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Allegro Oil & Gas - Order, November 1, 1993

Order, November 1, 1993

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter of

Alleged Violations of Part 551 of Title 6 of
the Official Compilation of Codes, Rules and Regulations of
the State of New York and Environmental Conservation Law Article 23, Title 3

- by -

ALLEGRO OIL AND GAS, INC.,

Respondent

ORDER

DEC File No.
D9-0113-92-05

WHEREAS:

  1. Pursuant to a Notice of Hearing issued on July 9, 1992 an administrative enforcement hearing was held before Susan J. DuBois, Administrative Law Judge ("ALJ") on February 25, 1993 at the Department's Region 8 Office located in Avon, New York. The Department Staff appeared by Carl G. Dworkin, Esq., Principal Administrative Litigator. The Respondent appeared by G. William Gunner III, Esq., of the firm of Embser & Woltag, Wellsville.
  2. Upon review of ALJ DuBois' Hearing Report, a copy of which is attached, I concur with its Findings of Fact, Conclusions and Recommendations.
  3. As concluded in the Hearing Report, well operators are required to submit annual production reports for any well that is not permanently plugged, whether or not actual production took place.
  4. A civil penalty in excess of the amount recommended by the ALJ is appropriate in these circumstances. The violations involved hundreds of wells and were committed after the Department Staff had repeatedly advised the Respondent of its obligation to report. Moreover, the Respondent has a history of non-compliance with respect to the conduct of its oil and gas operations. The new violations are particularly problematic because the reports which Respondent should have provided were needed to monitor compliance with the January 30, 1991 enforcement order issued against it.

NOW, THEREFORE, have considered this matter and being duly advised, it is ORDERED that:

  1. Respondent is found to be in violation of Environmental Conservation Law Section 23-0305(8)(f) and Subdivision 551.2(b) of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York with regard to reports for 1989, 1990 and 1991.
  2. Respondent is assessed a civil penalty of FIFTY THOUSAND DOLLARS ($50,000). This penalty shall be due and payable thirty (30) days after the service of a conformed copy of this Order on Respondent.
  3. Respondent is ordered to file with the Department annual well reports for 1989 and 1990 for all wells which were the subject of the Shut-In Orders and the Complaints issued by the Department on June 16, 1989 and July 7, 1989.
  4. Respondent is ordered to file with the Department annual well reports for 1991 for all of the wells identified in the preceding paragraph with the exception of the 25 wells which were listed in the disapproved November 26, 1990 notice of transfer of well plugging responsibilities.
  5. All communications between the Respondent and the Department concerning this Order shall be made to the Region 8 Director, New York State Department of Environmental Conservation, 6274 East Avon-Lima Road, Avon, New York 14414.
  6. The provisions, terms and conditions of this Order shall bind the Respondent, its officers, directors, agents, servants, employees, successors and assigns and all persons, firms and corporations acting for or on behalf of the Respondent.

For the New York State Department
of Environmental Conservation

/s/
By: THOMAS C. JORLING, COMMISSIONER

Dated: Albany New York
November 1, 1993

To: Allegro Oil and Gas, Inc.
P.O. Box 1077
Jamestown, New York 14702

G. William Gunner III, Esq.
Embser & Woltag
164 North Main Street
Wellsville, New York 14895-1152

Carl G. Dworkin, Esq.
NYS Department of Environmental Conservation
50 Wolf Road
Albany, New York 12233-5500

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION

50 Wolf Road
Albany, New York 12233-1550

In the Matter

- of -

Alleged Violations of Part 551 of Title 6 of
the Official Compliation of Codes, Rules and Regulations of the State of New York and
of Environmental Conservation Law Article 23 (Mineral Resources) by

ALLEGRO OIL AND GAS, INC.,

RESPONDENT

Case No. D9-0113-92-05

HEARING REPORT

by

/s/
Susan J. DuBois
Administrative Law Judge

PROCEEDINGS

Pursuant to Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR") Part 622, an administrative enforcement hearing was held to consider allegations by the New York State Department of Environmental Conservation (the "Department") against Allegro Oil and Gas, Inc. (the "Respondent"), P.O. Box 1077, Jamestown, New York 14702.

The Department alleged that the Respondent failed to file required annual well reports for over 400 oil or gas wells for the reporting years 1989, 1990, and 1991, in violation of Environmental Conservation Law ("ECL") Section 23-0305(8)(f) and 6 NYCRR Subdivision 551.2(b).

The hearing took place on February 25, 1993 in the Department's Region 8 Office, 6274 East Avon-Lima Road, Avon, New York, before Susan J. DuBois, Administrative Law Judge ("ALJ"). The Department Staff was represented by Carl G. Dworkin, Esq., Principal Administrative Litigator, Albany. The Respondent was represented by G. William Gunner III, Esq., of the law firm of Embser & Woltag, Wellsville.

The Respondent was served with a Notice of Hearing and Complaint dated July 9, 1992. On September 18, 1992, the Respondent submitted its Answer, which is described further below. On September 25, 1992, the Department Staff moved to amend the Complaint, to state that a request had been made to approve transfer of ownership of certain wells from BCR Development Co., Inc. ("BCR") to the Respondent, rather than from the Respondent to BCR as stated in the initial Complaint. On September 28, 1992, I granted the request to amend the Complaint.

The Department Staff also submitted a reply to the Answer on September 25, 1992. The reply stated that the Answer had not denied that the reports were not filed and that therefore the Department Staff was entitled to summary judgement. On September 28, 1992, I denied the request for summary judgement. The Respondent requested and was given the opportunity to obtain documents and other disclosure from the Department Staff but the Respondent apparently did not transmit any discovery demands.

On November 9, 1992 the Department Staff renewed its motions, now described as a motion for summary order. On December 30, 1992, I denied this motion for procedural reasons and because the Respondent had denied most of the allegations in the Complaint.

At the hearing, the Department Staff called as its witness Donald Drazen, Chief of the Technical Assistance Section in the Department's Bureau of Oil and Gas Regulation. The Respondent called as its witness James R. Lee, the sole officer of Allegro Oil and Gas, Inc.

On May 28, 1993, the Department Staff submitted its brief and also requested that an additional document be received in the record. The record had been scheduled to close on May 31, 1993. I extended the close of the record to June 14, 1993 to allow time for the Respondent to reply to the Department Staff's request. No such reply was received and the record closed on June 14, 1993.

The additional document enclosed with the Department Staff's May 28, 1993 request was a copy of a "Notice of Transfer of Well Plugging Responsibilities" and two attached pages which listed specific wells. This document is Exhibit 25 and is received in evidence.

The Charges

The Department Staff charged that the Respondent had failed to submit annual well reports for over 400 oil or gas wells for reporting years 1989, 1990 and 1991, in violation of 6 NYCRR Subdivision 551.2(b) and ECL Section 23-0305(8)(f). The Department Staff identified the wells, some of which were wells for which a request had been made by the Respondent and by BCR Development Co., Inc. for the Department's approval of transfer of ownership from BCR to the Respondent. The Department Staff alleged that during the relevant time periods, the Respondent had been the owner or the operator of all of the wells identified in the allegations.

The Answer

The Respondent denied the allegations. The Respondent also stated that: its operation of the wells had been shut in by the Department and that consequently no annual reports were required; BCR was the owner of some of the wells for the Department's purposes since the Department had not approved the transfer of these wells from BCR to Allegro; and the Respondent has never been the title owner of the wells and is no longer the operator of the wells.

Relief Sought

The Department Staff sought an Order assessing a civil penalty of $4,300,000 (four million three hundred thousand dollars), of which $2,300,000 would be suspended if the Respondent submits the annual well reports within 30 days of the date of the Order.

Official Notice

Official notice was taken of the Second Interim Decision and Order issued by Commissioner Thomas C. Jorling on January 30, 1991 In the Matter of James R. Lee, Allegro Oil and Gas, Inc., Allegro Investments, Inc. (d/b/a Whitesville Producing Co.), Associated Drilling Co. (d/b/a 37th Joint Venture), Professional Planning Drilling Associates - 1983, Professional Planning Drilling Associates - 1984 and BCR Development.

There were requests that official notice be taken of a number of other documents. Official notice of these documents was conditioned upon a properly authenticated copy of the document being provided for the record by the party which was proposing that official notice be taken. No such copies were provided, and official notice is not being taken of these additional documents.

LAW AND REGULATIONS

ECL Section 23-0305(8)(f), as it read during the time from January 1, 1989 to July 23, 1989, provided in pertinent part that:

"With respect to oil pools or fields and natural gas pools or fields, the department shall have power to: ... (f) Require that every person who produces, sells, purchases, acquires, stores or transports oil or gas in this state shall keep and maintain complete and accurate records of the quantities thereof. True copies or duplicates shall be kept or made available for examination within this state by the department or its agents at all reasonable times and every such person shall file with the department such reports concerning production, sales, purchases, transportation or storage on a form acceptable to the department...."

ECL Section 23-0305.8(f) was amended by Chapter 721 of the Laws of 1989, effective July 24, 1989, to read as follows:

"With respect to oil pools or fields and natural gas pools or fields, the department shall have power to: ... (f) Require that every person who produces, sells, purchases, acquires, stores or injects oil or gas and associated fluids and every person who transports oil or gas in this state shall keep and maintain complete and accurate records of the quantities thereof. Quantities of associated fluids injected or produced may be reported as estimated volumes. True copies or duplicates shall be kept or made available for examination within this state by the department or its agents at all reasonable times and every such person shall file with the department such reports concerning production, sales, purchases, acquisitions, injection, transportation or storage on a form provided by the department or approved by the department prior to submittal."

6 NYCRR Subdivision 551.2(b) provides that:

"Each person who first produces, sells or purchases oil and gas produced in the State and the operator of each gas storage facility in the State must file with the department on a form the department prescribes a statement of the oil and gas produced, sold, purchased or stored. The information contained in this statement must be compiled on a calendar year basis and must be filed no later than March 31st next following the close of the calendar year, unless the department requires otherwise."

FINDINGS OF FACT

  1. Allegro Oil and Gas, Inc. (the "Respondent") is a corporation whose address is P.O. Box 1077, Jamestown, New York 14702. As discussed more fully in the Findings below, the Respondent operated oil and gas wells in western New York State during calendar years 1989, 1990 and 1991.
  2. The Complaint alleged that the Respondent had failed to file production reports for 413 wells, which are listed in Appendix A of this hearing report (Exhibit 4 of the hearing record). Some of these wells were also the subject of two shut-in orders issued by the Department on June 16, 1989 and July 7, 1989, respectively (the "1989 shut-in orders"). The 1989 shut-in orders were accompanied by notices of hearing and complaints. The allegations in the 1989 shut-in orders and complaints which were relevant to the question of whether wells should be shut in were adjudicated in a hearing which took place in 1989 and 1990. The remaining allegations in the 1989 shut-in orders and complaints which related to relief such as penalties were deferred to a later phase of that hearing, which has not yet taken place.
  3. It is not clear from the record of the present hearing that all of the wells which are the subject of the present allegations were also the subject of the 1989 shut-in orders, but at least 281 of the wells in the present complaint were the subject of the 1989 shut-in orders. These 281 wells are included in the lists which are attached as Appendices B and C of this report. The 1989 shut-in orders were lifted, pursuant to a court order, on November 1, 1989. The Second Interim Decision and Order issued by Commissioner Thomas C. Jorling on January 30, 1991 re-imposed the shut-in for only those 98 wells on the list which is Appendix B of the present report.
  4. In 1989, the Respondent was the operator of the wells which were the subject of the 1989 shut-in orders and complaints. The Respondent continued to be the operator of these wells in 1990 and 1991, with the possible exception of 25 wells which may have been operated by another company in late 1990 and 1991.
  5. The Respondent did not submit any annual reports to the Department for calendar year 1989 for any of the wells identified in the present complaint. No person has submitted annual reports for 1989 for any of the wells. Similarly, neither the Respondent nor any other person has submitted annual reports for 1990 or 1991 for any of the wells.
  6. In January 1990, the Department sent to the Respondent copies of the annual well report form and a form letter notifying the Respondent of how the annual well reports for 1989 were to be filled out and submitted. The Department also sent follow-up letters dated March 20, 1990 and May 23, 1990 to the Respondent which notified the Respondent that the Department had not received reports from the Respondent and that the Respondent could be subject to penalties for failing to report.
  7. The Department sent similar correspondence to the Respondent in early 1991 regarding the reports for 1990, and in early 1992 regarding the reports for 1991.
  8. The Respondent had submitted annual reports for wells on the Duke lease for 1985, 1986, 1987 and 1988, in which the Respondent reported on both active wells and an inactive well.
  9. The Respondent's assets are probably limited, but their actual extent is not identified in the record.

DISCUSSION

The applicable requirements of the Environmental Conservation Law and of the Department's regulations are cited in a prior section of this report. The evidence is clear that no annual well reports were filed by any person for the wells identified in the present complaint. The other question at issue in the hearing was whether the Respondent was obligated to submit such reports.

The Respondent's answer stated, in part, that its operation of the subject wells had been shut in by Department action during the period complained of, thus dispensing with the need for annual reports. Prior to the hearing, I requested that the parties submit briefs on the question of reporting on wells that are not in operation during a particular year. The Department Staff submitted a brief but the Respondent did not. On February 5, 1993, I notified the parties that the Department Staff's brief had demonstrated that an annual report regarding production is required for each well irrespective of whether any oil or gas was produced from the well during the year in question, and that consequently evidence regarding whether or not particular wells produced any gas or oil in the years in question (1989-1991) was not relevant and would not be considered in the hearing.

Given the lack of reports and the above ruling about production, the main question to be decided is whether or not the Respondent was the operator of the wells named in the complaint during any of the years 1989, 1990 and 1991. The reporting requirements of ECL Section 23-0305(8)(f) and 6 NYCRR Subdivision 551.2(b) apply to operators of oil and gas wells, among others.

Only limited evidence was presented by the Department Staff regarding the allegations that the Respondent was either the owner or operator of the wells named in the complaint. At the same time, the Respondent was not specific in presenting evidence to refute the allegations that it was the owner or operator of the wells named in the complaint. The record does, however, demonstrate that the Respondent was the operator of at least a majority of the wells named in the complaint and that this was so in 1989, 1990 and 1991.

During the hearing on the 1989 shut-in orders, counsel for Allegro Oil and Gas, Inc. stated on the record of the July 25, 1989 hearing that Allegro Oil and Gas, Inc. was the operator of all of the wells involved in the 1989 shut-in orders and complaints. These statements from the July 25, 1989 transcript were read into the record of the present hearing The hearing report which accompanied the January 30, 1991 Second Interim Decision and Order concluded, at page 33 of the hearing report, that, "While the identity of the owner(s) and operator(s) is still unclear, the best indication in the present record is that Allegro Oil and Gas, Inc. is both the owner and the operator of these 60 wells [wells drilled by Allegro Oil and Gas, Inc. which were discussed in Finding 7 (at page 11) of that hearing report]." The hearing report which accompanied the 1991 Second Interim Decision and Order reported on only the first phase of the proceeding. The findings and conclusions of the present hearing report are based on the record of the present proceeding, which has been completed.. The President of the Respondent testified in the present hearing that for a "short time" prior to October 1990 the Respondent was the operator of the wells for which BCR is identified as the "registered owner" in the list which is Appendix A of this hearing report.

The Respondent sought to prove that in late 1990 Lee Oil Company, Inc. had become the operator of some of the wells. The transfer of operator responsibilities from the Respondent to Lee Oil Company, Inc. involved 25 wells which are located on the Duke and McCaffery leases. Regardless of whether or not the Respondent is still the operator of these 25 wells, there is no evidence that any other entity has become the operator of any of the other the wells named in the complaint. Thus, the record of the present hearing indicates that in 1991 the Respondent continued to be the operator of at least the majority of the wells named in the Complaint.

With regard to the 25 wells, a notice of transfer of well plugging responsibilities dated November 26, 1990 was submitted to the Department by the Respondent and Lee Oil Company, Inc. The Department's review of such notices relates to the Department's authority to approve or disapprove the transfer of well plugging responsibilities pursuant to ECL 23-0305(8)(e), rather than to determining who is the actual operator of the wells identified on such a notice. This particular transfer was disapproved by the Department. In view of the notice and its disapproval, the record is unclear as to who was actually the operator of these 25 wells in 1991, but Lee Oil Company, Inc. may have been the operator during part of 1990 and part of 1991.

The Department's disapproval of this transfer of well plugging responsibilities has been upheld by the Supreme Court, Appellate Division, Fourth Department (Lee Oil Company, Inc. v. Jorling, 593 N.Y.S.2d 688). The Appellate Division decision is dated February 5, 1993. It reversed a decision of the Supreme Court, Cattaraugus County, the date of which is not identified.

The Department Staff requested that a penalty of $4,300,000 (four million three hundred thousand dollars), of which $2,300,000 (two million three hundred thousand) would be suspended if the Respondent submits the reports within 30 days of the date of the Commissioner's Order in this matter. In their closing brief, the Department Staff stated that this penalty was approximately one percent of the maximum penalty which could be imposed based in the number of violations and the number of days on which the violations continued, and that a large penalty was justified based on the Respondent's defiance of the Commissioner. The Respondent did not submit a closing brief, but elicited some testimony at the hearing regarding the Respondent's financial status.

The Department's Civil Penalty Policy (Enforcement Guidance Memorandum No. II, issued on June 20, 1990) identifies a number of factors which the Department takes into account in imposing penalties for violations of the Environmental Conservation Law and the related regulations. Factors which are pertinent in the present hearing include the Respondent's cooperation or lack of cooperation in remedying the violation, any history of non-compliance, and the Respondent's ability to pay the proposed penalty.

The Respondent was aware of the reporting requirement, as shown both by its reports for the Duke lease wells in the years up to 1988 and by the letters which the Department sent to the Respondent about the 1989, 1990 and 1991 reports. The Respondent's assertion that reports were not necessary since the wells were shut in does not appear to be an actual misunderstanding of the requirements, besides being irrelevant to the question of whether the reports were required.

While the second phase of the hearing on the 1989 shut-in orders and complaints has not been completed, the first phase of that hearing revealed safety and financial security violations which led to approximately 100 of the wells being shut in.

Although the Respondent presented some evidence that indicates that its assets are small, the record does not provide a basis to quantify this in a manner which would be meaningful in evaluating a penalty.

The penalty sought by the Department Staff is disproportionately large in comparison with the penalties imposed by the Commissioner following recent administrative enforcement hearings for violations of a variety of provisions of the Environmental Conservation Law. There are few precedents from hearings involving violations of this particular reporting requirement or similar requirements. In the most similar case which appears in the Office of Hearings' index of orders rendered in adjudicatory proceedings, a penalty of $1,000 was imposed for a failure to file production reports for 12 wells for five years, $500 of which was suspended (In the Matter of Solomon's Resources, December 16, 1991, Case No. R9-3130-90-05). Other violations were also found to have occurred in that matter and resulted in additional penalties. Half of the penalties were suspended in order to provide an incentive for Solomon's Resources to resume management of its oil lease and to remedy the violations. In the present case, it does not appear likely that a suspended penalty would be a useful incentive.

In view of the record in the present case, a civil penalty within the range of $2,000 to $10,000 would be appropriate.

CONCLUSIONS

  1. The Respondent violated ECL Section 23-0305(8)(f) and 6 NYCRR 551.2(b) by failing to file annual reports for oil and gas wells which it operated in 1989, 1990 and 1991. The exact number of wells for which the Respondent failed to file reports in each of these three years is difficult to identify from the hearing record, but the violation involved failure to report on at least 280 wells in 1989 and 1990 and at least 255 wells in 1991.
  2. ECL Section 71-1307 identifies the administrative sanctions for violation of any provision of ECL Article 23.

RECOMMENDATION

I recommend that the Respondent be ordered: (a) to submit annual well reports for 1989 and 1990 for all of the wells which were named in the 1989 shut-in orders and complaints (i.e., the wells for which it admitted to being the operator); and (b) to submit annual well reports for 1991 for this same group of wells except for the 25 wells which were involved in the November 26, 1990 proposed transfer from Allegro Oil and Gas, Inc. to Lee Oil Company, Inc.

I further recommend that a civil penalty within the range of $2,000 (two thousand dollars) to $10,000 (ten thousand dollars) be imposed upon the Respondent.

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