Petro Mex, LLC v. United States

In the United States Court of Federal Claims

No. 14-1024C

Filed: February 20, 2023

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PETRO MEX, LLC, *

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Plaintiff, *

v. *

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UNITED STATES, *

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Defendant. *

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Douglas J. Reynolds, The Reynolds Law Group, Durango, CO. With him was

Michelle Der Ohanesian, The Reynolds Law Group, Durango, CO.

Kara M. Westercamp, Trial Attorney, Commercial Litigation Branch, Civil Division,

United States Department of Justice, Washington, DC, for defendant. With her were

Allison Kidd-Miller, Trial Attorney, Commercial Litigation Branch, Tara K. Hogan,

Assistant Director, Commercial Litigation Branch; Patricia M. McCarthy, Director,

Commercial Litigation Branch, and Brian M. Boynton, Principal Deputy Attorney

General, Civil Division. Philip C. Lowe, Solicitor’s Office, United States Department of

the Interior, Lakewood, CO, of counsel.

OPINION

HORN, J.

In the above-captioned case, plaintiff Petro Mex, LLC (Petro Mex) filed its

complaint in the United States Court of Federal Claims alleging that defendant breached

its lease agreement for oil and gas mining. Plaintiff seeks more than $5,000,000.00 in

damages, including expectations damages, reliance damages, interest and fees.

Specifically, plaintiff “seeks damages for the approximately two-year period in which it

was prevented from producing and selling oil and gas and for damage to the wells on the

Lease that were caused by the extended shut-in period.” The above captioned case was

originally assigned to Judge Nancy B. Firestone. The above captioned case was

subsequently reassigned to Judge Robert H. Hodges, before ultimately being reassigned

to the undersigned. The undersigned held a trial on plaintiff’s breach of contract claims

and defendant’s offset claims.

FINDINGS OF FACT

The Garfield Lease

The parties have stipulated that “[e]ffective March 1, 1965, Celeste C. Grynberg

and the DOI [United States Department of Interior] entered into oil and gas lease number

COC-0124705A (Garfield Lease) on public land,” and “[t]hrough a series of assignments,

Petro Mex acquired record title to the Garfield Lease effective October 1, 2004. At all

times relevant to this case, Petro Mex was the owner and the operator of the Garfield

Lease.”1 (alterations in original). Additionally, the parties stipulated that “[a]t all times

relevant to this case, Jesus Villalobos was the owner and president of Petro Mex.” Mr.

Villalobos testified at trial that he is the sole owner of Petro Mex. Mr. Villalobos explained

that he founded Petro Mex

[b]ecause I get a chance to come into the -- since I’ve been in the oilfield

business all my life -- I used to have a friend that -- his name was John

Durham and he come over and talk to me to buy oil wells in Colorado. Well,

he’s trying to buy those wells, but he said he can’t come up with the money.

So he asked me if I can buy them. So that’s when I started Petro Mex.

(alteration added).

The Garfield Lease began with a series of “Lease Terms.” Section 1 of the Garfield

Lease states:

1 As noted by defendant, although there were also “references to Lease COC-088586

(Mesa Lease) and Lease COC-60770 (Esmerelda [sic] Lease) throughout the trial, the

Garfield Lease is the only lease at issue.” (alteration added). Plaintiff’s counsel stated at

the trial that the Mesa Lease “is not at issue in this matter for ownership reasons.” Plaintiff

did not contest defendant’s statement that the Esmeralda Lease is not at issue in this

case. The court notes that the Esmeralda Lease was referenced in a June 16, 2009 letter

to Petro Mex, discussed below. The June 16, 2009 letter stated, in part:

Lease COC-60770

The status of COC-60770 has been difficult to track for the past several

years. The Esmeralda 1-2 was spud on July 4, 2007 and a lease extension

was earned by drilling over the lease expiration date. As of today the well

has not been completed. In addition, the location for the Esmeralda 2-2 has

been built and Petro Mex will be responsible for restoration. The APD

[Application for Permit to Drill] for the 2-2 well has expired. We have

consulted with the Minerals Management Service and our State Office and

have determined that the subject lease terminated due to failure to pay the

lease yearly rental. Find attached a notice of the lease termination

(Enclosure 6).

(emphasis in original; alteration added).

2

SECTION 1. Rights of Lessee. — The lessee is granted the exclusive right

and privilege to drill for, mine, extract, remove, and dispose of all the oil and

gas deposits, except helium gas, in the lands leased, together with the right

to construct and maintain thereupon, all works, buildings, plants,

waterways, roads, telegraph or telephone lines, pipelines, reservoirs, tanks,

pumping stations, or other structures necessary to the full enjoyment

thereof, for a period of 10 years, and so long thereafter as oil or gas is

produced in paying quantities; subject to any unit agreement heretofore or

hereafter approved by the Secretary of the Interior, the provisions of said

agreement to govern the lands subject thereto where inconsistent with the

terms of the lease.

(capitalization and emphasis in original).

Section 2(g) of the Garfield Lease provides: “Statements, plats and reports.— At

such times and in such forms that the lessor may prescribe, to furnish detailed statements

showing the amounts and quality of all products removed and sold from the lease, the

proceeds therefrom and the amount used for production purposes or unavoidably lost[.]”

(alteration added; emphasis in original).2 Section 7 of the Garfield Lease provides:

SEC. 7. Proceedings in case of default. — If the lessee shall not comply

with any of the provisions of the act or the regulations thereunder or of the

lease, or make default in the performance or observance of any of the terms

hereof (except that of payment of annual rental which results in the

automatic termination of the lease), and such default shall continue for a

period of 30 days after service of written notice thereof by the lessor, this

lease may be cancelled by the Secretary of the Interior in accordance with

section 31 of the act, except that if this lease covers lands known to contain

2 Pursuant to the operative version of 43 C.F.R. § 3162.4-1(a) (2007) during the period at

issue in this litigation, an operator “shall keep accurate and complete records with respect

to all lease operations including, but not limited to, production facilities and equipment,

drilling, producing, redrilling, deepening, repairing, plugging back, and abandonment

operations, and other matters pertaining to operations.” Id. The current version provides:

(a) The operator must keep accurate and complete records with respect to:

(1) All lease operations, including, but not limited to, drilling, producing,

redrilling, repairing, plugging back, and abandonment operations;

(2) Production facilities and equipment (including schematic diagrams as

required by applicable orders and notices); and

(3) Determining and verifying the quantity, quality, and disposition of

production from or allocable to Federal or Indian leases (including source

records).

43 C.F.R. § 3162.4-1(a) (2022).

3

valuable deposits of oil or gas, the lease may be cancelled only by judicial

proceedings in the manner provided in section 31 of the act, but this

provision shall not be construed to prevent the exercise by the lessor of any

legal or equitable remedy which the lessor might otherwise have. Upon

cancellation of this lease, any casing material, or equipment determined by

the lessor to be necessary for use in plugging or preserving any well drilled

on the leased land shall become the property of the lessor. A waiver of any

particular cause of forfeiture shall not prevent the cancellation and forfeiture

of this lease for any other cause of forfeiture, or for the same cause

occurring at any other time.

(capitalization and emphasis in original).

After the “Lease Terms,” the Garfield Lease included an “OFFER TO LEASE AND

LEASE FOR OIL AND GAS,” (capitalization in original), from the Department of the

Interior (DOI), Bureau of Land Management (BLM), which stated:

The undersigned hereby offers to lease all or any of the lands described in

item 2 [meets and bounds description] that are available for lease, pursuant

and subject to the terms and provisions of the Act of February 25, 1920 (41

Stat. 437, 30 U.S.C. sec. 181),[3] as amended, hereinafter referred to as the

act, and to all reasonable regulations of the Secretary of the Interior now or

hereafter in force, when not inconsistent with any express and specific

provisions herein, which are made a part hereof.

(alterations added).

The parties stipulated that “[a]t all times relevant to this case, there have been

three operational natural gas wells on the Garfield Lease: Federal 15-9; 6-9-8-101; and

Government 5.”4 The parties further stipulated that “[t]he ‘minimum royalty’ for the Garfield

3 As noted in defendant’s post-trial brief:

The Mineral Leasing Act of 1920, ch. 65, 41 Stat. 437 (1920) (codified, as

amended, at 30 U.S.C. § 181 et seq.) (1981), authorizes and governs the

leasing of public lands, i.e., lands “owned by the United States,” for

developing deposits of certain minerals, including oil and gas. As the

principal administrator of the Mineral Leasing Act for onshore minerals

owned by the United States, Interior issues oil and gas leases authorizing

mineral exploration and development activities by private entities.

4The court notes that at trial, the parties and the witnesses did not refer to the names or

number of the wells operated by Petro Mex with consistency. By way of example, Linn

Wilson, a Petro Mex employee, had the following exchange with plaintiff’s counsel at trial:

Q. How many wells are on that lease?

4

lease was $1,080. The ‘royalty on production’ for the Garfield lease was 12.5 percent on

production removed or sold from the leased land.” The royalties were to be paid to the

lessor, the BLM.

In an exchange with plaintiff’s counsel, Mr. Villalobos testified at trial regarding the

operations of Petro Mex and its wells:

[Question by plaintiff’s counsel of record Douglas Reynolds] What is it that

Petro Mex does? What is the business that Petro Mex is in?

[Answer by Mr. Villalobos] Petro Mex owns leases in Colorado and now we

own leases in New Mexico and Utah right now.

Q. Okay. And you’re saying they own leases. You’re referring to oil and gas

leases, right?

A. That’s correct, yes, sir.

Q. And does Petro Mex operate those leases as well?

A. Yes, sir.

Q. Okay. And you were here for the testimony yesterday or at least you

observed the testimony from Mr. Wilson, Linn Wilson, yesterday, correct?

A. Yes.

Q. And are you familiar with the lease that we were discussing, the Garfield

lease?

A. Yes, sir.

Q. Okay. When did Petro Mex purchase that lease?

A. There is [sic] four wells on that lease.

Q. And what are those wells called? What are the names --

A. There is the 15-9, the 6-9, the Government 6, and the Government 5.

(alteration added). During Mr. Villalobos’ direct testimony in response to the question:

“You said that the lease -- the wells that were in place were the 15-9, the 6 and the 2.

Yesterday, we also heard discussion of a Government 5 well,” Mr. Villalobos confirmed:

“Yes, sir.” To add further confusion, in a April 1, 2009 letter to Petro Mex from the BLM,

discussed below, the BLM indicated: “There are five wells on the lease and all are

operated by Petro Mex, LLC,” “Federal 15-9 Government 9 Government 5 Government 6

Federal 6-9.”

5

A. 2003. 2002 or 2003.

Q. Okay. Well, you said that Petro Mex was formed in 2002 or 2003. Did

Petro Mex buy that lease essentially right after it was formed?

A. Yes. That’s the reason I formed Petro Mex.

Q. Was to buy that lease?

A. Yes, sir.

Q. And there’s another lease as well, right?

A. Yes, sir.

Q. In Colorado?

A. Garfield County and Mesa County.

Q. Okay. So there’s another lease that Petro Mex owned or operated and

that’s called the Mesa lease. Is that correct?

A. Yes, sir.

Q. Was there a third lease at that point in time as well?

A. Yeah, we had another lease in Section 2.

Q. Okay.

A. That was terminated.

Q. Okay. When you purchased the Garfield lease, was there a well already

in place on the lease?

A. Yeah, that was [sic] three wells in place already, yes.

Q. Okay. Which wells were in place?

A. The 15-9, the number 6 and then number 2.

Q. Okay. And were those wells productive when the lease was purchased?

A. The [sic] was making some gas, yes.

6

Q. Okay. Were they making enough gas to cover royalties and expenses?

A. Yes, but I had to lay 15 miles of pipeline to be able to produce more.

...

Q. Okay. You said that the lease -- the wells that were in place were the 15-

9, the 6 and the 2. Yesterday, we also heard discussion of a Government 5

well.

A. Yes, sir.

Q. Was that a well you drilled after you purchased the lease?

A. Already -- that well was already drilled. It wasn’t hooked up. So I have to

do -- redrill it and hook it up to the other system.

Q. Okay. Do those wells produce oil as well, Mr. Villalobos?

A. The only one that produce oil is the 15-9.

Q. Okay. And does it produce very much oil?

A. Not very much.

Q. It’s primarily a natural gas oil well?

A. Most -- gas, yes.

Q. Okay. What employee handled most of the day-to-day operations of the

wells back in 2007 and 2008?

A. Mr. Linn Wilson.

Q. Okay. Did you do much on a day-to-day basis with regard to those wells?

A. I was doing some of it. I do -- I was doing some work, and I didn’t do that

much paperwork because I don’t know how to do it.

(alterations added). Mr. Wilson, the Operations Manager of Petro Mex, testified at trial

that after 2005, the Garfield Lease was consistently productive.

Well Inspection and Notices of Incidents of Noncompliance

The parties agree that the “lease at issue in this matter was, at all times relevant

to this case, subject to the jurisdiction of BLM’s Grand Junction (Colorado) Field Office

7

(Field Office).” (capitalization in original). As noted by defendant: “Because all gas

produced from a Federal lease is subject to royalty payments, 30 C.F.R. §§ 1202.150(a),

(b)(1), operators must submit production reports in order to verify and calculate the royalty

payments due to the United States. 30 C.F.R. § 1210.101(a).” (internal reference

omitted). Related to the required reports for the Garfield Lease, a BLM employee Mr.

Robert Hartman, a petroleum engineer in the Field Office with the BLM, sent Petro Mex

a letter on March 14, 2007, which stated, in part:

Please refer to our letter dated August 11, 2006 that requested information

concerning wells operated by Petro-Mex. To date, none of the information

requested has been received. Petro-mex’s [sic] failure to provide this

information is an Incident of Non Compliance.

The following is an order of the authorized officer. In accordance with

43 CFR 3163.1(a), please submit the above indicated reports to this office

no later than twenty (20) days from the receipt of this letter to correct the

violations. If you fail to submit the required reports in the time specified, you

will be liable for an assessment of $250.00 under 43 CFR 3163.1(a)(2). For

clarity we repeat our request for information in the following bolded italicized

text.

We are lacking several reports for wells operated by Petro-Mex

Resources. The listed items cover different wells and areas of

concern.

Lease COC088586, Well 1-15-8-101, NW¼, NW¼ Section 15, T8S,

R101W

Lease COC0124705A, Well 6-9-8-101, SE¼ SW¼, Section 9, T8S,

R101W

Form 3160-5, Spud Notification: two copies due of written

confirmation of verbal spud notification. We have no record of the

spudding of these wells.

Form 3160-4, Well Completion Report and Log: two copies due within

30 days after well is completed (Onshore Order No. 1, Section VIII).

Geologic Logs: two copies due within 30 days after well is completed.

(43 CFR 3162.4-1b requires duplicate copies of all types of wire line

logs, sample logs, drilling time logs and other well surveys).

Lease COC0124705A, Well 5, SW¼ SW¼, Section 9, T8S, R101W

First Production Notification: Notification to the BLM is required within

5 days of first production. The COGCC website indicates the subject

8

well began producing in January 2006 after being shut in for several

years.

Form 3160-4, Well Completion Report and Log: two copies due within

30 days after well is completed (Onshore Order No. 1, Section VIII).

Please update status of recompletion as requested in your sundry of

August 2004 which involved pulling the existing casing and running

new strings.

Lease COC088586, Well 2, NW ¼ NW ¼, Section 15, T8S, R101W

First Production Notification: Notification to the BLM is required within

5 days of first production. The COGCC website indicates the subject

well began producing in July 2004 after being shut in for several years.

The Minerals Management Service is responsible for the collection of

production reports for all federal leases and agreements. Their

database shows that Petro-Mex has not reported for several years.

Please indicate in your response to this letter [sic] status in updating

the production reporting for all of the wells listed in Attachment 1.

(emphasis in original; alterations added). At the trial, defendant’s counsel and Mr.

Hartman had the following exchange about the March 14, 2007 letter at trial.

[Question by defendant’s counsel of record Kara Westercamp] [B]eneath

the first production notification, there is a reference to a Form 3160-4, Well

Completion Report and Log. Why were you asking for that?

[Answer by Mr. Hartman] I believe we did not have any record of that well

being completed. Again, I’m not sure if Petro Mex was the -- drilled the well

or not, but we didn’t have a copy of it, so I was just asking for that. And that’s

due within 30 days of the well being completed.

Q. And considering that there’s a reference to a sundry of August 2004, and

now we know we’re at least past August 2006, was that something that

Petro Mex should have provided?

A. Yes.

(alterations added).

Regarding the reference in the March 14, 2007 letter to the Minerals Management

Service, defendant’s counsel asked Mr. Hartman

just going to the last paragraph, a reference to MMS [Minerals Management

Service], and it looks like you state that their [Minerals Management Service]

9

database shows that Petro Mex has not reported for several years. Why --

why were you asking about -- about the MMS database?

A. Well, we were sort of shooting blind. We didn’t know for sure what was

going on. We didn’t have any production reports from Petro Mex, so we

were asking for them to update the MMS so that we would know more.

(alterations added).

Previous to the March 14, 2007 letter sent by Mr. Hartman, on November 30, 2006,

Edward Fancher, a petroleum engineering technician with the BLM, sent a letter to Petro

Mex indicating that Petro Mex’s “leases and wells have been selected by the Grand

Junction Field Office (GJFO) for a production inspection.” The testimony developed at

trial demonstrated that Mr. Fancher was the BLM employee who had the most direct

contact with Petro Mex and visited the site most often during the time period at issue in

this above captioned case.

The November 30, 2006 letter from Mr. Fancher continued:

In accordance with 43 CFR 3162.7-5(b)(6), you shall submit the following

documents to the GJFO by January 15, 2007:

1. (a) OGOR [Oil and Gas Operations Report] reports submitted to MMS

[Minerals Management Service5] for each well during the inspection times.

(b) Gas purchase statements, Quarterly Meter Calibration Reports,

Configuration Report, and Chart Integration Volume Statements (Daily

Chart Integration Audit Reports) for each well.

(c) Gas Chromatography Analysis showing BTU content and Specific

Gravity.

(d) Methods used to estimate volumes of gas Flared, Vented, or otherwise

Lost.

(d)[sic] Methods used to estimate volumes of gas Used on Lease; list

equipment on the lease that uses gas, by well location.

(e) Manufacturer’s MCF use rating of production equipment.

2. (a) Fluid Transporter

5 Defendant notes that “Interior reorganized the former MMS [Minerals Management

Service] in 2011, and the section relevant to gas production and royalty payments is now

called the Office of Natural Resources Revenue (ONRR).” (alteration added).

10

(b) Run tickets for oil sold, or water hauled for each facility.

(c) Tank number(s), tank size(s) and tank strapping for each storage

facilities.

(d) Daily pumper’s reports for period showing produced water and gas.

(h) [sic] Pipeline run statements for the period.

(alterations added). The November 30, 2006 letter concluded:

All documents shall be properly identified by federal case/lease and well

number and include the information requested above. Failure to comply with

these instructions may result in the issuance of a “Notice of Incident of

Noncompliance”. You have the right to request a review of these

instructions per 43 CFR 3165.3 and to appeal per 43 CFR 3165.4.

Mr. Fancher testified that, at that time, “[m]y primary job duties was [sic] production

accountability, which is production inspections, field inspections.” (alterations added).

direct examination with defendant’s counsel, Mr. Fancher had the following exchange:

[Q.] [W]hat is production accountability?

A. That’s comparing the two databases against each other for accuracy. It

also includes requesting documentation from the operator and comparing

that data with what they say they’ve produced and what they actually

reported that they produced.

Q. And what is the purpose of a production accountability inspection?

A. Just to ensure that everything that is harvested out of the -- the minerals

and stuff that is harvested, that we have some kind of accurate way of

tracking it.

Q. And why is it important that you be able to track production?

A. To make sure that it’s getting reported, of course, and then -- and then

the royalty concern that comes out of that, and that’s taken care of by the

ONRR [Office of Natural Resource Revenue] people.

Q. Okay. And you mentioned you used two databases when you do the

production accountability work. Could you tell us what those were, please?

A. Yes. One is our OGOR [Oil and Gas Operations Report] statements, our

oil and gas statements that we get from our AAFMS database, American

Automated Fluid -- Automatic Fluid Measurement System. And then I look

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at, like, Colorado, their oil and gas website, and I would compare those

figures, what they reported there. They should be the same. If their [sic] not,

then we may ask the operator to send me a copy of their -- their reporting

to see where the difference is at.

(alterations added). Additionally, defendant’s counsel asked Mr. Fancher about “site

security:”

[Q.] could you tell us what the -- what are some of the major areas that you

are inspecting as part of site security?

A. We’re concerned with any bypasses around any gas meters, and we’re

also concerned about any sealing of oil tanks. So every tank has to have a

-- a seal. If it’s dealing with oil, it needs to be properly sealed, and site

security is how we would -- the activity we would be doing when we inspect

those things.

Q. Okay. And could you explain more about why you look for proper seals?

Why is that important?

A. Well, it affects the royalty income and the production accountability. If the

seals aren’t in place properly, then the fluids -- the oil, water, whatever --

can be removed from the location without anybody ever knowing where it

goes to, and we like to have an idea where all the production fluids go, water

and oil.

Q. Okay. And you said one of the other things that you inspect for during a

site security inspection is any bypasses around gas meters. What could that

-- if you found such a thing, what could that mean?

A. That would mean that the -- the operator could be filtering off gas, taking

the gas meter out of line and just totally going around it. So there would be

no measurement of that gas, and if that’s the case, then that would affect

royalty income.

Q. Okay. In addition to -- are there any inspections that you do in addition

to production accountability and site security inspections?

A. Yes. We also do, like, meter calibrations and chart verifications, which

they’re kind of similar in a way. If I’m doing a meter calibration, then I'm

witnessing someone calibrate the gas meter to ensure that it’s accurate

according to regulations, and if I’m doing a CV, is what we call the chart

verification, then we are looking to see how well the operator’s or the

mechanic’s electronics are doing as far as the accuracy of the meter.

(alteration added).

12

Regarding the November 30, 2006 letter from Mr. Fancher to Petro Mex,

defendant’s counsel asked Mr. Fancher, “why did you decide to request these particular

documents [referenced above, including the OGOR reports, the Quarterly Meter

Calibration reports, the Configuration reports gas purchase statements, the Daily Chart

Integration Audit reports, and the gas purchase statements] from Petro Mex?” (alteration

added) Mr. Fancher testified:

Well, I wanted to verify their -- their reporting. So the OGOR statements, I

wanted a copy of those. I wanted a copy of their gas purchase statements,

calibration reports, and I look through all these to ensure that the meters

are being calibrated when they’re supposed to be, the frequency they’re

calibrated, that the reporting is really flawless, you know, we want to make

sure they’re -- what they’re producing is what they’re reporting, and that

would include, like to see the gas chromatography, we like to know that,

too, for our calculations, and it’s not too often anybody flares or vents gas.

We don’t really particularly care for that very much, but if they did, I wanted

to verify all their records with that that I would get from MMS.

(alteration added). On March 1, 2007, Mr. Fancher contacted Linn Wilson at Petro Mex

about the November 30, 2006 letter and Mr. Fancher testified:

I called him to find out the status of their audit that I requested for the 2007,

and I -- I mentioned I gave an extension, but I still haven’t received anything.

So they had -- and we talked about -- I mentioned that the material -- he

said that the material was in Trudy [Grubilnick6]’s hands, that he’d call her,

6Mr. Wilson testified that Trudy Grubilnick was Petro Mex’s former bookkeeper. Plaintiff’s

counsel and Mr. Wilson had the following exchange at trial regarding Ms. Grubilnick:

[Q.] Is she [Ms. Grubilnick] still with Petro Mex?

A. No.

Q. Was she eventually terminated by Petro Mex?

A. Yes, she was.

Q. Do you remember when she was terminated?

A. I believe it was in 2008, but I’m not --I can’t remember exactly when.

Q. And do you know why she was terminated? Did you terminate her?

A. No, I did not. Jesus did.

13

so kind of like basically saying he didn’t really know what happened. Trudy

was supposed to take care of all that.

(alteration added). Defendant’s counsel subsequently asked Mr. Fancher: “So as of

7/3/2007, had Petro Mex provided the information that you had requested for the fiscal

year 2007 production accountability inspection?” to which Mr. Fancher testified: “No.” Mr.

Fancher testified that he followed up with Petro Mex in July 2007 about the missing

documents. In response to defendant’s counsel question at trial, “did Petro Mex provide

any explanation for its failure to give you the information you had requested?” Mr. Fancher

responded: “No.”

Mr. Fancher also testified about his authority as an inspector. Defendant’s counsel

and Mr. Fancher had the following exchange during his direct testimony:

[Q.] [A]s a petroleum engineer, technician, and an inspector, do you have

the authority to take enforcement actions against lessees and operators?

A. Yes, I do.

Q. Okay. I’d like to talk about the different enforcement actions that were

available to you in 2007 to 2010. What was the lowest level of enforcement

action that was possible for you to take if you found some problem during

an inspection?

Q. Okay. Do you know why she was terminated?

A. Because she was not filing the records and the reports as she should

have been, and the royalties was not getting paid.

(alterations added). Mr. Villalobos, on his direct testimony, clarified with plaintiff’s counsel

about the timeframe for Ms. Grubilnick’s employment with Petro Mex:

[Q.] Do you remember when you hired her?

A. Like 2007, 2006.

Q. Okay. And when did you terminate her?

A. I think that was at the end of 2007.

Q. Okay.

A. Or early 2008.

Q. Okay.

14

A. Well, if I found just a problem, that’s something that’s not characterized

as a violation of regulation, I would take a -- make a written order and have

that signed at that time by the authorized officer, which would be like the

building manager or whoever he designated, and I would pursue it that way.

That would be my first step, would be that written order in that particular

case.

Q. Okay. Is that a -- does BLM call that an order of an authorized officer?

A. Yes.

Q. Okay. And as a petroleum engineer/technician, were you an authorized

officer who could give such orders?

A. Yes. I could -- I could -- now we can’t sign them for sure. Back then, I

think they liked our -- our field office -- kind of a field office delegation for

those at that time.

Q. And could you give us an example of a situation when an order of the

authorized officer would be appropriate?

A. Say if there was a -- a lot of weeds, noxious weeds or something like that

growing or some rilling[7] off of the pad which would cause erosion. That

wold [sic] be a good reason to use a -- because it’s not really against the

regs could have -- to have that natural erosion happening, but to have it

corrected, we would have to use what -- some kind of instrument to

communicate that to the operator, and written orders would be used first.

Q. Okay. And earlier you drew a distinction between a problem and a

violation. So if you find a violation -- what does a violation mean to you?

A. A violation is something that’s specifically addressed in the on-shore

orders or the 43 CFRs, and with that -- or a violation of a condition of

approval or a violation of a written order, and I can issue a [sic] incident of

noncompliance and giving a date and request them to repair their fix to

make whatever change is necessary to be in compliance.

Q. Okay. And I noticed you said “written order.” Are you using that

interchangeably with “order of the authorized officer”?

A. Yes, yes. It is an interchangeable thing. You might consider one might

be a written form. I had a regular form in my database for written orders,

and we could do, like, one of those forms, or you can do a -- a letter form.

7Although not defined by Mr. Fancher at the trial, “rilling” refers to rill erosion, which can

occur if runoff water forms small channels as it concentrates down a slope.

15

(alterations added). Regarding different kinds of enforcement actions, Mr. Fancher

explained to defendant’s counsel at trial:

Q. If you found a violation on a lease, what was the lowest level of

enforcement action available to you?

A. I would write an incident of noncompliance.

Q. Okay. Is there anything that is less serious than an incident of

noncompliance?

A. Yes, there is. There’s some things that, according to the reg, doesn’t --

doesn’t have enough weight to be a major -- it’s a minor violation -- they

have two gravities, minor and major. A minor violation, the time to repair it -

- so like a -- a sign wasn’t correct, then I would write an incident of

noncompliance and have them correct their sign.

Q. And just -- I just want to make sure this doesn’t get confused, but I'm

asking about if there’s something lesser than an incident of noncompliance.

A. Oh, I’m sorry.

Q. And, if so, if you could tell us what that is, please.

A. That would be like -- less than that would be the written order of the

authorized officer. That would be -- yeah.

Q. Okay. Are there any kind of verbal warnings?

A. At that time, there was [sic] verbal warnings, but even a verbal warning

had to be documented, and a copy of the documented verbal warning would

have to be sent to the operator within 15 days.

Q. Could you give us -- well, did you ever issue any verbal warnings?

A. I have, yes.

Q. Could you give us a sense of the situation where a verbal warning might

be appropriate?

A. If I was on location, say, where an operator was or a hand or somebody

and, like, even the -- the sign, if I couldn’t read the sign correctly or a lease

number had changed perhaps and it was incorrect, then I would request

them to correct that sign, something they could possibly do immediately

right there.

16

Q. Okay. And I believe you explained, but I want to make sure we’ve got it

clear for the record, even though it’s called a verbal warning, was there still

an element in writing?

A. Oh, yes. Yes, everything had to be documented for the verbal warnings,

too.

Q. And now could you tell us about a minor incident of noncompliance?

We’re going to talk in more detail about incidences of noncompliance, but

could you just start out by telling generally what that is.

A. We have a -- a set of standards and regs put forward through CFRs

[Code of Federal Regulations] and the on-shore orders, and like I said, the

conditions of approval, if something is violated because it’s written down,

you know, and an incident of noncompliance would be the way to correct

that. It would be like the sign issue, could be a tank number, safety signs,

things like that.

Q. And what does the word “minor” mean in this context?

A. It means that it doesn’t quite have the gravity to be a major. So that would

be, like, does it really pose an immediate threat or adverse condition to

health and safety, for production accountability, for oil and gas safety, things

like that. I don’t know all the jargon for that.

...

[Q.] Could you describe for us, please, what a major incidence [sic] of

noncompliance?

A. A major incidence [sic] of noncompliance is something that would create

an adverse immediate danger to health and safety, starting something

without approval, something that would have an effect on really the health

and safety, production accountability, royalties, and there’s a couple more.

I don’t remember what they are.

Q. After a major incident of noncompliance, what is the next level of

enforcement action available to you?

A. Then that would be an assessment.

Q. What is an assessment?

A. An assessment for a major would be a -- a $500 fine per day until the

incident was corrected. It’s a little different than maybe a -- a minor, whereas

17

we -- if we need to make a reasonable effort to contact the producer, the

operator, and in doing that, then, we would close the initial incident of

noncompliance, issue the major incident of compliance with the

assessment. That would be the ongoing document at that time. And then

from there, then it would go obviously to civil penalties or. . .

Q. Okay. And could you give us an example of -- well, let me ask, in what

situations do you issue civil penalties? You’ve just described the escalation

from INCs [Incidents of Noncompliance] to assessments to civil penalties,

but are there ever times where you -- the civil penalty would be the first

enforcement action you took for some issue?

A. Not the first one, no. It always has to start at the lowest level, and then if

it’s not complied with, whatever the error was, then we would build on the -

- the assessment, and then from there, if they still refused to do it after a

certain time, then we would go on into the civil penalty aspect of it, and I

can’t really quote a lot of that. I don’t remember everything about that. It’s

just like you’ve really got to look at the directions behind it.

Q. Okay. After a -- so let me -- we talked about major incidents of

noncompliance and how those could go to assessments or civil penalties,

but let’s go back to major incidents of noncompliance now, and I want to

ask you, is there a next level of enforcement action available to you for a

violation, a next level higher than a major incident of noncompliance, other

than what we’ve already talked about?

A. Yes. There’s a -- there’s other avenues when you get to that level, too, I

suppose, to the civil penalties. Depending on the violation, it can go as far

as shutting in the operator, if there’s just continued noncompliance issues.

That’s – that’s one step. I could hire someone to -- go through the motions

of hiring somebody to complete the work, and they would be billed for it.

That doesn’t happen very often at all.

Q. And we’ll talk a lot more about shut-in orders but at this point, generally,

what is a shut-in order? What does it require of the operator?

A. It would require the operator to abide by the directions of the shut-in

order, which means he would need to potentially shut down their operation,

shuttering their wells and tanks and everything until whatever was corrected

that was outstanding.

Q. Okay. And, again, still focusing on that 2007 to 2010 time period, what

kind of discretion, if any, did you have as an inspector in deciding what kind

of enforcement action to take?

A. I had full discretion.

18

Q. And could you give us an example of a time where you might have to

make a decision between -- you might have to exercise that discretion

between different options?

A. Yeah. Sometimes when something is just not completed, not completed

right, you can’t communicate with the operator, we can’t get something fixed

that needs to be dealt with immediately, then -- or something to secure the

tanks, then -- then I have a discretion to halt their operation until they get in

compliance. Other issues like a serious leak or something could be a reason

to ask them to shut everything in, still followed up by the documentation.

(alterations added).

Between August 15, 2007 and May 29, 2008, Mr. Fancher inspected the wells at

Petro Mex’s site related to the Garfield Lease and issued a total of eleven Notices of

Incidents of Noncompliance. Seven of the Notices of Incidents of Noncompliance were

for minor violations, including ineffectively sealing sales valves, failing to identify storage

tanks by a unique number, a leaking bull plug, insufficient water storage pit and full steel

tank, and the failure to notify the Field Office prior to oil sales. Four of the Notices of

Incidents of Noncompliance were for major violations, for unsealed sales valves and for

an underground leak.

On August 15, 2007, Mr. Fancher inspected wells related to the Garfield Lease

and issued three Notices of Incidents of Noncompliance, all related to the Federal 15-9

well. Two of the Notices of Incidents of Noncompliance were for minor violations, Notice

of Incident of Noncompliance No. EF007056 was for the tank valves “ineffectively sealed

to minimum standards,” and Notice of Incident of Noncompliance No. EF007057 was for

the failure to clearly identify the storage tank by a unique number. The third Notice of

Incident of Noncompliance was for a major violation, Notice of Incident of Noncompliance

No. EF007055, which stated: “The sales valves on your tank found to be ineffectively

sealed to minimum standards. US GOV BLMI seal No. 0286 was placed on the the [sic]

sales valve. You must obtain prior approval to remove this seal. After approval, install

your seal to obtain compliance.” (capitalization in original; alteration added). Regarding

the Notices of Incidents of Noncompliance issued on August 15, 2007, the Operations

Manager of Petro Mex, Mr. Wilson, had the following exchange with plaintiff’s counsel:

[Q.] So do you have any recollection of what happened, what Petro Mex did

in response to these notices of incidents of noncompliance?

A. I am the one that fixed all of these incidents of noncompliance. On the

sales valve and the B&W valve, I bought what they call darts that go through

the locking mechanism of the valve, so you can put a seal on it, and that

way it can’t be tampered with. And on the third one, I had signs made and

installed on the production tank.

19

Q. Okay. Do you know if Petro Mex ever signed these violations and

returned the notice once the violations were corrected?

A. I believe I did. Yes.

Q. Okay. Did that always happen when you corrected an incident of

noncompliance, a notice of incident of noncompliance?

A. No. There could be instances where they were not signed.

Q. And were you ever -- maybe “punished” isn’t the right word. Did the field

office ever take action against Petro Mex for failing to actually return a

signed copy?

A. Not to my knowledge.

Q. Okay. So if you didn’t sign one of these, how would you usually let Mr.

Fancher know that the issue had been corrected?

A. I would call him on the phone and tell him that everything had been

corrected.

Q. Okay. Would he remind you to send in a signed copy or not?

A. No. Usually not.

Q. Did he ever indicate that it was necessary there would be some kind of

assessment or fine if you didn’t actually send a signed copy?

A. I don’t remember him ever saying that to me.

(alteration added).

On October 9, 2007, Mr. Fancher, inspected wells on the Garfield Lease and

issued two additional Notices of Incidents of Noncompliance for the Federal 15-9 well –

one minor violation and one major violation. Notice of Incident of Noncompliance No.

EF08004 was for the minor violation and stated: “Drain valves are ‘appropriate valves’

and shall be ‘effectively sealed’ using the dart system, during the production and sales

phases or combination of production and sales phases” by October 21, 2007. Notice of

Incident of Noncompliance No. EF08003 was the Notice of Incident of Noncompliance for

the major violation and stated: “Sales valves are ‘appropriate valves’ and shall be

‘effectively sealed’ using the dart system, during the production and sales phases or

combination of production and sales phases” by October 21, 2007. Regarding the two

Notices of Incidents of Noncompliance issued on October 9, 2007, Linn Wilson had the

following exchange with plaintiff’s counsel:

20

[Q.] Do you recognize these documents?

A. Yes.

Q. Okay. Why don’t you tell us what these are.

A. It is telling me that the incident of noncompliance is sales valves are

appropriate valves and should be effectively sealed, using the dart system

during the production and sales phases or combination of production and

sales phases by the date indicated.

Q. Okay. So let’s back up here. Are these two different notices of incidents

of noncompliance than the ones we just looked at [the three Notices of

Incidents of Noncompliance issued on August 15, 2007]?

A. Yes, they are.

Q. When are these dated?

A. These are dated 10/9 of 2007.

Q. Okay. Are these the same violations that we just looked at in Exhibit 9

[Notices of Incidents of Noncompliance issued on August 15, 2007]?

A. They are the -- they are the same violation, just worded differently.

Q. Okay. So the sale [sic] valve violation on 10/9/07 was the same sales

valve violation from the previous exhibit?

A. Yes.

...

Q. So is that the same sales valve violation as the violation that was in Joint

Exhibit 9 [Notices of Incidents of Noncompliance issued on August 15,

2007]–

A. Yes.

Q. -- Mr. Wilson?

A. Yes.

21

Q. And then what is the violation in the second notice of incidents of

noncompliance in this exhibit [Joint Exhibit 10]? That would be trial page

32[8].

A. It is the drain valve.

Q. Okay.

A. And it says the same thing, that it has to be effectively sealed by the dart

system during production.

Q. So -- and, again, is that the same violation that was cited in the notice of

incidents of noncompliance in the previous exhibit, JX-9?

A. Yes.

Q. Okay. So those two had not been fixed by this point in time. Is that fair

to say?

A. That’s fair to say. Yes.

Q. Okay. And this is about two months later. Correct?

A. Yes.

Q. Okay. And are either one of these notices of incidents of noncompliance

signed by a BLM representative?

A. No.

Q. Okay. And did these come from Mr. Fancher as well?

A. Yes.

Q. Okay. And again on these, you did testify earlier that these violations

were eventually fixed. Correct?

A. Correct.

Q. And, again, do you know if you ever signed the violation and returned it

once it was corrected?

8 Each page of the joint trial exhibits was sequentially numbered, so plaintiff’s counsel’s

reference to “trial page 32,” was the 32nd page of the trial exhibits, and part of Joint Exhibit

10.

22

A. I feel confident that I did sign these and return them when it was fixed.

Q. Okay. Do you have any idea when it was fixed?

A. I cannot say with certainty what date.

Q. Do you know -- do you remember these violations from -- and I recognize

that this is from September of 2007. Do you remember these, Mr. Wilson?

A. I remember receiving a violation about the tank valves. Yes.

Q. Okay. Did Mr. Fancher ever give you a call about these?

A. I don’t recall if he did or not.

(alterations and footnote added).

The parties have stipulated that “[t]he Garfield Lease produced gas during the

months of January through May 2008, until it was shut-in on or around May 29, 2008

following inspection and re-inspection.” (alteration added). The joint stipulated facts stated

that “[a]s of April 2008, BLM records indicated that Petro Mex had not submitted any

production reports for the Garfield lease since July 2007,” and “[a]s of April 2008, BLM

records indicated that Petro Mex had not made any royalty payments on production from

the Garfield lease since July 2007.” (alterations added).

On April 25, 2008, Mr. Fancher inspected the wells on the Garfield Lease and

issued five additional Notices of Incidents of Noncompliance, all of which were delivered

to Petro Mex by certified mail. One Notice of Incident of Noncompliance, Notice of Incident

of Noncompliance No. EF08016, related to the Government 5 well and was a minor

violation for “a leaking bull plug.” The other four of the Notices of Incidents of

Noncompliance all related to the Federal 15-9 well. One of the Notices of Incidents of

Noncompliance, No. EF08017, was a major violation for “unsealed sales valves.” The

other three Notices of Incidents of Noncompliance were for minor violations. Notice of

Incident of Noncompliance No. EF08018, was a minor violation for “storage tanks lacking

clearly identifiable unique numbers;” Notice of Incident of Noncompliance No. EF08020,

was a minor violation for “insufficient water storage pit and full steel tank;” and Notice of

Incident of Noncompliance No. EF08021, was a minor violation for the “failure to notify

the Field Office prior to oil sales.”

The parties further stipulated: “Each Notice of Incidents of Noncompliance[9] had

text stating ‘WARNING’ and further stated that ‘[e]ach violation must be corrected within

9 The parties’ joint stipulations and filings are inconsistent in referring to the Notice of

Incident of Noncompliance. The court’s review of the BLM documents reveals similar

inconsistencies. The court refers to a single notice as a Notice of Incident of

Noncompliance and refers to multiple notices as Notices of Incidents of Noncompliance.

23

the prescribed time from receipt of this Notice and reported to the [BLM] office.’” (first

alteration added; footnote added; capitalization in original). The Notices of Incidents of

Noncompliance listed different dates for compliance, with compliance for all five Notices

to be completed by June 2, 2008.

On cross-examination, defendant’s counsel asked Mr. Villalobos about the Notices

of Incidents of Noncompliance:

[Q.] From that same 2007 to 2009 time frame, do you recall correcting some

of the violations on incidents of noncompliance?

A. I remember, yes.

Q. And so you would go -- once you corrected whatever was on the

incidents of noncompliance, you would go -- you would tell Linn Wilson that

you had fixed the violation, correct?

A. That’s correct. That what I do and then I told -- after that, Linn have to do

the paperwork or whatever he have to do. That’s his department.

Q. Right. And so you don’t know when Mr. Wilson would send that incidents

of noncompliance back to BLM, right?

A. No.

Q. And then when -- did you ever -- so was it Petro Mex’s policy, again

during that 2007 to 2009 time frame, to keep a copy of an incidents of

noncompliance or, I guess, to make a copy of it for the records?

A. I don’t know if they -- Linn [Wilson] or Susan [Wilson] or Trudy [Grubilnick]

keep copies. I don’t know that.

(alterations added). Regarding Notices of Incidents of Noncompliance, Mr. Villalobos also

testified “when it come in to paperwork, I’m not doing any paperwork. I don’t know how to

do it.” Similarly, on cross-examination, defendant’s counsel asked Mr. Wilson about Petro

Mex’s policies:

Q. Did Petro Mex have any policies on recordkeeping?

A. No.

Q. Did Petro Mex have any policy on how to handle important emails?

A. At that time, no.

The court, however, leaves quotations unchanged.

24

Q. Did Petro Mex have any policy on what to do following important phone

calls?

A. No. Not any policy. No.

Q. Did Petro Mex have any policy on how to address incidents of

noncompliance?

A. The only -- it wasn't really a policy. The only thing was as soon as you

got one, you needed to get it fixed as soon as possible.

Q. Did Petro Mex have a process for tracking whether it had corrected

violations from incidents of noncompliance?

A. No, not really. It was -- once we got them and we got them completed

and we signed them and sent it back, whenever they sent us one, we would

have two copies, one for us and one that we had to sign and send back to

the BLM. And I would try to put our copy in the well file.

In a May 16, 2008 memorandum to the Colorado BLM State Director, Mr. Hartman

noted that:

Petro-Mex has a history of failing to comply with Orders of the Authorized

Officer and Incidents of Non Compliance with resulting assessments being

issued. In the past two years this office has issued 31 incidents of non

compliance. Petro Mex’s failure to correct three of the INCs has resulted in

the assessments of $750. To date, one of the assessments has not been

paid and the corresponding INC [Incidents of Noncompliance] has not been

corrected. By the end of May we may be forced to proceed to civil penalties

for Petro Mex’s failure to correct these non compliance issues. Applicable

examples of the past and current non compliance issues include:

Failure to notify this office of oil sales per written request

Failure to provide tank gauging reports

Hydrocarbon accumulation on pits

Leaking well head equipment

Failure to provide adequate free board on produced water and

drilling reserve pits – Multiple incidents and one assessment

Inadequate sealing of oil sales tanks - multiple incidents and

one assessment

(alteration added).

The parties’ joint stipulated facts indicate that “[o]n May 27, 2008, Mr. Fancher re-

inspected the three wells on the Garfield Lease,” and “Mr. Fancher observed that Petro

25

Mex had not corrected any of the violations from the April 25, 2008 Notices of Incidents

of Noncompliance.”(alteration added). At trial, Mr. Fancher testified

on the 28th [of May 2008], I talked to a -- the office person there at Petro

Mex, her name was Susan [Wilson], that they had a gas leak at the number

5 pad, and there was an underground problem, and that it required

immediate attention. She said she would pass on the information to Jesus

[Villalobos] or Linn [Wilson]. I mentioned the leak on the wellhead and the

INC [Incidents of Noncompliance] that had not been complied with, such as

the oil tank sealing.

(alterations added). The parties have stipulated:

On May 29, 2008, Mr. Fancher issued a new Notice of Incidents of

Noncompliance, EF08025, for a “major violation” on the Government 5 well,

an underground leak. The notice directed Petro Mex to repair the leak by

May 31, 2008. The notice further stated that “[e]ach violation must be

corrected within the prescribed time from receipt of this Notice and reported

to the [Field] office.”

(all alterations in original; capitalization in original). Mr. Fancher explained at trial in his

direct examination:

On the 29th [of May 2008], I called to see if they had resolved the issue of

the leak. She [Susan Wilson] said that Linn [Wilson] told her that they had

been informed by someone else and that someone should be repairing it

today.

Q. Okay. Did you visit the Garfield lease again on May 29th, 2008?

A. Yes, we did, and I say ”we,” myself and Carroll Snyder went out on that,

and there was no activity being taken on -- on anything. There was no one

out there.

Q. Who is Carroll Snyder?

A. Carroll Snyder was a full performance petroleum engineer technician that

has since then retired.

Q. Okay. What did you discover on that visit to the lease on the 29th?

A. That the -- the gas was still leaking. There was [sic] no other compliance

issues corrected.

(alterations added).

26

Additionally, the parties have stipulated:

Also on May 29, 2008, Mr. Fancher issued EF08025SI, “Notice to Shut

Down Operation” (Shut In Order). The Shut In Order stated that Petro Mex

had 24 hours from oral notice being provided “on 5/28/2008 at 15:38 hr.” to

immediately “shut in all wells on this lease until all leaks are corrected and

all compliance issues are resolved.” The “WARNING” section in the Shut In

Order stated that “[o]perations are not to be resumed until permitted by the

authorized officer.” The Shut In Order stated “when violation is corrected,

sign this notice and return to” the Field Office. It also informed Petro Mex of

its review and appeal rights.

(alteration in original; capitalization in original).10 At the trial, defendant’s counsel asked

Mr. Fancher to discuss the meaning of some of the language in Petro Mex’s Shut-In

Order:

[Q.] Could you please -- under the Remarks section of the shut-in order,

could you please read the sentence following, “You are shut in.”

A. It says, “We are required to shut in all wells on this lease until all leaks

are corrected and all compliance issues are resolved.”

Q. I want to ask you about this language, “all compliance issues are

resolved.” You did not list the specific compliance issues here, did you?

A. No, I did not.

Q. Why did you use this language, “all compliance issues?”

A. Because I had compliance issues with Petro Mex and so did our surface

people and others in BLM. So I wanted to make sure all the INCs [Incidents

10 The “Remarks” section of Shut-In Order stated in full:

YOU ARE SHUTIN [sic]. You are required to shut in all well on [sic] this

lease until all leaks are corrected and all compliance issues are resolved.

This shutin [sic] shall be complied within 24 hours of our verbal notification

to you [sic] office personnel “Susan” on 5/29/2008 at 15:38 hr. When

necessary for compliance, or where continued operations could result in

immediate, substantial, and adverse impacts on public health and safety,

the environment [sic], production accountability, or royalty income, the

authorized officer may shut down operations. Immediate shut-in action may

be taken where continued operations could result in immediate, substantial,

and adverse impacts on public health and safety, the environment,

production accountability, or royalty income.

(capitalization in original; alterations added).

27

of Noncompliance] and letters that were out were addressed and corrected.

And there was a lot going on, so. . .

Q. Did compliance issues include the five incidents of noncompliance from

April 25th, 2008?

A. Yes.

Q. Was anything else included in all compliance issues?

A. There was surface -- the surface inspectors had issues with them, too.

There was some letters and documents like that, but I don’t remember

specifically what they were.

(first alteration added; ellipse in original). In response to the question, “[w]hat did you

intend the shut-in order to encompass?” Mr. Fancher answered: “They encompass

everything that -- all the production, all the valves, the tanks, the oil, the receipts,

everything, getting them fully in compliance and caught up with everything that I, at least,

had the authority to check on.” (alteration added). Mr. Fancher also testified at trial that

he could have issued a Shut-In Order, absent a leak:

[Q.] You said this was the first shut-in order that you had ever issued, right?

A. That is correct.

Q. How did you feel when you issued this shut-in order?

A. Well, I kind of felt kind of let down a little bit. I tried to work with Petro Mex

a lot and tried to get them on the right path of doing -- what to do with the

reporting and with the site security and everything. I think I bent over

backwards trying to get it straightened out. And then there was other issues

with the drilling and stuff like that and we worked with them painlessly on

that. So when this gas leak took out, the oil came up missing, no run tickets,

it was just pretty much, you know, just like -- they just like blew us off

basically is the way I felt. So I felt totally within my right and power to shut

them in and requesting information, getting them caught up fully to that point

anyway.

Q. Yesterday, you described the leak on the Government 5 well that led you

to go out to the lease on May 27th, 2008.

A. Yes.

Q. If the Government 5 well had not had that leak, would you have still

issued a shut-in order to Petro Mex?

28

A. Yes, yes. I was working on the shut-in order in that area because of the

missing oil, the reporting, site security. There was too many violations really

just on that one pad to just kind of lie -- just to forget it. You know, they just

wasn’t paying attention and I needed to get their attention and I was

planning a shut-in order to do that.

In his trial testimony, Mr. Fancher had a dialogue with defendant’s counsel to put

the decision to issue the Shut-In Order in context for the ongoing issues with Petro Mex.

Defendant’s counsel first asked, regarding May 14, 2008:

[Q.] Did you visit the lease that day?

A. Yes, I did.

Q. What did you discover?

A. I discovered that there was no compliance from Petro Mex and would

return -- and they would not return my calls. So I installed a BLM seal on

that valve, on the 15-9 valve from that tank.

Q. Okay. When did you next -- well, this was an in-person visit to the lease?

Yes, right?

A. Yes.

Q. Because you just said you installed a seal. When did you next visit the

Garfield lease?

A. According to these notes, I followed up again on 5/27, and there was no

change, except a new leak was called in to us by the public, and this was

on the -- the 5 pad or by the number 5 pad.

Q. Okay. And let me just stop you there because I want to ask you a little

bit more about that before we go on.

Did you personally observe that gas leak?

A. Yes. When I went out there, I did observe it.

Q. And what did you -- how did you -- how did you observe it? For example,

using your senses or -- how did you know there was a gas leak?

A. I knew there was a gas leak because I could hear it, and you can smell

gas because they have an odorizer that they put in it.

29

Q. And had Petro Mex corrected any of the April 25th, 2008, incidents of

noncompliance as of your May 27th visit?

A. No, they hadn’t.

Q. All right. What did you do as a result of the leak?

A. Well, then we had to think -- take everything into consideration. I

understood the field well enough to know --

Q. And I’m sorry, sir, but I'm just asking specifically for the leak.

A. Oh.

Q. So did you issue an incident of noncompliance, for example, for the leak?

A. I issued a -- a notice of shut-down, a shut-in order.

(alteration added). The parties have stipulated that “[i]n addition to the oral notice, a hard

copy of the Shut-In Order was delivered in person and by certified mail.” (alteration

added). At trial, defendant’s counsel and Mr. Fancher had the following exchange:

Q: [h]ow do you then notify an operator of a shut-in order?

A. We would immediately call him as soon as we could and try to get some

kind of communication to him, his office, or we would make a diligent effort

to ensure that he knows about it probably by telephone. And then we would

still send a written copy of the form to him.

Q. And how do you send those written copies?

A. Certified, return receipt.

Q. Have you ever issued a shut-in order that was verbal only without any

written confirmation?

A. No.

Q. Would you ever issue a shut-in order that was oral only without written

confirmation?

A. No.

Q. Why not?

A. There would be no documentation of it if I didn’t put it on paper and keep

-- keep tabs on it. It’s a serious matter, shutting somebody in, so it has to

30

be -- it has to be documented. It has to be in the -- in the well file as well as

the office database.

Q. What is an operator supposed to do upon receipt of a shut-in order?

A. They should immediately, you know, take the action that is prescribed in

it. In this case, it would be like fixing the leak and getting all the other

compliance issues that needed to be resolved.

The Shut-In Order also provided under “Review and Appeal Rights:”

A person contesting a violation shall request a State Director review of the

Incidents of Noncompliance. This request must be filed within 20 working

days of receipt of the Incidents of Noncompliance with the appropriate State

Director (see 43 CFR 3165.3). The State Director [sic] review decision may

be appealed to the Interior Board of Lands [sic] Appeals, 801 North Quincy

Street, Suite 300, Arlington VA 22203 (see 43 CFR 3165.4). Contact the

above listed Bureau of Land Management office for further information.

(alterations added).

Plaintiff’s counsel and Mr. Fancher had the following exchange on cross-

examination regarding the resolution of some of the Notices of Incidents of

Noncompliance that led to the Shut-In Order:

[Q.] [T]hat’s the notice of incident of noncompliance regarding the

underground leak on Government 5, right?

A. That’s correct.

Q. And that was the -- that was the violation that prompted the shut-in order.

Is that correct?

A. Yes.

Q. Okay. Do you know when that was corrected?

A. I think like May 30th.

Q. And, again, I’ll have you reference -- I’ll have you look back at the

interrogatory answers to refresh your memory for [Notice of Incident of

Noncompliance No.] 8025. Eight-zero-two-five, I should say.

A. [Notice of Incident of Noncompliance No.] 8025 was corrected on July

3rd, 2008.

...

31

Q. [Notice of Incident of Noncompliance No.] 8025, will you look at that

again and tell me what the interrogatory says about when that was

corrected?

A. It says it -- the violation was corrected by June 2rd [sic], 2008.

Q. So that was within three or four days of you issuing that notice, correct?

A. Yes, that’s correct.

Q. What’s your -- really quick, what’s your actual memory of that, of knowing

about them fixing that underground leak?

A. The only thing I remember would be we traveled out there to verify the

leak. We heard about it and we went out and checked it and went back to

see if there was any action taken on it. That was the 28th -- the 27th, 28th,

and 29th [of May 2008]. I think it was like the 30th, we actually -- there were

people out there pouring cement into a couple pipes trying to get it to stop

leaking.

Q. All right. So you actually observed the crew fixing that leak?

A. Yes.

Q. At least attempting to fix that leak?

A. Yeah, they -- and maybe it was on the 29th [of May 2008] that they fixed

it. You know, I don’t -- the exact day, I don’t -- I don’t -- you know, that’s a

little bit too far back.

(alterations added).

Regarding additional Notices of Incidents of Noncompliance issued by the BLM to

Petro Mex in April and May of 2008, plaintiff’s counsel and Mr. Fancher had the following

exchange at trial:

Q. There were six notices of incidents of noncompliance issued between

April 25th and May 27th [2008], correct?

A. Yes.

Q. And from the notes I just took, it looks like three of them were corrected

by July 1st, 2008, right? According to what you just told us.

A. Or at least closed by --

32

Q. Well, I’m talking about the ones that were actually corrected. You testified

that the bull plug was corrected on June 3rd, 2008.

A. Okay.

Q. The sales valve was collected on July 1st, 2008 -- corrected, correct?

A. Yes.

Q. And that’s when you observed Mr. Villalobos actually doing that.

A. Okay.

Q. Is that correct?

A. What’s the number on that?

Q. [Notice of Incident of Noncompliance No.] 8017.

A. Okay. Oh, yes, I -- it may have been corrected by that date, yes.

Q. But then you talked about how you saw Mr. Villalobos do that.

A. And is that --

Q. You had that meeting with him.

A. And that was the 1st of April --

Q. July 1st. It was July 1st.

A. I corrected it then, yeah. I put a seal on it, but he didn’t have the darts for

it.

Q. And then the underground leak was fixed on June 3rd, correct, [Notice

of Incident of Noncompliance No.] 8025?

A. [Notice of Incident of Noncompliance No.] 8025?

Q. Mm-hmm.

A. [Notice of Incident of Noncompliance No. 80] 25 was -- it was corrected

June 3rd, 2008.

Q. Okay. And then one of them was closed on July 1st, 2008, [Notice of

Incident of Noncompliance No.] 8021, correct?

33

A. It was not corrected. It was just closed on July 1st.

Q. Well, that’s what I said. It was closed on July 1st, 2008, right?

A. Oh, yes, closed.

Q. And no assessment was issued?

A. No, not at that time, no.

Q. And then the other two remaining were both closed on October 9th, 2009,

correct?

A. August 4th -- that’s. . .

Q. Again, you testified that [Notice of Incident of Noncompliance No.] 8018

was closed on October 9th, 2009. That’s the numbered storage tank.

A. Yes.

Q. And [Notice of Incident of Noncompliance No.] 8020 was closed on

October 9th, 2009. That was the full water tank.

A. Yes, we closed the INC [Incidents of Noncompliance] that day.

Q. Okay. So there were -- out of the six incidents, by the end of July 2008,

there were only two that were still outstanding?

...

A. Yes. Well, that wasn’t [sic] closed anyway.

Q. And that was the numbered storage tank and the water tank, correct?

A. Yes[.]

(alterations added).

The parties stipulated that “[o]n June 16, 2008, Mr. Fancher inspected the Garfield

lease. Mr. Fancher observed that the Garfield lease wells were ‘not producing because

of line pressure.’” (alteration added). The also parties stipulated that “[o]n July 1, 2008,

Mr. Fancher met with Mr. Villalobos at the Garfield lease. Mr. Fancher and Mr. Villalobos

‘talked about the oil and seal on the tank.’ Mr. Fancher found ‘no indication that the well

is on.’” (alterations added). Mr. Fancher’s “conversation record” for the July 1, 2008

meeting stated:

34

Carol Snyder and my self [sic] visited Jesus Villolabos [sic]. We talked about

the stains at the staging are [sic] and I told him they needed to be dealt with.

I recommended he call Christina Stark. We went to the 15-9 well and talked

about the oil and seal on the tank. He changed the seal with their seal. The

level is still @9.5’. There was no indication that the well is on. I told him he

needed to empty the water tank so it does not over flow. He said he would

call the water truck out to haul the water off. We discussed the letter Bob

[Robert Hartman] sent requesting the drilling reports and targeted the

cementing reports. He said that Trudy [Grubilnick] and Linn [Wilson] was

expose [sic] to have that together with the late reporting and be sending us

a copy. We talked about the bond issue. He is fully aware of the situation

there. Jesus was setting up a compressor on the private land location.

(alterations added). At trial, Mr. Wilson testified he called Mr. Fancher in July of 2008 to

discuss the April and May 2008 Notices of Incidents of Noncompliance. Mr. Wilson and

plaintiff’s counsel had the following exchange at trial:

[Q.] [D]id you place a phone call to the field office?

A. Yes.

Q. Will you tell me about that phone call, when you think it was and what

you -- who you talked to?

A. I called Ed Fancher and told him that all the incidents of noncompliance

had been repaired, and would he like to go out and do a reinspection. And

he told me, no, not at this time.

Q. When did you make that phone call to the best of your recollection?

A. It would have been right at the end of July [of 2008].

Q. Okay. Did you write anything down regarding that phone call? Do you

have any record of that?

A. No, I do not.

(alterations added). At trial, plaintiff’s counsel additionally asked Mr. Wilson, the

Operations Manager of Petro Mex: “To the best of your knowledge, were all of those --

were all of the issues from the April and May notices of incidents of noncompliance

resolved by the end of July?” Mr. Wilson testified: “I believe they was [sic]. Yes.” (alteration

added).

The joint stipulated facts reflect that “[i]n August 2008, Petro Mex resumed

production from the Garfield lease. The Garfield Lease produced gas during the months

of August, September, and October of 2008. Production from the Garfield Lease

35

decreased in late October 2008, and ceased completely beginning November 1, 2008.”

(alteration added; internal reference omitted). Mr. Villalobos testified at trial regarding

resuming production in August 2008, explaining in an exchange with plaintiff’s counsel:

Q. The wells produced -- you turned the wells back in August of 2008, right?

A. Yes.

Q. And to the best of your memory, did those wells produce in August and

September of 2008?

A. Yes.

Q. Did they produce in October of 2008?

A. I think they did, yes.

Q. You shut the wells back down at the end of October, correct?

A. Yes.

Q. Why was that?

A. I think that’s when they -- they send us the shut-in orders.

Q. Well, we talked about the shut-in order was in May of 2008, correct?

A. Yes.

Q. The written shut-in order?

A. Yes.

Q. So in October of 2008, why did you shut the wells back in?

A. That’s when Mr. Ed [Fancher] called me and he told me that I need to

shut the wells in again.

Q. Okay. So let’s talk about that. It’s your testimony that you received a call

from Mr. Fancher?

A. Yes.

Q. Okay. And what did Mr. Fancher tell you in that phone call?

36

A. I remember that morning he called me and said I got to shut those wells

in, all the wells in.

Q. So why did he tell you you needed to shut the wells in?

A. Well, he -- I asked him again why they need to shut them in. He say, I

don’t know, I got to -- he say, I’m the bad man, I got to give you the bad

news, and I got orders to tell you to shut them in. And I ask him again why.

I said, well -- I don’t know, he said. You got to shut them in.

...

Q. Okay. So what did you do once you got off the phone with Mr. Fancher?

A. I got off the phone and I called Linn [Wilson]. I say, I just got a call from

Mr. Ed [Fancher], they want us to shut in all the wells in. And I told Ed, why.

I keep fighting. I say, why.

Q. And did you instruct Mr. Wilson to go shut the wells in?

A. And I told -- he say, well, that’s what they want, I guess that’s what we

need to do. So I say, well, all right, shut them in.

Q. Okay. Did you remember getting -- did you ever get anything in writing

about this from Mr. Fancher or the field office?

A. I can’t remember.

(alterations added). Mr. Fancher, in response to defendant’s counsel’s question: “Did you

have a telephone call with Mr. Villalobos in October 2008 in which you told him the lease

was still shut in?” testified: “I don’t recall that conversation.”

Regarding the shut down in October 2008, Linn Wilson had the following exchange

with plaintiff’s counsel at trial:

Q. Why did you shut the wells back in in October?

A. Because Jesus [Villalobos] called me and told me that he had received a

phone call that we had to shut the wells back in, that we was on -- we was

still in the shut-in order.

And so i [sic] called Brian Gartner with Energy Transfer,[11] and asked him

if he could go out and shut the compressor down for me, and he said he

11Energy Transfer’s role was not defined at trial, however, from the testimony it appears

Energy Transfer may have purchased gas from Petro Mex and may have paid royalties.

Defendant’s counsel and Mr. Villalobos had the following exchange on cross-examination

37

would. And then that was -- I believe that was on a Friday, and he -- then I

went back up there on either Monday or Tuesday and took care of all the

block valves and the wellheads.

Q. Okay. Production was going pretty well in October before that, wasn’t it?

A. Yes, it was.

Q. Would there have been any other reason to shut down at the end of

October?

A. No.

Q. And we talked about how in August, it looked like you resumed

production around the 14th. Correct?

A. Correct.

Q. Why was that?

A. Because I had spoke to Ed Fancher and told him at the end of July that

all the incidents of noncompliance had been completed and did he want to

do a reinspection. And he said -- told me, no, not at this time.

Q. Okay.

at trial, with Mr. Villalobos’ answers as follows:

[T]he companies trying to buy the gas, they -- we got it -- they give us -- they

show us if we want to pay the royalties or they want to pay the royalties.

And that -- back then, they was paying the royalties for us, for Petro Mex.

Q. Do you recall the name of that company? Could that have been maybe

Energy Transfer or --

A. No, that was before the Energy Transfer. I know they used to have the

main office in Salt Lake City. I can’t remember the name of the company.

Q. And the company -- and whatever the company’s name was, they would

make Petro Mex’s royalty payments, but would they also do the production

reporting for Petro Mex?

A. No. They only take care of the royalty payments. That’s it.

Additionally, Joint Exhibit 33 reflected gas volume statements from Energy Transfer from

February 2008 to December 2008.

38

A. So my assumption was that we could turn everything back on.

Q. Did he tell you you could turn everything back on?

A. No, he did not.

Q. Did you ask him if you could turn everything back on?

A. No, I did not.

Q. Okay. So were you concerned about the shut-in order still being in place?

A. I was. When I found out about it in October, I was.

Q. But when you turned it on in August, when you resumed production in

August, were you concerned about the shut-in still being in place?

A. No.

Q. Why not?

A. Because we had completed all the incident [sic] of noncompliance.

(alterations added). On cross-examination, defendant’s counsel pressed Mr. Wilson

about restarting production in August 2008:

[Q.] Whose responsibility was it to sign and date, complete this shut-in

notice?

A. It could have been either one of us. Could have been myself or Jesus

Villalobos.

Q. Whose responsibility was it to mail it back to BLM?

A. Again, it could have been either one of us. Whoever signed it would have

usually take [sic] it and mail it back.

Q. Did you sign and return this form?

A. No, I did not.

Q. Okay. Earlier you testified that when you called Mr. Fancher at the end

of July, you did not tell him that Petro Mex was going to resume production.

Is that right?

39

A. No, I did not. I asked him if he wanted to reinspect the wells.

Q. And let me -- so did -- just to be clear, did you tell Mr. Fancher you were

going -- that Petro Mex was going to resume production during that --

A. No.

Q. Okay. -- end of July phone call?

A. No.

...

Q. [C]ould you look at the warning section, please. Do you see that?

A. Okay.

Q. Can you read the first sentence, please, under, Warning.

A. “Operations are not to be resumed until permitted by the authorized

officer.”

Q. Okay. And Petro Mex resumed production in August 2008.

A. Yes.

Q. And did -- Petro Mex did so without permission of the authorized officer.

Right?

A. Correct.

Q. Do you recall specifically when in August Petro Mex resumed

production?

A. I believe it was mid-August, around the 14th, 15th.

Q. And then Petro Mex shut down production again near the end of October

2008. Right?

A. Correct.

(alterations added). Mr. Wilson testified regarding the shutting down production again in

October 2008:

[A.] Looks like we was in full production up until the 25th of October, and

then it dropped off. I believe that’s when we shut the wells back in.

40

Q. Okay.

A. I had -- I called a guy to go shut in the -- shut down the compressor, but

the wells was still open at that time.

Q. Okay. Based on the numbers here, when do you think the compressor

was shut down?

A. I would say it was shut down on the 24th.

(alteration added).

Subsequent to the October 2008 shutdown, Mr. Fancher visited Petro Mex in 2009.

According to the joint stipulated facts:

On March 30, 2009, Mr. Fancher inspected the Garfield lease. Mr. Fancher

observed that one well had a health and safety violation, a pump jack present

without any guards, but he did not issue a Notice of Incidents of

Noncompliance for that violation. Mr. Fancher observed that a field

compressor he had observed in June 2008 was “now gone.” Mr. Fancher

“found that Petro Mex had sold gas during after [sic] the shut in.”

(alteration in original). Mr. Fancher’s notes, which were admitted as a joint exhibit at trial,

twice indicated: “We found that Petro Mex had sold gas during after [sic] the shut in. This

is on our plate.” (alteration added). On cross-examination regarding Mr. Fancher’s March

30, 2009 inspection of the Garfield Lease, plaintiff’s counsel asked:

[Q.] You did say on the first one you note that “We found that Petro Mex

had sold gas during and after the shut-in. This is on our plate.” What did you

mean by “this is on our plate?”

A. This is on our plate meaning this is something new that we had to deal

with that it came up. We’d have to investigate it and see when they started

and everything and that’s basically all I meant by it.

Q. So what happen -- what did you do? Did you do any investigating into

that question?

A. Well, I did the investigating as far as I could on the OGORs [Oil and Gas

Operations Report], the reported MMS website. I looked in Colorado’s

website also and seen that they had started and stopped. That’s really about

all I did, what I remember.

(alterations added). With defendant’s counsel, Mr. Fancher clarified the phrase “this is on

our plate”

41

meant that we had to research that and find out why they did that, why they

started production without -- without notifying us.

Q. And on what date was this?

A. This was on March 30th, 2009.

Q. Was this the first time that you learned that Petro Mex had produced

during the shut-in?

A. Yes, I think it is.

Q. Did you know in August 2008, at that time, did you have any knowledge

that Petro Mex was producing?

A. I don’t remember any knowledge of that. I’d have to look and see if I

made any notes anywhere.

Q. Okay. Do you know whether in September 2008 you had any knowledge

that Petro Mex was producing?

A. No, no, ma’am.

Q. Did you have any knowledge in October 2008 that Petro Mex was

producing from the Garfield lease during the shut-in?

A. No, ma’am.

According to the joint stipulated facts, subsequent to Mr. Fancher’s March 30, 2009

inspection,

[o]n April 1, 2009, Robert Hartman sent a letter to Petro Mex stating that

BLM’s records showed Petro Mex had “last produced in October 2008,” and

removal of the field compressor “eliminates the possibility of production from

the wells.” Mr. Hartman stated that BLM had determined that “the lease is

not capable of production in paying quantities.” In the April 1, 2009 letter,

Mr. Hartman cited 43 C.F.R. § 3107.2-2 and gave Petro Mex 60 days to

“restore production in paying quantities.” Mr. Hartman further stated that, “if

justification that the lease is capable of production in paying quantities is not

submitted within 60 days from receipt of this letter, the lease will

automatically terminate.” The letter was delivered to Petro Mex by both

regular mail and certified mail. Because the certified copy was returned

unclaimed, a third copy was hand delivered to Petro Mex’s office the week

of May 18, 2009.

42

(alteration added). At trial, Mr. Hartman, on direct examination explained:

This is a letter that’s commonly referred to as a 60-day letter but more

appropriately potential lease termination letter. And it’s telling the lessees

of a lease that they -- the BLM has reviewed the production and it appears

that the wells are no longer capable -- or the lease is no longer capable of

production.

Q. Okay.

A. And we ask -- yes.

Q. And I didn’t mean to cut you off there if I did, but how many such 60-day

letters have you issued in your career?

A. I don’t know, maybe 500. It’s one of our most common letters. It’s the

really only way that leases are terminated. They have -- the lessees, per the

regulations, are required to be given notification that, hey, this lease is in

danger, please respond.

Q. Okay. And in your experience, how do operators usually respond?

A. One of three ways. They’ll ignore it; or just -- yeah, they can ignore it,

which is an option. They’ll return the wells to production with proper

notification. Or those are the only real -- really two options.

Defendant’s counsel questioned Mr. Hartman about the language in the 60 day letter that

stated: “If justification that the lease is capable of production in paying quantities is not

submitted within 60 days from receipt of this letter, the lease will automatically terminate,”

and asked Mr. Hartman:

[Q.] [H]ow could Petro Mex have shown justification that the lease is

capable of production in paying quantities?

A. Well, I guess a couple ways. They could have put a compressor onsite

and produced the wells. Obviously if they were shut in at that time, they

would have had to eliminate that hurdle before that. The other option that

was suggested by Petro Mex in one of the meetings I guess we’re going to

talk about, but that idea of venting the gas to the atmosphere, doing what

we would call an absolute open flow testing of the wells, where gas is vented

to the atmosphere or measured and then vented to the atmosphere.

Q. And does that require special equipment to do the venting test?

A. It requires -- yes, special equipment, yes.

43

Q. And then have you ever issued a 60-day letter while an operator was

shut in?

A. No.

Q. And then do you recall when after [sic] you sent this letter if Petro Mex

contacted you?

A. I don’t remember contacting, but reading through the case file in the last

couple days indicated that we were contacted.

...

[Q.] Do you recall speaking with Petro Mex on May 5th, 2009?

A. I do not remember specifically, no.

Q. Okay. What about references to, like, the compressors being stolen and

this list of equipment? Was this necessary information for you to know?

A. It didn’t seem to be applicable to what our desire was to have the leases

paid or to get the leases back on production. No, it did not.

Q. Is there any reference in this letter about Petro Mex having any kind of

justification for returning the wells to production in paying quantities?

A. No. I don’t see any reference.

Q. Okay. And then there’s at the very bottom a reference to an MMS fine

and royalties, but to your understanding, does BLM have any involvement

with the MMS fine or royalties?

A. No, we do not.

Q. And then there’s also –

A. Not that I’m aware of, we don’t have any. Definitely not at the field office

level.

(alterations added).

In response, Mr. Villalobos sent a letter to Mr. Hartman in May 2009, which stated,

in part:

44

Pursuant to our conversation on May 5th, 2009,[12] Petro-Mex LLC would be

willing to pay off what fines that have been levied against Petro-Mex_@12

½% of total production

...

Petro-Mex disagrees with the M.M.S. fine. The royalties have- been paid.

The paper work wasn’t filed on time. $150,000.00 is a little steep for 8

months of reports that wasn’t filed on time. The people in charge of filing

paperwork have been replaced.

(punctuation in original; footnote added)

As stipulated to by the parties:

On May 27, 2009, Mr. Villalobos and his friend, John Durham, met with Mr.

Hartman, Mr. Fancher, and David Lehmann from the Field Office. Mr.

Hartman documented the meeting in a June 16, 2009 letter to Petro Mex

that was signed by Catherine Robertson. Mr. Hartman summarized the

issues discussed at the May 27, 2009 meeting as including “royalty

payments, production reporting, increased bond amounts, past incidents of

non-compliance and lease status for the leases operated by Petro-Mex.” As

to the status of the lease, the letter stated that Petro Mex’s response “during

the meeting is that the lease is capable of production but without

compression the wells are not able to produce.” Petro Mex did not have a

compressor on the lease from May 2009 to August 2009. In the June 16,

2009 letter, the Field Office directed Petro Mex to provide a “written

response to explain the paying status” of the lease within 15 days. The Field

Office warned that “failure to provide adequate justification will result in

termination of the lease[].”[13]

At the May 27, 2009 meeting, Petro Mex and [sic] Field Office discussed

alternatives for demonstrating production. Petro Mex offered to perform

production testing by flow testing the wells, and either venting the gas to the

atmosphere or setting a compressor and selling the gas. As to royalties due

on production, which were the basis for the October 22, 2008 Notice of Civil

Penalty, the June 16, 2009 letter stated that Petro Mex remained

12 At trial, in response to the question, “so did you actually call Mr. Hartman after receiving

this letter?” Mr. Villalobos testified, “I don’t know. I think John [Durham] did. I didn’t call

Bob, no.” Mr. Villalobos testified, regarding the 2009 letter, “I told Linn [Wilson] to write it

up and I sign it. I don’t know who wrote it, Linn or Susan [Wilson] or Barbara [Sonnier]. I

don’t know who did.” (alterations added).

13 The June 16, 2009 letter stated: “Failure to provide adequate justification will result in

the termination of the leases,” referring to the Garfield Lease, as well as the Mesa Lease

and Esmerelda Lease. As noted above, the Mesa Lease and Esmerelda Lease are not

at issue in the above captioned case.

45

delinquent. Mr. Hartman acknowledged Petro Mex’s request to modify its

royalty amount “in order to pay off fines,” but explained that the Field Office

lacked authority to “modify lease terms such as royalty rates.” Mr. Hartman

explained the Field Office would forward Petro Mex’s request to the State

Office, “but at this time will not recommend approval.”

(first alteration in original; footnote added; internal references omitted). The June 16, 2009

letter to Petro Mex noted:

This office requested a bond increase from Petro Mex due to large liability

on your leases. Your history of non-compliance with on the ground

operations and apparent failure to report timely to the MMS led this office to

require this bond increase. Our letter was dated August 25, 2008 and asked

for a response from Petro Mex within 30 days of receipt of the letter. You

addressed this issue in our May 27 meeting indicating that Petro Mex was

unwilling or unable to provide this increase in bond amount. As noted above,

your May 20, 2009 letter requested an increase in royalties in order to pay

off fines. This office does not have the authority to modify lease terms such

as royalty rates. Your failure to keep current with royalty obligations gives

us no comfort that you will with future obligations. The failure to respond to

requests for well completion information, bond increase requests and lease

production data is also troubling. We will forward your request to our state

office for their review but at this time will not recommend approval.

The June 16, 2009 letter to Petro Mex also stated that

[y]our letter [undated letter from Petro Mex that was received by BLM on

May 20, 2009] stated that you disagree with the Mineral Management

Service fines and royalties had been paid. In our meeting you reiterated

that you were current with royalty payments. We have talked to MMS

personnel in Denver concerning royalties and fines that are due. It is our

understanding that minimum royalties may be current for the two producing

leases but the royalties that are due on production are not current. The

failure to pay production royalties is the basis for the penalties as outlined

in the Notice of Civil Penalty letter dated October 22, 2008.

(alterations added).

Regarding the June 16, 2009 letter to Petro Mex, the joint stipulated facts also

stated:

As to the bond, the letter stated that Petro Mex indicated it “was unwilling or

unable to provide” the required increase in the amount of its bond to

$100,000. BLM issued an “order of the authorized officer” to increase the

bond and directed Petro Mex to respond in writing to the August 25, 2008

letter within 20 days. BLM warned that failure to submit the required bond

46

“will” result in “an assessment of $250. . . and lease cancellation.” In the

June 16, 2009 letter, BLM issued an “order of the authorized officer”

directing that “[a]ll production is to remain shut in” on the Garfield lease “until

Petro-Mex satisfies the increased bond request and all fines are paid to

[MMS].” BLM warned that “[f]ailure to abide by this order will result in an

assessment of $250. . . and civil penalties.”

(alterations in original; internal references omitted). The parties further stipulated that

“[t]he June 16, 2009 letter informed Petro Mex of its appeal rights,” and “[t]he June 16,

2009 letter was delivered to Petro Mex by certified mail, first class mail, and hand

delivery.” Mr. Villalobos testified that Petro Mex did not appeal.

Regarding the May 27, 2009 meeting and June 16, 2009 letter, defendant’s

counsel asked Mr. Hartman

did Petro Mex ever -- when it comes to the paying status, did Petro Mex

ever ask permission from you to take any steps related to demonstrating an

ability to produce in paying quantities from the Garfield lease?

A. Not that I remember.

Q. Did the shut-in prevent Petro Mex from flow-testing the wells for

purposes of demonstrating ability to produce in paying quantities?

A. I think with the request -- I’m looking back, if they had requested it, we

probably could have gotten around that shut-in order to actually allow

testing, but as far as I know, they did not.

Q. So what do you mean by that? So gotten around the shut-in order, so --

A. We could have -- we could have worked -- worked with them with the

idea that -- two options. We could have extended the so-called 60-day letter

to additional time until things got straightened out on the INCs [Incidents of

Noncompliance], the shut-in orders, or we could have worked out the idea

of flow-testing versus installing compressors, but that 60 days obviously --

well, it’s not obvious here, but that 60 days is flexible as long as we’re

receiving feedback from the operator that they’re wanting to do something.

Q. And so when you say it’s flexible and could have extended it, why didn’t

you extend the 60-day letter?

A. It wasn’t apparent to me that they were actually interested in continuing

in responding to any of our information requests.

47

Petro Mex’s Bond

The parties have stipulated that

[p]rior to May 2008, Petro Mex’s bond requirement was $25,000. In April

2008, the Field Office’s field manager, Catherine Robertson, sent a

memorandum to the Colorado BLM State Director requesting an increased

bond from $25,000 to $100,000 for Petro Mex. Ms. Robertson stated that

the reasons for the requested increase in bond coverage included: (1) Petro

Mex’s “history of failing to comply” with orders and Notices of Incidents of

Noncompliance; and (2) the fact that Petro Mex was delinquent in its

production reporting. Ms. Robertson stated that the increased bond was

“required to reduce the liability” to the Government in the event the wells

were plugged and abandoned because the estimated cost per well was

$20,000.[14]

(alteration and footnote added; internal references omitted). At trial, Mr. Hartman testified

that he drafted the April 2008 memorandum for Ms. Robertson’s signature. Regarding the

April 2008 memorandum, defendant’s counsel and Mr. Hartman had the following

exchange:

[Q.] And then can you just generally explain what this memorandum is?

A. It’s a recommendation to the state director from the field office manager

saying that an operator has particular issues and that we believe that a bond

14The joint stipulated facts note that in Ms. Robertson’s April 2008 memorandum to the

Colorado BLM State Director requesting an increased bond for Petro Mex, “Petro Mex’s

wells were then in a ‘shut in or unapproved temporarily abandoned status.’ However,

none of Petro Mex’s wells were then in a ‘shut in or unapproved temporarily abandoned

status.’” Mr. Hartman had the following exchange with plaintiff’s counsel regarding the

Ms. Robertson’s phrasing that “none of Petro Mex’s wells were then in a ‘shut in or

unapproved temporarily abandoned status:’”

[Q]. Is it possible that that was an incorrect statement that the wells were

currently in a shut-in or an unapproved temporarily abandoned status.

A. Yes.

Q. So it’s certainly possible that in sending this memorandum to the state

director asking for the increased bond, you provided incorrect information.

A. With respect to the well status, maybe, yes.

(alteration added).

48

-- an increase to their bond should be required. And it lists our criteria of

why we believe it should be increased.

Q. Okay.

A. Yes.

Q. And then the first indent refers to -- and I think ties back to the

spreadsheet we just looked at, but refers to seven wells and all of them are

currently in a shut-in or unapproved temporarily abandoned status. And

even if that were not true, would you have still made a recommendation to

increase the bond?

A. Whether they were shut in or not?

Q. Yes.

A. Being the criteria? Yes. Nonproduction is a concern. It’s one of the criteria

for a bond increase. Yes.

Q. And then there’s a reference to the middle paragraph, which is the

indented paragraph, refers to a history of failing to comply with orders of the

authorized officer and incidents of noncompliance resulting in assessments

being issued. Why was that a reason for asking for an increase in bond

coverage?

A. It’s one of the -- on the -- let’s see, in the memo, the memo from

Washington. It’s one of the criteria that can be used to show a bond increase

is needed.

Q. And then can you explain why you have that third indented paragraph

and what the purpose of that was?

A. This is based on -- I believe it was based on conversations or emails from

MMS between me and one of the -- some MMS representative that there

were failures to pay royalty and failures to report production.

(alteration added). The parties have stipulated:

On May 15, 2008, the Colorado BLM State Director approved the bond

increase request and required Petro Mex to obtain a bond of $100,000. The

State Director gave Petro Mex 60 days from receipt of her letter to comply.

The State Director’s decision was delivered to Petro Mex by certified mail.

On August 25, 2008, Ms. Robertson notified Petro Mex that BLM had failed

to receive any response to the State Director’s order to increase its bond.

Ms. Robertson directed Petro Mex to provide the requested additional bond

49

amount within 30 days of receipt of her letter, and stated, “[t]his is an order

of the authorized officer.” Ms. Robertson’s letter was delivered to Petro Mex

by certified mail.

(internal reference omitted). The August 25, 2008 letter from Ms. Robertson stated, in

part:

Reference is to the attached letter from the Bureau of Land Management-

Colorado State Office that requested you provide an increase in bonding

amount for your oil and gas operations within Colorado. The letter requested

a response by 60 days of receipt of the letter. To date no response has been

received. As the May 15th letter indicates, this office has concerns on the

amount of liability that exists on Petro Mex Resources operated properties.

Your history of non compliance with on the ground operations and the

apparent failure to report timely to the Minerals Management Service led

this office to request this bond increase. Please provide the requested

additional bond amount as requested in the May 15, 2008 within 30 days of

receipt of this letter. This is an order of the authorized officer. If you fail to

submit the required reports in the time specified, you will be liable for an

assessment of $250.00 under 43 CFR 3163.1(a)(2) and possible lease

cancellation.

Regarding the increased bond, Mr. Villalobos testified in response to plaintiff’s

counsel’s question,

[w]hat about the bond? That hadn’t been posted yet, right [by October

2008], the increased bond?

A. No.

Q. How come you hadn’t posted the increased bond yet?

A. Because I was still fighting that. I keep arguing why they want that bond.

Q. Okay. Did you have revenue sufficient to post an increased bond yet?

A. I can’t remember, but I did have the money to --

Q. Okay.

A. -- take care of the bond.[15]

15The parties have stipulated that on January 12, 2010, “Petro Mex obtained the required

additional bond, which brought its total bond amount to $100,000.”

50

(alterations and footnote added).

Civil Penalty

The parties have jointly stipulated that

[o]n October 22, 2008, DOI’s Minerals Management Service (MMS) issued

a Notice of Civil Penalty to Petro Mex for “knowing/willful failure to pay

royalties and failure to comply with reporting requirements.” As a basis for

the Civil Penalty, the MMS found that Petro Mex had failed to pay royalties

on gas produced and sold on two leases, including the Garfield lease, for

sales months August 2007 through May 2008. As a basis for the Civil

Penalty, the MMS found that Petro Mex had failed to submit required form

MMS 2014, Report of Sales and Royalty Remittance, for the lease during

that same time period, August 2007 through May 2008. The Civil Penalty

that was assessed was three times the estimated royalty owed for the

delinquent periods, or $149,131.[16] This amount did not include the

royalties then due or interest. The invoice sent with the Notice of Civil

Penalty indicated the Civil Penalty was due by November 26, 2008.

(alteration added; internal references omitted). The October 22, 2008 Notice also

indicated

PM [Petro Mex] has also failed to submit forms MMS-2014. These reports

must be submitted monthly to MMS as required by 30 C.F.R. § 210.10. PM

is not being assessed penalties at this time for its failure to submit these

reports. However, penalties of as much as $500 per day per violation may

be assessed should MMS not receive the reports for the two leases and

sales months cited above within 20 days of receipt of this Notice. Such

penalties, provided for in 30 C.F.R. § 241.53, may be escalated to $5000

should the violations continue beyond 40 days of receipt.

(alteration added). Regarding royalty payments, on cross-examination with defendant’s

counsel, Mr. Villalobos had the following exchange:

16 The October 22, 2008 Notice explained that

[w]hile MMS has the authority to assess $ 10,000 a day for each of these

violation days. [sic] we are limiting that assessment to $100 per violation

per day. However, that amount would be $247,500. Accordingly, MMS is

limiting this penalty to three times the estimated royalty owed for the

delinquent periods, or $149,131. The penalty will continue to accrue at the

rate of $100.00.

(alterations added; emphasis in original; internal reference omitted).

51

[Q.] [W]e’re in 2007 through 2009. Production was not reported during the

period of time Petro Mex did not have a bookkeeper, right?

A. In 2007?

Q. So when Petro Mex did not have a bookkeeper, Petro Mex was not

reporting production, correct?

A. I believe that was 2008. Part of 2008, if I remember right.

(alteration added).

The BLM’s Decision to Terminate the Garfield Lease

After the October 22, 2008 Notice of Civil Penalty to Petro Mex, on July 21, 2009,

Mr. Hartman sent a memorandum to the State Director indicating that Petro Mex was

notified on April 1, 2009 “of the potential termination of the lease due to lack of paying

production.” The parties have stipulated: “Mr. Hartman went on to state that, ‘to date no

verbal or written intent to reestablish production on the lease has been received.’ Mr.

Hartman then stated that ‘it is recommended the lease terminate due to lack of

production.’” At trial, plaintiff’s counsel specifically asked Mr. Hartman about the line: “To

date, no verbal or written intent to reestablish production on the lease has been received,”

and asked him:

[Q.] Hadn’t they [Petro Mex] indicated a willingness to reestablish

production on the lease if you’d work with them?

A. Not in my mind. They were talking about venting. It was about their only

option that they gave me.

Q. Do you think this memo gives the impression that Petro Mex wasn’t even

talking to you guys?

A. That’s fair.

Q. It doesn’t really represent all the communications and the things that they

had said, does it?

A. No, it doesn’t.

Q. Missing a lot of context.

A. That’s correct.

(alterations added).

52

Petro Mex responded to Mr. Hartman on August 6, 2009, and as stipulated to by

the parties:

Petro Mex stated that at the May 27, 2009 meeting “production testing was

discussed. We stated that we could flow test the wells and vent the gas or

set a new compressor. To go to sales both plans were not acceptable.”

Petro Mex then stated that, “at this time Petro Mex can’t figure out a way to

test [the wells].” Petro Mex stated it was “investigating the MMS payment,”

and stated that “if any royalties have not been paid, they will be.” Petro Mex

stated that it was “currently working on the increase of the bond amount.”

Petro Mex confirmed “[t]he wells are still shut-in.”

(alterations in original). Mr. Hartman testified on direct examination with defendant’s

counsel:

[A.] My reaction [to Petro Mex’s response] was that there was -- and, then,

they -- at the bottom of the letter, they talk about -- well, we had discussed

flow testing and installation of compressor, and they made a statement that

-- that I guess that the BLM didn’t think that that was acceptable, and Petro

Mex couldn’t figure out a way to test them. And my reaction is I don’t think

it changed anything in regards to what -- where BLM was headed with

recommending the termination of the leases.

Q. Well, why not? Was it -- why not? Why didn’t it change anything?

A. There was really no plan here other than they said they didn’t know what

to do. That’s what I got out of this.

...

[Q.] was it your overall impression that this -- that this just wasn’t a solution

or an adequate response to the June 16th letter even?

A. I don’t think it was a valid response. What we were after -- what we were

after throughout the discussions and the letters was continuous production.

Q. Okay, so --

A. And I didn’t think this was an acceptable response.

In response to defendant’s counsel’s question, Mr. Hartman further testified:

Q. And so this letter, you at least received it August 6th, 2009, and you had

earlier made the recommendation to terminate the lease for nonproduction

on -- I believe that was August -- don’t let me get my dates wrong -- on July

21st, 2009, but after receiving this letter via fax, did you consider taking

back your recommendation for the -- the recommendation to terminate?

53

A. No, I did not. And I just -- and I didn’t see any viable solution that they

were proposing. They weren’t really voluntarily -- they weren’t proposing

anything that was going to fix it other than actual production. And I didn’t

even see that.

Q. Mm-hmm. Was there any further correspondence with Petro Mex after

this letter was faxed to you regarding the showing [sic] production of paying

quantities?

A. I don’t believe so.

Q. And so did the [BLM’s Colorado] state office eventually accept your

recommendation to terminate the lease?

A. I believe so. I believe the leases were terminated -- or attempted to be.

(alterations added). The joint stipulated facts stated that

[i]n an August 26, 2009 decision, BLM’s Colorado State Office terminated

the Garfield Lease. As grounds for the termination, the State Office

explained that “the Grand Junction Field Office has determined that this

lease was no longer capable of producing oil and gas in paying quantities

after October 1, 2008.” The State Office went on to state that “as no

evidence of new production has been received the lease terminated the

same date.”

(alteration added)

After the BLM’s August 26, 2009 decision, Petro Mex appealed the State Director’s

termination decision to the Interior Board of Land Appeals on September 18, 2009. On

September 27, 2010, the Interior Board of Land Appeals issued a decision, reversing the

decision to terminate the Garfield Lease. The Interior Board of Land Appeals noted that

Petro Mex repeatedly informed GJFO [Grand Junction Field Office] that it

would restore production from these leases if the May 2008 shut-in orders

were lifted, but GJFO refused to lift those orders. Thus, the issue here

presented is what effect, if any, those shut-in orders have on Petro Mex's

rights and obligation, under and pursuant to the MLA’s [Mineral Leasing Act

of 1920] third exception to lease termination.

(alterations added).17 The Interior Board of Land Appeals held

17The Interior Board of Land Appeals reference to the third exception comes from 43

C.F.R. § 3107.2-2, which states:

54

we reverse BLM’s decisions terminating these leases. Petro Mex

challenges the decisions on appeal as violative of its rights under the MLA’s

exceptions to lease termination. It claims GJFO erroneously determined

that the wells on these leases were not capable of producing in paying

quantities and compounded its error by failing to afford Petro Mex an

opportunity to be heard before an Administrative Law Judge on that issue.

Petro Mex also contends it was precluded by GJFO’s shut-in orders from

restoring production under the MLA’s third exception. Petro Mex raises

additional claims under the MLA’s other exceptions to automatic lease

termination, but in light of our resolution of this case, we need not address

them here.

Petro Mex contends GJFO erred in determining that these leases (and their

wells) were incapable of producing gas in paying quantities. BLM responds

by asserting that Petro Mex failed to provide “objective evidence that the

wells could produce gas in paying quantities” and failed to request State

Director Review of the June 2009 Order. It is uncontroverted that wells on

the leases at issue were producing natural gas in paying quantities when

they were again shut-in to comply with the GJFO orders in early October.

The only stated basis for GJFO determining these leases were not capable

of producing gas in paying quantities under 43 C.F.R. § 3107.2-2 was that

Petro Mex lacked field compressors necessary to deliver that gas to

purchasers. Although the parties disagree on whether these wells can

produce without compression, it is undisputed that if GJFO’s shut-in orders

were lifted, Petro Mex could install field compressors and return them to

producing status shortly thereafter.

There is no record evidence that the wells at issue were not “capable of

producing oil or gas in paying quantities” under the MLA’s third exception,

only that their production could not be sold without compression. The

legislative history makes clear that “actual production” is not necessary for

this exception to apply and that it is sufficient if a well has an “established

physical capability . . . to produce oil or gas in paying quantifies.” [sic]

American Resources Management Corp., 40 IBLA [195] 200 [(1979)]; see

discussion, supra. The adequacy of or necessity for surface facilities is

A lease which is in its extended term because of production in paying

quantities shall not terminate upon cessation of production if, within 60 days

thereafter, reworking or drilling operations on the leasehold are commenced

and are thereafter conducted with reasonable diligence during the period of

nonproduction. The 60-day period commences upon receipt of notification

from the authorized officer that the lease is not capable of production in

paying quantities

43 C.F.R. § 3107.2-2 (2022).

55

largely (if not totally) irrelevant in determining whether a well is capable of

producing oil or gas in paying quantifies. [sic] See 40 IBLA at 201.

...

We therefore conclude that GJFO erred in determining that these leases

(and their wells) were not capable of producing gas in paying quantities

under 43 C.F.R. § 3107.2-2 because they currently lack field compressors

and an ability to compress the gas produced for transport by pipeline. To

the extent those determinations were affirmed by BLM’s decision, they are

reversed and that decision is modified. See Coronado Oil. Co., 164 IBLA

[309,] 326 [(2005), aff’d, No. 05-CO-llJ (D. Wyo. Aug. 23, 2006), appeal

dismissed, No. 06-8083 (10th Cir. Sept. 14, 2007)].

(internal citations omitted; footnote omitted; alterations added). The Interior Board of Land

Appeals also indicated:

Petro Mex repeatedly represented that it would and could restore production

if the May 2008 shut-in orders were lifted; GJFO refused to lift its orders,

which were still in place when BLM terminated these leases on August 26,

2009. Although they state that all wells would remain shut-in until “all

compliance issues are resolved,” we interpret this language in the context

of the facts presented as referring to the violations identified by GJFO in its

NOICs [Notices of Incidents of Noncompliance] to Petro Mex.

...

GJFO erroneously refused to lift and required continuing compliance with

its May 2008 shut-in orders. The record shows Petro Mex could restore its

wells to producing status if those orders were lifted. Until GJFO lifts those

orders and gives notice to Petro Mex under 43 C.F.R. § 3107.2-3, BLM

cannot terminate these leases for nonproduction. If it intends to pursue

lease termination under 30 U.S.C. § 226(i), BLM must allow Petro Mex a

reasonable time in which to place its wells in a producing status after such

notice is given. Cf., Coronado Oil Co., 164 IBLA at 326. Simply stated, there

can be no termination of these leases by operation of law under the

circumstances of this case.

(internal citations omitted; alteration added).

In an October 27, 2010 letter, Mr. Fancher lifted the May 29, 2008 Shut-In Order.

The parties have stipulated that “Petro Mex resumed production in December 2010, and

the Garfield Lease thereafter produced gas,” and “[o]n March 1, 2011, BLM’s State

Director rescinded the recommendation to terminate the lease and return it to non-

terminable status.” (alteration added). Mr. Fancher, in a dialogue with defendant’s counsel

at trial, indicated:

56

This is a letter referring to the shut-in order. I wrote it and it was lifting the

shut-in order at that time. I wrote then that in light of the recent IBLA [Interior

Board of Land Appeals] decision, and I quoted the decision, that our most

recent meeting -- or in our most recent meeting, we discussed the

outstanding compliance issues. I have lifted -- enclosed a notice of

shutdown order of those two items.

Q. Okay. Previously, we looked at the language in the shut-in order

regarding the necessity of fixing all compliance issues. Do you recall that

discussion?

A. Yes.

Q. Okay. Had all compliance issues been corrected at the time you lifted

the shut-in order?

A. No, no, they had not.

Q. Given that not everything had been corrected, why did you lift the shut-

in order?

A. We felt that the two years had been gone by. In hindsight, I should have

insisted it remain until they did get everything corrected and did get all the

accountability issues corrected, but I chose to go ahead and let them, in

good faith, to start operating again.

...

Q. What part, if any, did the IBLA [Interior Board of Land Appeals] decision

play in your decision to lift the shut-in?

A. They remanded the decision back to the field office for nonproduction or

whatever. I don’t remember specifically what it stated.

(alterations added). In response to plaintiff’s counsel question, “what happened after the

decision of the Interior Board of Land Appeals?” Mr. Wilson testified “we got notice that

we could turn the wells back on, and we went and set a compressor, and we started

production again.”

Procedural History

Thereafter, Petro Mex filed its complaint in this court. As noted above, the case

was originally assigned to Judge Firestone, subsequently reassigned to Judge Hodges,

and ultimately reassigned to the undersigned. Plaintiff alleged in its complaint:

57

In granting the Leases, and pursuant to the provisions thereof, the United

States promised that the leaseholders, including Petro Mex, that they would

have the right to explore for, produce and sell oil and gas from the defined

parcels. Petro Mex relied upon such promises and obligations. In granting

the Leases, the United States agreed to comply with the terms of the Leases

and all applicable rules and regulations and to allow Petro Mex to explore

for, produce and sell oil and gas from the defined parcels provided that they

were not in material breach of the Lease and all applicable rules and

regulations, and to follow all applicable rules and regulations in managing

the Leases and Petro Mex’s performance under the Leases.

In its complaint, plaintiff contends:

The United States breached the Leases and its agreement with Petro Mex

by ordering Petro Mex to cease production on the Leases in October of

2008 when it had no valid contractual, statutory or regulatory grounds to do

so, and by refusing to allow production to resume once Petro Mex had

adequately demonstrated that there were no more remaining violations on

the Leases that constituted “immediate, substantial and adverse impacts on

public health and safety [or] the environment.” The United States breached

the Leases and its agreement with Petro Mex by attempting to terminate the

Leases on or about August 26, 2009 when it had no valid contractual,

statutory or regulatory grounds to do so. As a result of the breaches of the

Leases by the United States, Petro Mex has suffered damages, including

the loss of the full potential value of the Leases (including loss of profits),

loss of reasonable expectancy and reliance damages including the

expenses incurred in reliance upon the right to produce and sell oil and gas

from the Leases.

(alteration in original). For damages, plaintiff alleges:

As a result of the breaches of the Leases by the United States, Petro Mex

has suffered damages, including the loss of the full potential value of the

Leases (including loss of profits), loss of reasonable expectancy and

reliance damages including the expenses incurred in reliance upon the right

to produce and sell oil and gas from the Leases.

WHEREFORE, Petro Mex request [sic] that a judgment be entered against

the United States for the breach of the Leases awarding damages for the

loss of the full potential value of the Leases (including loss of profits), loss

of reasonable expectancy and reliance damages including the expenses

incurred in reliance upon the right to produce and sell oil and gas from the

Leases all in an amount exceeding five million dollars ($5,000,000.00)

exclusive of interest, costs and attorney fees and such other and further

relief as the Court deems just. Petro Mex also seeks an award of attorney

fees along with interest, costs and expenses of litigation.

58

(capitalization in original; alteration added).

In response to the complaint, defendant filed a motion to dismiss for lack of

jurisdiction, alleging that the facts giving rise to the alleged breaches occurred more than

six years before the filing of the complaint and, thus, the case was time-barred under the

statute of limitations set forth in 28 U.S.C. § 2501 (2012). Judge Firestone denied the

motion to dismiss on August 10, 2015, as discussed more fully below. See Petro Mex,

LLC v. United States, 122 Fed. Cl. 536, 540-41 (2015).

After the motion to dismiss was denied, Judge Firestone gave plaintiff the option

to file an amended complaint, however, on October 23, 2015, plaintiff file a notice

indicating the plaintiff would not file an amended complaint. Subsequently, the parties

engaged in discovery. Once discovery was complete, the case was reassigned to Judge

Hodges, and the parties filed cross-motions for summary judgment. Defendant argued

that a prior material breach committed by Petro Mex, specifically the failure to pay

royalties, provided the justification for the government’s alleged breach of attempting to

terminate the lease in August 2009. Judge Hodges, in a brief, unpublished opinion,

determined that

Defendant has not provided sufficient evidence or argument to show that it

is entitled to judgment as a matter of law on this issue. Its assertion that the

failure to pay royalties for a period of approximately nine months does not

establish a relationship with the alleged breach of termination for non-

production. In addition, the materiality of such an alleged breach is not clear

from the facts presented.

Plaintiff’s cross-motion for summary judgment argued that issue of whether the

government breached the lease is precluded by the Interior Board of Land Appeals’

decision, but Judge Hodges determined:

While decisions from the Interior Department Board can have preclusive

effects in this court, whether the Government committed a material breach

of contract was not fully litigated by the parties. The Board’s decision was

based on a narrow set of issues that did not ultimately decide whether a

breach of contract had occurred. In fact, the focus there was whether the

termination for non-production was proper, not whether either party

breached the contract, resulting in damages. The Board did not need to

determine whether the Government breached the lease to decide that the

termination was improper based on bureaucratic guidelines. The issues

presented here are not precluded by prior litigation; genuine issues of

material fact remain, and summary judgment based on issue preclusion

must therefore be denied.

(emphasis in original).

59

After Judge Hodges denied the cross-motions for summary judgment, the parties

attempted to engage in mediation to resolve the case. After the mediation was

unsuccessful, on September 11, 2020, the above captioned case was reassigned to the

undersigned. After a hearing with the parties, defendant filed a motion for leave to amend

its answer to “assert a new claim of offset pursuant to 31 U.S.C. § 3728(a), and to re-

open fact discovery for the limited purpose of updating gas production data from October

2016, through the present.” The court granted the defendant’s motion for leave to amend

the answer, and on December 11, 2020, defendant filed an amended answer to plaintiff’s

complaint which included a claim for offset, which alleges that, “as of September 14, 2020,

Petro Mex owes $330,205.58 to the United States for unpaid royalties, civil penalties,

interest, administrative fees, and Treasury collection fees.” On January 21, 2021, plaintiff

filed a response to the amended answer and claim for offset. The parties subsequently

undertook further discovery on the updated gas production data and prepared for, and

proceeded to, trial.

DISCUSSION

Statute of Limitations

Plaintiff’s complaint was filed October 22, 2014 and the case was initially assigned

to Judge Firestone. In lieu of an answer, defendant filed a motion to dismiss for lack of

jurisdiction alleging that the plaintiff’s claims were time-barred under the applicable statute

of limitations. As indicated above, the motion to dismiss was denied by Judge Firestone.

In its post-trial filings, defendant argues that “Petro Mex failed to prove any shut-in

related breach of contract,” and claims that “Petro Mex’s shut-in related breach claim is

barred by the statute of limitations.” Defendant argues that

[d]espite identifying October 2008 as the date of the United States’ first

alleged breach in both the parties’ pretrial statement of fact and issues,[18]

and in the introduction to its post-trial brief, Petro Mex briefs a different

question: whether the United States breached the lease by “continuation of

the May 29, 2008 shut-in order after the ‘immediate’ concern of the

underground leak had been resolved.” (capitalization altered). The answer

to that question is “no.” First, by Petro Mex’s own allegations, this breach

accrued before October 22, 2008 and is, therefore, outside the six-year

statute of limitations in 28 U.S.C. § 2501.

(internal citations omitted; alteration and footnote added). Plaintiff responds that “Petro

Mex does assert that the Government acted improperly when it failed to lift the Shut-In

18One of the joint issues of law filed by the parties in advance of the trial asked: “If the

Court finds that the Field Office orally ordered Petro Mex to cease production on the

Lease in October of 2008, whether that oral order was a partial breach of Section 1 of the

Lease.”

60

Order after the immediate safety issue or issues that led to the issuance of the order were

resolved, but this does not mean that Petro Mex’s claim accrued at that time.” As

referenced above, plaintiff’s complaint alleges: “The United States breached the Leases

and its agreement with Petro Mex by attempting to terminate the Leases on or about

August 26, 2009 when it had no valid contractual, statutory or regulatory grounds to do

so.”

Although the Tucker Act waives federal sovereign immunity in certain cases, and

grants this court jurisdiction to hear monetary claims against the government, including

military pay claims, this court’s jurisdiction is expressly limited by 28 U.S.C. § 2501, which

prescribes a six-year statute of limitations for filing claims arising under the Tucker Act’s

waiver of sovereign immunity. According to 28 U.S.C. § 2501:

Every claim of which the United States Court of Federal Claims has

jurisdiction shall be barred unless the petition thereon is filed within six years

after such claim first accrues. . . . A petition on the claim of a person under

legal disability or beyond the seas at the time the claim accrues may be filed

within three years after the disability ceases.

Id. “The six-year statute of limitations set forth in section 2501 is a jurisdictional

requirement for a suit in the Court of Federal Claims.” John R. Sand & Gravel Co. v.

United States, 457 F.3d 1345, 1354 (Fed. Cir.), reh’g en banc denied (Fed. Cir. 2006),

aff’d, 552 U.S. 130 (2008); see also Roseberry-Andrews v. United States, 144 Fed. Cl.

29, 33 (2019); Schnell v. United States, 115 Fed. Cl. 102, 104-5 (2014). The United States

Court of Appeals for the Federal Circuit has indicated that a claim accrues ““when all

events have occurred to fix the Government’s alleged liability, entitling the claimant to

demand payment and sue here for his money.”” Samish Indian Nation v. United States,

419 F.3d 1355, 1369 (Fed. Cir. 2005) (quoting Martinez v. United States, 333 F.3d 1295,

1303 (Fed. Cir. 2003), cert. denied, 540 U.S. 1177 (2004)); see also FloorPro, Inc. v.

United States, 680 F.3d 1377, 1381 (Fed. Cir. 2012); Martinez v. United States, 333 F.3d

at 1303 (“A cause of action cognizable in a Tucker Act suit accrues as soon as all events

have occurred that are necessary to enable the plaintiff to bring suit, i.e., when ‘all events

have occurred to fix the Government’s alleged liability, entitling the claimant to demand

payment and sue here for his money.’” (quoting Nager Elec. Co. v. United States, 177 Ct.

Cl. 234, 240, 368 F.2d 847, 851 (1966), motion denied, 184 Ct. Cl. 390, 396 F.2d 977

(1968)) (emphasis in original); Mildenberger v. United States, 643 F.3d 938, 944–45 (Fed.

Cir. 2011); Hopland Band of Pomo Indians v. United States, 855 F.2d 1573, 1577 (Fed.

Cir. 1988); see also Eden Isle Marina, Inc. v. United States, 113 Fed. Cl. 372, 481 (2013);

Brizuela v. United States, 103 Fed. Cl. 635, 639, aff’d, 492 F. App’x 97 (Fed. Cir. 2012),

cert. denied, 133 S. Ct. 1645 (2013).

As summarized by the United States Court of Appeals for the Federal Circuit in

Holmes v. United States:

Section 2501 states that all claims that otherwise fall within the jurisdiction

of the Court of Federal Claims “shall be barred unless the petition thereon

is filed within six years after such claim first accrues.” 28 U.S.C. § 2501. A

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cause of action first accrues when all the events have occurred that fix the

alleged liability of the government and entitle the claimant to institute an

action. Ingrum v. United States, 560 F.3d 1311, 1314 (Fed. Cir. 2009).

Generally, “[i]n the case of a breach of a contract, a cause of action accrues

when the breach occurs.” Alder Terrace, Inc., v. United States, 161 F.3d

1372, 1377 (Fed. Cir. 1998) (quoting Mfrs. Aircraft Ass’n v. United States,

77 Ct. Cl. 481, 523, 1933 WL 1818 (1933)). Compliance with the statute of

limitations is a jurisdictional requirement. John R. Sand & Gravel Co. v.

United States, 552 U.S. 130, 133–34, 128 S. Ct. 750, 169 L. Ed. 2d 591

(2008).

Holmes v. United States, 657 F.3d 1303, 1317 (Fed. Cir. 2011).

In addition, a Judge of the United States Court of Federal Claims has noted that:

It is well-established that a claim accrues under section 2501 “when ‘all

events have occurred to fix the Government's alleged liability, entitling the

claimant to demand payment and sue here for his money.’” Martinez v.

United States, 333 F.3d 1295, 1303 (Fed. Cir. 2003) (en banc), cert. denied,

540 U.S. 1177, 124 S. Ct. 1404, 158 L. Ed. 2d 76 (2004) (quoting Nager

Elec. Co. v. United States, 368 F.2d 847, 851 (Ct. Cl. 1966)); see also

Samish [Indian Nation v. United States], 419 F.3d [1355,] 1369 [(2005)].

Because, as noted, this requirement is jurisdictional, plaintiff bears the

burden of demonstrating that its claims were timely. See Alder Terrace, Inc.

v. United States, 161 F.3d 1372, 1377 (Fed. Cir. 1998); Entines v. United

States, 39 Fed. Cl. 673, 678 (1997), aff’d, 185 F.3d 881 (Fed. Cir.), cert.

denied, 526 U.S. 1117, 119 S. Ct. 1766, 143 L. Ed. 2d 796 (1999); see also

John R. Sand & Gravel Co. v. United States, 457 F.3d 1345, 1362 (Fed. Cir.

2006) (Newman, J., dissenting); Reynolds v. Army & Air Force Exch. Serv.,

846 F.2d 746, 748 (Fed. Cir. 1988).

Parkwood Assocs. Ltd. P’ship v. United States, 97 Fed. Cl. 809, 813-14 (2011), aff’d, 465

F. App’x 952 (Fed. Cir. 2012); see also Mgmt. & Training Corp. v. United States, 137 Fed.

Cl. 780, 783 (2018); Klamath Tribe Claims Comm. v. United States, 97 Fed. Cl. 203, 209

(2011) (citing Alder Terrace, Inc. v. United States, 161 F.3d 1372, 1377 (Fed. Cir. 1998)).

Accrual of a claim is “‘determined under an objective standard’” and plaintiff does

not have to possess actual knowledge of all the relevant facts in order for a cause of

action to accrue. FloorPro, Inc. v. United States, 680 F.3d at 1381 (quoting Fallini v.

United States, 56 F.3d 1378, 1380 (Fed. Cir. 1995), cert. denied, 517 U.S. 1243 (1996)).

Plaintiff does not need to be aware of all relevant facts for a cause of action to accrue,

the statute of limitations begins running once they are aware of sufficient facts to know

that they have been wronged. See Osborn v. United States, 47 Fed. Cl. 224, 233 (2000).

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The Federal Circuit in Holmes offered further explanation, writing,

the “accrual of a claim against the United States is suspended, for purposes

of 28 U.S.C. § 2501, until the claimant knew or should have known that the

claim existed.” Id. [Holmes v. United States, 92 Fed. Cl. 311,] 319 (quoting

Young v. United States, 529 F.3d 1380, 1384 (Fed. Cir. 2008)). For the

accrual suspension rule to apply, the plaintiff “must either show that the

defendant has concealed its acts with the result that plaintiff was unaware

of their existence or it must show that its injury was ‘inherently unknowable’

at the accrual date.” Young, 529 F.3d at 1384 (quoting Martinez v. United

States, 333 F.3d 1295, 1319 (Fed. Cir. 2003) (en banc)).

Holmes v. United States, 657 F.3d at 1317 (footnotes omitted).

Plaintiff’s October 22, 2014 complaint alleges that

[o]n May 27, 2008, inspections of certain wells on the Leases were again

conducted by GJFO [Grand Junction Field Office] personnel. The

inspections found that the violations cited during the April 25, 2008

inspections had not been rectified and found an additional major violation

on the Government 5 well. In addition, the inspection of the Federal 2 well

on the Mesa Lease found a major violation at that well. As a result of the

foregoing violations, on May 27, 2008 the GJFO ordered all of the wells on

both Leases to be shut-in “until all leaks are corrected and all compliance

issues are resolved.” Petro Mex immediately complied with this order and

shut all of the wells in. Petro Mex corrected all of the major and minor

violations that had been cited on the Leases by the GJFO pursuant to the

April 25, 2008 and May 27, 2008 inspections by the end of June, 2008.

Petro Mex advised the GJFO of this fact and resumed production from the

wells on the Leases in August of 2008. In October of 2008, the GJFO

advised Petro Mex that the May 27, 2008 shut-in orders on the Leases had

not been lifted and should still be in effect. The GJFO ordered Petro Mex

to halt the resumed production from the wells until the order was lifted.

Petro Mex complied with this order and halted production from the wells on

or about October 31, 2008. ln the months following the October 2008 order,

Petro Mex repeatedly asked the GJFO what it needed to do to have the

May 27, 2008 shut-in order lifted, but they received nothing but vague,

inconsistent and uncertain instructions or directions on how to do so.

(alterations added). Plaintiff’s October 22, 2014 complaint also alleges that

[t]he United States breached the Leases and its agreement with Petro Mex

by ordering Petro Mex to cease production on the Leases in October of

2008 when it had no valid contractual, statutory or regulatory grounds to do

so, and by refusing to allow production to resume once Petro Mex had

adequately demonstrated that there were no more remaining violations on

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the Leases that constituted “immediate, substantial and adverse impacts on

public health and safety [or] the environment.” The United States breached

the Leases and its agreement with Petro Mex by attempting to terminate the

Leases on or about August 26, 2009 when it had no valid contractual,

statutory or regulatory grounds to do so. As a result of the breaches of the

Leases by the United States, Petro Mex has suffered damages, including

the loss of the full potential value of the Leases (including loss of profits),

loss of reasonable expectancy and reliance damages including the

expenses incurred in reliance upon the right to produce and sell oil and gas

from the Leases.

(second alteration in original).

In response to the August 22, 2014 complaint, defendant, on February 20, 2015,

filed a motion to dismiss before Judge Firestone alleging “Petro Mex was on inquiry notice

of a potential breach of contract action when it claimed that it had resolved the

noncompliance issues, informed the BLM of this fact, and resumed production on the

leases by August of 2008,” and “[a]ll of the events fixing the Government’s alleged liability

had occurred by this point.” (alteration added). According to defendant, therefore, “Petro

Mex knew or should have known it had a potential breach of contract claim once it

allegedly had resolved the noncompliance issues, but BLM did not permit it [Petro Mex]

to resume production.” (alteration added).

As reflected above, while assigned the case earlier, Judge Firestone had denied

defendant’s February 20, 2015 motion to dismiss on August 10, 2015. Judge Firestone

first noted that

[a]ccording to the government, Petro Mex’s claim accrued on or before

August 2008—but no later than October 1, 2008—because the only

potential breach by the BLM was its failure to lift the shut-in orders after

Petro Mex alleges that it had remedied its noncompliance and so notified

the BLM. The government argues that only one shut-in order was imposed,

so the BLM’s reinforcement of that order could not be a separate breach.

Additionally, the government states that it is unclear whether the alleged

phone call instructing plaintiff to continue the shut-in order actually occurred,

as it contends that the BLM does not make such requests without confirming

it in writing. Further, the government argues that the decision to terminate

Petro Mex's leases in 2009 does not give rise to a separate breach claim

because Petro Mex’s failure to produce stems from the BLM’s same failure

to lift the shut-in orders in August 2008.

In response, Petro Mex argues that its complaint was timely filed because

the government has mischaracterized its claims and that, when properly

construed, the breach of contract claims were timely filed. First, Petro Mex

argues that it is asserting a breach based on the BLM s decision in late

October 2008 to order Petro Mex to stop production after the violations were

corrected. Petro Mex has filed an affidavit asserting a breach based on a

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late October 2008 BLM phone call in which Petro Mex claims it was

instructed by the BLM to stop the production it had resumed in August 2008.

Second, Petro Mex argues that the BLM’s August 2009 termination

decisions also breached the leases because, as the IBLA [Interior Board of

Land Appeals] determined, they were legally wrongful. Petro Mex asserts

that the breaches associated with termination of the Leases do not relate

back to the original shut-in orders issued in May 2008 or to BLM’s actions

taken in October 2008. Rather, Petro Mex claims that the termination

decisions are separate from the shut-in orders because BLM based the

terminations of the Leases on new compliance issues that were identified

in 2009 involving the compressor and certain fines and a bond allegedly

owed by Petro Mex.

Petro Mex, LLC v. United States, 122 Fed. Cl. at 540–41 (alterations added). Although

denying the motion to dismiss, Judge Firestone’s decision indicated that she assumed,

for purposes of the motion to dismiss, and prior to the trial before the undersigned and

further development of the facts in the case, she was considering that plaintiff has stated

a valid claim for breach of contract, and based on that assumption, the claims were timely

filed. Judge Firestone held:

The court finds that plaintiff’s breach of contract claims are not barred by

the statute of limitations for two main reasons. First, while the government

argues that the breach alleged by plaintiff cannot be an actual breach, the

government has not moved to dismiss for failure to state a claim. At this

stage of the proceeding, the court must take plaintiff’s alleged breach claims

at face value. See Ashcroft [v. Iqbal], 556 U.S. [662,] 678, 129 S. Ct. 1937

[(2009)] (citing [Bell Atl. Corp. v.] Twombly, 550 U.S. [544,] 555–56, 127 S.

Ct. 1955 [(2007)]). As such, regardless of whether plaintiff has stated a valid

claim for breach of contract, the court’s task at this juncture is to determine

whether, assuming plaintiff has stated a valid claim for breach of contract,

the claims were timely filed. Accordingly, the court rejects the government’s

motion to dismiss based on the statute of limitations because the breach

alleged by plaintiff occurred within 6 years of filing the complaint. Plaintiff

does not challenge the BLM’s failure to timely respond to a request to lift

the shut-in order in August 2008, as the government contends. Rather,

plaintiff alleges that the BLM wrongfully told or ordered Petro Mex to shut-

in during a phone call in late October 2008 after the violations on the Leases

were allegedly corrected. While the evidence of the alleged date of the

phone call, sometime after October 22, 2008, comes from plaintiff’s

employees, the date and the occurrence of the phone call have not been

disputed by the government. While government argues that it has not been

able to confirm that any phone call was made, the undisputed evidence

presented before the court indicates that, for the purpose of determining

whether the statute of limitations has run, Petro Mex was told to stop

production on either October 24 or 25, 2008. Accordingly, the breach claim

based on the October shut-in is therefore timely filed. If, after discovery, the

65

evidence establishes that there was no phone call, plaintiff's breach claim

will fail on the merits.

Petro Mex, LLC v. United States, 122 Fed. Cl. at 541 (footnote omitted; alterations added).

At the time of Judge Firestone’s 2015 decision, Judge Firestone did not have the benefit

of the full trial record, including the trial exhibits and trial testimony, developed after the

case was transferred, and Judge Firestone accepted as true the claims in plaintiff’s

complaint for the purposes of the motion to dismiss, she was considering at the time.

Subsequent to Judge Firestone’s decision in 2015, as detailed above in the lengthy

findings of fact, the parties filed joint stipulated facts, filed numerous exhibits and took

extensive testimony from witnesses. As discussed below, in the court’s breach analysis,

the defendant argued “[a]lthough Mr. Villalobos testified that the call occurred, his

testimony has been inconsistent, and is unsupported by any contemporaneous record.”

Before the undersigned, after the trial record was closed, defendant, in its post-

trial brief, again raised the statute of limitations issue and argues “Petro Mex’s shut-in

related breach claim is barred by the statute of limitations.” In her opinion, when she

denied defendant’s earlier motion to dismiss, Judge Firestone had indicated further

evidence should be reviewed in order to evaluate the breach issues and any impact on

the statute of limitations. Therefore, in order to evaluate if the parties’ claims were within

the statute of limitations in this court, consistent with Judge Firestone’s earlier opinion,

see Petro Mex, LLC v. United States, 122 Fed. Cl. 536, the parties conducted discovery

and the court held a trial, in order to hear testimony from both plaintiff and government

witnesses and to weigh the credibility of trial testimony before reaching a decision on all

the issues.

After the trial before the undersigned, defendant argues:

Petro Mex alleges that it had a right to have the shut-in order lifted

“presumably as early as June 3, 2008, when the underground leak on the

Government 5 [well] was fixed,” Pl. Post-Tr. Br. at 41, and no later than July

2008, id. at 34-35. Thus, Petro Mex itself places accrual of its claim at

between three and nearly five months outside the statute of limitations.

(alteration in original). Defendant argues: “Now that the record has been fully developed

through trial, Petro Mex has settled on a theory, and that theory rests upon a single

event—failure to lift the shut-in in July 2008—and its continuing negative effects.”

Defendant also points to plaintiff’s argument in its post-trial brief which states: “The

Government’s continuation of the May, 29 2008 Shut-In Order after the ‘immediate’

concern of the underground leak had been resolved was not permitted by the applicable

legal authorities and violated Petro Mex’s right to produce oil and gas from the Lease.”

Plaintiff contends,

Petro Mex does not dispute the Government’s finding from April, 25 [sic]

2008 that it was in violation of certain regulations with regard to the Lease

at that time, such that Mr. Fancher was justified in citing them and issuing

66

the April 2008 Notices. But it must be remembered that of those five notices,

only one was for a major violation; the remainder were all minor violations.

Similarly, Petro Mex does not dispute the Government’s finding from May

27, 2008 that there was a serious and major safety violation on the Lease

that justified not only the issuance of the May 27, 2008 Notice, but also the

Shut-In Order. There is little question that the “underground leak” that was

observed on that day [May 27, 2008] constituted an “Act of Noncompliance”

that was subject to the remedies set forth in 43 C.F.R. § 3163.1. Specifically,

the underground leak without question constituted a situation where

“continued operations could result in immediate, substantial, and adverse

impacts on public health and safety, the environment, production

accountability, or royalty income,” such that it was justified to take

“immediate shut-in action” under 43 C.F.R. § 3163.1(a)(3). However, once

the immediate situation of the underground leak was addressed, the

Government was not justified or authorized under the applicable regulations

to maintain or keep the Shut-In Order in place for the purpose of gaining

compliance with other, non-immediate prior violations. And later, the

Government was also not authorized to maintain or keep the Shut-In Order

in place for the purpose of gaining compliance with other, non-related

compliance issues that arose after the issuance of the Shut-In Order. In

doing so, the Government unduly interfered with Petro Mex’s right to

produce oil and gas and breached its obligations under the Lease.

(alterations added). Plaintiff argues “it is clear that once the issue that justified the taking

of ‘immediate shut-in action’ On [sic] May 29, 2008 (the underground leak) had been

resolved and the Government was aware of such, the Government had an obligation to

lift the Shut-In Order.” (alteration added). Turning to the testimony at trial, plaintiff

indicates:

Mr. Fancher testified at trial that he actually observed a crew on the Lease

repairing the underground leak within days of the Shut In Order being fixed.

However, despite having observed the leak being fixed and presumably

being satisfied with the effort that was made to fix it (he made no attempt to

inspect or check the leak when he visited the 15-9 well with Mr. Villalobos

on July 1, 2008), when asked at trial if he had considered the Shut-In Order

to still be in place on August 1, 2008, almost two months later, he stated

that he did “because not everything was corrected at that time.” As was

demonstrated at trial, the only issues that were still outstanding by that time

were EF08018 (unnumbered storage tank) and EF08020 (insufficient water

storage pit and full tank). Neither issue justified the continuance of the Shut-

In Order.

(internal references omitted). Therefore, plaintiff concludes:

Given the foregoing, it is clear that Petro Mex had a right to have the Shut-

In Order lifted and to re-establish production on the Lease sometime during

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the summer of 2008, presumably as soon as June 3, 2008 when the

underground leak on the Government 5 was fixed. The Government does

not deny that it was aware that this violation (as well as any other safety

violations) was fixed by the end of July 2009 [sic]. Further, Mr. Wilson

testified that he advised Mr. Fancher near the end of July that Petro Mex

had remedied all of the outstanding violations and that Mr. Fancher had

declined an offer to reinspect the wells to verify. However, regardless of

whether this call happened or not (Mr. Fancher has denied receiving the

call but admitted to not conducting further inspections), it cannot be disputed

that the Government had actual knowledge that the issue justifying the

“immediate” shut-in action had been resolved. Based upon this, and upon

the fact that the Lease provided Petro Mex with the “right and privilege to

drill for, mine, extract, remove, and dispose of . . . oil and gas deposits” from

the Lease, provided it was in compliance with the applicable regulations,

Petro Mex was legally justified in re-starting production from the Lease in

August of 2008 as it did.

(internal references omitted; alteration added).

At the closing argument, plaintiff’s counsel argued:

Trial testimony and exhibits established that three of the five notices of

incidents of noncompliance that were issued pursuant to the April 25

inspections were all either resolved or closed by July 1st of 2008. More

im

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