Pipelines drawn: The Justice Department investigates local gas-field owners
October 13, 2012
Editor’s note: A version of this story, with sections of copy in the wrong location, was posted throughout the day on Sunday, Oct. 14, 2012. A corrected version was posted Sunday evening. The corrected online version now varies slightly from the printed version.
CARBONDALE – The two principal architects of natural gas development in a rugged belt of disputed public lands near McClure Pass are under investigation by federal antitrust authorities again.Allegations of price gouging along pipelines co-owned by the two gas companies, Gunnison Energy and SG Interests, center the new inquiry, according to multiple sources in the industry. The pipelines tie together existing gas fields south of McClure Pass with emergent ones closer to Carbondale in the controversial Thompson Divide area farther north.The inquiry is separate from a joint bidding, or collusion, case of local origin that Gunnison Energy and SG Interests – owned by billionaires and local ranch owners Bill Koch and Russell Gordy, respectively – agreed to settle with the U.S. Justice Department Antitrust Division in February, an investigation by Aspen Journalism has learned.Pressed about the pipeline matter in an interview, Robbie Guinn, vice president of SG Interests, said, “Yes, OK, there is a Department of Justice inquiry, but I’m not going to comment on anything to do with an ongoing DOJ inquiry.”Justice Department officials, including spokesman Jeff Dorschner and antitrust investigator Sarah Wagner, have declined to confirm or deny the existence of the pipeline inquiry.But, according to current and former players, both antitrust inquiries arose from a snarl of bad blood, clashing, and lawsuits between shifting factions of gas operators competing for stakes – territory, infrastructure and loyalties among them – in the expanding Ragged Mountain and Thompson Divide areas in the early and mid-2000s.The Ragged Mountain area is located directly south of the Thompson Divide proper, near County Road 265 in the Muddy Creek headwaters area of northern Gunnison County.Parker Semler, the attorney for one former area operator, BDS International, likened the prickly and persistent rivalries between certain players to that of the Hatfields and McCoys.”There wasn’t something that the one guy wouldn’t do to poke the other guy in the eye,” Semler said.Implications of the new inquiry are not clear, but more antitrust allegations against the area’s two most heavily invested operators may disquiet an already fragile dtente between local gas companies and opposition groups such as the Carbondale-based Thompson Divide Coalition and the Wilderness Workshop.The earlier antitrust case – described in detail for the first time in a Justice Department court filing in August, and still pending final approval by a federal judge – requires Gunnison Energy and SG Interests to pay damages totaling $550,000 while admitting no guilt.That case implicated the two companies in a joint-bidding scheme connected to the purchase of four federal minerals leases in the Ragged Mountain area at two Bureau of Land Management auctions in 2005.Reed Williams, president of Willsource Enterprise, an operator in the Mesa County corner of the Thompson Divide, said he didn’t think the new inquiry would be a “killer issue” for Gunnison Energy and SG Interests, either.In addition to the local pipelines, the two companies independently and through joint-venture agreements own tens of thousands of acres of federal minerals leases in and around the Thompson Divide and Ragged Mountain areas, according to public records.”I think the DOJ will slap them on the wrist, maybe make them pay a fine, and maybe make them divest of some assets so as to not make them have a monopoly along the pipelines,” Williams said.Though opposition groups have sworn to stop them, natural gas companies including Gunnison Energy and SG Interests are moving forward with longstanding plans to drill in about 45 percent of the Thompson Divide, some 100,000 acres – even as gas is flowing from wellheads into pipelines where the boundaries between the Thompson Divide and Ragged Mountain areas blur near McClure Pass.Gunnison Energy and SG Interests’ local pipelines, the only gas-gathering lines serving development in the south-north belt of mountains, are not regulated by any county, state or federal agency, for safety or otherwise.But pipelines that cross public lands – like the newly operational, 25.5-mile, $80 million dollar Bull Mountain Pipeline, the trunk for at least three smaller feeder pipes in Gunnison Energy and SG Interests’ network – are subject to federal common carrier laws.The laws require pipeline owner-operators to accept and transport gas produced by nearby third-party operators at fair market prices.Instead, according to Scott Thurner, president of Riviera Drilling & Exploration, a veteran operator in the Ragged Mountain area, Gunnison Energy and SG Interests used their monopoly along the pipes “as a device to squeeze out other operators on our end of the field.””I’m so irate at what these monsters have done, it’s pathetic,” said Thurner, a well-known enemy of the two companies. “I’m not too happy with the Justice Department, either. They’ve been investigating this thing for two and three-quarter years and in the meantime my ship is going under.”
The name, Thompson Divide, implies a division of some kind and in a way it’s true: The singular crest of the Thompson Divide separates the tourist and outdoor recreation industries of mountain towns like Aspen and Carbondale in the Roaring Fork and Crystal River valleys from Colorado Plateau communities to the west like Silt, New Castle and Rifle.Out west, along the Interstate 70 and Colorado River corridor in Garfield County, natural gas development has been booming – and, by certain measures, welcome – over the last decade.It’s a different story in the Roaring Fork and Crystal River valleys, where public opinion is rarely if ever so unified, where the Thompson Divide represents the “last buffer between our communities from the millions of acres of development to the west,” said Zane Kessler, executive director of the Thompson Divide Coalition.But the Thompson Divide moniker, actually, is derived from two prominent drainages on either side of the crest, which extends roughly from County Road 265 near McClure Pass in the south to Sunlight ski resort near Glenwood Springs in the north: Thompson Creek flows down from the east side into the Crystal and then the Roaring Fork, near Carbondale, and Divide Creek flows from the west side into the Colorado River, near Silt.By late 2009, when a group of citizens from the east side formed the Thompson Divide Coalition – whose mission is “to secure permanent protection from oil and gas development on federal lands in the Thompson Divide” – the zone was already divvied up for drilling through federal lease auctions, with companies including Gunnison Energy, SG Interests, Falcon Seaboard, Willsource Enterprise, Encana and Antero Resources acquiring the rights to develop approximately 100,000 acres of it.That didn’t stop the Thompson Divide Coalition from drawing a line around the area, some 221,500 acres encompassing nearly all of the Thompson Divide crest and parts of 15 different watersheds connected to it.The area also includes eight different inventoried federal roadless areas, two proposed federal wilderness areas, interlocking chunks of five counties and the White River, Gunnison and Grand Mesa-Uncompahgre national forests, and some Bureau of Land Management and private lands too, as well as the 100,000 acres of leased tracts.The anti-gas perspective is clear, according to Dorothea Farris, a former Pitkin County commissioner and coalition board member, and enhanced regulation or compromise are not part of the vision.”We don’t want development here,” Farris said. “This area is totally inappropriate for development.”Add in a draft bill proposed in August by U.S. Senator Michael Bennet of Colorado, the Thompson Divide Withdrawal and Protection Act of 2012, and in view of the fact that no single map covers the entire area, the Thompson Divide becomes an easy place to get lost.Underneath it all, of course, are considerable minerals reserves, primarily natural gas. Placing a value on the reserves in the area is imprecise at best, given the evolving forces of world markets, certain unknowns associated with any exploratory gas play and challenges unique to developing wells and infrastructure in remote mountain areas. But, according to Williams from Willsource Enterprise, “It’d be easy to say we’re talking about billions of dollars of reserve value coming out of the ground over time out of the Thompson Divide Coalition’s area of interest.””There’s clearly a large resource there. What’s it ultimately worth? We’re not in a position to know. I mean, we obviously think it looks pretty good or we wouldn’t be working,” said Brad Robinson, president of Gunnison Energy. “But, again, a lot of it can’t be accessed at two or three dollar gas. It’d take a little higher price.”
A decade ago, high in the North Fork Valley near County Road 265 and McClure Pass in the Ragged Mountain gas field, Gunnison Energy and SG Interests began emerging as two of the most powerful operators in the zone, where some early wells were developed on private land.Unlike a “cash poor, asset rich” operation like Scott Thurner’s Riviera Drilling & Exploration – a company that needs to readily produce and sell gas in order to stay afloat – Gunnison Energy and SG Interests represented a sort of boutique operator in the industry: Neither are “Big Oil,” by definition, but each is backed by a billionaire owner and as such has capital resources dwarfing that of traditional independent operators.”For a lot of small independents, making the monthly payroll, paying the bills, is a big concern,” said one gas executive familiar with the area. “Most of them don’t have the luxury to work an area that’s not going to pay out pretty quickly.”Prior to 2003, the two companies’ local activities “generally focused on different parts of the Ragged Mountain Area, with [SG Interests] acquiring leases on the eastern side of the area … while [Gunnison Energy] acquired leases along the southern boundary,” according to a Justice Department report related to the joint bidding case. “However, over the course of 2003 and 2004, their interests began to overlap as each sought pipelines and leases held by BDS International, and as the BLM leased additional parcels” – including leases in the Clear Fork and Thompson Creek areas of the Thompson Divide proper.Long since dissolved, BDS International was a company like Riviera Drilling – “cash poor, asset rich,” according to Parker Semler, the former attorney of BDS – but the company controlled the only gas pipeline serving the area at the time, the Ragged Mountain line, a small 8-inch-diameter gathering system. According to common industry practices, and despite an “ongoing pissing match,” Semler said, operators like Riviera Drilling worked deals with BDS in order to sell gas into the line.But both Gunnison Energy and SG Interests were working independently to acquire BDS and its pipeline. Eventually, the two companies did get BDS and its pipeline – in 2005, out of bankruptcy – but they did so jointly as part of a broader joint-venture deal known in the industry as “area of mutual interest agreement,” according to public records. The deal also quashed a number of pending lawsuits, including several between Gunnison Energy and SG Interests.But the wrangling and infighting on the ground was by that time already legendary, seeming to recall earlier, wilder times – the sort of stuff one might associate with the Jesse James, Billy the Kid and George Armstrong Custer artifacts that Gunnison Energy’s owner, “Wild Bill” Koch, is amassing for a private collection at his nearby ghost town revival ranch. (Koch also owns the Oxbow coal mine nearby in Somerset.)Mike Born, a former part-owner of BDS International, put it this way: “I sure in the hell didn’t see any collusion because everybody out there was in their own little boat and ready to slit anybody else’s throat. It wasn’t a happy group of campers I ran into out there.”Gunnison Energy and SG Interests were, in fact, “kicking the shit out of one another and kicking the shit out of us in the process,” according to Semler. “They were incredibly acrimonious with one another throughout our battle, so the thing that surprised everybody is how at the end of the day they came to work together ultimately.”Maybe this is when they got married,” he added.
While Riviera Drilling was still moving its gas along the Ragged Mountain line in accordance with a new deal worked out with the new operator, Gunnison Energy, the complexion of the play was beginning to shift. Some wells were turning into lucrative producers and the foremost challenge to developing the broader zone became pipeline capacity.”When those guys started punching holes in the ground, there just wasn’t enough volume in the Ragged Mountain line to get the gas to market. And I remember thinking, ‘What the hell are the other people gonna do that want access to get out of this area?'” Semler said.The answer was the new, 20-inch-diameter Bull Mountain line, built by SG Interests and Gunnison Energy over the last five years. Except for a notable detour through the Spruce Mountain roadless area, the Bull Mountain line runs roughly alongside County Road 265, along the southwestern backside of the Thompson Divide proper through Gunnison, Delta and Mesa counties. South of Silt, on West Divide Creek, the line feeds into a larger interstate pipe called the Questar line.As part of their joint-venture agreement of 2005, Gunnison Energy and SG Interests also agreed to cooperatively develop the new pipeline project together, according to public records. “It was a very tall order for two companies the size of ours to try to undertake this development,” said Robinson from Gunnison Energy. “And so we realized by pooling our resources, and not just our financial resources, but our technical resources, that we could better develop the project.”It really started by both of us trying to develop independent pipelines and then finding out from a practical standpoint we should only be building one,” he continued. “So when BDS was in bankruptcy, we agreed to cooperate and purchase them jointly. That was kind of the start of our cooperative agreement.”The alliance had other ramifications, not all of which have become clear, but are tied to both Justice Department antitrust inquiries.
A petroleum engineer originally from southeast Ohio named Tony Gale, Gunnison Energy’s former senior vice president of operations, left the company in December 2006 or January 2007. The circumstances of his departure are in dispute, but Gale maintains he left on his own terms.He struck up with Thurner from Riviera Drilling and negotiated a deal to form a new company, Buccaneer Energy, that would purchase Riviera’s assets, including 10,000 acres of private gas leases beneath a picturesque old sheep farm on East Muddy Creek in the heart of the Ragged Mountain patch.Everybody, it seemed, wanted Thurner and Riviera Drilling out of the area, according to Semler from BDS.Gale, who describes the old McIntyre spread as “primo” for natural gas development, thought he did his due diligence: geologic studies, surface mapping and conversations with Brad Robinson from Gunnison Energy.”I was concerned with litigation before I even got into the deal,” said Gale, “so I talked to Brad before I got into any of it.”In order to pull together financing for the $32 million deal, Gale needed a formal transportation contract for pipeline access into the Ragged Mountain line, which was operated by Gunnison Energy per the terms of the Gunnison/SG joint venture, according to public records.”I couldn’t finance the deal unless I had transportation,” Gale said. “Nobody wants to buy stranded gas.”Legally, they have to do it – they have to transport third party gas,” Gale continued. “And Brad called me and said, ‘We’d do that and we think it’d help us get Thurner out of there.’ But then he drug his feet and tried to wear me out.”Negotiations between Gale and Robinson for pipeline access broke down. (Robinson declined to comment on the dealings.) At one point, among other roadblocks, Gale said Robinson offered terms to transport gas at $3.92 per MMBtu – a rate that exceeds the price of the gas itself today. “Basically, a way to say, ‘Yeah, I have to transport your gas but I’m gonna rob you for it,'” Gale said.Without pipeline access, the Buccaneer-Riviera deal collapsed and eventually all the producing Riviera wells had to be shut in, according to court filings and interviews.”Something changed,” Gale said because in his view, “Gunnison wanted to buy Thurner’s leases instead.”Their real intent,” Gale explained, “wasn’t to price gouge us, but rather to force all the competition out.”The lawyers went back to work.
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Riviera Drilling sued Gunnison Energy and SG Interests in civil court, laying out the price gouging claims. Gunnison Energy fought back by suing Gale and Riviera, essentially alleging that Gale was in breach of contract by collaborating with Riviera.By 2009, Gale’s patience was spent, but he still had a few cards to play. He filed a federal whistleblower lawsuit against Gunnison Energy and SG Interests, accusing the two companies – and himself, effectively, as a former ranking executive of Gunnison Energy – of illegally conspiring together in order to buy Ragged Mountain and Thompson Divide area leases at Bureau of Land Management auctions on the cheap.After two-plus years of investigation, the Justice Department agreed with Gale in part, and the government announced its collusion settlement – the first of its kind in U.S. history – against the two companies in February. According to a Justice Department report, “The payment of damages to the United States reflects the likely additional bid revenue that the BLM would have received had [SG Interests] and [Gunnison Energy] acted as independent competitors at the February and May 2005 auctions.””I’d like to tell you that my motives were totally pure and I just want to right all the wrongs of the world,” Gale said. “I’d be lying to you if I said that was the only reason. There were some things that happened after I left Gunnison … where I was wronged, along with a lot of other people. For example, I was sued personally in state court to keep quiet, and some of those reasons were the reason I finally reached my end and said I had enough.”Asked specifically about his involvement in the 2005 joint-bidding agreements covered in the Justice Department collusion settlement, Gale said, “I made a big mistake. I’ve got to be careful about what I say, but the bottom line is did I think that agreement was improper at the time? Yes.”But in separate interviews, Robinson from Gunnison Energy and Guinn from SG Interests downplayed the two companies’ activities tied to the collusion settlement. Both have said they believed the companies were lawfully working together at the auctions of February and May 2005, albeit under a different contract than the broader joint venture agreement executed in early June 2005.”The bottom line,” said Guinn of SG Interests, “is that all the leases that we bought jointly were for a joint venture. And basically they were acquired for the joint venture with joint bidding procedures, which is permissible as far as BLM lease sales go. Joint bidding happens all the time in the oil and gas industry at BLM lease sales, and that’s essentially what we did.”And the government spent two years investigating it and we fully cooperated and produced over 100,000 pages of documents and the reason we settled was because the government just continued to investigate this, causing us to spend money, and we would rather drill wells with our money than have to continue with these government investigations,” Guinn continued. “So, we still own the leases in question, we just paid a settlement to end the investigation, and that’s what we did.”Robinson from Gunnison Energy had his own take.”We believe the joint venture started back at least in ’04,” Robinson said. “You know, we elected to settle that so we need to live with that settlement. But to pretend that those four leases are not part of the joint venture and all the others are – when they’re going to use the same pipelines and roads and compressor station – I mean, we had a written agreement in place, it just had a slightly different form than the agreement that we entered into where we bought all the other leases.”In settlement negotiations with the government, Gunnison Energy sought terms that would quash any possible, related antitrust inquiries originating from the Ragged Mountain area, according to Gale, whose attorney was at the bargaining table. But the Justice Department “flat out said no,” according to Gale.In fact, in a footnote in the Justice Department’s collusion settlement against the two companies, the detail is casually noted: “The proposed Final Judgment does not preclude the United States from bringing an action against [Gunnison Energy] or [SG Interests] for any antitrust claims arising from their acquisition and operation of the Ragged Mountain pipeline.”Guinn and Robinson both declined to discuss Riviera Drilling, Scott Thurner, Tony Gale or Buccaneer Energy in detail, but Robinson offered this: “I think Riviera managed to sue almost everybody they shook hands with.””I can’t disagree with that,” said Guinn, adding, “Again, that’s getting into an ongoing area that I’d just prefer not to have any comments out there on.”Other ongoing matters include a lawsuit by Gunnison Energy against SG Interests over control – and operator-ship, specifically – of the Bull Mountain line and its associated facilities like the Ragged Mountain line and the West Divide Creek compressor station, and a lawsuit by Buccaneer Energy against Gunnison Energy and SG Interests that alleges the same pipeline antitrust violations as the earlier Riviera Drilling suit against the two companies.At times, Tony Gale is wistful about the whole, messy situation and about the opportunities lost.”Typically, if there’s two or three oil companies in there, they would’ve worked together to figure out a development plan and a pipeline plan,” Gale said. “But these guys didn’t want to do that. They wanted it all for themselves.”He added, “Gunnison’s pretty litigious with everybody. I mean, Koch sues anybody and his brother, including his own brother. And the guy who owns SG, he’s pretty hard to get along with. So you put those two egos together and there’s going to be a lot of litigation.”
In early 2010, Riviera went bankrupt pursuing the pipeline antitrust claims against Gunnison Energy and SG Interests in civil court, court records show. The suit was eventually dismissed because, Thurner said, he could no longer afford to pay his attorneys as fees climbed into the seven digits. “They ran me outta money,” he said.Meanwhile, Riviera’s formal appeals for regulatory relief to agencies like the Federal Energy Regulatory Commission and the Bureau of Land Management were rejected – not on the merits of the antitrust allegations, according to public records and interviews, but rather because both agencies denied having regulatory authority over the pipelines.FERC’s ruling on the Riviera appeal reads, in part, “As to the allegation of anti-competitive behavior, Riviera must seek recourse before the appropriate federal or state agency or in federal court or state court, rather than the commission.”But no such federal or state agency exists for Riviera to appeal to.Representatives from a host of agencies, including the Colorado U.S. Attorneys Office, the U.S. Forest Service, the offices of U.S. Sens. Mark Udall and Michael Bennet, the Colorado Department of Regulatory Agencies, the Colorado Public Utilities Commission, and the Colorado Oil and Gas Conservation Commission, denied in interviews having any powers of oversight or regulation along the pipelines.Representatives from the same host of agencies also denied knowledge of the Justice Department’s pipeline antitrust inquiry.”If it’s an antitrust violation, I’d assume maybe it’s the attorney general, I don’t know. I just know it’s not here,” said Terry Bote, a spokesman from the Colorado PUC. “We do not have statuary authority to regulate gathering systems.”Briefed on the inquiry, Diana Moss, an oil and gas expert from the American Antitrust Institute and an adjunct economics professor at the University of Colorado-Boulder, suggested that the absence of any local regulatory agency may be the reason that the Justice Department has gotten involved. “Federal antitrust authorities would typically defer to the local regulatory authorities, so they wouldn’t be involved. But in this case, there are no regulators or protections in place at any level,” she said.Thurner and Gale have claimed that Riviera Drilling and Buccaneer Energy are not the only Ragged Mountain area operators impacted by the power play along the pipelines. But that claim could not be independently verified.Mike Clark, owner of Petrox Resources, another independent operator in the area, declined to talk about the matter in depth. “We’re sandwiched between both of these companies, so we have to be careful about what we do,” Clark said. “For me, it’s better if I don’t get involved. I think it’s an interesting story, but these guys are very powerful companies.”The Bull Mountain Pipeline runs right through – and in one spot, directly underneath – upper West Divide Creek, near where Willsource Enterprise’s leases are located. Willsource president Reed Williams said his company has a contract in place with the two companies to sell gas into the line.But Williams said he has not been in contact with federal antitrust investigators looking into the pipeline matter, and he indicated that he would not be inclined to cooperate with them anyway.”I’m a big boy in terms of being a businessman and I can take care of myself. I don’t need the Justice Department negotiating a deal for me. If I get punched in the nose, I’ll stand up and deal with it,” Williams said.
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