Court: K.P. Kauffman can’t avoid $1.9M fine for oil and gas violations, even if it shuts the company down

Troubled oil and gas operator K.P. Kauffman was rebuffed by a state court judge in its bid to avoid a $1.9 million fine and the prospect of being shut down by Colorado oil and gas regulators.

The Denver-based company has been plagued with violation notices — 148 since 2020, according to state records — and has been legally sparring with the Colorado Energy and Carbon Management Commission for the past two years.

In August 2023, the ECMC reimposed a $1.9 million fine that had been waived pending the cleanup of sites, and suspended the ability of the company, known as KPK, to sell its oil and gas.

KPK said it could not pay the fine and suspending its so-called certificates of clearance would be “business-ending.” The company took the commission to court with a long list of arguments, including invoking the Eighth Amendment, which shields against excessive fines and cruel and unusual punishment.

Denver District Court Judge Andrew Luxen rejected each of the half-dozen arguments KPK made.

“The court finds that, under the circumstances and based on the record, the penalties imposed on KPK, while drastic, are not grossly disproportionate to the gravity of KPK’s underlying offenses,” Luxen wrote.

Kristin Kemp, a ECMC spokesperson, said that “everything pre-lawsuit is back in effect, so KPK has to pay the fine and lose their certificates.”

In a news release, KPK said it was “disappointed” in the decision and that it “intends to vigorously appeal the orders … and is evaluating procedural options for doing so in both the district court and court of appeals.”

KPK operates 1,200 largely low-producing oil and gas wells, primarily in Weld, Adams and Jackson counties. In 2024, KPK wells produced the equivalent of 14,836 barrels of oil and gas. That is equal to 12 barrels per well, though some produce more and some none.

The ECMC has had repeated concerns with KPK operations. In April 2021, 87 wells were ordered shut and 29 sites cleaned up after a litany of violations, ranging from fouling farm fields to covering the road in front of a high school with oily waste.

In November 2021, the ECMC issued another notice for additional violations. KPK and the commission struck a compliance plan agreement to clean up and remediate 78 sites over five years.

As part of the agreement the bulk of a $1.9 million fine was deferred if the plan was successful in cleaning up the site.

However, by February 2023 the ECMC staff and commissioners felt that insufficient progress had been made. The commission issued an order for the company to pay the full fine by Aug. 1, 2023. At the same time the ECMC revoked KPK’s certificates of clearance. The company continued to sell its oil and gas.

In July 2023, KPK got a district court injunction to block the ECMC actions. The case was heard in May 2024.

KPK has filed two more lawsuits against the ECMC. In January 2024, the company sued the commission over its order to provide financial guarantees, required under new rules, that 1,089 of its wells would be properly plugged.

“We don’t have the liquidity”

Cash-strapped KPK had proposed a $13 million plugging fund for the wells. The ECMC ordered that over time KPK must put up $133 million. In January 2024, the company sued to block the order.

“We don’t have the liquidity to write a check for financial assurance in whatever your amount,” John Jacus, an attorney representing KPK, told the commission at the time.

In December 2024, the commission imposed another fine and moved to suspend the clearance certificates at six locations. This past January KPK filed a lawsuit to block it.

Kemp, the ECMC spokesperson, said the commission could not comment on pending litigation or offer any additional comment on Luxen’s ruling.

In that case KPK argued that the actions by the ECM were “arbitrary and capricious,” violated the state’s Administrative Procedures Act, that the record did not support the action, and that the fine was excessive.

For this last point, the company cited the excessive fines clause in the Eighth Amendment.

Citing case law and the legislation giving the ECMC the power to levy fines, Luxen said “the commission possessed authority to impose such a penalty under the relevant and applicable statutes and regulations.”

The judge rejected all the other arguments as well.

“The court cannot substitute its judgment for the commission and finds that the commission made an effort to reasonably apply the relevant legislative standards in terminating the CPA (compliance plan agreement) and imposing other penalties,” Luxen said.

KPK has said that the steep fines and restrictions on its business could lead to all of its wells ending up in the ECMC’s orphan well program with the state responsible for the cleanup and plugging.

“ECMC’s termination of its contract with KPK, imposition of crippling penalties, and suspension of the company’s authorization to engage in its business will have profoundly negative consequences,” KPK said.