BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
|
IN THE MATTER OF AN APPLICATION BY EXTRACTION OIL & GAS INC. FOR, AMONG OTHER THINGS, A HEARING ON OBJECTIONS TO THE DESIGNATED HORIZONTAL WELLBORE SPACING UNITS PROPOSED FOR THE ENRIGHT 2, 4, 6, 8, 10, 12, 14 AND 16 WELLS, LOCATED IN CERTAIN PORTIONS OF SECTION 18, TOWNSHIP 4 NORTH, RANGE 68 WEST, 6TH P.M. AND SECTION 13, TOWNSHIP 4 NORTH, RANGE 69 WEST, 6TH P.M., FOR DEVELOPMENT OF THE NIOBRARA AND CODELL FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO |
Cause No. 1
Docket No. 171000736
TYPE: spacing
ORDER NO. 1-204 |
REPORT OF THE COMMISSION
The Commission heard this matter on March 20, 2018, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for a hearing by Extraction Oil & Gas, Inc., on objections to the designated horizontal wellbore spacing units proposed for the Enright 2, Enright 4, Enright 6, Enright 8, Enright 10, Enright 12, Enright 14, and Enright 16 Wells located in certain portions of Section 18, Township 4 North, Range 68 West, 6th P.M., and certain portions of Section 14, Township 4 North, Range 69 West, 6th P.M., for the development and operation of the Niobrara and Codell Formations.
The Commission finds as follows:
1. Extraction Oil & Gas Inc. (Operator No. 10459) (“Extraction” or “Applicant”), as applicant herein, is an interested party in the subject matter of the above-referenced hearing.
2. Ivar W. Larson, Donna M. Larson, and Larson Front Range Farms, as objectors herein, are interested parties in the subject matter of the above-referenced hearing. Mr. and Mrs. Larson are collectively referred to herein as “the Larsons.” Larson Front Range Farms is referred to herein as “LFRF.”
3. Due notice of time, place, and purpose of the hearing has been given in all respects are required by law.
4. The Commission has jurisdiction over the subject matter embraced in said matter and the parties interested therein, and has authority to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act (“Act”).
PROCEDURAL AND FACTUAL HISTORY
5. On April 27, 1998, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule. Section 18, Township 4 North, Range 68 West, 6th P.M. and Section 14, Township 4 North, Range 69 West, 6th P.M., are subject to this Rule for the Niobrara and Codell Formations.
6. In January 2017, Extraction sent notices by certified mail of the proposed horizontal wellbores spacing units for the Enright 2, Enright 4, Enright 6, Enright 8, Enright 10, Enright 12, Enright 14, and Enright 16 Wells (sometimes collectively referred to as “Subject Wells”) for the below-described lands (“Application Lands”), which were received by the relevant parties between January 17, 2017, and January 24, 2017:
Township 4 North, Range 68 West, 6th P.M.
Section 18: SW¼NE¼, NW¼SE¼, S½NW¼, N½SW¼
Township 4 North, Range 69 West, 6th P.M.
Section 13: S½N½, N½S½
Wellbore Spacing Unit (“WSU”) Nos. 1 and 2; Enright 2 and 4 Wells
560 acres, more or less
Township 4 North, Range 68 West, 6th P.M.
Section 18: NW¼SE¼, N½SW¼
Township 4 North, Range 69 West, 6th P.M.
Section 13: N½S½
WSU No. 3; Enright 6 Well
280 acres, more or less
Township 4 North, Range 68 West, 6th P.M.
Section 18: SW¼, W½SE¼
Township 4 North, Range 69 West, 6th P.M.
Section 13: S½
WSU Nos. 4-6; Enright 8, 10 and 12 Wells
560 acres, more or less
Township 4 North, Range 68 West, 6th P.M.
Section 18: SW¼SE¼, S½SW¼
Township 4 North, Range 69 West, 6th P.M.
Section 13: S½S½
WSU No. 7; Enright 14 Well
280 acres, more or less
Township 4 North, Range 68 West, 6th P.M.
Section 18: SW¼SE¼, S½SW¼
Section 19: N½NW¼, NW¼NE¼
Township 4 North, Range 69 West, 6th P.M.
Section 13: S½S½
Section 24: N½N½
WSU No. 8; Enright 16 Well
560 acres, more or less
7. On or about February 8, 2017, and within the 30-day Rule 318A.e.(5)B. comment period, James H. Parsons, Jr. (“Parsons”) filed a written objection to the WSU Nos. 1-8 proposed for the Subject Wells (“Parsons Objection”).
8. On or about February 24, 2017, Staff of the Colorado Oil and Gas Conservation Commission (“COGCC” or “Commission”) informed Extraction and Parsons of its decision to interpret the Parsons Objection as a valid written objection to the notices issued for the Subject Wells.
9. On or about February 17, 2017, and within the 30-day Rule 318A.e.(5)B. comment period, the Commission received a written objection to WSU Nos. 1-3 and 8 proposed for the Enright 2, 4, 6 and 16 Wells (“Larson Objection”) from Ivar W. Larson, personally, and as a member of Larson Front Range Farms (“LFRF”), and Donna M. Larson, personally, and as a member of LFRF. Mr. Larson, Mrs. Larson, and LFRF are collectively referred to herein as “Larson.”
10. On or about February 24, 2017, COGCC staff informed Extraction and Larson of its decision to interpret the Larson Objection as a valid written objection to the notices issued for the WSU Nos. 1-3 and 8.
11. On August 31, 2017, Extraction, by its attorneys, filed a verified application in Docket No. 171000736 (“Application”) requesting a hearing on objections received for the designated horizontal wellbore spacing units proposed for the Enright 2, Enright 4, Enright 6, Enright 8, Enright 10, Enright 12, Enright 14, and Enright 16 Wells, to be drilled in the Application Lands, for horizontal well development of the Niobrara and Codell Formations. The Application requested a hearing be set, and that upon such hearing, the Commission enter an order (1) dismissing the Parsons Objection and the Larson Objection of WSU Nos. 1-8, as applicable, proposed for the Subject Wells; and (2) approving the designated horizontal wellbore spacing units, comprised of the Application Lands, for the Subject Wells, for the production of oil, gas, and associated hydrocarbons from the Codell and Niobrara Formations.
12. On December 13, 2017, Extraction and Larson, by their respective counsel, and Parsons convened for a prehearing conference in Docket No. 171000736.
13. On December 15, 2017, Extraction received a letter from the COGCC requesting documents in connection with Docket No. 171000736. Extraction submitted responses consistent with the requirements in the letter on or before December 22, 2017.
14. On December 18, 2018, Larson filed a Motion for Bifurcation of Issues and Continuance of Commission Hearing (“Motion for Bifurcation”). Thereafter, Extraction filed a responsive brief in opposition.
15. On March 6, 2018, the Hearing Officer entered an order denying Larson’s Motion for Bifurcation and set a Joint Contested Administrative Hearing and Final Prehearing Conference (“Administrative Hearing” for March 9, 2017. The order of the hearing officer, upon further clarification, indicated that the issues for the Administrative Hearing would be as follows: (A) Whether the notice provided by Extraction complied with the informational requirements of Rule 318A.e.(5)A.; (B) Whether Extraction is an owner as required by Rule 318A.e.(5)B. and C.; and (C) Whether approval of Extraction’s wellbore spacing units for the Subject Wells will either create waste or adversely affect Larson’s correlative rights.
16. On March 8, 2018, Extraction and Larson filed a Stipulation for Contested Administrative Hearing and Final Prehearing Conference (“Stipulation”), whereby the parties agreed to stipulate with regard to certain facts and arguments as follows:
a. Larson and Extraction stipulated that Larson is an “Owner,” as defined in the Colorado Oil and Gas Conservation Act (“Act”), of mineral estates through which the wellbore penetrates within the target formation as identified in Extraction’s wellbore spacing unit applications for the Enright 2 and 4 Wells (“Enright WSUs”).
b. Specifically, LFRF owns mineral rights in Section 13, S½NW¼. Mr. Larson and Ms. Larson own mineral rights in Section 13, NE¼SE¼. These mineral rights are located within Extraction’s wellbore spacing applications for the following proposed wells: Enright 2, Enright 4, Enright 6, Enright 8, Enright 10, and Enright 12.
c. Documentary evidence of Larson’s ownership of such mineral rights was previously provided by Larson to the Commission during the course of this proceeding, and such evidence was hereby incorporated by the Stipulation for the purposes of the Administrative Hearing.
d. Larson withdrew its objections to the wellbore spacing unit applications on the following grounds: (a) Whether the notice provided by Extraction complied with the informational requirements of Rule 318A.e.(5)A.; and (b) Whether approval of Extraction’s wellbore spacing unit applications will either create waste or adversely affect Larson’s correlative rights.
e. Larson maintained its objections (“Larson Objections”) to the Enright WSUs on the grounds that Extraction is not an Owner of the mineral estate(s) through which the wellbore penetrates within the target formation as identified in the wellbore spacing unit applications, and specifically with respect to Larson’s mineral rights.
f. Larson and Extraction stipulated that the sole legal issues to be presented at the Administrative Hearing was whether, for the purposes of the Enright WSUs, Extraction is an Owner as defined by the Act and required by Rule 318A.e.(5), and whether the Larson Objection to the Enright WSUs shall stand or shall be dismissed by the Commission.
17. On March 9, 2018, prior to the Administrative Hearing, Parsons withdrew the Parsons Objection.
18. On March 9, 2018, the parties convened for the Administrative Hearing. Presentations were put forth by both Larson and Extraction on the issues pursuant to the Stipulation. During the course of the Administrative Hearing, and consistent with the Stipulation, Larson withdrew its objections against the wellbore spacing unit applications for the Enright 6, Enright 8, Enright 10, Enright 12, and Enright 14 Wells. Thus, the only remaining objections were with regard to the Enright 2 and Enright 4 Wells.
19. On March 13, 2018, the Hearing Officer entered an order for recommendation (“Recommendation”) of dismissal of the Larson Objections on the grounds that Larson had failed to meet its burden under Rule 318A.e.(5)C. to show that Extraction was not an owner, as defined by the Act. Pursuant to the Recommendation, the hearing officer made the following findings of fact:
a. Larson admitted that its objection regarding Extraction’s ownership of the mineral estates through which the wellbore penetrates was only applicable to proposed WSU Nos. 1 and 2 for the Enright 2 and Enright 4 Wells.
b. Larson admitted that it no longer had any objection to the proposed WSU Nos. 3 through 8.
c. Ivar W. Larson and Donna M. Larson own 100% of the mineral interests in the NE¼NE¼SE¼ of Section 13, Township 4 North, Range 69 West, 6th P.M. (“Larsons’ Mineral lnterest”).
d. The proposed wellbores for the Enright 2 and Enright 4 in WSU Nos. 1 and 2 penetrate the Larsons’ Mineral Interest in the target formation identified by Extraction.
e. LFRF owns minerals in S½NW½ of Section 13, Township 4 North, Range 69 West, 6th P.M. (the “LFRF Minerals”).
f. No proposed wellbores penetrate the LFRF Minerals.
g. Extraction has leased minerals, and is thus an owner as defined in the Act, in proposed WSU Nos. 1 and 2.
19. On March 13, 2018, Extraction and Larson each filed a Prehearing Statement with electronic exhibits, proposed exhibits and witnesses in this matter.
20. On March 14, 2018, Extraction filed a Motion in Limine to Exclude Testimony and Exhibits of Larson.
21. On March 15, 2018, Extraction and Larson each filed Responses to Prehearing Statements.
22. On March 15, the Hearing Officer issued a Final Prehearing Order. The Final Prehearing Order set forth stipulated issues, summarized the Recommendation, set forth time and order of case presentation, identified witnesses for the parties, and deemed exhibits submitted by the parties as authentic and admitted before the Commission.
23. The Final Prehearing Order also identified certain exhibits and witness testimony that were subject to Extraction’s Motion in Limine. As the Commission dismissed the Larsons’ and LFRF’s objections, Extraction’s Motion in Limine is moot.
HEARING
1. On March 19, 2018, the Commission conducted an adjudicatory hearing on the issue of whether to adopt the Recommendation.
2. Pursuant to the Final Prehearing Order, Extraction and Larson each presented argument on the Recommendation.
3. Larson argued that the intent of Rule 318A.e.(5) was to eliminate hearings on wellbore spacing units and to allow for negotiation. The Larsons further argued that the “wellbore penetration” language which appears in Subsection B of Rule 318A.e.(5) is carried forward to Subsection C, and therefore, for their objection to stand, Larson need only show that Extraction is not an owner of all minerals through which the proposed wellbores penetrate.
4. Extraction argued that the Recommendation reached the correct conclusion and that the lack of “wellbore penetration” language in Subsection C is a clear indication that the Commission intended to have a different requirement for an objection to stand than for the objection to remove a proposed WSU from the administrative approval process.
5. Jane Stanczyk, Permitting Supervisor for the COGCC, explained COGCC standard practice for reviewing objections under Rule 318A.e.(5)B, upon request by Chairman Benton. Ms. Stanczyk stated that she reviewed objections for compliance with Subsection B, and directed the objector and operator to communicate in an attempt to resolve the issue.
6. The Hearing Officer and COGCC Director provided their own analysis of the language of Subsections B and C. The Hearing Officer stated that she found it persuasive that Subsection C did not include language which referred to minerals penetrated by the proposed wellbore, which was included in Subsection B. The Director stated the purpose of the objection process enumerated in Rule 318A.e.(5) was to provide for an administrative process for approval of WSUs, but which also allowed for a hearing officer to decide whether the objection should move forward if the operator and objector could not reach a resolution. The Director also found the differing language between Subsections B and C to be persuasive.
7. Commissioner Overturf asked Larson what remedy they request. Counsel for Larson responded that they request the WSUs be denied so that Extraction must go through the full adjudicatory process. Should the Commission choose to approve the proposed WSUs, the only condition Larson proposed was that further time be allowed for further lease negotiations.
8. Commission Boigon asked Counsel for Extraction for its interpretation of the language in Subsection B. Extraction’s Counsel responded that the language was the result of competing views of how development in the Denver-Julesburg Basin should proceed over concerns of mineral trespass. The language in Rule 318A.e.(5) reflects a compromise where Subsection B halts the administrative approval process, but Subsection C provides that, in order for the objection to prevent approval of a WSU, the objector must prove the operator does not own any minerals within the proposed WSU.
9. Commissioner Boigon asked Counsel for Extraction if ownership of the minerals through which the wellbore penetrates become irrelevant once the process under Rule 318A.e.(5) moves to the hearing under Subsection C. Counsel for Extraction agreed, except that the objection regarding mineral ownership of the minerals through which the wellbore penetrates remains relevant as it would still have halted the administrative approval process and forced a Commission adjudicatory hearing.
10. Commissioner Boigon asked Counsel for Extraction if the only basis for objection is ownership of minerals through which the wellbore penetrates. Counsel responded that at hearing the objector must bring some substantive basis that would prevent approval of the WSU, such as lack of standing by operator, waste, harm correlative rights, as would be the case for any other proposed spacing unit.
11. The Director commented that the purpose of Subsection C is to allow a hearing officer to serve as a “gate-keeper” to review the merits of objections, but that the objection is still presented to the Commission no matter what decision a hearing officer reaches in a recommendation.
12. Chairman Benton asked Larson if Extraction was an Owner, as defined by the Act, in the proposed WSUs at issue. Counsel for Larson agreed that Extraction was an Owner in the proposed WSUs.
13. Chairman Benton also asked Counsel for Extraction if statutory pooling would still take place. Counsel for Extraction stated that if Extraction and Larson could not come to an agreement on a lease, then Extraction would need to apply to the Commission for statutory pooling of the proposed WSUs.
14. The Commission conducted a brief discussion on the process, and a continuance was discussed. Both Extraction and Larson opposed a continuance.
COMMISSION DELIBERATIONS
15. Commissioner Overturf stated she did not believe that the Larson Objection on ownership grounds necessitates rejection of the proposed WSUs.
16. Commissioner Boigon stated that he was persuaded by Counsel for Extraction’s explanation of the intent of the process in Rule 318A.e.(5), but that it was hard to ignore the purpose of the objection a stated in Subsection B. Commissioner Boigon, stated that, in the end, this process is only the creation of the spacing unit; which is a subsurface, technical determination that is grounded in the normal criteria. The Recommendation made sense in that an objection slows the process, and in that sense the objection achieved its intended purpose. In the final analysis, it ultimately made sense to grant the spacing order.
17. Commission Hawkins stated that before Rule 318A was written, there was no “fast lane” for approval of a WSU, and the intent of the objection process in 318A.e.(5) was to provide circumstances for when the “fast lane” was not appropriate. Commissioner Hawkins believed the objection followed the rules, even though it may not change the ultimate result on approval of the WSU.
18. Commissioner Ager stated that, if Subsection C impliedly contains the “wellbore penetration” language, it is not clear why the approval process for a WSU under Rule 318A.e.(5) is different from approval of any other spacing unit. If the rule is written for administrative efficiencies, then Commissioner Ager does not see a reason to make it different than other approvals of spacing units.
19. Commissioner Wolk stated that he listens for fairness and leverage in all Commission hearings and the Commission should not be put into a position where it gives leverage to one party. A finding in favor of Larson would provide them with leverage over Extraction. Commissioner Wolk also considered fairness in this case and as he saw that both parties will continue to negotiate and did not see a fairness issue here, he supported the Recommendation.
20. Commissioner Jolley stated he saw that the language in Subsection C is different from that of Subsection B and so supported the Recommendation.
21. Chairman Benton stated he agreed with the Recommendation and concluded Extraction has the right to drill the well based on the definition of an Owner in the Act.
22. The Commission approved a motion to adopt the Recommendation by a vote of 5-2. The Commission then closed the record.
COMMISSION CONCLUSIONS
23. The Commission concluded that the purpose of the objection process in Rule 318A.e.(5) is to:
a. Ensure that a WSU proposed under Rule 318A.e.(5) meets the requirements of Commission Rules and the Act that the operator proposing the WSU is an owner as defined in the Act, that the proposed WSU does not cause waste, that the proposed WSU avoids the drilling of unnecessary wells, and that the proposed WSU protects correlative rights;
b. Halt the administrative approval process when a valid objection is submitted so that the Commission may review the objection; and
c. Halt the administrative approval process when a valid objection is submitted so that the operator proposing the WSU, and the objector, may negotiate a mutually satisfactory resolution.
24. The Larsons’ objection in this matter achieved the intended purpose in that it halted the administrative approval process so that the parties could negotiate a resolution, and so that the Commission could review the objection.
25. The Larsons’ objection did not show that the proposed WSUs failed to meet any of the requirements of Commission Rules or the Act for spacing units. The Larsons’ objection was based only on ownership of minerals through which the proposed wellbores penetrate; it did not show that the proposed WSUs would cause waste, that correlative rights were not protected, or that the wells to be drilled were unnecessary. Further, the Larsons did not dispute that Extraction was an owner within the proposed WSUs.
ORDER
IT IS HEREBY ORDERED:
1. The Hearing Officer’s Recommendation is hereby ADOPTED.
2. Larsons’ and LFRF’s objections are hereby DISMISSED.
3. Extraction’s applications for WSU Nos. 1 and 2 for the Enright 2 and Enright 4 Wells may be evaluated for approval by Commission Staff pursuant to Rule 318A.e.(5)E.
IT IS FURTHER ORDERED:
1. The provisions contained in the above order shall become effective immediately.
2. The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.
3. Under the State Administrative Procedure Act the Commission considers this Order to be final agency action for purposes of judicial review within 35 days after the date this Order is mailed by the Commission.
4. 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, 2018, as of March 20, 2018.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By____________________________________
Julie Spence Prine, Secretary