Ledes from the Land of Enchantment

It’s settled: New Mexico to bankroll plugging of oil wells for Texas company

A settlement between the state of New Mexico and Ridgeway Arizona Oil Corp. will plug 299 of the company’s moribund, nonproducing oil wells, with the state paying the costs and the company reimbursing the state $30,000 a month until the bill is repaid.

Plugging costs could top $30 million, said Sidney Hill, public information officer with the New Mexico Energy, Minerals and Natural Resources Department, the parent of the regulatory and enforcement Oil Conservation Division. At $30,000 a month, the repayment process could take more than 83 years.

The settlement also waives more than $270,000 in proposed fines for produced water violations and an unlit flare at a facility owned by Ridgeway.

The Oil Conservation Division has not reached a settlement quite like this before, Hill said. During negotiations between the division and the company, “It became clear that Ridgeway was not positioned to bear the projected liabilities of remediation and plugging and abandonment of 299 wells,” which necessitated the deal, he said. Last year, Capital & Main highlighted Ridgeway’s numerous inactive wells and its politically connected CEO, Simon Kukes, a former executive in the Russian petrochemical industry, a onetime ally of Russian President Vladimir Putin and a supporter of former U.S. President Donald Trump.

Hill said the settlement offered “the best opportunity to alleviate financial risk to the State of New Mexico while plugging the inactive, and potentially venting … wells in the shortest possible timeframe.”

Andrew Forkes-Gudmundson, senior manager for state policy at Earthworks, a nonprofit watchdog of the mineral and fossil fuel industries, said in an interview that he understood the reason for the deal between the division and Ridgeway and that it might be the best option available in light of the circumstances. “But I’m not sure that makes it actually, like, reasonable.”

New Mexico “is doing that because they don’t have any other tools available,” Forkes-Gudmundson continued. “This is as good as they can hope for in their current framework, so we’ve desperately got to change the framework. Because this is not a good deal for the residents in New Mexico.”

Officials at Ridgeway Arizona Oil Corp. and its parent company, Pedevco Corp., did not respond to Capital & Main’s requests for comment on this story.

The framework mentioned by Forkes-Gudmundson is the state’s Oil and Gas Act, the primary law outlining how oil and gas are produced in New Mexico. It covers the full lifespan of a well, from drilling to plugging and everything in between. Hill previously said that the 1935 law hasn’t had a major update since the 1980s and ’90s, rendering it “stale.”

“I hope this is a wake up call for the legislature to take action this session to protect against this catastrophe repeating itself,” said Tannis Fox, senior attorney with the Western Environmental Law Center.

Since September, Fox, Forkes-Gudmundson, Oil Conservation Division representatives and roughly four dozen others from environmental protection groups and the oil and gas industry have been meeting to craft an update to the act, an effort initiated by Gov. Michelle Lujan Grisham’s office. The group is scheduled to unveil a draft bill by Dec. 22 to be introduced at the legislative session beginning in January. A similar bill, without the governor’s direct backing, died last session. Hill called the Ridgeway violations “important examples” in support of Oil and Gas Act reform.

*   *   *

In August 2022, Ridgeway was at the center of a Capital & Main investigation into companies taking advantage of a state program allowing oil and gas producers to temporarily shut off wells due to the collapse of the fossil fuel market following global COVID-19 economic shutdowns. Instead of forcing companies to produce oil and gas at a loss during the pandemic — which has the side effect of lowering state tax revenue from undervalued oil and gas sales — the Oil Conservation Division implemented an emergency rule allowing companies to shut down wells for up to three years without penalty. Normally, companies can idle only a few operational wells for a maximum of 15 months, at which point they must be put back into production or plugged.

Dozens of companies shut down thousands of wells under the program. Ridgeway didn’t have the most wells in the program overall, but it did have the most that had already ceased production — some for years, some for decades — and should have been plugged long ago. When asked about Ridgeway’s inactive wells in 2022, the division’s then-director Adrienne Sandoval said Ridgeway was already on the agency’s radar. The initial violation notice the division sent to Ridgeway this April showed that the division twice sent an inspector to check the company’s field operations: once after Capital & Main raised the initial questions in June 2022 and again after the story ran two months later.

The company was charged with breaking several laws in its field operations but Ridgeway complied with state-mandated financial assurance obligations — also a part of the Oil and Gas Act. Like other oil-and-gas-producing states and the federal government, New Mexico requires companies to buy assurance bonds that can be cashed in to pay for plugging and cleaning up abandoned wells should the company go broke and leave wells behind. Ridgeway Arizona has such bonds as required by state law. But Ridgeway isn’t bankrupt, so the state doesn’t have access to that money. Even if it did, Hill said it wouldn’t be enough — just $1.25 million — underscoring what he called “the extreme disparity” between plugging costs and New Mexico’s current bonding requirements. As a result, the department allowed the company to continue operating and incrementally paying the plugging and cleanup bills.

The settlement order said that the division wanted “to resolve the alleged violations without the cost and expense of a hearing on the legal and factual issues.” Basically, it didn’t want to tie up more of its limited finances and human resources in a long and expensive legal fight.

Western Environmental Law Center’s Fox called the Ridgeway situation “a poster child for the need for financial assurance reform under the Oil and Gas Act.”

Ridgeway Arizona is a wholly-owned unit of Pedevco Corp., a small Houston-based publicly traded corporation with two other oil production companies in its portfolio: EOR Operating Co. in New Mexico and Red Hawk Petroleum in Colorado. Kukes, Pedevco’s majority owner and CEO, bought his controlling interest in the financially distressed company in 2018 for pennies on the dollar. He is a Russian-born American who first entered the public eye in the 1990s, during the post-Soviet free-for-all in the Russian oil industry. Kukes ran oil companies, sometimes controversially, culminating in 2003 when Russian President Vladimir Putin appointed him to run Yukos Oil Co., the country’s largest petroleum company at the time, after throwing its previous head, Mikhail Khodorkovsky, in prison. Following more years in the industry, Kukes entered the spotlight again in 2016 after donating $443,400 to multiple Republican committees and candidates, including $273,000 to the Trump Victory committee. According to reports at the time, he told a Russian official, “I am actively involved in the Trump presidential campaign and am part of the election strategy development group.”

*   *   *

In the U.S., publicly traded companies are required to file quarterly and annual reports with the Securities and Exchange Commission outlining (among other things) profits, losses and potential legal liabilities. Pedevco’s latest quarterly report, signed by Kukes on Nov. 9, makes no mention of the company’s legal troubles with New Mexico through Ridgeway Arizona. Under the heading “Legal Proceedings,” it said, “We are not aware of any material legal or governmental proceedings against us or contemplated to be brought against us.”

The report showed the company had increased total sale volumes of oil and natural gas (measured in barrels of oil equivalent) by 43%. It also showed a working capital surplus of $15.1 million. That’s down $1.2 million from 2022 — not from plugging and remediating its nonproducing wells but from buying new leases and drilling new wells. In addition, the company’s annual report said its top four executives received $2.3 million in total compensation in 2022.

Pedevco owns Ridgeway through a holding company called Pedco. Hill said that when dealing with corporate structures like this, “In most cases, the subsidiary will be legally distinct from the operator’s parent corporation and [the parent is] afforded a degree of protection from the liability of the subsidiary.” Going after the parent would require a “significant allocation of legal resources,” he added. Even so, the Oil Conservation Division “has not waived its right to seek such responsibility and indemnification from parent corporations.”

The division’s goal at this point is to keep Ridgeway operating. “If the operator is able to bring new wells online, its rate of reimbursement [to the state] will increase dramatically,” Hill said. “If Ridgeway is not able to bring new assets online, OCD projects that Ridgeway will only be able to make minimum payments.”

Plugging and remediation costs will likely come from the state’s orphan well reclamation fund, Hill said.

“The state needs to really look closely at this Ridgeway example, and see how quickly the numbers get really, really, really big for taxpayers,” Forkes-Gudmundson said. “I mean, $30 million is a lot of money.”

By comparison, in 2022, New Mexico started a new Office of Family Representation and Advocacy, which provides legal representation to underserved parents, children and guardians who appear before the state’s child welfare system. Its total annual budget is a little more than $10 million.

Forkes-Gudmundson praised the Oil Conservation Division and Dylan Fuge, its director, for doing as much as they do with the limited funding they get from the New Mexico Legislature.

“They clearly don’t have the support that they need,” Forkes-Gudmundson said. And with at least 1,700 known abandoned wells in the state, he said, “the math gets really scary really, really quickly — and New Mexico needs to grapple with that really seriously.”

Comments are closed.