BEFORE THE OIL & GAS CONSERVATION COMMISSION

IN THE MATTER OF THE APPLICATION OF MCELVAIN OIL & GAS PROPERTIES, INC. FOR AN ORDER AUTHORIZING THE OPERATOR TO SELECT THE APPROPRIATE ARTIFICIAL LIFT EQUIPMENT ON THE PAYNE NO. 1 FRUITLAND COAL SEAM FORMATION WELL, IGNACIO-BLANCO FIELD, LA PLATA COUNTY, COLORADO

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CAUSE NO. 112

Docket No. ______________

APPLICATION

McElvain Oil & Gas Properties, Inc., a Colorado corporation (“Applicant”), by its attorneys Dorsey & Whitney LLP makes application to the Oil and Gas Conservation Commission of the State of Colorado (“Commission” or “COGCC”), for an order authorizing the Applicant as operator of the proposed Payne No. 1 Well, to select the type of artificial lift equipment on the permitted Fruitland Coal Seam Well. In support thereof, Applicant states and alleges as follows:

1. That the Applicant is the owner of 100% of the leasehold underlying the wellsite for the Payne No. 1 Well to be located in the NWNE of Section 17, T32N, R6W, La Plata County, Colorado. This well is located within the area covered by COGCC Order No. 112-156 dated April 25, 2000.

2. That the Payne No. 1 Well has received an APD from this Commission dated March 12, 2004, a portion of which is attached hereto as Exhibit A.

3. That the surface location of the Payne No. 1 Well was authorized by the COGCC through Permit No. 20040352 dated March 12, 2004. See Exhibit A. The COGCC Permit is at an exception location to accommodate the surface owners’ request. Applicant also entered into an Easement, Right-of-Way and a Surface Use Agreement dated January 13, 2004 with the surface owners, Ranela and Abenecio Munoz authorizing Applicant to conduct its operations on this 40-acre surface tract. This Agreement specifies the surface location of the Payne No. 1 well.

4. Pursuant to Order 112-156, Applicant is required to comply with the terms and conditions set forth therein by the Commission including without limitation, conditions relating to water well sampling, plugged wells, wildlife matters, emergency preparedness plans, build-up tests, 3-M requirements, on-site inspections and many others. These specific orders are in addition to the Commission regulations.

5. Since the well is located in La Plata County, Applicant also filed an Application for a Minor Facility Permit with the County on February 25, 2004. On March 11, 2004, the La Plata County Planning Department deemed the Application “incomplete.” On March 23, 2004, Applicant provided more explanation regarding its surface location, the selection of the exception location and how it attempted to accommodate the adjacent objecting surface owner by moving the well away from such owner out of the established window. See March 25, 2004 letter attached hereto as Exhibit B.

6. Through a letter dated April 7, 2004, a copy of which is attached hereto as Exhibit C, La Plata County “granted” the local permit conditioned upon Applicant’s compliance with numerous conditions, including without limit, conditions 2.D. and 3. which states as follows:

D. Due to the existing conditions of the area surrounding this proposed gas well, as put forth in Condition Number 2, and per 90-123 of the LPLUC, if artificial lift is deemed necessary for the successful operation of this proposed facility, the Applicant will only be allowed to use a traditional beam pumping unit (“pump jack”) for the initial six months following first production of the proposed well. After six months from first production of the well, the Applicant shall evaluate whether artificial lift is still necessary. If artificial lift is still necessary the Applicant will be required to replace the beam pumping units with an alternative pumping device which minimizes and/or eliminates one or both of the following visual issues inherent with traditional pumping units:

1). Device is distracting visually, due to the continuous up and down motion of the unit’s pumping beam and rotation of flywheel.

2). Device is distracting visually, due to the unit’s vertical height, which oftentimes is greater than the already-existing surrounding development, topography, and vegetation. Additionally, it is very difficult to effectively screen these beam-pumping units via typical mitigation screening measures.

Such a device may include, but not be exclusive to one of the following examples:

1. Low-profile pumping unit (example: Lufkin Low-Profile Pump);

2. Use of low-profile, buried, or partially buried tanks

4.[sic.] Progressive cavity pumping device (examples: Corlac & Seepex Downhole PC Pumps).

Before the required replacement pumping device is installed at the proposed well site, the Applicant shall submit a proposal to Planning for review on what device it desires to install. Planning will then approve or deny the proposed replacement-pumping device. If approved, the Applicant shall immediately replace the pre-existing traditional beam-pumping unit, with the Planning-approved replacement. If the Applicant is unsatisfied with Planning’s administrative review and decision, the Applicant may appeal to the BOCC.

If after the initial 6 month period has terminated, and the Applicant believes that none of the required replacement artificial lifting options will operate adequately enough to effectively extract the coal bed methane and associated produced water, the Applicant has the option to appeal to Planning. For such an appeal, the Applicant will immediately need to provide the following three items in writing:

1. A detailed explanation why none of the alternative artificial lifting devices will be adequate for the job.

2. Information on the minimum size and type of beam pump that the Applicant feels is needed to “do the job.”

3. Comprehensive data of the produced gas and water amounts that have been obtained, up to that point, from the proposed gas well.

If it is determined through the review of the provided appeal information that the Applicant truly needs a standard beam-pumping unit for an extended period of time, Planning may grant an extension of use of such a device, for a period of time to be determined by Planning. If Planning denies the Applicant’s appeal request, the Applicant may appeal Planning’s administrative decision to the BOCC. (Emphasis added.) . . .

3. For purposes of reducing potential facility noise, the Applicant shall use electricity to power any motors (engines) at the site with the exception of motors used for drilling, periodic or temporary maintenance or re-completion. Associated electrical lines shall be placed underground (Sec 90-122.d.4 LPLUC).

7. Based upon competent engineering analysis, compliance with the County mandatory directive will cause waste as prohibited by Colo. Rev. Stats. § 34-60-107 and § 34-60-117 since it will significantly inhibit or limit production from this well. Such condition violates the waste prevention as defined in Colo. Rev. Stats. § 34-60-103(12), (13)(a) and (b). Applicant submits that the COGCC is the governmental agency vested with jurisdiction over all downhole wellhead equipment including artificial lift equipment, in accordance with Colo. Rev. Stats. § 34-60-103(13)(b) and § 34-60-105.

8. Similarly, requiring Applicant to install and bury electric lines at an estimated cost of $200,000 to $400,000 for one well creates an economic hardship. Moreover, this Commission has sound regulations in place with which Applicant must comply. Such County directive is premature absent evidence of violation of Commission standards and is preempted by such Commission regulation.

9. Compliance with the County Permit conditions will violate Applicant’s and its mineral owners’ correlative rights and will cause decreased production and may cause the drilling of unnecessary wells.

10. Even through implied in applicable statutory directives, Applicant’s APD should be clarified to expressly authorize the Applicant to utilize lift and pumping equipment which will maximize the efficient and economic recovery of resources so that Applicant shall be in compliance with existing spacing orders, so that Applicant may avoid drilling an unnecessary additional well and so that Applicant may avoid claims from its mineral owners that it has breached its implied covenant of development.

11. Applicant requests the Commission determine that the type of artificial lift equipment is “operational” in nature and is within the Commission’s jurisdiction.

12. Exhibit D attached hereto and made part hereof is the list of the names of “Owners” required to be notified in accord with Commission Rule 507.

WHEREFORE, Applicant respectfully requests that this matter be set for hearing, that notice thereof be given as required by law and that upon such hearing this Commission enter its order:

A. Establishing that the existing COGCC permit for the Payne No. 1 Well be clarified to authorize the Applicant to utilize the appropriate artificial lift device which will maximize the economic and efficient production from the Payne No. 1 Well.

B. Directing that Applicant be authorized to conduct its operations without buried electrical lines provided it is in compliance with existing Commission sound regulations.

C. For such other findings and orders as the Commission may deem proper or advisable in the premises.

DATED this 24^th day of May , 2004.

Respectfully submitted,

MCELVAIN OIL & GAS PROPERTIES, INC.

By:

Michael J. Wozniak

Dorsey & Whitney LLP

Attorneys for Applicant

370 17^th Street, Suite 4700

Denver, Colorado 80202

(303) 629-3400

Applicant’s Address:

1050 17th St., Suite 1800

Denver, CO 80265-1801

STATE OF COLORADO )

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CITY AND COUNTY OF DENVER )

________________________, of lawful age, being first duly sworn upon oath, deposes and says that he is the ___________________ for McElvain Oil & Gas Properties, Inc. and that he has read the foregoing Application and that the matters therein contained are true to the best of his knowledge, information and belief.

Subscribed and sworn to before this 24^th day of May, 2004.

Witness my hand and official seal.

My commission expires:

Notary Public