CHAPARRAL ENERGY, LLC — Notice of Probable Violation

party submissionOfficial PDF420135025_Operator Response and Request for Time Extension_11262013.pdf#

420135025_Final Order_12122014_text.pdf, page 1Official PDFDECEMBER 12, 2014 Mr. Mark Fischer Chairman, Chief Executive Officer Chaparral Energy, LLC 701 Cedar Lake Blvd. Oklahoma City, OK 73114 Re: CPF No. 4-2013-5025 Dear Mr. Fischer: Enclosed please find the Final Order issued in the above-referenced case. It makes findings of violation and assesses a civil penalty of $47,900. It further finds that Chaparral Energy, LLC, has completed the actions specified in the Notice to comply with the pipeline safety regulations. Since the civil penalty was paid by wire transfer dated January 10, 2014, this enforcement action will be closed upon service of this Final Order. Service of the Final Order by certified mail is deemed effective upon the date of mailing, or as otherwise provided under 49 C.F.R. § 190.5. Thank you for your cooperation in this matter. Sincerely, Jeffrey D. Wiese Associate Administrator for Pipeline Safety Enclosure cc: Mr. R.M. Seeley, Director, Southwest Region, PHMSA, OPS Mr. David Ketelsleger, SVP and General Counsel, Chaparral Energy, LLC CERTIFIED MAIL - RETURN RECEIPT REQUESTED#

420135025_Final Order_12122014_text.pdf, page 2U.S. DEPARTMENT OF TRANSPORTATION PIPELINE AND HAZARDOUS MATERIALS SAFETY ADMINISTRATION OFFICE OF PIPELINE SAFETY WASHINGTON, D.C. 20590 ____________________________________ ) In the Matter of ) ) Chaparral Energy, LLC, ) CPF No. 4-2013-5025 ) Respondent. ) ____________________________________) FINAL ORDER On multiple dates in 2012, pursuant to 49 U.S.C. § 60117, a representative of the Pipeline and Hazardous Materials Safety Administration (PHMSA), Office of Pipeline Safety (OPS), conducted an on-site pipeline safety inspection of the facilities and records of Chaparral Energy, LLC (Chaparral or Respondent), in Oklahoma, Kansas and Texas. Chaparral is a privately- owned oil and gas exploration/drilling company that operates approximately 230 miles of hazardous liquid pipelines in these three states.1 As a result of the inspection, the Director, Southwest Region, OPS (Director), issued to Respondent, by letter dated October 31, 2013, a Notice of Probable Violation, Proposed Civil Penalty, and Proposed Compliance Order (Notice) which also included a warning pursuant to 49 C.F.R. § 190.205. In accordance with 49 C.F.R. § 190.207, the Notice proposed finding that Chaparral had violated 49 C.F.R. §§ 195.111, 195.214, and 195.420 and assessing a civil penalty of $47,900 for the alleged violations. The Notice also proposed ordering Respondent to take certain measures to correct the alleged violations. The warning item required no further action, but warned the operator to correct the probable violation or face possible enforcement action. Chaparral responded to the Notice by letter dated January 9, 2014 (Response). The company did not contest the allegations of violation and paid the proposed civil penalty of $47,900, as provided in 49 C.F.R. § 190.227. Payment of the penalty serves to close the case with prejudice to Respondent. FINDINGS OF VIOLATION In its Response, Chaparral did not contest the allegations in the Notice that it violated 49 C.F.R. Part 195, as follows: 1 PHMSA Annual Report, Chaparral Energy, LLC. See https://primis.phmsa.dot.gov/comm/reports/operator/OperatorReport opid 31672.html?nocache=6234.#

420135025_Final Order_12122014_text.pdf, page 3CPF No: 4-2013-5025 Page 2 Item 1: The Notice alleged that Respondent violated 49 C.F.R. § 195.111, which states: § 195.111 Fracture propagation. A carbon dioxide pipeline system must be designed to mitigate the effects of fracture propagation. The Notice alleged that Respondent violated 49 C.F.R. § 195.111 by failing to design its recently-constructed carbon dioxide pipeline system to mitigate the effects of fracture propagation. Specifically, the Notice alleged that despite multiple requests from PHMSA, Chaparral was unable to produce a fracture propagation analysis demonstrating that its carbon- dioxide Farnsworth Laterals had been designed to mitigate the effects of fracture propagation prior to, or subsequent to commissioning of the lines in 2011. Chaparral could not demonstrate it had performed a separate fracture propagation analysis for each of the Farnsworth Laterals, as follows: • 4” east lateral, constructed Oct/Nov 2010 • 6” west lateral, constructed Jan/Mar 2011. Respondent did not contest this allegation of violation. Accordingly, based upon a review of all of the evidence, I find that Respondent violated 49 C.F.R. § 195.111 by failing to design its recently-constructed carbon dioxide pipeline system to mitigate the effects of fracture propagation. Item 2: The Notice alleged that Respondent violated 49 C.F.R. § 195.214, which states: § 195.214 Welding procedures. (a) Welding must be performed by a qualified welder in accordance with welding procedures qualified under Section 5 of API 1104 or Section IX of the ASME Boiler and Pressure Vessel Code (incorporated by reference, see § 195.3). The quality of the test welds used to qualify the welding procedure shall be determined by destructive testing. (b) Each welding procedure must be recorded in detail, including the results of the qualifying tests. This record must be retained and followed whenever the procedure is used. The Notice alleged that Respondent violated 49 C.F.R. § 195.214 by using welding procedures on the Farnsworth Laterals, as described above, that had not been properly qualified in accordance with Section 5 of [American Petroleum Institute (API)] 1104 or Section IX of the ASME Boiler and Pressure Vessel Code. Specifically, the Notice alleged that PHMSA requested a copy of Chaparral’s complete welding procedure, including both the welding procedure specification (WPS) as well as the procedure qualification record (PQR). According to the Notice, Respondent provided qualification records indicating its welders had been qualified to procedure “A100” (but with no procedure qualification documents), and the “A100” procedure was missing important elements that would qualify it as a complete welding procedure.#

420135025_Final Order_12122014_text.pdf, page 4CPF No: 4-2013-5025 Page 3 Respondent did not contest this allegation of violation. Accordingly, based upon a review of all of the evidence, I find that Respondent violated 49 C.F.R. § 195.214 by using welding procedures on the Farnsworth Laterals that were not qualified in accordance with Section 5 of API 1104 or Section IX of the ASME Boiler and Pressure Vessel Code. Item 4: The Notice alleged that Respondent violated 49 C.F.R. § 195.420, which states, in relevant part: § 195.420 Valve maintenance. (a) Each operator shall maintain each valve that is necessary for the safe operation of its pipeline systems in good working order at all times. (b) Each operator shall, at intervals not exceeding 7½ months, but at least twice each calendar year, inspect each mainline valve to determine that it is functioning properly. . . . The Notice alleged that Respondent violated 49 C.F.R. § 195.420 by failing to perform valve inspections at proper intervals, and by failing to perform complete inspections in order to determine that each valve functioned properly. Specifically, the Notice alleged that Chaparral could not produce valve maintenance records on the Borger mainline block valves (MLVs) 3 and 6 showing they had been inspected in April 2011. Instead, the company’s valve maintenance records allegedly indicated that MLVs 3 and 6 had been inspected in November 2010 and December 2010, but did not show that inspections had been conducted in April 2011, when inspections had been conducted for the other MLVs. In addition, the Notice alleged that Chaparral failed to perform proper inspections for all of the valves inspected in November 2010 and December 2011. Specifically, the Notice alleged that the company’s maintenance records indicated the valves “could not operate due to operating conditions.” Chaparral’s Operation and Management (O&M) procedures implementing § 195.420(b) required valves to be operated “to the fullest extent practical and then returned to [their] position,” but there was no follow-up documentation indicating Respondent had returned to perform maintenance on the valves when conditions were more favorable. Respondent did not contest these allegations of violation. Accordingly, based upon a review of all of the evidence, I find that Respondent violated 49 C.F.R. § 195.420 by failing to perform valve inspections at proper intervals and by failing to perform complete inspections in order to determine that each valve functioned properly. These findings of violation will be considered prior offenses in any subsequent enforcement action taken against Respondent. ASSESSMENT OF PENALTY Under 49 U.S.C. § 60122, Respondent is subject to an administrative civil penalty not to exceed $200,000 per violation for each day of the violation, up to a maximum of $2,000,000 for any#

420135025_Final Order_12122014_text.pdf, page 5CPF No: 4-2013-5025 Page 4 related series of violations.2 In determining the amount of a civil penalty under 49 U.S.C. § 60122 and 49 C.F.R. § 190.225, I must consider the following criteria: the nature, circumstances, and gravity of the violation, including adverse impact on the environment; the degree of Respondent’s culpability; the history of Respondent’s prior offenses; and any effect that the penalty may have on its ability to continue doing business; and the good faith of Respondent in attempting to comply with the pipeline safety regulations. In addition, I may consider the economic benefit gained from the violation without any reduction because of subsequent damages, and such other matters as justice may require. The Notice proposed a total civil penalty of $47,900 for the violations cited above. Item 1: The Notice proposed a civil penalty of $19,000 for Respondent’s violation of 49 C.F.R. § 195.111, for failing to design its recently-constructed carbon dioxide pipeline system to mitigate the effects of fracture propagation. Chaparral paid the proposed penalty in full, which serves to close the case with prejudice to Respondent. Accordingly, having reviewed the record and considered the assessment criteria, I assess Respondent a civil penalty of $19,000 for the violation cited above. Item 4: The Notice proposed a civil penalty of $28,900 for Respondent’s violation of 49 C.F.R. § 195.420, for failing to perform valve inspections at the proper intervals and to determine that all valves were functioning properly. Chaparral paid the proposed penalty in full, which serves to close the case with prejudice to Respondent. Accordingly, having reviewed the record and considered the assessment criteria, I assess Respondent a civil penalty of $28,900 for the violation cited above. In summary, having reviewed the record and considered the assessment criteria for each of the Items cited above, I assess Respondent a total civil penalty of $47,900, which amount has already been paid by Respondent. COMPLIANCE ORDER The Notice proposed a compliance order with respect to Items 1 and 2 in the Notice for violations of 49 C.F.R. §§ 195.111 and 195.214, respectively. Under 49 U.S.C. § 60118(a), each person who engages in the transportation of hazardous liquids or who owns or operates a pipeline facility is required to comply with the applicable safety standards established under chapter 601. The Director indicates that Respondent has taken the following actions specified in the proposed compliance order: 1. With respect to the violation of § 195.111 (Item 1), Respondent submitted recently-completed fracture propagation analyses for the Farnsworth Laterals to the Director on January 9, 2014. 2. With respect to the violation of § 195.214 (Item 2), Respondent provided 2 The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, Pub. L. No. 112-90, § 2(a)(1), 125 Stat. 1904, January 3, 2012, increased the civil penalty liability for violating a pipeline safety standard to $200,000 per violation for each day of the violation, up to a maximum of $2,000,000 for any related series of violations.#

420135025_Final Order_12122014_text.pdf, page 6CPF No: 4-2013-5025 Page 5 qualification paperwork for the weld procedure (A101) that was actually used on the Farnsworth Laterals. Respondent also provided confirmation that the weld procedure used on the lines had been properly qualified and documented. The Region Director has reviewed Respondent’s submissions under Items 1 and 2 and has found them to be satisfactory. Therefore, the compliance terms proposed in the Notice are not included in this Order. WARNING ITEM With respect to Item 3, the Notice alleged a probable violation of Part 195 but did not propose a civil penalty or compliance order for this item. Therefore, this is considered to be a warning item. The warning is for: 49 C.F.R. § 195.403 (Item 3) ─ Respondent’s alleged failure to adequately document its emergency response training program. Chaparral presented information in its Response showing it had taken certain actions to address this item. If OPS finds a violation of this provision in a subsequent inspection, Respondent may be subject to future enforcement action. The terms and conditions of this Final Order are effective upon service in accordance with 49 C.F.R. § 190.5. ___________________________________ __________________________ Jeffrey D. Wiese Date Issued Associate Administrator for Pipeline Safety#

420135025_NOPV PCP PCO_10312013_text.pdf, page 1Official PDFNOTICE OF PROBABLE VIOLATION PROPOSED CIVIL PENALTY and PROPOSED COMPLIANCE ORDER CERTIFIED MAIL - RETURN RECEIPT REQUESTED October 31, 2013 Mr. David Ketelsleger SVP General Counsel Chaparral Energy LLC 701 Cedar Lake Blvd Oklahoma City OK 73114 CPF 4-2013-5025 Dear Mr. Ketelsleger: On multiples dates in April, May, August, September, and October, 2012, a representative of the Pipeline and Hazardous Materials Safety Administration (PHMSA), Office of Pipeline Safety (OPS), pursuant to Chapter 601 of 49 United States Code inspected Chaparral Energy CO2 pipeline records and facilities in Oklahoma, Kansas and Texas. As a result of the inspection, it appears that you have committed probable violations of the Pipeline Safety Regulations, Title 49, Code of Federal Regulations. The items inspected and the probable violations are: 1. §195.111 Fracture propagation. A carbon dioxide pipeline system must be designed to mitigate the effects of fracture propagation.#

420135025_NOPV PCP PCO_10312013_text.pdf, page 2Chaparral could not demonstrate that it had designed its recently constructed pipeline(s) to mitigate the effects of fracture propagation. A documented fracture propagation analysis was requested by PHMSA to demonstrate compliance with the requirement that the Farnsworth Laterals were designed to mitigate the effects of fracture propagation. It was determined that Chaparral had not performed a fracture propagation analysis. In addition, Chaparral could not demonstrate that fracture propagation design considerations and analysis had been performed prior to or subsequent to the commissioning of the Farnsworth laterals in 2011. The fracture propagation analysis for the Farnsworth laterals was requested multiple times by PHMSA Southwest Region personnel, including at the initial construction inspection documentation review in April 2012, and during subsequent and follow up inspections (office and field), telephone conversations and by email. Also, the construction of the Coffeyville pipeline took place contemporaneously with the 2012 PHMSA Southwest Region inspection of the existing Chaparral CO2 pipelines, including the Farnsworth laterals. The necessity for each of the three pipelines to have its own fracture propagation analysis performed was discussed and that Chaparral should commence work upon a documented fracture propagation analysis for the Coffeyville pipeline project while there was still time to avoid placing that pipeline in service without being in compliance with the requirement that it be designed to mitigate the effects of fracture propagation. A fracture propagation analysis for the Coffeyville pipeline was accomplished and was (after revision) found by PHMSA to be acceptable, in August 2012. Due to differences in construction and materials, there is still the requirement to perform a separate fracture propagation analysis for each of the Farnsworth Laterals as follows: • 4" east lateral constructed Oct/Nov 2010 • 6" west lateral constructed Jan/Mar 2011 2. § 195.214 Welding procedures (a) Welding must be performed by a qualified welder in accordance with welding procedures qualified under Section 5 of API 1104 or Section IX of the ASME Boiler and Pressure Vessel Code (ibr, see § 195.3) . The quality of the test welds used to qualify the welding procedure shall be determined by destructive testing. (b) Each welding procedure must be recorded in detail, including the results of the qualifying tests. This record must be retained and followed whenever the procedure is used. 2#

420135025_NOPV PCP PCO_10312013_text.pdf, page 3Welding performed during the construction of the Farnsworth Lateral was not performed in accordance with a qualified welding procedure. Welding procedures presented by Chaparral were not qualified in accordance with Section 5 of API 1104 or Section IX of the ASME Boiler and Pressure Vessel Code (ibr, see § 195.3) . Chaparral has not shown that the quality of the test welds used to qualify the welding procedure was determined by destructive testing, or that test welds were examined. The welding procedure presented did not include the results of qualifying tests and was missing essential variables. There are two Farnsworth Laterals as follows: • 4" east lateral constructed Oct/Nov 2010 • 6" west lateral constructed Jan/Mar 2011 At the initial construction inspection documentation review in April 2012 PHMSA personnel requested the welder qualification records and the welding procedure specification (WPS) as well as the procedure qualification record (PQR) for the welding performed during the construction of the Farnsworth Laterals. A complete welding procedure contains both the WPS and the PQR. The welder qualification records presented at the inspection indicated that welders were qualified to procedure “A100.” There was not a procedure qualification record available from Chaparral for this weld procedure A100 to which welders were qualified. A one page procedure specification document was available for procedure “A100,” however; no procedure qualification document was ever produced, despite repeated requests from PHMSA personnel during the course of the inspection. It also appears that the welding procedure “A100” presented at the audit is missing important essential variables, such as speed of travel and other parameters, such as material group discrepancies between procedure and construction, and discrepancies between weld procedure and welder qualification such as changes in filler group and joint design. 3. §195.403 Emergency Response Training. (a) Each operator shall establish and conduct a continuing training program to instruct emergency response personnel to: (1) Carry out the emergency procedures established under 195.402 that relate to their assignments; (2) Know the characteristics and hazards of the hazardous liquids or carbon dioxide transported, including, in case of flammable HVL, flammability of mixtures with air, odorless vapors, and water reactions; (3) Recognize conditions that are likely to cause emergencies, predict the consequences of facility malfunctions or failures and hazardous liquids or carbon dioxide spills, and take appropriate corrective action; (4) Take steps necessary to control any accidental release of hazardous liquid or carbon dioxide and to minimize the potential for fire, explosion, toxicity, or environmental damage; and 3#

420135025_NOPV PCP PCO_10312013_text.pdf, page 4(5) Learn the potential causes, types, sizes, and consequences of fire and the appropriate use of portable fire extinguishers and other on-site fire control equipment, involving, where feasible, a simulated pipeline emergency condition. (b) At the intervals not exceeding 15 months, but at least once each calendar year, each operator shall: (1) Review with personnel their performance in meeting the objectives of the emergency response training program set forth in paragraph (a) of this section; and (2) Make appropriate changes to the emergency response training program as necessary to ensure that it is effective. PHMSA was unable to confirm that Chaparral conducted the appropriate emergency response training. PHMSA requested documentation to demonstrate appropriate training of emergency response personnel during the records portion of the inspection. There was not adequate documentation provided by Chaparral at the 2012 inspection to demonstrate appropriate training of emergency response personnel. Chaparral indicated that emergency response personnel training would be conducted as soon as possible. Chaparral has since provided documentation of emergency response personnel training, conducted in the first quarter of 2013 at locations where Chaparral personnel are stationed. 4. § 195.420 Valve maintenance. (a) Each operator shall maintain each valve that is necessary for the safe operation of its pipeline systems in good working order at all times. (b) Each operator shall, at intervals not exceeding 7 1/2 months, but at least twice each calendar year, inspect each mainline valve to determine that it is functioning properly. Chaparral did not perform valve inspections at the proper intervals and inspections were not complete in order to determine that each valve could function properly. PHMSA personnel requested Chaparral valve maintenance records and related documentation during the records portion of the inspection. Chaparral valve maintenance records were missing on the Borger line for some mainline block valves. Valve maintenance records indicate that mainline block valves (MLV) 3 and 6 were inspected in November 2010 and December 2011. Other mainline block valves were inspected in April 2011 per the documentation provided at the inspection; however, there was no indication on the April 2011 valve inspection report that either MLV 3 or 6 were inspected at that time. In addition, Chaparral valve maintenance records are noted as “5 - could not operate due to operating conditions” for all valves listed on the November 2010 and December 2011 valve maintenance records. Chaparral O&M procedure 195.420 Valve Maintenance Process Description states “Valves should be operated to the fullest extent practical and then returned to its position…” There was no documentation provided to indicate that further valve maintenance was performed, such as returning to a valve to perform a partial operation of that valve when operating conditions became more favorable to performing valve maintenance and inspection activities. 4#

420135025_NOPV PCP PCO_10312013_text.pdf, page 5The evidence demonstrates that the operator violated § 195.420 by failing to conduct a proper inspection per the regulations related to inspecting each main line valve. In the event that such inspections were, in fact, performed, the evidence demonstrates the operator violated §195.404(c)(3) by failing to maintain a record of each inspection and test required by this subpart for at least 2 years or until the next inspection or test is performed, whichever is longer. Proposed Civil Penalty Under 49 United States Code, § 60122, you are subject to a civil penalty not to exceed $200,000 per violation per day the violation persists up to a maximum of $2,000,000 for a related series of violations. For violations occurring prior to January 4, 2012, the maximum penalty may not exceed $100,000 per violation per day, with a maximum penalty not to exceed $1,000,000 for a related series of violations. The Compliance Officer has reviewed the circumstances and supporting documentation involved in the above probable violation(s) and has recommended that you be preliminarily assessed a civil penalty of $47,900 as follows: Item number PENALTY 1 $19,000 4 $28,900 Warning Items With respect to item(s) 3 we have reviewed the circumstances and supporting documents involved in this case and have decided not to conduct additional enforcement action or penalty assessment proceedings at this time. We advise you to promptly correct these item(s). Failure to do so may result in additional enforcement action. Proposed Compliance Order With respect to items numbers 1 and 2 pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration proposes to issue a Compliance Order to Chaparral. Please refer to the Proposed Compliance Order, which is enclosed and made a part of this Notice. Response to this Notice Enclosed as part of this Notice is a document entitled Response Options for Pipeline Operators in Compliance Proceedings. Please refer to this document and note the response options. All material you submit in response to this enforcement action may be made publicly available. If you believe that any portion of your responsive material qualifies for confidential treatment under 5 U.S.C. 552(b), along with the complete original document you must provide a second copy of the document with the portions you believe qualify for confidential treatment redacted and an explanation of why you believe the redacted information qualifies for confidential treatment under 5 U.S.C. 552(b). If you do not respond within 30 days of receipt of this Notice, this constitutes a waiver of your right to contest the allegations 5#

420135025_NOPV PCP PCO_10312013_text.pdf, page 6in this Notice and authorizes the Associate Administrator for Pipeline Safety to find facts as alleged in this Notice without further notice to you and to issue a Final Order. In your correspondence on this matter, please refer to CPF 4-2013-5025 and for each document you submit, please provide a copy in electronic format whenever possible. Sincerely, R. M. Seeley Director, Southwest Region Pipeline and Hazardous Materials Safety Administration Enclosures: Proposed Compliance Order Response Options for Pipeline Operators in Compliance Proceedings 6#

420135025_NOPV PCP PCO_10312013_text.pdf, page 7PROPOSED COMPLIANCE ORDER Pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration (PHMSA) proposes to issue to Chaparral Energy LLC a Compliance Order incorporating the following remedial requirements to ensure the compliance of Chaparral Energy LLC with the pipeline safety regulations: 1. In regard to Item Number 1 of the Notice pertaining to fracture propagation analyses, Chaparral shall perform a technically sound fracture propagation analysis for each of the Farnsworth Laterals. This analysis should be completed with 30 days of the Final Order. Should the fracture propagation analysis determine that the existing design and construction of either or both of the Farnsworth laterals as commissioned is deficient with regard to mitigating the effects of fracture propagation, Chaparral develop a plan and submit that to PHMSA with 30 days of completing the analysis for approval. 2. 4. In regard to Item Number 2 of the Notice pertaining to incomplete welding procedure documentation, including no procedure qualification document for welding procedure A100, Chaparral shall qualify this procedure per the appropriate standard and submit the documentation showing that A100 is a complete and qualified welding procedure. Chaparral shall separately address quality of weld issues as could be related to all missing essential variables in the A100 document as presented by Chaparral as the procedure used in constructing the Farnsworth laterals. Chaparral shall complete item 2 within 30 days of the issuance of the Final Order. It is requested (not mandated) that Chaparral maintain documentation of the safety improvement costs associated with fulfilling this Compliance Order and submit the total to R. M. Seeley, Director, Southwest Region, Pipeline and Hazardous Materials Safety Administration. It is requested that these costs be reported in two categories: 1) total cost associated with preparation/revision of plans, procedures, studies and analyses, and 2) total cost associated with replacements, additions and other changes to pipeline infrastructure. 7#