News

January 23, 2020

Burns Charest LLP Files Suit in Colorado to Recover Damages from Failed Waterflood Project

Burns Charest is representing Thomas Minick, the Liquidating Trustee for the Liquidating Trust of bankrupt energy company Nighthawk Royalties LLC and its affiliated debtors, in litigation against Houston-based engineering consulting firm Sigma Cubed Integrated Reservoir Solutions, Inc. The lawsuit, filed in Arapahoe County District Court in Colorado, seeks to recover damages, conservatively estimated at nearly $10 million, relating to a failed project to increase oil production in eastern Colorado’s Arikaree Creek Field. Mr. Minick is represented by Christopher J. Cormier of the firm’s Denver office and Daniel Charest, Will Thompson, Ryan Gaddis and Morgan Buller in Dallas.

Nighthawk, which emerged from Chapter 11 bankruptcy protection in 2019, was a United States-focused oil and gas company with operations in the Denver-Julesburg Basin of eastern Colorado. After experiencing an initial period of success producing oil in the Arikaree Creek Field area of the Basin from early 2012 to mid-2014, production levelled off, compelling Nighthawk to consider how it could try to increase output.

Nighthawk had multiple options, but it ultimately chose to inject water into the developed area of Arikaree Creek to increase pressure and maximize production of the remaining oil through existing wells—a process called “waterflooding.” Nighthawk chose this option after relying on a purportedly valid and reliable model that Sigma developed, based on a contract between the two companies, that forecasted significantly increased production following initiation of the waterflood. In November 2016, with regulatory approval in hand and Arikaree Creek primed to go, Nighthawk began the waterflood and waited for the increased production Sigma’s model forecasted. But it never came.

The lawsuit claims that Sigma manipulated key data inputs and made unjustified assumptions in the model—clearly contrary to its obligations under the contract—that caused the waterflood’s forecasted production to be drastically overstated. Sigma’s lead engineer later admitted that he could not make the model increase production, so he improperly altered the data and made unjustifiable assumptions to artificially produce a favorable waterflood forecast. He further admitted that Sigma ultimately directed the result because it was eager to get more reservoir simulation modelling work. A subsequent review of Sigma’s model by an independent engineering firm revealed that Arikaree Creek was a bad candidate for waterflooding and that Sigma’s model contained various fatal errors—which Sigma’s engineer admitted—that caused an entirely unrealistic production forecast.

Because Nighthawk spent all of its remaining capital on the failed waterflood, Nighthawk’s senior secured lender called in the remaining balance on the loan that it had made to Nighthawk to help finance the waterflood. Not having the money to repay the outstanding balance and continue operations, Nighthawk filed for Chapter 11 bankruptcy protection in May 2018.

Said Chris Cormier, “We are honored to represent Mr. Minick in his capacity as the Liquidating Trustee in this matter. While there is unfortunately nothing we can do to bring Nighthawk back, we are determined to hold Sigma accountable for the significant damage it caused.”


Daniel Charest added, “When so-called waterflood experts falsify their work for money and provide bogus, unsupported recommendations that cost oil and gas operators, the law should and does provide a remedy. We look forward to pursuing Nighthawk’s claims in court.”

A copy of the complaint can be accessed HERE.