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Bankrupt Driller Not Required to Plug Abandoned Well

Authors: Francis J. Lawall and Michael J. Custer

Bankrupt Driller Not Required to Plug Abandoned Well

Reprinted with permission from the June 15, 2017 issue of The Legal Intelligencer. © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

When an oil and gas driller enters bankruptcy, a host of unique issues often arise, including how to close abandoned wells in a ­responsible manner. The United States Bankruptcy Court for the District of Delaware recently confronted this problem in the case of an energy exploration and production company liquidating through Chapter 11, as in City of Beverly Hills v. Venoco (In re Venoco) 2017 Bankr. LEXIS 1457 (Bankr. D. Del. May 31, 2017). In Venoco, the city of Beverly Hills, California and its school district sought a preliminary injunction requiring the debtor to monitor and maintain an oil and gas drilling site and create a separate reserve to fund those ­obligations. In ruling for the debtor, the court found that the problem created by the wind-down at the site, although a serious one, could be addressed through the claims process rather than the extraordinary relief of a preliminary injunction.

Venoco operated an oil and gas well ­located on the grounds of a Beverly Hills high school, which it acquired in 1995 by transfer from a prior operator. The underlying lease, which it also assumed, was subject to various contractual as well as statutory and regulatory restrictions. First, the lease itself terminated the right to extract oil and gas from the site automatically on Dec. 31, 2016. It further provided that within 90 days thereafter, all oil and gas operations at the site were to be discontinued in compliance with applicable laws and the site restored to its original condition. Similarly, the California regulatory agency responsible for oversight, known as DOGGR, expressly required cessation of oil and gas production by Dec. 31, 2016, and the wells properly "abandoned" in accordance with applicable law. Furthermore, the original site construction permits granted by the city of Beverly Hills called for the issuance of an Environmental Impact Report concurrent with production termination by Dec. 31, 2016, as well as restoration of the property to its original condition.

As of Dec. 31, 2016, Venoco ceased operations at the site. It did not, however, plug the wells or remove its equipment, tank and derricks. Venoco instead announced its intention to vacate by May 31, after which it would have no employees or contractors in Beverly Hills to monitor or maintain safety and security. On May 15, DOGGR issued an ex parte order, directing Venoco to plug and abandon the wells, decommission the production facilities, and restore the property. On May 16, Beverly Hills issued a compliance order, charging that Venoco had been in violation of the conditions of its permit and the city's ­municipal code since April 1 (i.e., 90 days after terminating operations at the site). The compliance order imposed various requirements on Venoco related to abandoning and restoring the site.

On May 18, Beverly Hills and the school district filed an adversary action against Venoco seeking preliminary injunctive relief: directing Venoco to remain on, monitor, and maintain the site until the earliest of either Venoco's satisfactory compliance with DOGGR's plug and abandon order and the city's ­compliance order, the resolution of any dispute regarding the plug and abandon order or the compliance order and Venoco's compliance with the respective orders consistent with such resolution, or further order of the bankruptcy court upon a finding that Venoco's continued presence was no longer necessary or appropriate, and directing Venoco to create a reserve of an appropriate amount of funds to enable it to comply with the plug and abandon order and the ­compliance order.

In deciding the request for preliminary injunctive relief, the bankruptcy court first identified the factors courts consider: the likelihood that the moving party will succeed on the merits; the extent to which the moving party will suffer irreparable harm without injunctive relief; the extent to which the nonmoving party will suffer irreparable harm if the injunction is issued; and the public interest. The court concluded that the movants had failed to satisfy all four of the factors.

With respect to the likelihood of success on the merits, the court drew a distinction between the case before it and precedent the movants cited involving the release or threatened release of hazardous waste. In contrast to those cases, the court found that Venoco was making certain that the surrounding community was protected from the harm the site might pose. Venoco presented testimony at the hearing that Venoco always had at least one employee present who periodically monitored and recorded pressure at the wells. Venoco's expert testified that the site was in very good condition and there was no imminent or identifiable harm at the site and minimal or no ­identifiable threat. The court concluded that Venoco had not put the public health at risk or refused to respond or reimburse for response costs. Venoco had also made it clear that it intended to remain at the site until a replacement entity was installed. The court thus found that the costs of decommissioning the site were best handled through the claim process. The movants could file a claim and the court would determine the claim's proper classification and amount. The court stated that the "ultimate answer to the Motion is this: there is no immediate and irreparable harm as long as the Site is monitored. Venoco is in bankruptcy liquidation and cannot be expected to remain in place for long. Therefore, movants must hire a replacement monitoring firm. Likewise, movants must find a firm to decommission the site. Their losses are compensable through the filing of claims."

With respect to the other preliminary injunction factors, the court found that the movants would not suffer irreparable harm because pure economic injury compensable through money damages is not irreparable injury. The court noted that movants' request for a reserve to enable compliance with the plug and abandon order and the compliance order was an admission that money damages would be sufficient. In contrast, the court concluded that Venoco would suffer substantial irreparable harm if the court granted the injunctive relief, because it had to be ­permitted to liquidate its estate without being held in suspension. Finally, the court determined that injunctive relief would not serve the public interest because if the transition of the monitoring process from Venoco is maintained, there would be no threat to the public's health or safety. The bankruptcy court therefore denied the requested preliminary injunction, but did require Venoco to remain at the site at its cost through June 30, and to monitor and assist in the transition to a replacement monitoring firm. This represented a one-month extension from Venoco's previously announced exit date.

The Venoco decision presents a practical approach to the real problems an oil and gas producer's liquidation in bankruptcy can cause. Here, the court recognized the serious complications Venoco's exit from the Beverly Hills site presented for the city and its citizens, but grounded its decision in the principle that those complications were ultimately monetary in nature, and could and should be dealt with through the claims process. Luckily, the Venoco well was not an imminent threat to the health, safety and welfare of the community. Had such existed and neither Venoco nor the surrounding community had the funds to deal with the problem, then the court's decision may have been much more difficult.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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