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

REPORT OF COMMISSION

This cause was heard by the Commission on November 29, 2010, in Suite 801, at The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order amending Order No. 112-210 to combine two established drilling and spacing units into a 719.02-acre drilling and spacing unit for certain lands located in Sections 21 through 23, Township 32 North, Range 4 West, N.M.P.M., and to approve two horizontal wells for the proposed drilling and spacing unit, for the production of gas and associated hydrocarbons from the Fruitland coal seams.

FINDINGS

The Commission finds as follows:

1.    Red Willow Production Company (“Red Willow” or “Applicant”) 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 the notice and the parties interested therein, and has jurisdiction to promulgate this order.

4.    On December 17, 1990, the Commission issued Order No. 112-85, which among other things, established 320-acre drilling and spacing units for certain lands, including Sections 21, 22, and 23 of Township 32 North, Range 4 West, N.M.P.M., for the production of gas from the Fruitland coal seams.

5.    On May 8, 2008, the Commission issued Order No. 112-210, which among other things, vacated the 320-acre drilling and spacing units previously established under Order No. 112-85, and established drilling and spacing units for the below-listed lands, for the production of gas and associated hydrocarbons from the Fruitland coal seams, and approved one horizontal well for the drilling and spacing unit, with the permitted well to be located no closer than 660 from the unit boundaries:

Spacing Unit #1

Township 32 North, Range 4 West, N.M.P.M.

Archuleta County, Colorado, containing 359.02 acres, more or less.

Spacing Unit #2

Township 32 North, Range 4 West, N.M.P.M.

Archuleta County, Colorado, containing 360.00 acres, more or less.

6.    On October 8, 2010, Red Willow, by its attorneys, filed with the Commission a verified application (“Application”) for an order to amend Order No. 112-210 to combine two established drilling and spacing units set out in Order No. 112-210 into a 719.02-acre drilling and spacing unit for the below-listed lands (“Application Lands”), and approve two horizontal wells for the newly established drilling and spacing unit, for the production of gas and associated hydrocarbons from the Fruitland coal seams, with the initial formation penetration, lateral leg, and terminus (bottomhole location) of the permitted wells to be not closer than 660 feet from the boundaries of the unit:

Township 32 North, Range 4 West, N.M.P.M.

Archuleta County, Colorado

Red Willow’s Application further requests that a common pad be used to drill the two horizontal wells.

7.    Certain surface tracts and mineral interests under the Application Lands are owned in trust by the United States of America for the benefit of the Southern Ute Indian Tribe (“SUIT”, “Trust Lands”).  The minerals under those Trust Lands have been leased by the SUIT to Red Willow under a mineral development agreement approved by the United States Department of the Interior, Bureau of Indian Affairs (“BIA”).

8.    Insofar as the Application Lands are subject to the jurisdiction of the SUIT, this Application is submitted to this Commission in accordance with the terms of the Memorandum of Understanding (“MOU”) dated August 22, 1991 between the Bureau of Land Management (BLM) and this Commission and separate MOU dated August 22, 1991 between the BIA, the BLM, and the SUIT.

9.    On November 16, 2010, Red Willow, by its attorneys, filed with the Commission a written request to approve the Application based on the merits of the verified Application and the supporting exhibits. Sworn written testimony and exhibits were submitted in support of the Application.

10.  Testimony and exhibits submitted in support of the Application by John L. Harrington, Landman for Red Willow, showed that Red Willow holds a majority leasehold interest in the Application Lands.

11.  Testimony and exhibits submitted in support of the Application by Andrew Benson, Lead Geologist for Red Willow, showed that the net coal thickness of the Fruitland coal seams in the general vicinity of the Application Lands range from about 25 to 35 feet and the net coal interval thickens toward the northwest and thins toward the southeast.  Additional testimony indicated that the majority of the net coal interval in the Application Lands is present as a thick continuous seam, and that the Application Lands are situated within a synclinal trough with steeply dipping contours to the northeast of the application area, indicating structural updipping toward the basin margin.  Further testimony showed that approving the Application will promote economical and efficient drainage, protect correlative rights, will avoid waste, and will effectively recover gas and associated hydrocarbons from the Fruitland coal seams of the Application Lands.

12.  Testimony and exhibits in support of the Application by Bryan Ward, Reservoir Engineer for Red Willow, showed that Original Gas-in-Place and the estimated ultimate recoveries (“EUR”) calculations for one horizontal well in the 360-acre drilling and spacing unit and the one horizontal well in the 359.02-acre drilling and spacing unit would not efficiently recover the gas in the Fruitland coal seams.  Additional testimony showed that combining the two drilling and spacing units into one 719.02-acre drilling and spacing unit with two horizontal wells will result in recovery factors of between 32% to 55% and EUR from  7.3 BCF to 8.8 BCF gas, an incremental increase of 800 MMCF gas and EUR of 5%.  Further testimony indicated that the development of the Fruitland coal seams in the Application Lands will be economic and not adversely affect correlative rights in the area, while minimizing the surface disturbance with the two horizontal wells being drilled from a common pad.

13.  On December 1, 2010, the SUIT, by its representative, filed a written letter with the Commission in support of the Application.  Further, on December 1, 2010, the BLM, by its representative, filed a written letter with the Commission in support of the Application.

14.  The above-referenced testimony and exhibits show that granting the Application will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of gas, and will not violate correlative rights.

15.  Red Willow agreed to be bound by oral order of the Commission.

16.  Based on the facts stated in the verified Application, having received no protests, and based on the hearing officer review of the Application under Rule 511., the Commission should enter an order amending Order No. 112-210 to combine two established drilling and spacing units into a 719.02-acre drilling and spacing unit for certain lands located in Sections 21 through 23, Township 32 North, Range 4 West, N.M.P.M., and to approve two horizontal wells for the proposed drilling and spacing unit, for the production of gas and associated hydrocarbons from the Fruitland coal seams.

ORDER

NOW, THEREFORE IT IS ORDERED, that Order No. 112-210 is hereby amended by combining those lands described below into an approximate 719.02-acre drilling and spacing unit, and authorizing up to two horizontal wells for said unit, for the production of gas and associated hydrocarbons from the Fruitland coal seams, with the initial formation penetration, lateral leg, and terminus (bottomhole location) of the permitted wells located no closer than 660 feet from the boundaries of said unit:

Township 32 North, Range 4 West, N.M.P.M.

Archuleta County, Colorado

IT IS FURTHER ORDERED, that a common pad shall be used to drill the two horizontal wells under this Order.

IT IS FURTHER ORDERED, that the provisions contained in the above Order, shall become effective immediately.

                        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 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 December  2010, as of November 29, 2010.

                                                            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

December 21, 2010