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.   112-172

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on May 24, 2004 at 1:00 p.m. in the Community Room at City Hall, 1000 10^th Street, Greeley, Colorado for an order to pool all interests in a 320-acre drilling and spacing unit for the development and operation of the Fruitland coal seams.

FINDINGS

            The Commission finds as follows:

1.   Maralex Resources, Inc. (“Maralex”), 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 the production of gas and associated hydrocarbons from the Fruitland coal seams underlying certain lands, including Section 11, Township 33 North, Range 7 West, N.M.P.M.

            5.  On April 5, 2004, Maralex filed with the Commission a verified application for an order to pool all interests in the 320-acre drilling and spacing unit consisting of the W½ of Section 11, Township 33 North, Range 7 West, N.M.P.M. for the development and operation of the Fruitland coal seams.  The Applicant proposes to drill the Keegan Patrick 33-7-11 #1 Well on the above-described lands.  Maralex requested, pursuant to C.R.S. §34-60-116(7)(a) and (b), that it be able to recover from the non-consenting owner’s share of production the penalty costs as provided in the statute.

            6.  Testimony and exhibits presented at the administrative hearing showed a protest to the application was filed on May 10, 2004 by Sierra Foundation Management, LLC protesting the penalty proposed in the joint operating agreement.  Additional testimony indicated that Mr. Simmons, Manager at Sierra Foundation appeared to be confused about the penalty, in that the penalty under involuntary pooling is based on §34-60-116, C.R.S. rather than the penalty defined in the joint operating agreement.  Hearing Officer Beaver indicated that she had tried to contact Mr. Simmons using a telephone number found through an Internet search, as there was no telephone number on the letterhead on which the protest was submitted.  She was able to leave a voice message at a telephone number attributed to Larry Simmons in Pagosa Springs, Colorado, but no one returned the call.  The Hearing Officers agreed to conduct the administrative hearing and continue to try to contact Mr. Simmons, and if unsuccessful, and Mr. Simmons appears at the hearing, the matter could be discussed then, in an effort to correct Mr. Simmons’ misconception regarding the penalty.

            7.  Testimony and exhibits presented at the administrative hearing showed that there are twenty (20) leased mineral owners and five (5) unleased mineral owners.  Additional testimony indicated that Maralex sent copies of its application via certified mail to all owners in the application lands and received delivery receipts on all but three (3) owners who are leased.

            8.  Testimony and exhibits presented at the administrative hearing showed that BP America Production Company (“BP”) executed an AFE and agreed to participate in the proposed well on April 8, 2004.  Additional testimony indicated that BP has leased one of the mineral owners and that there are now four (4) unleased mineral interest owners remaining, whose ownership is as follows:  Julie A. Eisenmann (.3968%), David Thomson (.9835%), Timothy and Cindy Hayes (1.5%) and Sierra Foundation Management, LLC (6.25%). 

            9.  Testimony and exhibits presented at the administrative hearing showed that offers to lease were hand-delivered to Ms. Eisenmann on March 27, 2004, to Mr. Thomson on April 1, 2004, and to Mr. and Mrs. Hayes on March 31, 2004.  Additional testimony indicated that an offer to lease was mailed to Sierra Foundation Management, LLC on March 29, 2004 and received on April 1, 2004.  Further testimony indicated that the terms of the leases were better than other leases in the unit, with a 3/16 royalty and one (1) year lease.

10.  Testimony and exhibits presented at the administrative hearing indicated that AFEs were sent to Ms. Eisenmann on April 5, 2004, to Mr. Thomson on April 1, 2004, to Mr. and Mrs. Hayes on April 1, 2004 and to Sierra Foundation Management, LLC on March 29, 2004.  Additional testimony indicated that all of the requirements of Rule 530. and §34-60-116 for involuntary pooling have been met by Maralex.

            11.  Subsequent to the administrative hearing, Ms. Eisenmann executed the joint operating agreement and Mr. and Mrs. Hayes executed an oil and gas lease.  There are now two (2) unleased mineral interest owners to be pooled;  David Thomson and Sierra Foundation Management, LLC.

12.  Maralex Resources, Inc. agreed to be bound by oral order of the Commission.

            13.  Sierra Foundation Management, LLC neither returned Commission staff’s telephone call nor appeared at the hearing.

            14.  Based on the facts stated in the verified application, having received one protest that was factually insufficient and having been heard by the Hearing Officer who recommended approval, the Commission should enter an order pooling all interests in the 320-acre drilling and spacing unit consisting of the W½ of Section 11, Township 33 North, Range 7 West, N.M.P.M. for the development and operation of the Fruitland coal seams.

ORDER

            NOW, THEREFORE IT IS 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 320-acre drilling and spacing unit consisting of the W½ of Section 11, Township 33 North, Range 7 West, 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.  Maralex Resources, Inc. shall be designated as the operator for the 320-acre drilling and spacing unit consisting of the W½ of Section 11, Township 33 North, Range 7 West, 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 June, as of May 24, 2004.

                                                    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

June 9, 2004