BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF ALLEGED VIOLATIONS OF THE RULES                                 )         CAUSE NO. 1V

AND REGULATIONS OF THE COLORADO OIL AND GAS                                        )

CONSERVATION COMMISSION BY ENCANA OIL & GAS                                        )         ORDER NO. 1V-297

(USA) INC., GARFIELD COUNTY, COLORADO                                                           )

                        1. A domestic water well was constructed on February 12, 1997 for Michael Dietrich under Colorado Division of Water Resources Permit No. 29972. The well, hereinafter referred to as the "former Dietrich water well" is located in the NE¼ NE¼ of Section 10, Township 7 South, Range 92 West, 6^th P.M. On January 30, 2003, Wright Water Engineers on behalf of EnCana Oil & Gas (USA) Inc. ("EnCana") collected water samples from the former Dietrich water well. The sampling was conducted as part of a baseline water quality study performed voluntarily by EnCana prior to gas well drilling. The results of the laboratory analysis showed the quality of the water from the former Dietrich water well was similar to other Wasatch Formation water wells in the area, and methane gas was not detected in the sample.

                        2. Between April 30, 2003 and March 30, 2004 five (5) gas wells were drilled by EnCana on the P3 well pad located in the SE¼ SE¼ of Section 3, Township 7 South, Range 92 West, 6^th P.M. The nearest gas well on the P3 well pad is approximately 860 feet northwest of the former Dietrich water well. The Arbaney 3-16C was completed as a producing well in 2003 and is the only well on the P3 pad that has been completed as a producer to date.

                        3. On April 8, 2004 a water sample was collected from the former Dietrich water well by Cordilleran Compliance Services ("Cordilleran") on behalf of EnCana as part of the West Divide Creek Seep investigation. The result of the laboratory analysis showed dissolved methane to be present in this sample at the concentration of 6.5 milligrams per liter (mg/l). A water sample was collected from the former Dietrich water well by COGCC staff on April 8, 2004. Methane was detected in this sample at a concentration of 10 mg/l. EnCana voluntarily agreed to perform additional sampling to determine the source of the methane in the former Dietrich water well. EnCana was already negotiating with Mr. Dietrich to purchase his property prior to the first detection of dissolved methane in the water in the well, and EnCana completed its purchase of the Dietrich property in June 2004.

                        4. On April 15, 2004 a gas sample was collected by Cordilleran from the former Dietrich water well for compositional and stable isotopic analysis to determine the source of the gas. A gas sample was collected by COGCC staff from the former Dietrich water well for compositional and stable isotopic analysis on April 19, 2004. The analytical results from both samples were similar. In addition to methane, the results of the compositional analysis showed the presence of ethane, propane, n-butane, iso-butane, n-pentane, iso-pentane, and hexanes. These heavier hydrocarbon gases are indicative of thermogenic gas. Analysis of the stable isotopes of carbon indicated the methane was a mixture of gas from thermogenic and biogenic sources which made it difficult to determine the source of the gas without further sampling and analysis.

                        5. On July 22, 2004 a dissolved gas sample was collected by Cordilleran from the former Dietrich water well for compositional and stable isotopic analysis. In addition to methane, the results of the compositional analysis showed the presence of ethane, propane, n-butane, iso-butane, n-pentane, iso-pentane, and hexanes as in the April 2004 samples. The gas was still a mixture of thermogenic and biogenic gas, but the proportion of thermogenic gas had increased relative to the proportion of biogenic gas, and the stable isotopes of carbon showed conclusively that most of the methane was of thermogenic origin. In addition, the chemical composition of the gas, that is, the proportions of methane, ethane, propane, n-butane, iso-butane, n-pentane, iso-pentane, and hexanes, was similar to the gas produced from Williams Fork Formation wells in the area.

                        6. The compositional and isotopic sampling was repeated for confirmation purposes by Cordilleran on September 22, 2004. The analytical results confirmed the findings of the previous tests, that the gas in the former Dietrich water well was of thermogenic origin and similar in composition to Williams Fork Formation gas.

                        7. On September 22, 2004, COGCC staff inspected the P3 well pad located in the SE¼ SE¼ of Section 3, Township 7 South, Range 92 West, 6^th P.M., as part of the investigation of the causes of the elevated methane concentrations observed at the former Dietrich water well. Staff observed bubbles coming up around the outside of the wellhead of the Magic 10-2 Well. COGCC staff measured the pressure on the bradenhead access of each of the five (5) wells on the P3 well pad and found three (3) of the five (5) wells had significant bradenhead pressure. COGCC staff immediately notified EnCana of the bubbles and pressures and discussed a remedial action plan to address them.

                        8. On September 28, 2004, COGCC staff issued a Notice of Alleged Violation ("NOAV") to EnCana for failure to adequately cement one or more of the wells on the P3 well pad as evidenced by the observed bubbles. The NOAV cited Rule 209. which requires that before a well is completed as a producer, gas and water strata must be sealed to prevent contamination and the intermingling of their contents, and Rule 324.A.a. which requires an operator to take precautions to prevent the unauthorized discharge of gas, and Rule 327., which requires operators to take all reasonable precautions to prevent the uncontrolled blowing of gas. The NOAV required abatement which included running a variety of logs and surveys on the wells to identify the source of the bubbles and where cement integrity was lacking. The information would be used to determine the most effective way to conduct remedial cementing on the wells and isolate the gas- bearing zones. The abatement plan required gathering compositional and isotopic gas data to compare to the gas found in the nearby former Dietrich water well. The abatement plan further required that the wells be remediated to eliminate the leaking bubbles and required venting of the bradenheads to reduce the likelihood of contamination while remediating the wells. Three (3) separate deadlines were set for the different phases of abatement. Remediation of the bubbles was required to be accomplished by November 28, 2004.

                        9. On October 1, 2004, EnCana’s contractor Environmental Services Network Rocky Mountain ("ESN") recorded bradenhead pressure on all five (5) gas wells on the P3 well pad as measured by EnCana’s field crew. In addition, it collected bradenhead gas samples from the Magic 10-1, Magic 10-2, Arbaney 3-16C, and Arbaney 3-15C Wells. There was no gas flow from the bradenhead of the Magic 10-1A Well so it was not sampled. The analytical results confirmed that the gas present in the former Dietrich water well was not similar to gas from the Schwartz 2-15B well, but it was more similar to gas from the wells on the P3 pad.

                        10. In October 2004, EnCana ran all of the logs and surveys required by the COGCC. COGCC staff and EnCana reviewed the logs and surveys together to determine the intervals at which the wells should be remedially cemented. In late October and in November 2004, EnCana remedially cemented four wells on the P3 pad consistent with the decisions reached jointly with COGCC staff. Three cement squeezes were performed on the Arbaney 3-16C well at depths of 2,600, 1,720, and 1,000 feet; two cement squeezes were performed on the Arbaney 3-15C at depths of 1,240 and 810 feet; two cement squeezes were performed on the Magic 10-1 at depths of 1,590-2,250 and 840 feet; and two cement squeezes were performed on the Magic 10-2 at depths of 800 and 304 feet. The squeeze on the Magic 10-2 at 304 feet successfully remediated the surface bubbles. The deeper squeezes on all of the other wells had no effect on the bubbling at the surface. All of the cement squeezes were performed above the Williams Fork producing interval, in the shallower Wasatch Formation. EnCana spent over $683,000 on remedial work on the P3 well pad that was required by the NOAV issued on September 28, 2004.

                        12. On October 6, 2004 ESN collected soil gas samples with probes from three (3) feet below the ground surface ("bgs") on the P3 well pad adjacent to the Magic 10-1, Magic 10-1A, Magic 10-2, Arbaney 3-15C, and Arbaney 3-16C Wells. The samples were analyzed for stable isotopes and composition. The analytical results showed the soil gases from the P3 well pad are

similar to bradenhead gas and Williams Fork Formation gas produced by gas wells in the area, but the gases had been altered by bacterial oxidation.

                        13. On October 6 and 25, 2004 EnCana ran temperature surveys on the Magic 10-1 Well which showed a cooling anomaly at 880 feet bgs indicative of gas flow just below the surface casing shoe. During testing of flow rates from the bradenheads of the wells on the P3 well pad, conducted pursuant to COGCC staff direction, it was determined that the Magic 10-1 Well was the only well on the pad that would not completely blow down, and it sustained a flow rate of approximately 40 thousand cubic feet per day for several weeks until remediated. The bradenhead on the Magic 10-1 Well would build up to approximately 250 pounds per square inch gauge ("psig") prior to remediation.

                        14. On October 8, 2004 COGCC staff issued a second NOAV to EnCana for impacting the former Dietrich water well with gas from the Williams Fork Formation. The NOAV cited Rule 209. which states special precautions shall be taken while drilling wells to guard against the contamination of fresh water by objectionable gas and that before any well is completed as a producer, all oil, gas, and water strata above and below the producing horizon shall be sealed or separated in order to prevent the intermingling of their contents; Rule 324.A.a. which requires an operator to prevent the unauthorized discharge of gas, and Rule 906.a and b., which state that impacts resulting from releases shall be investigated and cleaned up as soon as practicable and that any release of any size which impacts or threatens to impact any waters of the state, residence or occupied structure shall be verbally reported to the Director as soon as practicable after discovery. The NOAV required EnCana to submit a Site Investigation and Remediation Workplan, Form 27, to further address the well impact. The Form 27 submittal deadline was October 29, 2004.

                        15. On October 29, 2004 EnCana met the abatement deadline by submitting the Site Investigation and Remediation Workplan, Form 27, designed to further investigate, monitor and mitigate the water well impact.

                        16. On November 3, 2004 Cordilleran sampled the former Dietrich water well for methane on behalf of EnCana and split the samples. Methane was detected in the samples at concentrations of 13 mg/l and 21 mg/l.

                        17. The remedial squeeze performed on November 9, 2004 by EnCana on the Magic 10-1 Well at a depth of 840 feet bgs, referred to in Finding No. 10 above, eliminated the temperature survey anomaly just below the surface casing shoe. The repairs were verified by a temperature survey and cement bond log run by EnCana on November 17, 2004. The remedial cement squeeze completed abatement of the September 28, 2004 NOAV which was written to address gas well conditions at the P3 pad. Although EnCana has performed all requirements of the Form 27 for the second NOAV in a timely manner,. Aabatement has not yet been completed to addressing the presence of dissolved methane in the former Dietrich water well continues. Monitoring and mitigation contained in the Site Investigation and Remediation Workplan, Form 27 is ongoing.

                        19. On January 11, 2005 a water sample was collected from the former Dietrich water well by Cordilleran on behalf of EnCana. Methane was detected in the sample at a concentration of 7.4 mg/l.

                        20. On February 3, 2005 a water sample was collected from the former Dietrich water well by Cordilleran on behalf of EnCana. Methane was detected in the sample at a concentration of 12 mg/l.

                        21. On March 20, 2005 Dr. Anthony Gorody submitted a report to EnCana and the COGCC staff presenting the results of the second soil gas survey of the P3 well pad and surrounding area. Based upon additional data and further evaluation he concluded that the remedial cementation of production wells at EnCana's P3 pad appearsed to have successfully shut off gas flow (which, in his opinion, originated from shallow gas sands in the Wasatch Formation) that was migrating towards the surface, including the gas that had impacted the former Dietrich water well. Dr. Gorody believes, as shown in figures 22, 23, 24, and 25 of the January 27, 2005 report, that based on the higher hydrocarbon gases, the gases in the former Dietrich water well and those at the C5 soil gas seep are clearly distinguishable from bradenhead gases at the P3 pad and from Williams Fork production gas. The COGCC staff agrees that the flow of the gas that was impacting the former Dietrich water well and causing the gas seeps on the P3 well pad and at the C5 and two other unnamed seeps located on the east side of the former Dietrich property appears to have been eliminated; however, COGCC staff believes that based upon the higher hydrocarbon gases (ethane and propane) the gas in the former Dietrich water well is indistinguishable from the gases analyzed from the Magic Wells and Cretaceous Williams Fork Formation gas produced by gas wells in the area, and thus disagrees with Dr. Gorody’s conclusion that the source of gas is the Wasatch Formation.

                        22. On March 28, 2005 a water sample was collected from the former Dietrich water well by Cordilleran on behalf of EnCana. Methane was detected in the sample at a concentration of 1.8 mg/l. A gas sample was also collected and the analytical results appear to indicate that the proportion of thermogenic gas is decreasing relative to the proportion of biogenic gas. This suggests that additional gas is not entering the water well and that remediation of the gas wells on the P3 pad has been successful in eliminating the source of the thermogenic gas that was impacting the former Dietrich water well. Subsequent samples collected show a continuation of this trend.

                        23. On May 20, 2005 EnCana measured the bradenhead pressure of the wells on the P3 well pad. Bradenhead pressure on the Arbaney 3-16C Well was 120 psig. The other wells had zero bradenhead pressure. Bradenhead pressures on the P3 well pad are monitored on a continuous basis. Because a confirmation temperature survey showed that the temperature anomaly has been eliminated in the Magic 10-1 Well and because the amount of thermogenic gas in the former Dietrich water well is decreasing, bradenhead pressures on the P3 well pad are not a continuing source of gas contamination.

                        24. EnCana acknowledges that the fact that the contents of separate gas-bearing strata and water-bearing strata were allowed to intermingle constitutes a violation of Rule 209. from September 22, 2004 when the bubbles were observed until November 9, 2004 when the leak was remediated for a total of forty-eight (48) days of violation. EnCana also acknowledges that the fact that EnCana failed to prevent an unauthorized discharge of gas constitutes a violation of Rule 324.A.a. from September 22, 2004 when confirmation results of isotopic analysis showed conclusively that the contamination was from the wells on the P3 pad dissolved methane in the former Dietrich water well was of thermogenic origin until October 29, 2004 when the Site Investigation and Remediation Workplan, Form 27, was received for a total thirty-eight (38) days of violation.

                        25. Rule 523. specifies a base fine of One Thousand dollars ($1,000) for each day of violation of Rules 209., and 324. for a total fine of Eighty-Six Thousand dollars ($86,000). In accordance with Rule 523.d. the total fine should be reduced by ten percent (10%) because of mitigating factors resulting in a recommended fine of Seventy-Seven Thousand Four Hundred dollars ($77,400). The mitigating factors in determining this fine are as follows: (1) EnCana demonstrated prompt, effective response to the violations; (2) EnCana cooperated with the COGCC with respect to the violation; and (3) the cost of correcting the violation reduced the economic benefit to EnCana.

                        26. Rule 523.a.(3) specifies that "the maximum penalty for any single violation shall not exceed ten thousand dollars ($10,000) regardless of the number of days of such violation," unless the violation results in significant waste of oil and gas resources or "a significant adverse impact on public health, safety or welfare." EnCana does not admit liability for causing significant waste or significant adverse impact on public health, safety or welfare. However, EnCana agrees to pay the adjusted fine amount set forth in Finding No. 25 in order to resolve this matter without the necessity of an extended contested hearing.

                        27. EnCana should continue to follow the Site Investigation and Remediation Workplan, Form 27, until the impact to the former Dietrich water well and surrounding area has been mitigated, including any subsequent revisions and/or adjustments required by the COGCC staff.

                        28. EnCana should be required to remain responsible for complying with this Order notwithstanding any subsequent sale of the former Dietrich water well or property to a third party.

                        29. EnCana should be required to record a memorandum in the real property records of Garfield County giving public notice of the applicability of this order to land on which the former Dietrich water well is located.

ORDER

                        NOW, THEREFORE, IT IS ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found in violation of Rule 209., for failure to guard against the contamination of fresh water by objectionable gas, and Rule 324.A.a., for failure to prevent the unauthorized discharge of gas into a water resource, namely the former Dietrich water well located in the NE¼ NE¼ of Section 10, Township 7 South, Range 92 West, 6^th P.M.

                        IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found in violation of Rule 209. from September 22, 2004 when the bubbles were observed until November 9, 2004 when the leak was remediated for a total of forty-eight (48) days of violation, and of Rule 324.A.a. from September 22, 2004 when confirmation results of isotopic analysis showed that the dissolved methane in the former Dietrich water well was of thermogenic origin until October 29, 2004 when the Site Investigation and Remediation Workplan, Form 27, was received for a total of thirty-eight (38) days of violation.

                        IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be assessed a total fine of Seventy-Seven Thousand Four Hundred dollars ($77,400) for the two (2) violations described above, which shall be payable within thirty (30) days of the date this order is entered by the Commission.

                        IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall continue to follow the Site Investigation and Remediation Workplan, Form 27, until the impact to the former Dietrich water well and surrounding area has been mitigated, including subsequent revisions and adjustments required by the COGCC staff.

                        IT IS FURTHER ORDERED, that COGCC staff may, in its sole discretion, approve a public project proposed by Garfield County in lieu of fine within thirty (30) days of the date this order is entered by the Commission.

                        IT IS FURTHER ORDERED, that if, prior to completing the obligations under this order, EnCana sells the former Dietrich water well or property to a third party, EnCana shall remain responsible for complying with this order.

                        IT IS FURTHER ORDERED, that EnCana shall record a memorandum in the real property records of Garfield County giving public notice of the applicability of this order to land on which the former Dietrich water well is located.

                        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/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.

Recommended this ____________day of March, 2006.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                               OF THE STATE OF COLORADO

                                                                        By _________________________________ 

                                                                                                    Brian Macke, Director

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado  80203

AGREED TO AND ACCEPTED THIS _________DAY of March, 2006.

ENCANA OIL AND GAS (USA) INC.

By ____________________________           

            Joel S. Fox, Attorney-in-Fact