142-3

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 CANAL FIELD, MORGAN COUNTY, COLORADO

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CAUSE NO. 142

ORDER NO. 142-3 (Amended)

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 8:30 a.m. on October 16, 1996 in Suite 801, 1120 Lincoln Street, Denver, Colorado on the verified application of Deer Creek Exploration, Inc., for an order to vacate the spacing for the undrilled drilling and spacing unit identified as Unit No. 2 of the Canal Field. Concurrently, the Applicant filed an [sic] verified application for an order to establish a 160-acre exploratory drilling and spacing unit for production from the Dakota "D" and Dakota "J" Sand Formations for the NE¼ of Section 33, Township 4 North, Range 59 West, 6th P.M. In addition, the Applicant seeks an order pooling all interests in the proposed exploratory drilling and spacing unit, for the development and operation of the Dakota "D" and Dakota "J" Sand Formations.

FINDINGS

The Commission finds as follows:

1. Deer Creek Exploration, Inc., 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 March 4, 1960, the Commission issued Order No. 142-1, which established two 600-acre drilling and spacing units for the production of gas from the Dakota "D" Sand Formation for certain lands in Sections 3 and 4, Township 3 North, Range 59 West, 6th P.M., and in Sections 33 and 34, Township 4 North, Range 59 West, 6th P.M.

5. Unit 2 consists of the NE¼, E½NW¼, N½SE¼, and the NE¼SW¼ of Section 33 and the NW¼ and the N½SW¼ of Section 34, both in Township 4 North, Range 59 West, 6th P.M., and no well has been drilled on this 600 acre drilling and spacing unit.

6. Testimony presented at the administrative hearing indicated that the D Sand Formation, the J₁ Sand, and the J₂ Sand underlying Unit 2 and surrounding lands in Townships 3 and 4 North, Range 59 West, 6th P.M., are likely to be productive in the NE¼ of said Section 33.

7. Additional testimony indicated that the 600-acre drilling and spacing unit has prohibited the drilling of a well since in the past 36 years no wells have been applied for in the Unit.

8. The establishment of a 160-acre exploratory unit would permit the drilling of a well in the NE¼ of Section 33, and is not likely to be smaller than the area in which one well will efficiently and economically drain the unit.

9. Additional testimony presented at the administrative hearing indicated that 64.1% of the unit has been leased and that approximately 25% of the unit was owned by two mineral owners who have indicated they will not lease or participate in a well. The remaining interest owners have been contacted and have indicated they will not lease for the amount offered.

10. Offers to lease were sent to and received by unleased mineral owners and that the terms offered were consistent with those prevailing in the area.

11. Based on the facts stated in the verified application, having received no protests to the Application and having been heard by the Hearing Officer who recommends approval, the Commission should enter an order vacating the spacing for the undrilled drilling and spacing unit identified as Unit No. 2 of the Canal Field and establish a 160-acre exploratory drilling and spacing unit for production from the Dakota "D" and Dakota "J" Sand Formations for the NE¼ of Section 33, Township 4 North, Range 59 West, 6th P.M. Further, an order should be entered pooling all interests in the proposed exploratory drilling and spacing unit, for the development and operation of the Dakota "D" and Dakota "J" Sand Formations.

ORDER

NOW, THEREFORE, IT IS ORDERED, that the below-listed lands known as Unit No. 2 are hereby vacated from the provisions of Order No. 142-1 of the Canal Field:

Township 4 North, Range 59 West, 6th P.M.

Section 33: NE¼, E½NW¼, N½SE¼, NE¼SW¼

Section 34: NW¼, N½SW¼

IT IS FURTHER ORDERED, that the below-listed lands known as Unit No. 1 shall remain subject to the provisions of Order No. 142-1 of the Canal Field:

Township 3 North, Range 59 West, 6th P.M.

Section 3: NW¼

Section 4: NE¼, E½NW¼

Township 4 North, Range 59 West, 6th P.M.

Section 33: SE¼, E½W½

Section 34: SW¼

IT IS FURTHER ORDERED, that a 160-acre exploratory drilling and spacing unit is hereby established for production from the Dakota "D" and Dakota "J" Sand Formations for the below-described lands:

Township 4 North, Range 59 West, 6th P.M.

Section 33: NE

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 interests in the drilling and spacing unit consisting of the NE¼ of Section 33, Township 4 North, Range 59 West, 6th P.M., are hereby pooled for the development and operation of the Dakota "D" and Dakota "J" Sand Formations.

2. The production obtained from said 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 said drilling unit; each owner of an interest in said drilling unit shall be entitled to receive his share of the production of the well located on said drilling unit applicable to his interest in said drilling unit.

3. The owner of the unleased tract should be afforded the opportunity to elect whether to participate in the drilling and operation of said well, and pay a proportionate share of the actual costs thereof, which proportionate share shall be determined by dividing the number of acres in each unleased tract to the total number of acres within said drilling unit.

4. Within thirty (30) days from the date of receipt of said A.F.E. by the owner of said tract, such owner shall indicate whether he consents to the cost of the drilling of the well and agrees to participate in such costs. Such election shall be made in writing either by executing the AFE [sic] or similar document. In the event a written election to participate is not made by said owner within such time period, said owner shall be deemed to have elected not to participate and shall therefore be deemed to be non-consenting as to the well and be subject to the penalties as provided for by 34-60-116 (7).

5. Any non-consenting 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 or 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 C.R.S. 34-60-116 (7)(b), as amended. After recovery of such costs, the non-consenting mineral owner shall then own his proportionate 8/8ths share of the well, surface facilities and production, and then be liable for his proportionate share of further costs incurred in connection with the well as if he had originally agreed to the drilling.

6. 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.

7. Deer Creek Exploration, Inc. is hereby designated the operator of a well to be located in the NE¼ of Section 33, Township 4 North, Range 59 West, 6th P.M.

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.

ENTERED the 5th day of November, 1996, as of October 16, 1996.

AMENDED this 19th day of December, 1996, as of October 16, 1996.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

Patricia C. Beaver, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

December 19, 1996