IN THE MATTER OF ALLEGED VIOLATIONS OF THE          CAUSE NO. 1
RULES AND REGULATIONS OF THE
COLORADO OIL AND GAS CONSERVATION                       ORDER NO. 1V-157
COMMISSION BY DJ PRODUCTION SERVICES, INC.,
WELD COUNTY, COLORADO

REPORT OF THE COMMISSION

This cause came on for hearing before the Colorado Oil and Gas Conservation Commission (the “Commission”), at 8:30 a.m., on August 17, 1998, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, after giving Notice of Hearing as required by law, on why DJ Production Services, Inc. (“DJ”) should be found in violation of certain Commission rules and regulations, and why the Commission should invoke the provisions of §34-60-121 C.R.S., as amended, to assess penalties for violations of the Rules and Regulations of the Commission.

FINDINGS

The Commission finds as follows:

1. DJ 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, and that Mr. Jay Pape appeared on behalf of DJ in accordance with Rule 517.c (3).

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 June 14, 1996, DJ submitted to Commission staff a Change of Operator, Form 10 requesting that the Commission approve DJ as operator for five wells located in Weld County, Colorado, more particularly described as the Sargent Farms 2-B Well located in the SE¼ NE¼ of Section 25, the Cuykendall #3 Well located in the NW¼ NE¼ of Section 24, the Sargent Farms 1-A Well located in the NW¼ SE¼ of Section 25, the Sargent Farms 2-A Well located in the SE¼ SE¼ of Section 25 and the Sargent Farms 1-D Well located in the SE¼ SW¼, Section 25 all in Township 2 North, Range 63 West, Weld County, Colorado. Upon approval of the Form 10s the Commission staff and DJ discussed well status for these wells and the Commission’s concern that these wells had not produced since 1990. Accordingly, Commission staff directed that the wells either be put on production, pass a mechanical integrity test ("MIT") or be immediately plugged and abandoned. Staff also informed DJ that the locations were not free from weeds and trash, the wells had no signs and berms were not constructed around the stock tanks. DJ assured the Commission staff that these wells would be put on production and the well sites cleaned up as soon as DJ successfully negotiated a gas contract with the local gas purchaser.

5. On November 11, 1996 the Commission staff did a routine inspection to update the status of the wells. No clean up had been done on location, the wells were not on production and a MIT had not been performed. Staff contacted DJ’s main office in Fort Morgan concerning the inspections and lack of compliance and requested a return call. The November 11th call was not returned. On January 13, 1997 the Commission staff inspected the location and checked records looking for some evidence of production or MIT finding again no work had been completed. Commission staff called DJ and explained that if a phone call was not returned the staff would issue Notices of Alleged Violation ("NOAVs"). Jay Pape returned the call the next day explaining there were various contract problems which should be resolved within the next couple of days and the wells would be on line producing within two (2) weeks. Commission staff allowed additional time for DJ to negotiate a gas contract.

6. On March 14, 1997, the Commission staff again inspected the well sites and found no work had been done and the wells were still shut-in. On this date Commission staff issues five (5) NOAVs with an abatement date of June 14, 1997 requiring the wells to pass a MIT, be produced or plugged and abandoned.

7. On June 3, 1997 Commission staff notified DJ by phone that the NOAVs were due by June 14, 1997 and if not abated, penalties could be assessed. DJ returned this phone call and requested a meeting on location. Commission staff and DJ met at location on June 18, 1997 at which time DJ advised that none of the requested work had been completed, stating there were still problems associated with the gas sales contracts for the well DJ was trying to work out. DJ requested a two (2) week extension. The Commission staff approved this request.

8. On August 5, 1997, Commission staff inspected Sargent 2-B Well, Cuykendall #3 Well, Sargent Farms 1-A Well, Sargent Farms 2-A Well, and Sargent Farms 1-D Well. Aside from DJ’s construction of two (2) well signs and one (1) berm none of the requested work had been completed, and the wells remained in non-compliance.

9. On August 8, 1997, Commission staff issued DJ a proposed Administrative Order by Consent for non-compliance with the five (5) issued NOAVs.

10. During the week of August 18, 1997 Commission staff met with Mr. Pape on behalf of DJ to discuss the proposed AOC. Mr. Pape informed Commission staff that the Sargent Farms 2-B Well, Sargent Farms 1-A, Sargent Farms 2-A Well, and the Sargent Farms 1-D Well were now back on production. Mr. Pape also advised that the Cuykendall #3 Well, while not connected to a gas meter and without a gas contract, was being vented periodically to the production tank. After discussing these operations with Mr. Pape the Commission staff determined Commission rules did not permit venting periodically into a production tank. Commission staff then granted an additional extension until April 1, 1998, for DJ to either produce the well, perform an MIT in accordance with Rule 326.b., or to plug and abandon the Cuykendall #3 Well. Failure to produce, MIT or plug the Cuykendall #3 Well by this date would cause the AOC to be immediately docketed for hearing before the Commission.

11. On April 4, 1998, Commission staff contacted DJ at which time DJ advised that the required work had not been completed. On June 3, 1998, Commission staff inspected the Cuykendall #3 Well and confirmed that the required work had not been performed.

12. At hearing, Commission staff provided testimony and presented exhibits to support Commission’s staff’s allegation that DJ violated Rule 326.b. and in support of Commission adoption of staff’s proposed order.

13. Mr. Pape provided testimony to explain prior production reports and presented exhibits to show that the Sargent Farms 2-B Well was on production and that negotiations were ongoing for a gas contract for the Cuykendall #3 Well.

14. Based on the explanation and information provided by Mr. Pape Commission staff modified their proposed order to remove violations based on the status of the Sargent Farms 2-B Well.

15. Commission staff asked the Commission to find DJ in violation of Rule 326.b. for the Cuykendall #3 Well and require the work to be done by November 1, 1998, with a fine of Two Thousand Dollars ($2,000). Commission staff acknowledged the base fine of $1000 and recommended the fine be doubled based on aggravating factors contained in Rule 523.d., including the fact the violation was intentional or reckless (523.d (1)), that the violation had the threat of impact on the environment (523.d (3)) and that the violation resulted in an economic benefit to DJ (523.d (8)).

16. Based on the testimony presented, an order of the Commission should enter an order finding DJ in continuing violation of Rule 326.b., failure to perform a mechanical integrity test within two (2) years of initial shut-in date for the Cuykendall #3 Well. Further, DJ should be required by November 1, 1998 to either: 1) perform a successful mechanical integrity test; or 2) properly plug and abandon; or 3) put the well on production. DJ should be assessed a total fine of Two Thousand dollars ($2,000) for violation of Rule 326.b. for the well based on the aggravating factors described above. If DJ does not comply with the order, Commission staff should be directed to make a claim on the blanket plugging bond and properly plug and abandon the well. If plugging and reclamation costs exceed the bond amount Commission staff may confiscate available equipment and tubulars for salvage per §34-60-124(6)(c), C.R.S.

ORDER

NOW THEREFORE, IT IS ORDERED, that the Commission adopts the findings and order contained in Commission staff’s proposed findings and order, and hereby finds DJ Production Services, Inc. in continuing violation of Rule 326.b., failure to perform a mechanical integrity test within two (2) years of initial shut-in date for the Cuykendall #3 Well located in the NW¼ NE¼ of Section 24, Township 2 North, Range 63 West, 6th P.M., Weld County, Colorado.

IT IS FURTHER ORDERED, that DJ Production Services, Inc. shall be required by November 1, 1998 to either: 1) perform a successful mechanical integrity test; or 2) properly plug and abandon; or 3) put on production the Cuykendall #3.

IT IS FURTHER ORDERED, that DJ Production Services, Inc. shall be assessed a total fine of Two Thousand dollars ($2,000) payable within thirty (30) days from the date the order is issued.

IT IS FURTHER ORDERED, that if DJ Production Services, Inc. does not comply with the order, Commission staff shall be authorized to commence claim on the blanket plugging bond. If plugging and reclamation costs exceed the bond amount Commission staff may confiscate available equipment and tubulars for salvage per §34-60-124.(6).(c). C.R.S.

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 this 1st day of September, 1998, as of August 17, 1998.

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 September 1, 1998

(1V#157)