements being placed on operators of Class II injection wells by the Environmental Protection Agency. At his invitation, Laura Bacon and Gary McDermott attended today's meeting to provide further information concerning this matter. Mrs. Bacon provided copies of correspondence between EPA and J. R. Bacon Drilling, Inc. She advised the Board that EPA is increasing its bonding requirements from assuring plugging costs for ten Injection wells to requiring demonstration of financial responsibility for 100% of total plugging costs of all injection wells; in their case, from $70,000 to $574,000. J. R. Bacon was given 60 days to meet this requirement, and they were further directed to provide a complete inventory and status of each injection well and a revised standby trust agreement within 2 weeks.

Mrs. Bacon said that the drastic bonding increase required by the EPA poses an extremely serious problem for oil and gas operators and could lead to the unnecessary plugging of wells and loss of production in Montana. She suggested that the State of Montana consider providing assistance in some manner through its Board of Investments or the Resource Indemnity Trust to prevent that from happening. She asked the Board to endorse J. R. Bacon's efforts to seek either bonding or a letter of credit from the Montana Board of Investments for this purpose.

Following discussion, the Board directed Mr. Garrity to draft a letter to the Board of Investments requesting them to consider providing such assistance within their standards for prudent investments to qualifying oil and gas operators in Montana. The Board further directed the staff to proceed with its application for primacy of the Underground Injection Control Program at this time rather than requesting an opinion from the Attorney General concerning the Board's exclusive statutory authority to administer the program. The Board also requested Mr. Garrity to draft a letter to Governor Stephens to advise him of the EPA's increased bonding requirements for Injection wells and to request his assistance in advancing our application for primacy of the UIC Program. Mr. Garrity was also requested to draft similar letters to Montana's congressional delegation to request their assistance in this effort.

STATUS REPORTS - PENDING ISSUES

Washington Energy /Hoff Brothers - Ivan Hoff submitted a letter July 28, 1992 accepting the restoration work done by Washington Energy Exploration, Inc. on the Hoff 43-17 pit in Section 17, Township 31 North, Range 59 East, Sheridan County, Montana. No further action was taken by the Board in this matter.

Milan R. Avers - The conditions required by the Board for approval of the notice of intent to change operator for Williams Gas Field wells from Milan R. Ayers to Rocky Mountain Operating Co. Inc. as set forth in a letter dated July 6, 1992 were not met by the parties involved and Mr. Ayers has made no further attempt to plug the wells identified in Order No. 44-91.

2

MOTION: A motion was made by Mr. Rhodes, seconded by Mr. Schaenen and unanimously passed directing the staff to schedule a hearing on October 8, 1992 to require Milan R. Ayers to show cause why his bond should not be forfeited for failure to plug and restore the wells identified In Order No. 44-91 .

Pioneer Exploration - Mr. Halvorson reported that the surface owner of the well sites in Daniels County that Pioneer Exploration is required to reclaim wishes to have the cement slabs left in place and has refused to allow Pioneer access to the sites to complete the reclamation. At the Board's direction, Jim will advise Pioneer Exploration that they must obtain a signed release from the landowner to leave the slabs on the sites and remind Pioneer that the reclamation must be completed to Board specification by October 1, 1992. If necessary, Jim will contact the landowner concerning the need for Pioneer to access the sites and to inform him that any alternative restoration agreement between Pioneer and the surface owner must be in accordance with Board standards.

Bob Dennis Lawsuit - A judgment in the amount of $75,106 plus a civil penalty in the amount of $125,000 was ordered by District Judge Thomas C. Honzel on July 8, 1992 against Bob Dennis for his failure to properly restore the Steinbeisser and Reichenbach well sites in Richland County, Montana. Copies of the judgment and correspondence concerning the possibility of attempting to collect the judgment were sent to the Board members prior to today's meeting. It appears that Mr. Dennis has no assets and that It would be futile to attempt collection at this time. Mr. Garrity advised that he will register the judgment in North Dakota, where Mr. Dennis resides, and make periodic inquiries to determine if he has any money or other assets.

Bonanza-Vega - Mr. Richmond reported that following the June 25 meeting, he sent a certified letter to Bonanza-Vega at its last known address to advise that the Board would consider requiring forfeiture of its bond at today's meeting for its failure to plug and restore eight wells in Devil's Basin Field, Mussellshell County, Montana. The surface equipment on the sites was sold at a sheriff's sale to Darwin Lindberg. Mr. Lindberg has submitted a Form #20 requesting to be designated as the operator of the wells. However, the transferor portion of the form has not been completed. Bonanza-Vega Corp. is reportedly a defunct company with no assets. Mr. Lindberg does not have a bond on file with the Board at this time and has previously been in non-compliance with Board rules in another matter. Mr. Richmond recommended forfeiture of the Bonanza-Vega bond and asked the Board if they wished to approve the change of operator to Mr. Lindberg for the subject wells.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Gage and unanimously passed directing the staff to require forfeiture of the Bonanza-Vega bond and to approve Mr. Lindberg's request to be designated as the operator of the subject wells only upon his providing a bond and evidence of valid leases for said properties.

Randv Sealey - Mr. Richmond advised the Board that Randy Sealey recently requested a drilling permit from the BLM for a federal well in Golden Valley County, Montana. Tom advised the BLM, upon our receipt of the permit application, that Mr. Sealey Is in non-compliance with our rules and we would therefor not process the federal well permit in our usual manner. The permit request was denied by the BLM because Mr. Sealey failed to provide the required bond. Meanwhile we have Issued a contract in the amount of $53,000 to plug and cleanup Randy Sealey's three wells on non-federal lands in the same area. This project will be paid for from funds In the Production Damage Mitigation Account. Montana law requires that we attempt to recover any State expenditure from this account in excess of the bond forfeiture ($10,000 in this case) from the responsible party.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Rhodes and unanimously passed directing Mr. Garrity to institute proceedings against Randy Sealey to recover any expenditures in excess of $10,000 associated with the plugging and cleanup of the three subject wells.

Cal/gas - Mr. Halvorson reported that Callgas, has completed the cleanup work on its Brown and Hunt leases required by Orders No. 9-92 and 38-92. Mr. Johann, owner of Callgas, advised the Board by a letter

) received August 3, 1992 that he is making contacts to remove and sell the equipment on the sites and to

3

plug and restore the wells. He stated, however, that his finances are limited and he requested the Board to take that into account when taking action in this matter. Mr. Halvorson suggested that Callgas be given one year to complete the plugging and restoration of the three wells.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Rhodes and unanimously passed directing the staff to place a secondary lien on the equipment on the Brown and Hunt leases and to allow Callgas one year to plug and restore the three wells.

Five B's Oil and Gas Inc. - Mr. Sasaki reported that Five B's Oil and Gas is in substantial compliance with Board Order No. 41-92. He recommended no further action at this time and Informed the Board that he would continue to monitor Five B's operations to assure that all of the requirements of said order are met.

Nerdlihc Company. Inc. - Jim Halvorson informed the Board that Nerdllhc Company has failed to comply with the Board's rules governing reserve pits for six wells in the Cabarett Coulee Field. He said that Nerdlihc has been contacted several times concerning this matter and was advised that it would be brought before the Board at today's meeting. He recommended that the matter be scheduled for show cause and that a penalty be assessed if the work is not completed by September 14, 1992. He also recommended that Nerdlihc's permit to drill another well in Gallatin County be suspended until they have complied with the pit closure requirements.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Rhodes and unanimously passed directing the staff to schedule a hearing on October 8, 1992 to require Nerdlihc Co., Inc. to appear and show cause why it should not be fined $500 per day beginning September 14, 1992 for its failure to comply with Board rules governing pits at its Fugere #2-25, 3-30, 4-19 & 5-20 wells and its Fisher #1-24 and 2-24 wells in Cabarett Coulee Field; further to suspend Nerdlihc's drilling permit for the Waddell No. 1-2 well in Section 2, Township 2 North, Range 7 East, Gallatin County, Montana until further notice of the Board.

Gallup Citl/ Oll. Inc .• Wade and Kim Hawley - Mrs. Rickman reported that Gallup City Oil Inc. has failed to file production reports on its operations in Pondera and Teton Counties since June 1991, when it last brought its report filing up-to-date In response lo a show cause notice. The Board took the following action.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Schaenen and unanimously passed directing the staff to schedule a hearing on October 8, 1992 to require Gallup City Oil, Inc. to appear and show cause why it has not filed production reports on its operations in Pondera and Teton Counties and why it should not be assessed a fine for failure to do so.

Marian L. Jrgens - Mrs. Rickman reported that Marian L. lrgens files tax reports with the Department of Revenue on production from several wells in Toole County for herself and others. Mrs. lrgens has been advised on several occasions that production reports must also be filed with the Board. She has never acknowledged these letters.

MOTION: A motion was made by Mr. Nelson, seconded by Mr. Gage and unanimously passed directing the staff to schedule a hearing on October 8, 1992 to require Marian L. lrgens to appear and show cause why she has not filed the required production reports and why she should not be assessed a fine for her failure to do so.

RDGP Grants - Mr. Richmond reported that General Well Service has completed plugging the Van Dusen #2 well in Golden Valley County, Montana. This project was contracted under the Board's Resource and Development Grant "A" for a total cost of $83,392.

Tom also reported that Flint Engineering & Construction Co. completed plugging operations on the Haskell #1 well in Dawson County, Montana. The well, however, has been leaking small quantities of gas both inside and outside of the surface casing since shortly after the plugging operations were completed. The project is under warranty and the contractor will be required to correct the problem before payment is authorized.

4

SHELBY OFFICE COMPLIMENTED

The Montana Land and Mineral Owners Association, through Board Chairman Warren Ross, expressed its appreciation for the cooperation and help that they receive from Steve Sasaki and Gary Klotz in the Board's Shelby office. Mr. Fox also commended Steve and Gary for the amount and quality of work that they have provided In connection with the Solid Waste Management Study currently underway.

PUBLIC HEARING

At 10:00 a.m. Chairman Warren Ross announced thatthe Board would hear the applications scheduled for the August 13, 1992 public hearing. As a result of the discussion, study, testimony and technical data placed before the Board the following action was taken in each matter.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Rhodes and unanimously passed that the application of J. Burns Brown Operating Co. heard under Docket No. 54-92 be granted as set forth by Board Order No. 48-92.

MOTION: A motion was made by Mr. Schaenen, seconded by Mr. Swanson and unanimously passed that the application of J. Burns Brown Operating Co. heard under Docket No. 55-92 be granted as set forth by Board Order No. 49-92.

Docket No. 56-92, upon the application of Somont Oil Co., Inc., was withdrawn at the request of the applicant.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Gage and unanimously passed that the application of Somont Oil Co., Inc. heard under Docket No. 57-92 be granted as set forth by Board Order No. 50-92.

At the outset of the hearing of Docket No. 58-92, upon the application of Keesun Corporation, Board member Robert B. Rhodes announced that he deemed himself disqualified to participate and he took no further part in the proceedings of this matter.

MOTION: A motion was made by Mr. Schaenen, seconded by Mr. Nelson and unanimously passed that the application of Keesun Corporation heard under Docket No. 58-92 be granted as set forth by Board Order No. 51-92.

MOTION: A motion was made by Mr. Gage, seconded by Mr. Schaenen and passed that the application of Somont Oil Co., Inc. heard under Docket No. 59-92 be granted as set forth by Board Order No. 52-92. Board member James C. Nelson dissented In this matter, stating that he does not believe the applicant has satisfied the burden of proof that the full areal extent of the requested unit has been reasonably defined and determined by drilling operations.

MOTION: A motion was made by Mr. Rhodes, seconded by Mr. Gage and unanimously passed that the application of Terral Energy, Inc. heard under Docket No. 60-92 be granted as modified and set forth by Board Order No. 53-92.

MOTION: A motion was made by Mr. Swanson, seconded by Mr. Rhodes and unanimously passed that the application of Vintage Petroleum, Inc. heard under Docket No. 61-92 be granted as set forth by Board Order No. 54-92.

Docket No. 62-92, upon the application of The Montana Power Company, was withdrawn at the request of the applicant.

5

MOTION: A motion was made by Mr. Nelson, seconded by Mr. Schaenen and unanimously passed that the application of Somont Oil Co., Inc. heard under Docket No. 63-92 be granted as set forth by Board Order No. 55-92.

MOTION: A motion was made by Mr. Nelson, seconded by Mr. Rhodes and unanimously passed that the applications of Exxon Corporation heard under Docket Nos. 65-92 and 66-92 be granted as set forth by Board Order No. 56-92.

Docket No. 67-92, upon the application of Sands Oil Company, was withdrawn at the request of the applicant.

MOTION: A motion was made by Mr. Nelson, seconded by Mr. Swanson and unanimously passed that the application of J. Burns Brown Operating Co. heard under Docket No. 68-92 be granted as set forth by Board Order No. 57-92.

MEETING DATES

The next regular meeting of the Board of Oil and Gas Conservation Is scheduled to be held on Thursday, October a, 1992 at the Billings Petroleum Club, Billings, Montana. The filing deadline for that meeting is September 10, 1992. A meeting has also been scheduled to be on December 10, 1992 at the Billings Petroleum Club. The filing deadline for that meeting Is November 12, 1992.

The meeting adjourned at 5:45 p.m. Thursday, August 13, 1992.

(SEAL)

ATIEST:

~~~ Dee Rickman, Executive Secretary

Warren H. Ross, Chalrm ·n Dean A. Swanson, Vice Chairman James C. Nelson Scott 0. Gage Robert B. Rhodes, Jr. David Schaenen

6