10-123g.v12.htm

SUMMARY OF THE CASE AND JURISDICTION

1. The instant proceeding results from a Complaint for the Issuance of an Order to Revoke Permits (Complaint) filed by the Department of Natural Resources (Department) with the Natural Resources Commission (Commission) on June 25, 2010.

2. The Department’s Complaint alleges that Leo Rexing (Rexing) is the holder of two permits identified as Permits 28563 and 36180 to drill and operate oil and gas related wells. The Complaint continues in pertinent part:

4. On April 26, 2010, the Division issued a Notice of Violation (“NOV”) to Respondent Rexing for the August Wulf Well No. 5, Permit 28563. A true copy of the foregoing NOV is attached and incorporated by reference as if fully set forth herein.

5. Respondent Rexing has until July 1, 2010, to abate the violation noted in the NOV attached as Exhibit B-1, but has otherwise failed to secure an extension of time to abate said violation or request timely administrative review of the NOV as provided by I.C. 4-21.5-3-6.

6. The Division issued the following NOV or Notice of Civil Penalty Assessment (“CPA”) to Respondent Rexing for the Raymond Berger Well No. 5, Permit 36180. Respondent Rexing has failed to abate each violation noted or pay the civil penalty assessed, secure an extension of time to abate each violation, or request timely administrative review of the NOV or CPA as provided by I.C. 4-21.5-36:

a. NOV issued on February 26, 2009, a true copy of which is attached as Exhibit B-2 and incorporated by reference as if fully set forth herein.

b. CPA issued on May 27, 2009, a true copy of which is attached as Exhibit B-2a and incorporated by reference as if fully set forth herein.

c. NOV issued on February 19, 2010, a true copy of which is attached as Exhibit B-2b and incorporated by reference is fully set forth herein.

3. The Department is responsible for the regulation of wells for oil and gas purposes through the administration of Indiana Code §§ 14-37 and 312 IAC 16.

4. The instant proceeding is governed procedurally by the Administrative Orders and Procedures Act, Indiana Code §§ 4-21.5, and administrative rules adopted by the Commission at 312 IAC 3.

5. The Commission is the “ultimate authority” for the Department relating to substantive matters controlled by Indiana Code §§ 14-37 and 312 IAC 16. Indiana Code § 4-21.5-1-15; 312 IAC 3-1-2.

6. The Commission is possessed of jurisdiction over the persons of the parties and the subject matter of this proceeding.

7. The Department has the burden of proof with respect to the allegations contained within its Complaint.

DISMISSAL OF THE DEPARTMENT’S COMPLAINT AS TO PERMIT 28563:

8. Rexing took issue with the Department’s filing of a Complaint to revoke Permit 28563 on June 25, 2010 when the violation at issue did not require the violations to be abated until July 1, 2010.

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9. AmRhein testified that Rexing had abated the violations noted on the April 26, 2010 Notice of Violation regarding Permit 28563 but failed to complete those abatement activities by the July 1, 2010 deadline. AmRhein further testified that Rexing did not seek or receive a formal extension of time to address the violations. Rexing disputed AmRhein’s testimony testifying that the corrective action was completed by June 28, 2010.

10. A permit holder who is issued a Notice of Violation is subject to a Department action for permit revocation (1) if the Notice of Violation is not addressed within the prescribed time, (2) if the permit holder fails to obtain a written extension of time to complete the violation abatement activities and (3) the permit holder fails to seek administrative review of the notice of violation. 312 IAC 16-3-9(a)(6).

11. Regardless of whether Rexing completed the corrective action before or after July 1, 2010, it is evident that the Department filed it Complaint seeking the revocation of Rexing’s Permit 28563 five days before Rexing was required to seek an extension or have the corrective action completed. The Department’s Complaint was premature.

12. In any event, the Department determined that Rexing had completed the corrective action before the administrative hearing was conducted on November 3, 2010 and did not seek to pursue its Complaint associated with Permit 28563. Testimony of AmRhein.

13. The Department’s Complaint, as it pertains to Permit 28563 is dismissed and the remainder of this nonfinal order pertains solely to Rexing’s Permit 36180.

FINDINGS OF FACT

14. James AmRhein (AmRhein), Assistant Director of Enforcement and Compliance with the Department’s Division of Oil and Gas (Division), is responsible for ensuring enforcement and compliance matters are addressed consistently by the Division and tracking enforcement actions taken by the Division. AmRhein holds a Bachelor of Science degree in Geology and has been employed by the Division for 21 years.

15. Rexing has been the holder of Permit 36180 since he accepted transfer of that permit from Quick Stop Gas and Oil Corporation on November 16, 1990. Claimant’s Exhibit A.

16. Permit 36180 authorized Rexing’s operation of a Class II Injection well. Testimony of AmRhein. An injection well is used to inject water generated from the recovery of oil back into the ground for disposal and may also be used to enhance the recovery of oil from other production wells. The operation of a Class II Injection Well involves the transmission of fluid recovered from an oil production well to a separator where any water is separated from the recovered oil. The separated water and oil are then stored in separate tanks from which “the produced water then would be essentially put under pressure back down into the Class II Well.” Id.

17. The Division operates the Class II Injection Well Program under federal authority, which requires the holder of such permits to file Quarterly Monitoring Reports (QMR) with the Department. Testimony of AmRhein.

18. The Class II Injection Well associated with Permit 36180 was used in the fourth quarter of 1991 and the first quarter of 1992. Testimony of AmRhein, Claimant’s Exhibits B & C. However, the well was not used in the third and fourth quarters of 1994, the entire year of 1995, 1999 or 2000. Testimony of AmRhein, Claimant’s Exhibits D – K. A thorough search of the Department’s records indicated that QMRs related to Permit 36180 were unavailable except as otherwise identified.[1] Testimony of AmRhein.

19. Carly Walton (Walton), who holds a Bachelor Degree in Geology from the University of Southern Indiana, has been a Field Inspector for the Department’s Division of Oil and Gas for four and one half years. As part of her job responsibilities Walton conducts annual well inspections, including the inspection of Class II Injection Wells. Testimony of Walton. Walton inspected Rexing’s Class II Injection Well associated with Permit 36180 on February 26, 2009 and again on February 18, 2010. Testimony of Walton, Claimant’s Exhibits L & M.

20. On February 26, 2009 Walton determined that both the tubing pressure and the annulus pressure were at zero. She determined that the Class II Injection Well associated with Permit 36180 was “non-operational.” Testimony of Walton. Walton determined that the “pump house had no electric run to it and the pump itself was rusted. The plug that was coming from the pump itself was plugged into the wall but was not connected to the pump.” Id. Consequently, a Notice of Violation was issued by Walton on February 26, 2009. Testimony of Walton, Claimant’s Exhibit L. The Notice of Violation stated as follows:

The corrective action listed below must be taken by 4/27/2009:

Operate, formally T/A, plug and abandon, or re-permit for production in accordance with IC 14-37-8. NOTE: Operation and T/A require a pressure test.

Claimant’s Exhibit L.

21. During Walton’s February 18, 2010 inspection she noted the continued existence of the non-operational conditions as had formed the basis of the previous and still outstanding Notice of Violation issued on February 26, 2009. Testimony of Walton. Walton, once again checked the tubing pressure, which remained at zero. Upon checking the annulus pressure she determined that there was 90 pounds of pressure on the annulus. Id. In order to check the annulus pressure Walton was required to remove a broken U-Joint that was on the Class II Injection Well and install her own joint and gauge. Id. Upon opening the annulus valve Walton observed crude oil discharge from the annulus before she closed the valve to prevent additional discharges. Id. The pressure readings caused Walton to question the mechanical integrity of the well below the surface. Id. Based upon Walton’s February 18, 2010 inspection a second Notice of Violation was issued to Rexing on February 19, 2010 which required:

The corrective action listed below must be taken by 4/21/10:

Cease well operations and repair all equipment as needed to prevent the migration of fluids from within the well annuli per 312 IAC 16-5-13.

Claimant’s Exhibit M.

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22. Walton noted that while annulus pressures and crude oil discharge such as what she observed raise concerns about the mechanical integrity of the well but the violation would have been cleared and released by the Department if Rexing had conducted and the well had passed a supplemental Mechanical Integrity Test (MIT). Testimony of Walton.

23. Rexing did not correct the violations associated with the February 26, 2009 Notice of Violation and did not discuss that Notice of Violation with Walton by the April 27, 2009 deadline. Testimony of Walton.

24. Rexing did not correct the violations associated with the February 18, 2010 Notice of Violation or contact Walton about that Notice of Violation by the April 21, 2010 deadline. Testimony of Walton.

25. In August 2010, AmRhein visited the site of the Class II Injection Well associated with Permit 36180. Testimony of AmRhein. At that time the pump was “rusted completely” and electrical wiring had been disconnected such that the Class II Injection Well could not be operated for injection. Id. AmRhein also observed the tank battery noting that, “the water tank particularly is full of holes and wouldn’t be able to hold any water that would have produced from the lease.” Id.

26. Rexing’s first contact with Walton regarding either Notice of Violation associated with Permit 36180 occurred on November 1, 2010, when Rexing advised Walton that he was working on the well. Testimony of Walton. When Rexing requested that Walton re-inspect the well on November 3, 2010 she was detained by other work responsibilities so Kevin York assumed responsibility for the re-inspection. Id.

27. Kevin York (York) has been the Field Inspection Manager for the South Region for the Department’s Division of Oil and Gas for 20 years. York holds an Associate Degree in Petroleum Technology and has worked in the oil industry since 1978. Testimony of York.

28. York was at the site of the Class II Injection Well associated with Permit 36180 on two occasions on November 3, 2010. Id. York testified that he took several photographs of the site for the administrative hearing including photos of a well storage facility that includes a tank with holes rusted through, Claimant’s Exhibit N, a pump shelter that is in a state of disrepair, Claimant’s Exhibits O & P, the injection well pump with electrical wires disconnected, Claimant’s Exhibit S, and the water storage tank with holes rusted through. Claimant’s Exhibits Z & AA.

29. York also photographed the gauge readings associated with his re-check of the annulus pressure on the Class II Injection Well associated with Permit 36180. Testimony of York. With the annulus valve in the closed position the pressure reading is at zero, Claimant’s Exhibit X, but with the annulus valve open as depicted by the yellow handle in the photograph the pressure reading is over 100 pounds. Claimant’s Exhibit Y.

30. As part of the re-inspection requested by Rexing on November 3, 2010, Rexing applied approximately 100 pounds of pressure to the tubing with the annulus valve open and no fluid discharge was observed. Testimony of York, Testimony of Mike Waters. York acknowledged that if there was a hole in the tubing fluid would discharge from the annulus if 100 pounds of pressure were applied to the tubing. Id.

31. York also observed the well pump run for approximately five seconds after Rexing connected the pump’s electric motor to a generator. York testified that while the electric motor would run the pump was unable to actually operate within the approximate five seconds that Rexing allowed the motor to run. York opined that Rexing did not want to run the motor any longer because without water, the pump could be damaged if it actually operated. Running the pump’s motor does not confirm the integrity of the actual pump.

32. From the fact that Rexing had to use a generator to acquire electricity for the well pump’s motor, it is reasonable to infer that there is no electricity at the site of the Class II Injection Well associated with permit # 36180.

33. The evidence supports that overall factual conclusion that the well has been continually out of service throughout the years 2009 and 2010 and further supports a reasonable inference that the well at issue has been operated very little, if at all, between 1995 and the present.

34. Rexing presented evidence associated with incidents occurring in 1999 involving the J.R. Brown well that he owned and operated under Permit 26709. As a result of Rexing’s failure to ship oil within the year the “landowners sued for non-production.” In conjunction with the suit between Rexing and the landowners, Rexing’s well was plugged without his knowledge and all the equipment of any value was removed from the well site. Testimony of Rexing. After the well was plugged and the valuable equipment was removed, Rexing did not proceed to remove the casing, remaining equipment or debris or conduct site restoration as required in a Notice of Violation issued on June 18, 1999. Id. As a result, the Department filed a “Complaint for the Issuance of an Order to Revoke Permit and Forfeit Surety Bond” with the Commission under Department of Natural Resources v. Leo Rexing and Capitol Indemnity Corporation, Administrative Cause # 00-018G on January 24, 2000. Testimony of Rexing, Respondent’s Exhibit 4. Department’s Division of Oil and Gas staff witnessed the plugging of the J.R. Brown well. Testimony of York. York acknowledged that he did not know who paid for that plugging job and explained that the Department’s responsibility is only to confirm the plugging of the well and nothing more. Id.

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35. It is apparent that Rexing bears a grievance against the Department over incidents surrounding the plugging of the J.R. Brown well and believes the Department’s Division of Oil and Gas was responsible for the plugging and is, under some theory, liable to him for damages. Rexing stated his belief that these incidents are evidence of the Department’s unfair treatment of him over the years.

36. The matters at issue in Department of Natural Resources v. Leo Rexing and Capitol Indemnity Corporation, Administrative Cause # 00-018G are wholly unrelated to this proceeding and incidents associated with Rexing’s Permit 26709 have no bearing upon the validity or invalidity of the Department’s actions relating to the Class II Injection Well associated with Permit 36180.

CONCLUSIONS OF LAW

37. Rexing is required to exhaust administrative remedies. Fossil Fuels Min., Inc. v. DNR, 3 CADDNAR 35 (1986). If Rexing wished to contest the substantive allegations contained within the Department’s Notices of Violations, he was obliged to do so by seeking administrative review “within thirty (30) days of issuance” of the Notices of Violation. Indiana Code 14-37-12-4. Because Rexing failed to seek administrative review of the Department’s Notices of Violation within thirty days after February 26, 2009 or February 19, 2010, he cannot now, through this proceeding seek review of those issues.

38. Exhaustion of administrative remedies is most applicably demonstrated in the context of J.H. & L. Coal Company failure to seek administrative review of the Department’s issuance of a notice of violation. After the Department issued a cessation order based upon J.H. & L. Coal Company’s failure to address the notice of violation, J.H. & L. Coal Company attempted to contest the substance of the notice of violation through its appeal of the cessation order. The Commission stated “…the notice of violation is presumed to have been properly issued during an action which challenges the resulting cessation order.” J.H. & L. Coal Co. v. DNR, 5 CADDNAR 161 (1991). That same rationale applies here and prevents Rexing from now seeking review of the Notices of Violation issued by the Department that form the basis of the Department’s subsequently issued Notice of Civil Penalty Assessment and ultimately the Department’s Complaint. See also Chieftain Coal Co., Inc. v. DNR, DOR, 4 CADDNAR 48 (1987).

39. Because Rexing did not seek timely administrative review of the Department’s Notices of Violation, the Notices of Violation must now be deemed valid.

40. The Department presented much evidence during the administrative hearing regarding the substantive violations that underlie the instant proceeding seeking the revocation of Permit 36180. That evidence is not being considered in terms of the validity of the underlying Notices of Violation because the time for review of those issues has long since passed. However, that evidence is important to a determination that the violations remain unabated nearly two years later.

41. As a person to whom Permit 36180 was issued, Rexing is an “operator” of the Class II Injection Well. 312 IAC 16-1-38. As a person “who has the right to drill into and produce from a pool and to appropriate the oil and gas produced from the pool” for his benefit, and potentially for the benefit of others, Rexing is also an “owner” of the Class II Injection Well associated with Permit 36180. 312 IAC 16-1-39.

42. The Department possesses the authority to issue the Notices of Violation associated with Permit 36180 if Rexing violates any portion of Indiana Code §§ 14-37 or any portion of 312 IAC 16. Indiana Code § 14-37-12-2.

43. The evidence that is particularly relevant to this proceeding is that the Department’s Notice of Violation dated February 26, 2009 instructed Rexing to take corrective action to “operate, formally T/A, plug and abandon, or re-permit for production in accordance with IC 14-37-8” with the notation that well “operation and T/A require a pressure test” by April 27, 2009. Claimant’s Exhibit L. The Notice of Violation also provided instruction to Rexing regarding his ability to seek an extension or take administrative review of the Department’s action in issuing the Notice of Violation. Id.

44. Rexing failed to take the required corrective action by the April 27, 2009 deadline. Rexing failed to seek an extension of time to take corrective action before the April 27, 2009 deadline expired. Rexing also failed to seek administrative review of the Department’s February 26, 2010 Notice of Violation within thirty (30) days of its issuance.

45. The Department is authorized to assess a civil penalty against a person who violates Indiana Code § 14-37 or 312 IAC 16 and does not perform abatement of the violation within the time prescribed. Indiana Code § 14-37-13-3, Indiana Code § 14-37-12-5 and 312 IAC 16-5-21(c).

46. As a result of Rexing’s failure to take any action related to the Department’s Notice of Violation issued on February 26, 2009, the Department’s was authorized to assess a civil penalty against Rexing.

47. The Department issued its “Notice of Civil Penalty Assessment” to Rexing in the amount of $500.00 on May 27, 2009. The “Notice of Civil Penalty Assessment” ordered Rexing to pay the assessed penalty “within 30 days of receipt of this Order” and advised Rexing of his ability to seek administrative review of that penalty assessment under Indiana Code § 14-37-13-5 and 312 IAC 16-5-21(c).

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48. Rexing did not pay and has continued to fail to pay the penalty assessed by the Department on May 27, 2009. Rexing also did not seek administrative review of the Department’s determination to assess a civil penalty within 30 days.

49. The Department issued a second Notice of Violation on February 19, 2010 ordering Rexing to “cease well operations and repair all equipment as needed to prevent the migration of fluids within the well annuli per 312 IAC 16-5-13” by April 21, 2010. Claimant’s Exhibit M. As part of the Department’s February 19, 2010 Notice of Violation Rexing was again advised of the ability to request an extension of time to take corrective action or to seek administrative review of the Notice of Violation. Id.

50. Rexing did not take the corrective action required within the time prescribed or seek an extension of time to take the necessary corrective action by the April 21, 2010 deadline. Rexing also did not seek administrative review of the Department’s issuance of the February 19, 2010 Notice of Violation.

51. The Department may seek to revoke a permit held under Indiana Code §§ 14-37 if:

Sec. 9 (a)… (6) the owner or operator has been issued a notice of violation under IC 14-37-12-2 and 312 IAC 16-5-21, and has failed:

(A) to abate the violation with the prescribed period;

(B) to secure in writing from the division an extension of time in which to abate the violation before the expiration of the period established for abatement; or

(C) to request a proceeding under IC 4-21.5-3-6 within thirty (30) days after service of the notification or within the period provided by the division for abatement, whichever is longer.

312 IAC 16-3-9(a)(6)

52. The Notices of Violation and Notice of Civil Penalty Assessment are deemed valid as a result of Rexing’s failure to seek timely administrative review. Rexing’s failure to take corrective action or seek a written extension of time to take the required corrective action within the time prescribed on the Notices of Violation justifies the Department in seeking revocation of Permit 36180.

53. The revocation of Rexing’s Permit 36180 is authorized by Indiana Code § 14-37-13-1(5) and revocation of Permit 36180 is appropriate.

[EDITOR’S NOTE: The original format of the Administrative Law Judge’s Findings of Fact, Conclusions of Law, and Final Order has been modified to correspond with CADDNAR format. The Final Order, Paragraphs 54 through 58, have been relocated to the “Final Order” section at the beginning of this document.]

[1] It is noted that the Notices of Violation and Civil Penalty Assessment at issue in this proceeding do not relate to any failure on the part of Rexing to file the required Quarterly Monitoring Reports.