Executives of bankrupt methane farming company Luca Technologies Inc. sent a letter to Gov. Matt Mead and other state officials saying they are $1.9 million short in bonding of their wells but have a plan to plug them that involves selling a natural gas gathering system subsidiary to another company.

State agencies want well operators to obtain bonding as a protection measure in case operators go out of business or bankrupt. In such cases, the state would use the bond money to plug the wells. But Luca never obtained enough bonding for all of its wells, said Grant Black, Wyoming state oil and gas supervisor.

The Golden, Colo.-based company produced methane in coal-bed methane wells in the Powder River Basin that had previously been depleted of the gas. Luca used a proprietary process of feeding microbes that live in coal seams with water and chemicals.

Two years ago, the company lobbied the Wyoming Legislature to create a regulatory framework for its new industry. But in July, Luca filed for Chapter 11 bankruptcy protection in federal court in Denver, saying that low natural gas prices and delays in federal permitting caused investors, which had poured more than $100 million into the company, to pull financing.

The company is now in the process of selling all its assets to pay off creditors, which include residents and businesses in Wyoming. The state and Campbell County also allege the company underpaid taxes, which the company denies.

But Jill Morrison, of the landowner conservation group the Powder River Basin Resource Council in Sheridan, has studied bonding shortfalls in Wyoming and calls the plan that Luca executives outlined in the letter "a bit of a scam." And Black, the state's oil and gas supervisor, said Luca’s accounting of its wells is inaccurate – that the company owns more wells in Wyoming than the letter states.

The governor and officials from the Wyoming Oil and Gas Conservation Commission, the Wyoming Department of Environmental Quality and the Wyoming Office of State Lands and Investments are considering the letter and don’t know whether they’ll go along with Luca’s proposal, according to the officials or their spokesmen.  

The plan

In the Oct. 11 letter to Mead and state officials, the company said that for the wells to be economical, it must find a buyer willing to implement its technology. No one has been willing to buy the wells. In addition, the company also been permitted to discharge water into reservoirs.

Luca subsidiary Patriot Energy Resources LLC owns the wells.

“Patriot has virtually no money, no ability to sell its wells and limited assets to try to pull a deal together that would allow it to pay off creditors, plug and abandon wells and reclaim or release water reservoirs,” the letter stated. “The transaction proposed below is the best alternative that Patriot was able to craft.”

But Patriot’s sister company, Patriot Energy Gathering LLC, has significant equipment for the gathering system and no debt.

The proposed transaction would be a four-way contract among Patriot Energy, the state, Gillette-based Justice Oil and Gas LLC and Gillette-based Windcreek Services Inc., according to the letter:

  • Justice Oil currently owns on average a 15 percent working interest in 407 of the company’s wells. Under the proposed transaction, Justice would provide cash, up front, to help plug wells if the state would release Justice from future plugging liability of those wells. That cash would help pay Patriot’s existing debts, then allow Patriot to use its remaining assets to plug wells.
  • Patriot would assign all the equipment of the gathering system to Windcreek, which would own it free of obligations.
  • Windcreek would be assigned all of Patriot’s bonds.
  • When the state was able to prove that Windcreek properly plugged a well, it would release to Windcreek about $4,750 in bonds per well within 30 days. If reservoirs were properly reclaimed or released to landowners, DEQ would release bond money to Windcreek in 30 days.

The letter states that Patriot, Justice and Windcreek have agreed to the deal. Luca executives wrote in the letter that they want Mead’s office to coordinate for three state agencies.

State reactions

Renny MacKay, a spokesman for Mead, said in an email that the bankruptcy creates a complex situation. Mead and the state agencies are reviewing Luca’s proposal.

“The state agencies are compiling information and researching the legal, environmental and regulatory ramifications of Luca’s bankruptcy and will formulate a plan that is best for Wyoming,” MacKay said.

Black, the Wyoming state oil and gas supervisor, said the number of wells in Wyoming described by Luca executives is inaccurate. They said they had 786 wells on private and state-owned lands.

He said his agency, the Wyoming Oil and Gas Conservation Commission, has documented 826 wells on private lands, 86 wells on state lands and 11 injection wells that are on private lands but are regulated by DEQ.

Additionally, the company has 451 wells on federal land, making for a total of 1,374 wells in Wyoming, Black said.

Black agreed with the Luca executives’ assessment that it is $1.9 million short in bonding.

In November, Black said that the company’s executives will appear before the Oil and Gas commission because the state wants to cash some of Luca’s bonds held by a California bank. Black said the bank holds Luca assets that the commission can collect.

As for the proposal, Black’s agency will help the governor review it and decide whether to accept it.

“I’m not aware that what has been proposed has been done in the past,” he said. “We’re still evaluating that. It’s really hard to say [whether the proposal might be accepted].”

Bridget Hill, director of the Office of State Lands and Investments, said her office is still investigating the shortfall. Luca claims it has $541,090 in bonding for the wells on state lands. She said her office doesn’t have an opinion on Luca’s letter yet.

Bill DiRienzo of DEQ said that Luca’s bonding for reservoirs is current. The company has 32 permits allowing it to discharge into 89 reservoirs.

Other reactions

In an email statement to the Star-Tribune, Luca attorney Matt Micheli said that the proposed transaction is in good faith.

“Patriot is trying to be creative and use any existing assets to meet this obligation,” he said.

But Morrison of the Powder River Basin Resource Council described having to draw a diagram to understand the proposed transaction. She is concerned that Windcreek wouldn’t have to post a bond for Luca’s shortfall. There are no guarantees the state would be protected, she said.

She also is concerned that Justice Oil and Gas would get off the hook for liability of plugging wells under the deal. The proposed deal doesn’t say how much money or footage Justice would pay for plugging.

“It’s a bit of scam, I think,” she said.

The owner of Windcreek did not return messages to the Star-Tribune. Black, the state oil and gas supervisor, said Windcreek is a well-plugging company.

Justice is owned by Gillette attorney John Daly. State law is specific on plugging, and surface owners are not responsible for plugging them. If the state doesn’t go through with the proposed transaction, he is not sure what Justice’s liability on plugging the wells would be.

Daly said that many of the Luca wells he has interest in are on his ranch, north of Gillette. He insists the deal isn’t easy for his company.

“The state of Wyoming, Justice and Luca are all big losers in this,” he said of the bankruptcy.

Reach state reporter Laura Hancock at 307-266-0581 or at laura.hancock@trib.com. Follow her on Twitter: @laurahancock.

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