BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 9:00 a.m. on March 30, 2009, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to approve a comprehensive drilling plan for the Hotchkiss Federal Comprehensive Drilling Plan (the “Hotchkiss Federal CDP”) covering and including Sections 17 through 20, Township 12 South, Range 89 West, 6^th P.M., for the development and production of the oil and gas resources underlying said lands.

FINDINGS

The Commission finds as follows:

1.     That Gunnison Energy Corporation (“GEC”), as applicant herein, is an interested party in the subject matter of the above‑referenced hearing.

2.     That due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

3.     That 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.     That Rule 318.a. of the Rules and Regulations of the Commission requires that wells drilled in excess of 2,500 feet in depth be located not less than 600 feet from any lease line, and located not less than 1,200 feet from any other producible or drilling oil or gas well when drilling to the same common source of supply.  Sections 17 through 20, Township 12 South, Range 89 West, 6^th P.M., are subject to this Rule.

5.     That on February 9, 2009, GEC, by its representative, filed with the Commission materials in support of an order to approve a comprehensive drilling plan for the Hotchkiss Federal CDP covering and including Sections 17 through 20, Township 12 South, Range 89 West, 6^th P.M., for the development and production of the oil and gas resources underlying said lands.  GEC drilled and tested the Hotchkiss Federal 12-89 #17-13 Well (API No. 05-051-06064) in 2005 and put the well on production in 2007 from the Williams Fork Formation.  Subsequently, the Hotchkiss Federal 12-89 #18-31 Well (API No. 05-051-06071) was drilled by GEC in 2006 and put on production in 2007 from the Williams Fork Formation.  The Hotchkiss Federal 12-89 #18-22D WDW (API No. 05-051-06073) was drilled by GEC in 2006 and completed in 2007 as a saltwater disposal well into the Maroon and Precambrian Formations.  Lastly, GEC drilled the Hotchkiss Federal 12-89 #18-43 Well (API No. 05-051-06075) in 2006 and put the well on production in 2007 from the Williams Fork Formation.  GEC proposes to further develop the oil and gas resources underlying the application lands by drilling 16 wells from nine (9) well sites using both vertical and directionally drilled wellbores.

6.     That GEC has coordinated numerous consultations and public meetings in bringing the Hotchkiss Federal CDP forward for consideration which are recited below:

a.    On October 29, 2007, GEC held an on-site consultation with the Bureau of Land Management (“BLM”) for the proposal;

b.    On January 4, 2008, GEC submitted its initial package of six (6) Applications for Permit-to-Drill (“APD”) to the Commission, Gunnison County, and the BLM;

c.    On February 8, 2008, GEC formally requested consultation with the Colorado Division of Wildlife (“CDOW”);

d.    On March 14, 2008, GEC engaged in first formal work session with the Gunnison County Planning Commission;

e.    On March 21, 2008, the BLM initiated a 30-day scoping notice, and GEC filed an Application to Drill Gas Wells with the BLM.  SWCA Environmental Consultants initiated the preparation of the federal Environmental Assessment (“EA”) for the proposal;

f.     On April 23, 2008, GEC held on-site consultations with the Gunnison County Board of County Commissioners and the Gunnison County Planning Commission;

g.    On May 16, 2008, GEC engaged in second work session with the Gunnison County Planning Commission;

h.    On May 29, 2008, CDOW completed its consultation and made its recommendations.  On July 31, 2008, GEC stipulated to numerous CDOW conditions recommended through the consultative process (refer to Finding No. 7 contained herein);

i.      On June 24, 2008, Dennis R. Stenger, Professional Geologist, submitted his review of Gunnison Energy Corporation Oil and Gas Permit Application to Gunnison County;

j.      On July 9, 2008, Resource Engineering of Glenwood Springs, submitted its review of Gunnison Energy Corporation Oil and Gas Permit Application to Gunnison County;

k.    On July 14, 2008, public notice given of “Joint Public Hearing Concerning an Oil and Gas Operations Permit Application for the Hotchkiss Federal Project, 16 Wells on 9 Well Pads and Associated Gathering Lines, Located in Sections 17, 18, 19 and 20 of Township 12 South, Range 89 West, 6^th P.M., Gunnison County, Colorado;”

l.      On July 17, 2008, the BLM conducted on-site inspections for new specialists;

m.   On July 24, 2008, Gunnison County conducted its first public hearing on the proposal;

n.    On August 15, 2008, Gunnison County conducted a second public hearing on the proposal;

o.    On October 17, 2008, the Gunnison County Planning Commission issued a resolution recommending approval of the proposal to the Gunnison County Board of County Commissioners;

p.    On October 21, 2008, the Gunnison County Board of County Commissioners approved the proposal;

q.    On November 5, 2008, deadline passed for the BLM Staff to provide Barbara Sharrow, BLM Field Office Manager, with final comments on draft EA;

r.     On November 11, 2008, GEC met with the Colorado Oil and Gas Conservation Commission (“COGCC”) Staff to discuss the Hotchkiss Federal CDP;

s.     On November 12, 2008, the BLM released the EA and draft Finding of No Significant Impact (“FONSI”) for public review and comment, with initial start date for public review and comment on December 19, 2008;

t.      On December 16, 2008, met with the Colorado Department of Public Health and Environment (“CDPHE”) to discuss the Hotchkiss Federal CDP;

u.    On January 19, 2009, the public review and comment period for the EA conducted by the BLM ended;

v.    On February 2, 2009, the CDPHE completed its consultation and made its recommendations (refer to Finding No. 8 contained herein); and

w.   On February 10, 2009, Barbara Sharrow, BLM Field Office Manager, entered a FONSI as to the EA performed for the project.

7.     That on May 29, 2008, CDOW submitted a letter to GEC setting forth, in its consultative role involving potential impacts to wildlife resources on the Hotchkiss Federal CDP, its recommendations regarding the identification of potential impacts and development of appropriate conditions of approval to minimize adverse impacts resulting from oil and gas development activities within the geographic area covered by said CDP.  On July 31, 2008, GEC responded to the CDOW recommendations and agreed to the following Conditions of Approval for activities within the Hotchkiss Federal CDP geographic area, as said conditions pertain to wildlife habitat protection:

a.    That construction, drilling and completions for the HKF #17-11 location and the HKF #20-12 location will not be conducted between December 1 and April 15 of any calendar year without CDOW consultation and prior approval;

b.    That produced water from the Hotchkiss Federal CDP will be piped to the Hotchkiss Federal 12-89 #18-22D WDW for injection;

c.    That GEC will continue to have raptor surveys conducted prior to any construction activities for the Hotchkiss Federal CDP, and will continue to attend to the recommendations outlined in the CDOW’s Recommended Buffer Zones and Seasonal Restrictions for Colorado Raptors (2008).  That GEC’s surveys will also include all listed species and migratory bird species, and that appropriate mitigation recommended by CDOW with regards to that information will be followed;

d.    That bear-resistant trash containers will be utilized for food related trash at sites within the project, with adequate training concerning bear activity provided to all GEC employees and their contractors;

e.    That suitable screen will be placed on drilling and production equipment to prevent access by migratory bird species;

f.     That any pipeline constructed to cross West Muddy Creek will utilize the existing railroad car bridge to minimize creek disturbance, and that low water crossing and one culvert will be utilized for any identified intermittent streams;

g.    That interim reclamation will be conducted immediately upon final completion of all project wells and pipelines which is to include a weed management plan submitted to Gunnison County and the BLM;

h.    That surface disturbance associated with any pipeline will be reclaimed immediately following the completion of each pipeline segment;

i.      That the five new well pads associated with the project will be reclaimed as they convert from drilling operations to production operations, said reclamation to include reference vegetation plots to aid GEC in evaluating reclamation processes;

j.      That reserve pits will be netted following completion activities, and that said pits will continue to be netted until completely abandoned and reclaimed; and

k.    That site-specific reclamation will be competed along the roads, pads and pipelines utilized by the project in consultation with the surface owner, and reclamation will be monitored annually to evaluate effectiveness of the reclamation process.

8.     That on February 2, 2009, CDPHE submitted a letter to the COGCC Acting Director setting forth, in its consultative role regarding potential impacts to public health, welfare, safety, and the environment, its recommendation to approve the Hotchkiss Federal CDP, and its request to incorporate the following agreed-upon conditions of approval for activities within the geographic area covered by said CDP:

a.    That drilling will be conducted utilizing a closed-loop system resulting in dried cuttings;

b.    That water-based drilling fluids will be utilized while drilling any permitted well;

c.    That the total dissolved solids (“TDS”) of produced fluids from the formations being drilled are to be within 2,500 to 5,000 mg/L TDS;

d.    That, if feasible, all drilling fluids will be reclaimed and utilized for subsequent additional wells;

e.    That reserve pits will be constructed to contain all cuttings and dried drilling fluids only;

f.     That no plastic liners will be utilized while drilling any permitted well;

g.    That a single reserve pit will be constructed on each well pad (except the HKF #20-12 well, which is located on an existing pad within 300 feet of West Muddy Creek with cuttings from said well to be removed from said pad and buried at the HKF #17-11 or HKF #18-43 well pad) and will be utilized only for wells drilled on that same pad; and

h.    That reclamation of any reserve pit will conform to the Rules of the Colorado Oil and Gas Conservation Commission.

9.     That GEC has a surface use agreement with Hotchkiss Ranches, Inc., the current surface owner, and that said surface owner has been fully consulted with all relevant details of this project and is in agreement with the concept of this CDP and its requirements.

10.   That based on the materials filed in by this matter in support of the Hotchkiss Federal CDP, and acting consistent with Rule 216 of the Rules and Regulations of the Commission which becomes effective April 1, 2009, the Commission finds as follows:

a.    That the Hotchkiss Federal CDP covers more than one (1) proposed oil and gas location within a geologic basin;

b.    That GEC has invited, and consulted with, when necessary, the CDPHE, the CDOW, Gunnison County, and the surface owners in developing the Hotchkiss Federal CDP.  That participation by these agencies and individuals have facilitated the identification of potential impacts and the development of conditions of approval to minimize adverse impacts;

c.    That GEC, the COGCC Director, and other participants involved in the Hotchkiss Federal CDP process have reviewed the proposal, indentified information needs, discussed operations and potential impacts, and established measures to minimize adverse impacts which may result from oil and gas development activities covered by the proposal;

d.    That the COGCC Director has identified and documented the agreed-upon Conditions of Approval for activities within the geological area covered by the Hotchkiss Federal CDP and recited within this Order;

e.    That the information contained within the materials presented for approval of the Hotchkiss Federal CDP does not contain information substantially equivalent to that which would be required in a Form 2A of the Rules and Regulations of the Commission, where Form 2A is required under Rule 303.d.(2).B., for the proposed oil and gas locations indentified in said plan, and, as such, a Form 2A shall be required for a proposed oil and gas location included within said plan, with the proviso that the Director shall modify the informational and procedural requirements for any such Form 2A to reflect the information included in and the procedures used to approve said plan and with input, where appropriate, from the CDPHE and the CDOW.  Further, any Form 2A filed for this project, which does not seek a variance from the approved plan or rule not addressed from the plan, will not be subject to a public comment period due to an EA and a county hearing having been conducted on the project;

f.     That the Commission may incorporate variances to any of these rules, provided that all of the requirements for granting variances have been met;

g.    That GEC should obtain the written consent of the surface operator, as to the conditions of approval set forth in Finding No. 7 above regarding sensitive wildlife habitat, prior to commencing operations under the project;

h.    That information filed by GEC in support of the Hotchkiss Federal CDP is available for inspection on the COGCC website at https://cogcc.state.co.us/ (under “Images” on the COGCC Home Page Menu, then enter Search after inserting “2028” in the “Unique Identifier” databox); and

i.      That GEC through the CDP consultation process identified above meets the criteria of Rule 306 consultation and that consultation with the surface owner, local government, CDPHE, or CDOW shall not be required for any Form 2A submitted for the nine locations identified on the maps submitted with the CDP documentation.

11.   That Gunnison Energy Corporation agrees to be bound by oral order of the Commission.

12.   That an accepted Comprehensive Drilling Plan, such as the Hotchkiss Federal CDP, may be modified using the same process as that leading to the acceptance of the original Plan either upon the initiative of the operator or upon the initiative of the COGCC Director and upon a showing that there has been a change in an applicable provision in these rules or a significant change to the basis upon which the Plan was developed, with the review and approval of the modification focused only on the proposed modification(s).

13.   That once accepted by the Commission, a Comprehensive Drilling Plan, such as the Hotchkiss Federal CDP, shall be valid for a period of six (6) years.

14.   That this is the first Comprehensive Drilling Plan considered by the Commission, and it involves unusual circumstances given the number and variety of public reviews recited in Finding No. 6 above.  Therefore, the Commission believes that this Comprehensive Drilling Plan may not constitute a precedent or template for its review of subsequent Comprehensive Drilling Plans.  Instead, the Commission anticipates that subsequent Comprehensive Drilling Plans will be reviewed on a case-by-case basis.

ORDER

NOW, THEREFORE IT IS ORDERED, that the request for a comprehensive drilling plan for the Hotchkiss Federal CDP covering and including Sections 17 through 20, Township 12 South, Range 89 West, 6^th P.M., is hereby approved, for the oil and gas activities described in the CDP documentation of the  Hotchkiss Federal CDP, and the operator shall hereby comply with the provisions contained in this Order.

IT IS FURTHER ORDERED, that, as the materials presented for approval of the Hotchkiss Federal CDP do not contain information substantially equivalent to that which would be required in Form 2A of the Rules and Regulations of the Commission, where Form 2A is required under Rule 303.d.(2).B., for the proposed oil and gas locations indentified in said plan, and, as such, a Form 2A shall be required for a proposed oil and gas location included within said plan.  The Director shall modify the informational and procedural requirements for any such Form 2A to reflect the information included in and the procedures used to approve said plan and with input, where appropriate, from the CDPHE and the CDOW.  Further, any Form 2A filed for this project, which does not seek a variance from the approved plan or rule not addressed from the plan, will not be subject to a public comment period due to an EA and a county hearing having been conducted on the project.  In addition, insomuch that GEC, through this CDP consultation process meets the criteria of Rule 306 consultation, shall not be required, for any Form 2A submitted for the nine locations identified on the maps submitted with the CDP documentation, to consult with the surface owner, local government, CDPHE or CDOW.

IT IS FURTHER ORDERED, that GEC shall obtain the written consent of the surface operator, as to the conditions of approval set forth in Finding No. 7 above regarding sensitive wildlife habitat, prior to commencing operations under the project

IT IS FURTHER ORDERED, that mitigation measures set forth below will be incorporated as Conditions of Approval for both surface and drilling operations within the Hotchkiss Federal CDP, along with any other such conditions as deemed appropriate by the Director recognizing that any permit-specific wildlife conditions are consented to by the surface owner:

1)    That construction, drilling and completions for the HKF #17-11 location and the HKF #20-12 location will not be conducted between December 1 and April 15 of any calendar year without CDOW consultation and prior approval;

2)    That produced water from the Hotchkiss Federal CDP will be piped to the Hotchkiss Federal 12-89 #18-22D WDW for injection;

3)    That GEC will continue to have raptor surveys conducted prior to any construction activities for the Hotchkiss Federal CDP, and will continue to attend to the recommendations outlined in the CDOW’s Recommended Buffer Zones and Seasonal Restrictions for Colorado Raptors (2008).  That GEC’s surveys will also include all listed species and migratory bird species, and that appropriate mitigation recommended by CDOW with regards to that information will be followed;

4)    That bear-resistant trash containers will be utilized for food related trash at sites within the project, with adequate training concerning bear activity provided to all GEC employees and their contractors;

5)    That suitable screen will be placed on drilling and production equipment to prevent access by migratory bird species;

6)    That any pipeline constructed to cross West Muddy Creek will utilize the existing railroad car bridge to minimize creek disturbance, and that low water crossing and one culvert will be utilized for any identified intermittent streams;

7)    That interim reclamation will be conducted immediately upon final completion of all project wells and pipelines which is to include a weed management plan submitted to Gunnison County and the BLM;

8)    That surface disturbance associated with any pipeline will be reclaimed immediately following the completion of each pipeline segment;

9)    That the five new well pads associated with the project will be reclaimed as they convert from drilling operations to production operations, said reclamation to include reference vegetation plots to aid GEC in evaluating reclamation processes;

10) That reserve pits will be netted following completion activities, and that said pits will continue to be netted until completely abandoned and reclaimed;

11) That site-specific reclamation will be competed along the roads, pads and pipelines utilized by the project in consultation with the surface owner, and reclamation will be monitored annually to evaluate effectiveness of the reclamation process;

12) That drilling will be conducted utilizing a closed-loop system resulting in dried cuttings;

13) That water-based drilling fluids will be utilized while drilling any permitted well;

14) That the TDS of produced fluids from the formations being drilled are to be within 2,500 to 5,000 mg/L TDS;

15) That, if feasible, all drilling fluids will be reclaimed and utilized for subsequent additional wells;

16) That reserve pits will be constructed to contain all cuttings and dried drilling fluids only;

17) That no plastic liners will be utilized while drilling any permitted well;

18) That a single reserve pit will be constructed on each well pad (except the HKF #20-12 well, which is located on an existing pad within 300 feet of West Muddy Creek with cuttings from said well to be removed from said pad and buried at the HKF #17-11 or HKF #18-43 well pad) and will be utilized only for wells drilled on that same pad; and

19) That reclamation of any reserve pit will conform to the Rules of the Colorado Oil and Gas Conservation Commission.

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, 2009, as of March 30, 2009.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By__________________________________________       

                                                                                    Robert A. Willis, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

April 1, 2009