112-263

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 FRUITLAND COAL FORMATION, IGNACIO-BLANCO FIELD, LA PLATA COUNTY, COLORADO

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CAUSE NO. 112

DOCKET NO. 170100081

TYPE: POOLING

ORDER NO. 112-263

REPORT OF THE COMMISSION

The Commission heard this matter on January 30, 2017, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for an order to establish an approximate 480-acre drilling and spacing unit that overlays existing 320-acre drilling and spacing units, limited to and for the sole purpose of drilling the East Sauls Creek 26 2-1 Well and East Sauls Creek 26 2-2 Well, comprised of the S½ of Section 26 and the SE¼ of Section 27, Township 35 North, Range 6 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland Coal Formation, and to pool all interests in the proposed approximate 480-acre drilling and spacing unit comprised of S½ of Section 26 and the SE¼ of Section 27, Township 35 North, Range 6 West, N.M.P.M., for the development and operation of the Fruitland Coal Formation.

FINDINGS

The Commission finds as follows:

1. BP America Production Company (“BP” 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 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. On June 17, 1988, the Commission entered Order No. 112-60 which established 320-acre drilling and spacing units for certain lands including the Application Lands, for the production of gas from the Fruitland coal seams, with the permitted well to be located no closer than 990 feet to any outer boundary of the unit, nor closer than 130 feet to any interior quarter section line, for the production of methane gas from the Fruitland coal seams.

5. On August 15, 1988, the Commission entered Order No. 112-61 which amended parts of Order No. 112-60 and established rules, for the production of coalbed methane in the Fruitland coal seams for certain lands including the Application Lands, with the productive interval of the wellbore to be no closer than 990 feet to any outer boundary of the unit, and no closer than 130 feet to any interior quarter section line, without exception granted by the Director.

6. On December 17, 1990 (Corrected November 7, 1999), the Commission entered Order No. 112-85 which established additional field rules for certain lands including the Application Lands for the development and operation of the Fruitland coal seams.

7. On April 25, 2000, the Commission entered Order No. 112-156 which allowed an optional additional well to be drilled in certain lands including a portion of the Application Lands, with the permitted well to be located in any undrilled quarter section no closer than 990 feet to any outer boundary of the unit nor closer than 130 feet to any interior quarter section line, for the development and operation of the Fruitland coal seams.

8. On December 1, 2016, BP, by its attorneys, filed a verified application pursuant to §34-60-116, C.R.S., for an order to establish an approximate 480-acre drilling and spacing unit for the below-described lands (“Application Lands”), limited to and for the sole purpose of drilling the East Sauls Creek 26 2-1 Well, (No API No.), and East Sauls Creek 26 2-2 Well, (No API No.), for the production of gas and associated hydrocarbons from the Fruitland Coal Formation that overlays existing 320-acre drilling and spacing units with the productive interval of the wellbores be located no closer than 660 feet from the boundaries of the proposed unit, and no closer than 150 feet from any other producing well in the Fruitland Coal Formation, except that there shall be no setback between the proposed Wells, with no internal section line setbacks, unless an exception is granted by the Director:

Township 35 North, Range 6 West, N.M.P.M.

Section 26: S½

Section 27: SE¼

9. The Application included a request to exclude any existing or future wells producing from the Fruitland Coal Formation from the approximate 480-acre drilling and spacing unit and allocate production in existing or future wells according to the drilling and spacing unit in which the existing or future well is drilled.

10. The Application also requested an order to pool all interests in the approximate 480-acre drilling and spacing unit and subject any non-consenting interests to the cost recovery provisions of §34-60-116(7), C.R.S., effective as of the earlier of the date of the Application, or the date that any of the costs specified in §34-60-116(7)(b), C.R.S., are first incurred for the drilling of the East Sauls Creek 26 2-1 Well, (No API No.), and East Sauls Creek 26 2-2 Well, (No API No.) (“Wells”).

11. On January 9, 2016, Applicant submitted 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.

12. Land testimony and exhibits submitted in support of the Application by Scott Hammond, Senior Landman, San Juan North for BP, showed that the BP holds a partial undivided 91.67% leasehold interest in the Application Lands. Mr. Hammond’s testimony and exhibits showed that all nonconsenting interest owners were notified of the Application and received an Authority for Expenditure ("AFE") and offer to participate in the Wells. Further testimony concluded that the AFE sent by the Applicant to the interest owners was a fair and reasonable estimate of the costs of the proposed drilling operation and was received at least 35 days prior to the January 30, 2017 hearing date.

13. Mr. Hammond’s land testimony also showed the Applicant complied with the requirements of Rule 530., and is entitled to the cost recovery provisions pursuant to §34-60-116(7), C.R.S., for the East Sauls Creek 26 2-1 Well and East Sauls Creek 26 2-2 Well, but did not provide testimony for any subsequent Wells.

14. Geologic testimony and exhibits submitted in support of the Application by David Schoderbek, Geoscientist for BP, showed that the Fruitland Coal Formation underlies the Application Lands. Mr. Schoderbek submitted Fruitland Coal thickness maps predicting that coal thickness in the area of drilling is 53 feet net for the sum of all the coal seams, as well as type logs located in or around the Application Lands showing that the Fruitland Coal Formation exists under all the Application Lands.

15. Engineering testimony and exhibits submitted in support of the Application by Robert L. Moore, Reservoir Engineer for BP, showed that the requested relief will optimize resource development potential in the Application Lands, is reasonably necessary to increase the ultimate recovery of hydrocarbons in the Application Lands, and that the value of the estimated additional recovery of hydrocarbons exceeds the estimated cost incident to conducting such operations.

16. On January 20, 2017, BP and the Bureau of Land Management (“BLM”) agreed that the drilling and spacing unit contains federal minerals. As such, BP agrees to submit a Communitization Agreement (“CA”) to the BLM at least 90 days before the anticipated date of first production (as defined in the COGCC Rules) from the initial well drilled within the drilling and spacing unit

17. Applicant agreed to be bound by oral order of the Commission.

18. 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 to establish an approximate 480-acre drilling and spacing unit that overlays existing 320-acre drilling and spacing units, limited to and for the sole purpose of drilling the East Sauls Creek 26 2-1 Well and East Sauls Creek 26 2-2 Well, comprised of the S½ of Section 26 and the SE¼ of Section 27, Township 35 North, Range 6 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland Coal Formation, and to pool all interests in the proposed approximate 480-acre drilling and spacing unit comprised of S½ of Section 26 and the SE¼ of Section 27, Township 35 North, Range 6 West, N.M.P.M., for the development and operation of the Fruitland Coal Formation.

ORDER

IT IS HEREBY ORDERED:

1. An approximate 480-acre drilling and spacing unit that overlays existing 320-acre drilling and spacing units, limited to and for the sole purpose of drilling the East Sauls Creek 26 2-1 Well and East Sauls Creek 26 2-2 Well (“Wells”) is hereby established for the below-described lands, for the production of gas and associated hydrocarbons from the Fruitland Coal Formation:

Township 35 North, Range 6 West, N.M.P.M.

Section 26: S½

Section 27: SE¼

2. The productive interval of the wellbores shall be located no closer than 660 feet from the boundaries of the proposed unit and no closer than 150 feet from any other producing well in the Fruitland Coal Formation, except that there shall be no setback between the proposed Wells and there shall be no internal section line setbacks.

3. Existing or future wells producing from the Fruitland Coal Formation shall be excluded from the approximate 480-acre drilling and spacing unit; production in existing or future wells shall be allocated according to the drilling and spacing unit in which the existing or future well is drilled.

4. The drilling and spacing unit contains federal minerals. As such, BP agrees to submit a Communitization Agreement (“CA”) to the BLM at least 90 days before the anticipated date of first production (as defined in the COGCC Rules) from the initial well drilled within the drilling and spacing unit.

5. Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in the approximate 480-acre drilling and spacing unit established for the below-described lands are hereby pooled, for the development and operation of the Fruitland Coal Formation, effective as of the date of the Application, or the date that any of the costs specified in §34-60-116(7)(b)(II), C.R.S., are first incurred for the drilling of the East Sauls Creek 26 2-1 Well (No API No.) and East Sauls Creek 26 2-2 Well (No API No.):

Township 35 North, Range 6 West, N.M.P.M.

Section 26: S½

Section 27: SE¼

6. The production obtained from the drilling and spacing unit shall be allocated to each owner in the drilling and spacing unit on the basis of the proportion that the number of acres in such tract bears to the total number of mineral acres within the drilling and spacing unit; each owner of an interest in the drilling and spacing unit shall be entitled to receive its share of the production of the Wells located on the drilling and spacing unit applicable to its interest in the drilling and spacing unit.

7. The nonconsenting working interest owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating the Wells (including penalties as provided by §34-60-116(7)(b), C.R.S.) out of production from the 480-acre drilling and spacing unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.

8. Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the Wells and be subject to the penalties as provided for by §34-60-116(7), C.R.S. Any party seeking the cost recovery provisions of §34-60-116(7), C.R.S., shall first comply with subsection (d) for any subsequent well(s).

9. Each nonconsenting unleased owner within the drilling and spacing unit shall be treated as the owner of the landowner's royalty to the extent of 12.5% of its record title interest, whatever that interest may be, until such time as the consenting owners recover, only out of each nonconsenting 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, each unleased nonconsenting mineral owner shall then own its proportionate 8/8ths share of the Wells, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with the Wells as if it had originally agreed to the drilling.

10. The operator of the Wells drilled on the above-described drilling and spacing unit shall furnish the nonconsenting 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.

11. Nothing in this order is intended to conflict with §34-60-116, C.R.S., as amended. Any conflict that may arise shall be resolved in favor of the statute.

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 14^th day of February, 2017, as of January 30, 2017.

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

Julie Murphy, Secretary