BEFORE THE OIL AND GAS CONSERVATION COMMISSION
STATE OF COLORADO
IN THE MATTER OF PERMITS-TO-DRILL ISSUED ) CAUSE NO. 1
TO LEXAM EXPLORATIONS (U.S.A) INC., )
SAGUACHE COUNTY, COLORADO ) ORDER NO. 1-126
REPORT OF THE COMMISSION
This cause came on for hearing before the Commission on April 1, 2008 at 9:00 a.m. at The Chancery Building, 1120 Lincoln Street, Suite 801, Denver, Colorado, after giving Notice of Hearing as required by law, for an order granting a variance extending the time within which operations may commence under previously issued Permits-to-Drill, extending the expiration date for a period of one year or until April 2, 2009.
FINDINGS
The Commission finds as follows:
1. Lexam Explorations (U.S.A.) Inc. (“Lexam”) as applicant herein is an interested party in the subject matter of the above-referenced hearing.
2. Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.
3. The Commission has jurisdiction over the subject matter embraced in said Notice, and of the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act.
4. On February 8, 2008, Lexam filed with the Commission an application seeking an order to extend the expiration dates to commence operations under Permits Nos. 20064069 and 20064070 for the Baca #6 Well located in the SE¼ NE¼ of Section 33, Township 43 North, Range 11 East, N.M.P.M. and the Baca #5 Well located in NE¼ SW¼ of Section 28, Township 43 North, Range 11 East, N.M.P.M., for a period of one year or until April 2, 2009.
5. Between February 29, 2008 and March 3, 2008, letters of concern on the application were filed with the Commission by various individuals.
6. On March 14, 2008, Saguache County (the “County”) filed with the Commission a protest to the application.
7. On March 24, 2008, the San Luis Valley Ecosystem Council, by its attorney filed with the Commissioner a letter of concern on the application.
8. Since the late 1990s, Lexam has owned 100% of the non-oil and gas mineral rights and 75% of the oil and gas rights beneath an approximately 100,000 acre property located in Saguache County, Colorado, formerly known as the Luis Maria Baca Grant No. 4 (the “Baca Grant”). The remaining 25% of the oil and gas interest is owned by ConocoPhillips Company.
9. Lexam permitted and drilled two wells (Baca Wells #1 and #2) in 1995 pursuant to permits issued by the Colorado Oil and Gas Conservation Commission (“COGCC”). These wells were plugged, abandoned and reclaimed in accordance with COGCC rules. Two other wells (Baca Wells #3 and #4) were permitted, but never drilled.
10. In 2000, the surface of the Baca Grant was acquired by The Nature Conservancy and subsequently transferred to the United States Fish and Wildlife Service (“USFWS”).
11. On November 22, 2000, Public Law 106-530, entitled the “Great Sand Dunes National Park and Preserve Act,” was approved, resulting in creation of the Baca National Wildlife Refuge (“BNWR”). The BNWR is administered by the USFWS.
12. On or about October 27, 2006, Lexam filed Applications for Permits-to-Drill with the COGCC for two wells commonly referred to as Baca Well #5 and Baca Well #6.
13. In December 2006, Lexam conducted field work and baseline water quality sampling at numerous surface and subsurface sites on and near the BNWR in cooperation with the USFWS, the National Park Service and the Baca Grande Water and Sanitation District in preparation of its planned exploration. The sampling program was pre-approved by the agencies identified above, and Lexam provided the resulting data to them.
14. Lexam retained TRC Mariah Associates, Inc. to investigate and document cultural resources on the BNWR that may be affected by Lexam’s exploration program. The cultural resources survey was conducted in late October and early November 2006 (before the first snowfall) and covered approximately 16,000 acres on the BNWR. The cultural resources data was provided to the USFWS.
15. Lexam conducted a 3-D seismic survey on the BNWR in early 2007 after receiving a permit from the COGCC to conduct the survey and also agreeing to a number of measures required by the USFWS to protect the surface.
16. The Applications for Permits-to-Drill (“APDs”) for Baca Well #5 and Baca Well #6 were filed by Lexam on or about October 27, 2006. COGCC staff (David Dillon and David Shelton) met with USFWS and representatives of the County (a County Commissioner, the County Planner and a representative of the County Road and Bridge Department) on the BNWR on January 11, 2007 to inspect the drill sites and obtain USFWS comments to the APDs. The COGCC also received approximately 35 comment letters in response to the APDs, including letters from the Rio Grande Water Conservation District, the County, the Baca Grande Water and Sanitation District, the Baca Grande Property Owners Association, the Baca Grande Volunteer Fire Department and residents of Crestone. No comments were submitted by the U.S. National Park Service, the U.S. Environmental Protection Agency or the Colorado Division of Wildlife. The permits were issued by the COGCC as Permit Nos. 20064069 and 20064070 (collectively referred to herein as the “Permits”). Permit No. 20064069 is located in the SE¼ NE¼ of Section 33, Township 43 North, Range 11 East, N.M.P.M. Permit No. 20064070 is located in the NE¼ SW¼ of Section 28, Township 43 North, Range 11 East, N.M.P.M.
17. In addition to the usual requirements set forth on the face of the Permits, the Permits are subject to 18 additional “Conditions of Approval,” which are particularly the result of comments and input from the USFWS, the County and the Rio Grande Water Conservation District.
18. The Permits were issued on April 3, 2007 and expire April 2, 2008. Rule 303.h. states: “If operations are not commenced on the permitted well within one (1) year after date of approval, the permit shall become null and void.”
19. Lexam’s oil and gas rights, which were held by it at the time the USFWS acquired the surface, are referred to as “excepted rights” in the USFWS Manual, Land Use Series, 612 FW 2, Oil and Gas. The USFWS Manual and USFWS regulations (including, in particular, 50 C.F.R. § 29.32) contain detailed provisions related to protection of the USFWS surface by the holders of excepted rights.
20. In late 2006 and early 2007, the USFWS and Lexam were jointly preparing a Negotiated Operating Plan (“NOP”) consistent with provisions of the USFWS Manual and USFWS regulations. The NOP was a 50-page document that described Lexam’s exploration program and protection of surface resources on the BNWR. The NOP included various agreements between the USFWS and Lexam related to the exploration program and also described the specific measures that Lexam would apply to protect the surface of the BNWR. For example, Lexam agreed to cement its surface casing to a depth necessary to protect the shallow and deep aquifers in the San Luis Valley (based upon recommendations to the COGCC by the Colorado Division of Water Resources and the Rio Grande Water Conservation District), to use a closed loop mud and cutting system and to remove cuttings from the BNWR for off-site disposal. These measures were subsequently incorporated into the Permits.
21. On May 8, 2006, the San Luis Valley Ecosystem Council (“SLVEC”) filed a Complaint against the USFWS in federal District Court in the District of Colorado alleging that the USFWS was required to take certain actions under the National Environmental Policy Act (“NEPA”) in order to determine appropriate measures to protect the surface of the BNWR. Lexam was not named as a defendant in the Complaint.
22. On July 18, 2007, rather than incur litigation expense, the USFWS filed a Motion to Remand the underlying action back to the agency to allow it to prepare an Environmental Assessment (an “EA”). Under NEPA, preparation of an EA generally leads to either a Finding of No Significant Impact (a “FONSI”) or an Environmental Impact Statement (an “EIS”). The Motion to Remand took no position on the applicability of NEPA to these facts.
23. The Motion to Remand estimated that it would take approximately 180 days to complete the EA.
24. On November 28, 2007, the District Court Judge granted the Motion to Remand.
25. The EA, prepared by ENSR on behalf of the USFWS, was completed and distributed for public comment on or about January 18, 2008. A public meeting was held on February 12, 2008, and the public comment period ended on March 3, 2008.
26. The USFWS will determine whether to issue a FONSI or proceed to an EIS.
27. Representatives of the SLVEC have stated in recent newspaper articles that further NEPA-related litigation will be filed if a FONSI is issued by the USFWS.
28. As a result of its communication and cooperation with the USFWS, its attendance at several public meetings in the San Luis Valley (one of which was attended by COGCC representatives also), completion of the water sampling program and the cultural resources survey, negotiation of the NOP with the USFWS and its participation in the NEPA process, Lexam has demonstrated its diligent efforts to commence drilling operations pursuant to the Permits. Minutes of these meetings were posted on the County’s website.
29. In early January 2008, Saguache County adopted a resolution imposing a “moratorium” on oil and gas permitting in the County until July 7, 2008, by which time the County expects to have enacted new land use regulations applicable to oil and gas activities.
30. Since Lexam’s exploration program is located on federally-owned property, the County’s moratorium does not directly impact Lexam. However, the moratorium resolution also purports to prohibit issuance of road permits for transportation of drilling-related equipment over county roads during the period of the moratorium.
31. Lexam entered into an “Agreement Related to Drilling and Exploration Activities in Saguache County, Colorado,” with the County on April 17, 2007. This Agreement includes provisions related to issuance of road permits (the Agreement also addresses chemical testing of cuttings by Lexam prior to landfill disposal in the County). Lexam also received bids in early-2007 to build the roads on BNWR (from the “Lexam Road” to the drill site locations).
32. Lexam has agreed with the USFWS that it will not conduct any activities on the BNWR from May through July so as not to interfere with nesting birds, elk calving, etc. Because of this agreement, and in light of the Agreement between Lexam and the County, it is not clear whether the moratorium will have an impact, as a practical matter, on Lexam’s drilling operations or construction of roads and pads on the BNWR.
33. For purposes of this Application, the County’s moratorium resolution represents an additional circumstance which Lexam is diligently and in good faith trying to work through and resolve so that it can commence drilling operations.
34. Lexam anticipates that it will file a substitute water supply plan with the Colorado State Engineer’s office related to the water supply for the drilling operation.
35. In March 2007, Lexam approached the Baca Grande Water and Sanitation District about an agreement by which the District would sell replacement water to Lexam; however, following three separate meetings between the Board of Directors of the District and representatives of Lexam, the Board declined to enter into such an agreement.
36. Lexam expects that it will purchase replacement water from a private source for use as part of a substitute water supply plan.
37. Lexam’s efforts to obtain a project water supply further demonstrate its good faith efforts to timely commence drilling operations under the Permits.
COMMISSION’S REGULATORY AUTHORITY
38. Rule 303.h. states:
h. Permit expiration. If operations are not commenced on the permitted well within one (1) year after date of approval, the permit shall become null and void. The Director shall not approve extensions to applications for Permit-to-Drill, Form 2.
39. Under Rule 502.b.(1), the Commission may grant a variance to a rule or regulation upon a showing by the applicant that “it has made a good faith effort to comply, or is unable to comply with the specific requirements contained in these rules to secure a waiver or exception, if any, and that the requested variance will not violate the basic intent of the Oil and Gas Conservation Act.”
APPLICANT’S EVIDENCE
40. The Commission heard testimony from Ian Ball, Vice President of Corporate Development for McEwen Capital Corporation who manages Lexam regarding the history of Lexam’s involvement in the area, its relationship with Saguache County and the USFWS, and its plans for operations in the BNWR.
41. The Commission heard testimony from Jack Clark, Environmental Consultant for Lexam regarding work with the USFWS on the Negotiated Operating Plan, the meetings that have been held with and in Saguache County, plans for operations in the BNWR, and work to address visibility, noise and cultural resources issues.
SAGUACHE COUNTY’S EVIDENCE
42. The Commission heard testimony from Sam Pace, Saguache County Commissioner regarding the County’s concerns about drilling that have not been addressed by the APDs and the conditions of permit approval, impacts to the county roads from Lexam’s proposed operations, preference for directional drilling, and the preference for the preparation of an Environmental Impact Statement on the BNWR.
43. The Commission heard testimony from Linda Joseph, Saguache County Commissioner regarding her concerns about health issues and emergency response, including her belief that neither the APDs and the conditions of permit approval or the Environmental Assessment adequately address the County’s concerns.
U.S. FISH AND WILDLIFE SERVICE COMMENTS
44. The Commission heard comments from Ron Garcia, Wildlife Manager for the Baca National Wildlife Refuge regarding the status of the final decision on the Environmental Assessment and the scope of the NEPA process for Lexam’s proposed exploration and drilling. He stated that a new NEPA process to address reasonable regard to the land surface would be initiated if production or other operations were discovered on the BNWR.
COMMISSION ACTION
45. After questions of the witnesses and deliberation, the Commission determined that an extension of time to commence operations for the Baca Wells #6 and #5 should be granted, with additional conditions.
ORDER
NOW, THEREFORE, IT IS ORDERED, that a variance in accordance with 502.b.(1) is hereby granted to extend the time within which Lexam Explorations (U.S.A.) Inc. may commence operations under Permit Nos. 20064069 and 20064070 for the Baca Well #6 located in the SE¼ NE¼ of Section 33, Township 43 North, Range 11 East, N.M.P.M. and the Baca Well #5 located in NE¼ SW¼ of Section 28, Township 43 North, Range 11 East, N.M.P.M., for a period of one year or until April 2, 2009.
IT IS FURTHER ORDERED, that Permit Nos. 20064069 and 20064070 are hereby extended for drilling and completion operations and that permission shall be obtained from the Director of the Oil and Gas Conservation Commission prior to commencing production from the Baca Wells #6 and #5.
IT IS FURTHER ORDERED, that any conditions related to protection of public health, safety, welfare and the environment that are developed as a result of the federal Environmental Assessment process and that are under the jurisdiction of the Oil and Gas Conservation Commission shall be applied to Permits Nos. 20064069 and 20064070 for the drilling and completion operations of the Baca Wells #6 and #5.
IT IS FURTHER ORDERED, that the provisions contained in the above order shall become effective forthwith.
IT IS FURTHER ORDERED, that the Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.
IT IS FURTHER ORDERED, that under the State Administrative Procedure Act the Commission considers this order to be final agency action for purposes of judicial review within thirty (30) days after the date this order is mailed by the Commission.
IT IS FURTHER ORDERED, that an application for reconsideration by the Commission of this order is not required prior to the filing for judicial review.
ENTERED this__________day of April, 2008, as of April 1, 2008.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By____________________________________
Patricia C. Beaver, Secretary
Dated at Suite 801
1120 Lincoln Street
Denver, Colorado 80203
April 23, 2008