IN THE MATTER OF ALLEGED VIOLATIONS OF THE          CAUSE NO. 1
RULES AND REGULATIONS OF THE COLORADO
OIL AND GAS CONSERVATION COMMISSION BY             ORDER NO. 1V-175
McCORMICK OIL & GAS COMPANY, LOGAN,
MONTEZUMA, AND WELD COUNTIES, COLORADO

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 8:30 a.m., on August 19, 1999, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, after giving Notice of Hearing as required by law, on why McCormick Oil & Gas Company is in violation of certain rules and regulations of the Oil and Gas Conservation Commission and why the Commission should not invoke the provisions of §34-60-121 C.R.S., as amended, providing for penalties for violations of the Rules and Regulations of the Commission.

FINDINGS

1. McCormick Oil & Gas Company (“McCormick”) is an interested party in the subject matter of the above-referenced hearing. McCormick has also done business as Vaquero Aceite Joint Venture and as McCormick-Vaquero LLC, though not in official correspondence with the Colorado Oil and Gas Conservation Commission (“COGCC”).

2. Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

3. The Commission has jurisdiction of the subject matter, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order.

4. Vaquero Aceite Joint Venture (“Vaquero”) filed for Chapter 7 bankruptcy protection in January 1999. Vaquero claims an interest in the Gillette Nos. 1, 7 and 10 Wells and the Sheetz #1 Well. Daniel A. Hepner (“Trustee”) was appointed the Chapter 7 bankruptcy trustee of the Vaquero bankruptcy estate on June 10, 1999. Trustee has no knowledge of the matters on which the following findings are based or whether such findings are correct, because the events set forth below occurred prior to Vaquero’s bankruptcy filing. However, Trustee does not contest such findings as to McCormick. Trustee’s consent to such findings is not and should not be deemed an admission of the findings against Robert S. McCormick individually.

5. On May 2, 1990, the Gillette #7 Well located in the NW¼ SW¼ of Section 4, Township 9 North, Range 61 West, 6th P.M., Weld County was plugged and abandoned. On February 2, 1996, COGCC staff performed a site inspection on the well and found that a cement pump base still remained on location.

6. On January 10, 1997, COGCC staff issued a Notice of Alleged Violation (“NOAV”) to McCormick for the Gillette #7 Well. The NOAV cited a violation of Rule 1004., failure to complete restoration within six (6) months of plugging and abandonment. The NOAV specified an abatement date of February 10, 1997. The return receipt for the NOAV was received by COGCC on January 14, 1997.

7. The Rieke #1 Well located in the SE¼ NE¼ of Section 3, Township 9 North, Range 54 West, 6th P.M., Logan County, has been shut-in since December of 1988. On April 4, 1995, COGCC staff performed a site inspection. Staff found the well was shut-in with sucker rods installed in the well. No pumping unit was on the site and the well was incapable of production.

8. On January 10, 1997, COGCC staff issued a NOAV to McCormick for the Rieke #1 Well. The NOAV cited violation of Rule 319.b.(3)., failure to obtain Director approval to shut-in a well in excess of six (6) months and violation of Rule 326.b., failure to perform a mechanical integrity test (“MIT”) on a well within thirty (30) days if surface equipment is removed or the well becomes incapable of production. The NOAV specified an abatement date of July 10, 1997. The return receipt for the NOAV was received by the COGCC on January 14, 1997.

9. The Gillette #1 Well located in the SW¼ SE¼ of Section 4, Township 9 North, Range 61 West, 6th P.M., Weld County, was drilled in 1952. COGCC records do not reflect that the well has ever produced.

10. On February 7, 1997 Mr. Robert McCormick, a principal of McCormick, met with COGCC staff to discuss outstanding violations. Mr. McCormick requested and was granted an extension to July 31, 1997 to abate the restoration violation cited for the Gillette #7 Well. A revised NOAV with an abatement date of July 31, 1997 for Rule 1004. was issued on February 10, 1997 for the Gillette #7 Well.

11. On February 10, 1997, COGCC staff issued a NOAV to McCormick for the Gillette #1 Well. The NOAV cited violation of Rule 319.b.(3)., failure to obtain Director approval to shut-in a well in excess of six (6) months and violation of Rule 326.b., failure to perform a MIT on a well within two (2) years of initial shut-in date. The NOAV specified an abatement date of July 31, 1997. The return receipt for the NOAV was received by COGCC on February 13, 1997.

12. On February 21, 1997, COGCC staff conducted a site inspection on the Gillette #1 Well and determined the well was incapable of production as of that date.

13. On December 8, 1998, COGCC staff issued a NOAV to McCormick for the Sheetz #1 Well located in the NW¼ NE¼ of Section 9, Township 9 North, Range 61 West, 6th P.M., Weld County. The NOAV cited a violation of Rule 319.b.(3)., a well which has ceased production or injection or is incapable of production or injection shall be abandoned within six (6) months thereafter unless the time is extended by the Director upon application by the owner. The NOAV had an abatement date of January 7, 1999.

14. The last COGCC Form 7, Operator's Monthly Production Report, submitted to COGCC by McCormick was for March 1998. Production reports submitted for January, February, and March 1998 listed all wells as shut-in, with no production or sales reported. However, levy payments for the first and second quarters of 1998 were made to the COGCC by the oil transporters for the Gillette #10 Well located in the SW¼ SE¼ of Section 9, Township 9 North, Range 61 West, 6th P.M., Weld County, COGCC Lease Number 56480.

15. On December 8, 1998, COGCC staff issued a NOAV to McCormick for the Gillette #10 Well located in the SW¼ SE¼ of Section 9, Township 9 North, Range 61 West, 6th P.M., Weld County. The NOAV cited violations of Rule 206., all producers, operators, transporters, refiners, gasoline or other extraction plant operators and initial purchasers of oil and gas within the state shall from time to time file accurate and complete reports containing such information and covering such periods as the Commission shall require, and Rule 309., each producer or operator of an oil or gas well shall file with the Commission, within forty-five (45) days after the month in which production occurs, a report on Operator's Monthly Production Report, Form 7, containing all information required by said form. The NOAV had an abatement date of January 7, 1999.

16. The last reported production for the Goff-Pierre #1 Well located in the NE¼ SE¼ of Section 6, Township 35 North, Range 13 West, N.M.P.M., Montezuma County, COGCC Lease Number 40277, was in September, 1995. On March 31, 1997 COGCC staff approved a COGCC Form 6, Well Abandonment Report, Notice of Intent to Abandon, for the Goff-Pierre #1 Well.

17. On December 8, 1998 COGCC staff issued a NOAV to McCormick for the Goff-Pierre #1 Well. The NOAV cited violations of Rule 319.b.(3)., a well which has ceased production or injection or is incapable of production or injection shall be abandoned within six (6) months thereafter unless the time is extended by the Director upon application by the owner, and Rule 326.b.(1), a MIT shall be performed on each shut-in well within two (2) years of the initial shut-in date. The NOAV had an abatement date of January 7, 1999.

18. The NOAVs sent to McCormick on December 8, 1998 via certified mail were returned unclaimed on January 4, 1999, showing the attempted delivery dates of December 10, 18, and 25, 1998. Mr. Robert McCormick telephoned COGCC staff on December 23, 1998 and stated that although he had received notice from the U. S. Postal Service of the attempted delivery, he had not claimed the envelope from the Post Office. COGCC staff informed Mr. McCormick of the content of the NOAVs and the abatement requirements during the call.

19. As of July 1, 1999, the abatement requirements listed above for the Gillette #1 Well, Rieke #1 Well, Sheetz #1 Well, Gillette #10 Well, Goff-Pierre #1 Well, and Gillette #7 Well have not been performed.

20. A monetary penalty of Eighteen Thousand dollars ($18,000) should be assessed against McCormick, in accordance with Rule 523.a., for continuing violation of Rules 1004., 319.b.(3)., 326.b., 206. and 309. The fines for each well for the above-listed violations are as follows: for the Gillette #1 Well, Four Thousand dollars ($4,000); for the Gillette #7 Well, Two Thousand dollars ($2,000); for the Gillette #10, Two Thousand dollars ($2,000); for the Rieke #1 Well, Four Thousand dollars ($4,000); for the Goff-Pierre #1 Well, Four Thousand dollars ($4,000); and for the Sheetz #1 Well, Two Thousand dollars ($2,000). Per Rule 523.d., COGCC staff considers the following to be aggravating factors for fine determination: the violation was intentional or reckless (523.d.(1)); the violation involved recalcitrance or recidivism upon the part of the violator (523.d.(6)); the violation involved intentional false reporting or recordkeeping (523.d.(7)); the violation resulted in economic benefit to the violator (523.d.(8)).

21. On June 13, 1997, as of May 20, 1997, Order No. 1V-122 found McCormick in violation of Rule 304.a. for the six (6) wells listed below and assessed a fine in the amount of Five Thousand dollars ($5,000) per well.

McCormick-Goff #1 Well NE¼SE¼ Sec 6 T35N R13W Montezuma County
(a/k/a Goff-Pierre #1 Well)
Rieke #1 Well SE¼NE¼ Sec 3 T9N R54W Logan County
Gillette #1 Well SW¼SE¼ Sec 4 T9N R61W Weld County
Gillette #7 Well NW¼SW¼ Sec 4 T9N R61W Weld County
Gillette #10 Well SW¼SE¼ Sec 9 T9N R61W Weld County
Sheetz #1 Well NW¼NE¼ Sec 9 T9N R61W Weld County

McCormick was ordered to provide a conventional surety bond or cash bond for all existing wells and well sites operated by McCormick no later than September 1, 1997.

22. In addition, Order No. 1V-122 found McCormick in violation of Rule 317.g. for the Gillette #1 Well and assessed a fine of Two Thousand dollars ($2,000) for the violation. McCormick was ordered to remedy the violation of Rule 317.g. by complying with the stage cementing requirements contained in Rule 317.g., McCormick's permit and the COGCC's Notices of Alleged Violation, or by plugging and abandoning the Gillette #1 Well in accordance with Rule 319., within thirty (30) days of the date the order was issued.

23. In addition, Order No. 1V-122 specified that the total fine of Thirty-Two Thousand dollars ($32,000) shall be payable by McCormick within thirty (30) days of the date the order is issued.

24. On April 22, 1997, McCormick executed two (2) promissory notes in favor of the COGCC, secured by a deed of trust on certain property in Durango, Colorado. One note for the amount of Thirty Thousand dollars ($30,000) was provided to satisfy the financial assurance requirements in Order No. 1V-122. Another note for the amount of Thirty-two Thousand dollars ($32,000) was provided to satisfy the fines assessed in Order No. 1V-122.

25. On August 11, 1998, Richard L. Emmett, a Durango attorney, offered to purchase the COGCC’s interest in the two (2) promissory notes and the associated deed of trust for the amount of Forty Thousand dollars ($40,000). On March 8, 1999 the COGCC received a copy of the Sheriff’s Notice of Sale and Notice of Right to Cure or Redeem for the Durango property. In view of the property sale, on March 12, 1999 the COGCC indicated its interest to Mr. Emmett in selling the notes and deed of trust. On April 26, 1999, the COGCC assigned all of its right, title and interest to the promissory notes and deed of trust to Richard L. Emmett and Dan Huntsman in consideration of a payment to COGCC from them of Fifty Thousand dollars ($50,000).

26. On April 29, 1999, the COGCC deposited with the State Treasurer’s Office Thirty Thousand dollars ($30,000) as financial assurance for the McCormick wells and Twenty Thousand dollars ($20,000) as partial payment toward the assessed fine of Thirty-two Thousand dollars ($32,000).

27. On February 24, 1999, the COGCC filed a Motion for Relief from Automatic Stay in In re Vaquero Joint Venture Aceite, et al. (U.S. Bankruptcy Court, District of Colorado, case no. 99-10217 SBB). The COGCC requested the Bankruptcy Court issue an order declaring the COGCC is not stayed by 11 U.S.C. §362 to: (1) proceed with the present administrative proceeding to adjudicate McCormick’s alleged violations of the COGCC statutes and regulations promulgated thereunder, (2) enter an order declaring McCormick in violation of said statute and regulations, (3) order McCormick to comply with said order, and (4) assess a fine for violation of said statute and regulations. The COGCC acknowledged, pursuant to 11 U.S.C. §362(b)(4), that it would seek further bankruptcy court approval if it sought to collect any monetary judgment against assets of the bankruptcy estate. The COGCC’s motion was granted by the Bankruptcy Court in April, 1999.

28. Mr. Robert S. McCormick has admitted the violations described in this Order and acknowledges that the recommended fine is appropriate under the circumstances. Mr. McCormick asserts that the violations were not the result of wrongdoing by him personally, but rather resulted from deliberate wrongdoing by former principals and employees of McCormick and related entities. Mr. McCormick is currently in litigation with regard to the alleged wrongdoing by his former partners and employees; the determination of those issues is outside the scope of the matters before the COGCC in this Order.

ORDER

NOW, THEREFORE, IT IS ORDERED, that McCormick Oil & Gas Company (“McCormick”) shall be found in continuing violation of Rule 1004., failure to complete restoration within six (6) months of plugging and abandonment, for the Gillette #7 Well located in the NW¼ SW¼ of Section 4, Township 9 North, Range 61 West, 6th P.M., Weld County, Colorado.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of Rule 319.b.(3), failure to obtain Director approval to shut-in a well in excess of six (6) months and continuing violation of Rule 326.b., failure to perform a mechanical integrity test a well within thirty (30) days if surface equipment is removed or the well becomes incapable of production, for the Rieke #1 Well located in the SE¼ NE¼ of Section 3, Township 9 North, Range 54 West, 6th P.M., Logan County, Colorado.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of Rule 319.b.(3), failure to abandon within six (6) months a well which has ceased production or obtain Director approval to shut-in a well in excess of six (6) months and continuing violation of Rule 326.b, failure to perform a mechanical integrity test on a well within two (2) years of initial shut-in date for the Gillette #1 Well located in the SW¼ SE¼ of Section 4, Township 9 North, Range 61 West, 6th P.M., Weld County, Colorado.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of Rule 319.b.(3), failure to abandon within six (6) months a well which has ceased production or obtain Director approval to shut-in a well in excess of six (6) months for the Sheetz #1 Well located in the NW¼ NE¼ of Section 9, Township 9 North, Range 61 West, 6th P.M., Weld County, Colorado.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of Rule 206., failure to file accurate and complete reports containing such information and covering such periods as the Commission shall require, and Rule 309., failure to file with the Commission, within forty-five (45) days after the month in which production occurs, a report on Operator's Monthly Production Report, Form 7, containing all information required by said form for the Gillette #10 Well located in the SW¼ SE¼ of Section 9, Township 9 North, Range 61 West, 6th P.M., Weld County, Colorado.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of Rule 319.b.(3), failure to obtain Director approval to shut-in a well in excess of six (6) months and continuing violation of Rule 326.b., failure to perform a mechanical integrity test a well within two (2) years of initial shut-in date for the Goff-Pierre #1 Well located in the NE¼ SE¼ of Section 6, Township 35 North, Range 13 West, N. M. P.M., Montezuma County, Colorado.

IT IS FURTHER ORDERED, that with respect to wells that are the subject of this Order and which are not part of the bankruptcy estate, McCormick shall secure compliance with the violations listed within thirty (30) days of the earlier of (1) the entry of any final, non-appealable judicial order finding or declaring that one or more of the wells which are the subject of this Order are not, or are no longer, the property of the bankruptcy estate, or (2) the effective date of the abandonment of one, some or all of said wells by the Trustee.

IT IS FURTHER ORDERED, that McCormick shall be assessed a total fine of Eighteen Thousand dollars ($18,000.00) for the violations listed above.

IT IS FURTHER ORDERED, that McCormick shall be found in continuing violation of the provisions of Order No. 1V-122 and that the continuing violation of Rule 317.g. has the threat of significant negative impact on the environment or on public health, safety, or welfare.

IT IS FURTHER ORDERED, that McCormick has demonstrated a pattern of knowing and willful violation of COGCC Rules and Orders. Pursuant to §34-60-121.(7), C.R.S., the COGCC shall prohibit the issuance of any new permits to McCormick, or any company of which any of the principals of McCormick is a principal, until such time as McCormick demonstrates to the satisfaction of the COGCC that it has brought each of the violations into compliance and that any penalty not subject to judicial review or appeal has been paid.

IT IS FURTHER ORDERED, that if McCormick, or its successor-in-interest with respect to any of the subject wells, does not comply with the requirements of this order, then the COGCC shall use the cash bond to plug and abandon and restore the wells and well sites operated by McCormick, and may exercise its rights under §34-60-124.(6)(c), C.R.S.; except that the COGCC will first seek a judicial determination whether the property is part of the bankruptcy estate, and if it is part of the bankruptcy estate, the COGCC will seek Bankruptcy Court approval before such property is confiscated and sold for salvage.

IT IS FURTHER ORDERED, that this Order does not constitute a finding that Mr. Daniel Hepner, in his individual capacity or as Trustee for the bankruptcy estate, is an operator of the subject wells as the term “operator” is defined by §34-60-103(6.8), C.R.S. However, nothing in this Order is, or shall be construed as, a waiver of the COGCC’s right to file a proof of claim for pre-petition liability of the debtor; to seek an administrative claim pursuant to 11 U.S.C. §503 for, among other things, the cost to plug and abandon the wells and/or to restore the well sites, as appropriate; or to seek an order of the Bankruptcy Court requiring the bankruptcy estate to comply with this Order.

IT IS FURTHER ORDERED, that Trustee’s consent to the provisions of this Order does not constitute a finding that the violations set forth herein constitute an actual threat to the environment or the public health, safety or welfare, nor do they constitute a waiver of Trustee’s right to contest any administrative claim which may be filed by the COGCC for claims pursuant to 11 U.S.C. §503 to address actual or threatened impacts on the environment or on public health, safety, or welfare.

IT IS FURTHER ORDERED, that this Order does not constitute an order that the Trustee, in his individual capacity or as Trustee for the bankruptcy estate, shall secure compliance with the violations listed herein, and should the COGCC desire to enforce this order against the Trustee or property of the bankruptcy estate, the COGCC must seek an order of the Bankruptcy Court for such authority.

IT IS FURTHER ORDERED, that this Order does not constitute an adjudication of any issue relating to the business dealings or ongoing litigation(s) between Mr. Robert S. McCormick and other present or former principals or employees of McCormick or any related entity.

IT IS FURTHER ORDERED, that the provisions contained in the above Order shall become effective forthwith.

IT IS FURTHER ORDERED, that the COGCC expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

ENTERED this 31st day of August, 1999, as of August 19, 1999.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

By Dated at Suite 801 Patricia C. Beaver, Secretary 1120 Lincoln Street Denver, Colorado 80203 August 31, 1999.

(1V#175)