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South Dakota sues Texas gas drilling company for $15.5 million after years of violations

PIERRE, S.D. -- South Dakota is suing a Houston-based natural gas drilling company for $15.5 million after the company for years neglected to cap unused wells in the northwestern part of the state, falling out of compliance with state environmental standards.

The Office of Attorney General on Monday, May 13, filed a 100-page complaint against Spyglass Cedar Creek LP in the state's sixth circuit court in Hughes County after years of permit violations and financial turmoil. The state is seeking approximately $15.5 million in civil penalties from the company, and demanded a trial by jury.

The lawsuit comes over a decade after Spyglass first began drilling for natural gas in 2006 near Buffalo, South Dakota. Since then, the company has been shaken by economic turbulence and internal scandals: Natural gas prices fell, a lender filed bankruptcy, the company became entangled in several lawsuits, a business partner was indicted for tax fraud and a $20,000 bond meant to cover the cost of capping the wells was spent elsewhere.

Spyglass began to neglect the 40 wells they drilled in the state, but failed to cap them while they weren't in use, which violates state Department of Environment and Natural Resources (DENR) standards. The DENR's Board of Minerals and Environment gave Spyglass several chances to change course, but ultimately voted to revoke their permits in January, then to fine them $15.5 million in April, based on DENR's civil penalty calculation of $500 per day per violation.

Now, the state is taking Spyglass to court in order to get those fines, and to make Spyglass see to it that the wells are capped.

Deputy Attorney General Rich Williams told the governor-appointed board on Wednesday that his office would also consider a settlement, depending on how the company responds. As of Wednesday afternoon, Williams said Spyglass has not yet been served. Once they are, they will have 30 days to file a response.

Also included in the complaint are Spyglass general partners March Kimmel and Kevin Sellers, who Williams said are jointly responsible for the company's debts.

Kimmel told the board in September that Sellers cashed out the $20,000 bond in 2015 because the company didn't remember what the money was for, leaving the state with less than $10,000 to cap the 40 wells -- an effort estimated to cost at least $855,150. The DENR proposed in April using $130,000 in bonds from a different failed oil well project to cover some of Spyglass's costs.

By the end of the board's meeting Wednesday, the question remained where the money from Spyglass's civil penalties (if and when they are paid) would go and for what they would be used. The board wrestled with the question of whether to involve the state Legislature in the decision, but ultimately decided to wait until their July meeting -- hopefully after seeing how Spyglass responds to the lawsuit -- to decide.

"I’m willing to see a few more cards before we adopt a plan," said board chairperson Rex Hagg. "We’ve done everything we can and now we’re suing them, so we’re not standing still."