112-171

BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF THE PROMULGATION AND

ESTABLISHMENT OF FIELD RULES TO GOVERN

OPERATIONS IN THE IGNACIO-BLANCO FIELD,

LA PLATA COUNTY, COLORADO

)

CAUSE NO. 112

ORDER NO. 112-171

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on April 19, 2004 at 9:00 a.m. in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado for an order to vacate existing 320-acre drilling and spacing orders in Sections 11 and 14, Township 34 North, Range 6 West, (N.U.L.), N.M.P.M. and establish an approximately 939-acre drilling and spacing unit, allowing a horizontal production well system and service well to be produced on the 939-acre unit with the horizontal production legs located no closer than 660 feet from the outer section lines, and pooling all non-consenting owners for the development and operation of the Fruitland coal seams.

FINDINGS

The Commission finds as follows:

1. CDX Gas, LLC (“CDX”), 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.

4. On July 11, 1988, the Commission issued Order No. 112-60, which established 320-acre drilling and spacing units for production of gas from the Fruitland coal seams for certain lands, including Sections 11 and 14, Township 34 North, Range 6 West, N.U.L., N.M.P.M., in the Ignacio Blanco Field, with the permitted well to be located, when north of the north line of Township 32 North, in the NW¼ and SE¼ of the section, and when south of the north line of Township 32 North, in the NE¼ and the SW¼ of the section, and no closer than 990 feet from the unit boundaries, nor closer than 130 feet to any interior quarter section line.

5. On March 1, 2004, CDX, by its attorney, filed with the Commission a verified application for an order to vacate the 320-acre drilling and spacing units and the 990 foot setbacks in Sections 11 and 14, Township 34 North, Range 6 West, N.U.L., N.M.P.M. and to establish Sections 11 and 14 as one approximately 939-acre drilling and spacing unit for production from the Fruitland coal seams, with the permitted well to be located no closer than 660 feet from the outer boundary of the sections and without regard to quarter section lines within Sections 11 and 14, and without regard to the shared section line between Sections 11 and 14. CDX requested the right to drill a one location horizontal production well system (the Frahm 34-6-11 #1 and #2 Wells) and one service well (the Frahm 34-6-11-#1X Well). The surface location for the proposed horizontal production well system will be located in the NW¼ SW¼ of Section 11 and will include multiple horizontal production legs that extend no closer than 660 feet from the exterior boundaries of Sections 11 and 14 (except for the shared section line between Section 11 and Section 14). The service well which will not produce hydrocarbons will also be located in the NW¼ SW¼ of Section 11. CDX also requested an order to pool all non-consenting owners in the proposed 939-acre drilling and spacing unit for the development and operation of the Fruitland coal seams.

6. Testimony and exhibits presented at the administrative hearing showed the mineral ownership in and around Sections 11 and 14, the 660 foot boundary from the outer section boundaries, and the current laydown drilling windows. Additional testimony indicated that CDX has 100% of the leasehold in Sections 11 and 14 except for an unleased 1/8 of the S½ SW¼ of Section 11 and the W½ NW¼ of Section 14.

7. Testimony and exhibits presented at the administrative hearing showed the surface location in Section 11 proposed for both the service well and the production wells and the topography in Sections 11 and 14. Additional testimony indicated that the terrain is rough, with several small canyons, and that having one surface location will eliminate the need for approximately 85% of roads and pipelines.

8. Testimony and exhibits presented at the administrative hearing showed the proposed well pad layout with the access road. Additional testimony indicated that offers to lease and to participate were received by the Fitzgeralds on March 16, 2004 and that the terms of both offers were reasonable and in accordance with Commission Rule 530.

9. Testimony and exhibits presented at the administrative hearing showed the stratigraphic section of the Upper Cretaceous Fruitland Formation and the episodic pulses where coal platforms were formed. Additional testimony indicated that the coal seams expected to be encountered by the proposed production well system range from 18 feet to 24 feet thick.

10. Testimony and exhibits presented at the administrative hearing indicated that, based on data from other horizontal well systems, the proposed horizontal well system located no closer than 600 feet from the boundaries of the 939-acre drilling and spacing unit will efficiently drain the Fruitland coal seams, prevent waste and increase gas recovery, while reducing surface impacts and protecting public health, safety, welfare and the environment.

11. That CDX reserved the right to come back to the Commission for an order to drill vertical wells if the proposed horizontal well system is not successful.

12. CDX Gas, LLC agreed to be bound by oral order of the Commission.

13. Based on the facts stated in the verified application, having received no protests and having been heard by the Hearing Officer who recommended approval, the Commission should enter an order vacating existing 320-acre drilling and spacing orders in Sections 11 and 14, Township 34 North, Range 6 West, (N.U.L.), N.M.P.M. and establishing an approximately 939-acre drilling and spacing unit, allowing a horizontal production well system and service well to be produced on the 939-acre unit with the horizontal production legs located no closer than 660 feet from the outer section lines, and pooling all non-consenting owners for the development and operation of the Fruitland coal seams.

ORDER

NOW, THEREFORE IT IS ORDERED, that the 320-acre drilling and spacing units in Sections 11 and 14, Township 34 North, Range 6 West, (N.U.L.), N.M.P.M. are hereby vacated and that an approximately 939-acre drilling and spacing unit is hereby established.

IT IS FURTHER ORDERED, that a horizontal production well system and service well shall be allowed to be produced on the 939-acre unit with the horizontal production legs located no closer than 660 feet from the outer section lines.

IT IS FURTHER ORDERED, that 1. Pursuant to the provisions of §34-60-116 C.R.S. as amended, of the Oil and Gas Conservation Act of the State of Colorado, all non-consenting interests in the 939-acre drilling and spacing unit consisting of Sections 11 and 14, Township 34 North, Range 6 West, (N.U.L.) N.M.P.M. are hereby pooled for the development and operation of the Fruitland coal seams.

2. The production obtained from each drilling unit shall be allocated to each owner in the unit on the basis of the proportion that the number of acres in such tract bears to the total number of mineral acres within each drilling unit; each owner of an interest in each drilling unit shall be entitled to receive his/her share of the production of the well located on each drilling unit applicable to his interest in each drilling unit.

3. Said owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the well(s) and be subject to the penalties as provided for by §34‑60‑116 (7).

4. Any nonconsenting unleased mineral owner within the spacing unit shall be treated as the owner of the landowner's royalty to the extent of 12.5% of his/her record title interest, whatever that interest may be, until such time as the consenting owner recovers, only out of the non-consenting owner's proportionate 87.5% share of production, the costs specified in §34‑60‑116 (7)(b), C.R.S. as amended. After recovery of such costs, the non-consenting mineral owner shall then own his/her proportionate 8/8ths share of the well, surface facilities and production, and then be liable for his/her proportionate share of further costs incurred in connection with the well as if he/she had originally agreed to the drilling.

5. The operator of any well drilled on the above-described unit shall furnish all non-consenting owners with a monthly statement of all costs incurred, together with the quantity of oil and gas produced, and the amount of proceeds realized from the sale of production during the preceding month.

6. CDX Gas LLC shall be designated as the operator for the 939-acre drilling and spacing unit consisting of Sections 11 and 14, Township 34 North, Range 6 West, (N.U.L.) N.M.P.M. for the production of gas and associated hydrocarbons from the Fruitland coal seams.

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, as of April 19, 2004.

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

Patricia C. Beaver, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

April 29, 2004