BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

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

RULES AND REGULATIONS OF THE COLORADO OIL )

AND GAS CONSERVATION COMMISSION BY WALLACE ) ORDER NO. 1V-302

OIL AND GAS INC., BACA COUNTY, COLORADO )

REPORT OF THE COMMISSION

This cause came on for hearing before the Colorado Oil and Gas Conservation Commission on July 10, 2006, at 9:00 a.m. in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, after giving notice of hearing as required by law on why Wallace Oil and Gas Inc. is in violation of Rule 309., (2 violations), Rule 319.b.(3), (1 violation), and Rule 326.b., (1 violation).

FINDINGS

The Commission finds as follows:

1. Wallace Oil and Gas Inc. is an interested party in the subject matter of the above-referenced matter.

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. Wallace Oil and Gas Inc. ("Wallace") is the operator of the following wells:

Newman #1-7 SW¼ NE¼ Section 7, Township 32 South, Range 41 West, 6^th P.M.

Hume #17-1 SW¼ SE¼ Section 17, Township 32 South, Range 41 West, 6^th P.M.

Watkins #1 SE¼ NW¼ Section 20, Township 32 South, Range 41 West, 6^th P.M.

5. On October 25, 2004, the Colorado Oil & Gas Conservation Commission ("COGCC") docketed the three (3) Wells for hearing, with a request to approve an Order Finding Violation finding Wallace in violation of Rule 326.b., failure to perform a mechanical integrity test within two (2) years of being shut-in, for the three (3) Wells. The matter was dropped from the docket after Wallace submitted delinquent Operator’s Monthly Report of Operations, Form 7, for the three (3) Wells.

6. On October 21, 2005, COGCC staff sent a letter via certified mail to Wallace. The letter informed Wallace that Operator’s Monthly Report of Operations, Form 7, were delinquent beginning May, 2005, for the Newman #1-7 Well, the Hume #17- Well, and the Watkins #1 Well. The letter informed Wallace that the three (3) Wells were in violation of Rule 309. and requested that Wallace submit the required information by November 20, 2005. The COGCC received no response from Wallace.

7. On December 2, 2005, COGCC staff issued Notices of Alleged Violation ("NOAVs") to Wallace for alleged violations found on the three (3) Wells. The Newman #1-7 and Hume #17-1 Wells were alleged to be in violation of Rule 309., each producer or operator of an oil or gas well shall file with the Commission, within forty-five (45) days after the month in which production occurs, a report on Operator's Monthly Report of Operations, Form 7, containing all information required by said form. The NOAVs for these two (2) Wells specified an abatement date of December 20, 2005. The Watkins #1 Well was alleged to be in violation of Rule 319.b.(3), a well that has ceased production shall be abandoned within 6 months unless the time is extended by the Director upon application by the owner, and Rule 326.b., a mechanical integrity test shall be performed within two (2) years of initial shut-in date. This NOAV had an abatement date of February 28, 2006.

8. The NOAVs were sent Certified Mail, Return Receipt to Wallace. Per United States Postal Service tracking records, the NOAVs were delivered to Wallace on December 5, 2005.

9. Wallace did not respond to nor abate the violations alleged by the NOAV’s.

10. On March 31, 2006, COGCC staff offered Wallace an Administrative Order By Consent ("AOC") by certified mail. The return receipt of delivery to Wallace recorded April 18, 2006, as the date of delivery. To date, Wallace has not contacted the COGCC to discuss the AOC.

11. To date, the COGCC has not received the required Operator’s Monthly Report of Operations, Form 7’s, for the Newman #1-7 and Hume #17-1 Wells, nor has Wallace submitted any documentation that the alleged violations have been corrected for the Watkins #1 Well.

12. No one from Wallace was present at the hearing. David Shelton, COGCC Supervising Engineer, presented the recommended order to the Commission.

13. Based on the above findings, COGCC staff recommends that Wallace be found in violation of Rule 309., each producer or operator of an oil or gas well shall file with the Commission, within forty-five (45) days after the month in which production occurs, a report on Operator's Monthly Report of Operations, Form 7, containing all information required by said form, for the Newman #1-7 and Hume #17-1 Wells; Rule 319.b.(3), a well that has ceased production shall be abandoned within six (6) months unless the time is extended by the Director upon application by the owner, and Rule 326.b., a mechanical integrity test shall be performed within two (2) years of initial shut-in date, for the Watkins #1 Well.

14. Rule 523. specifies a base fine of Five Hundred dollars ($500.00) per day for each violation of Rule 309., and a base fine of One Thousand dollars ($1,000.00) per day for each violation of Rules 319.b.(3) and 326.b.

15. A monetary penalty of Six Thousand dollars ($6,000.00) should be assessed against Wallace Oil and Gas Inc., in accordance with Rule 523.a., for violation of Rules 309., 319.b.(3), and 326.b.

16. Wallace should bring the Newman #1-7 and Hume #17-1 Wells into compliance with COGCC rules within thirty (30) days of the date the order is issued.

17. If Wallace does not comply with Finding #16 above, COGCC staff should be authorized to suspend the Certificates of Clearance, preventing the gathering of gas for sales, for the Newman #1-7 and Hume #17-1 Wells.

18. Wallace should bring the Watkins #1 Well into compliance with COGCC rules within ninety (90) days of the date the order is issued.

19. If Wallace does not comply with Findings #16 and #18 above within one hundred and eighty (180) days of the date the order is issued, COGCC staff should be authorized to make a claim on the respective five thousand dollar ($5,000) plugging bond posted by Wallace for any or all of the three (3) Wells, in order to plug, abandon, and reclaim any or all of the three (3) Wells not in compliance with Commission Rules.

20. If Wallace does not comply with Findings #15, #16, and #18 above, COGCC staff should not approve any Application for Permit-to-Drill, or approve any COGCC Change of Operator, Form 10, for Wallace.

ORDER

NOW, THEREFORE IT IS ORDERED, that Wallace Oil and Gas Inc. shall be found in violation of Rule 309., for failure to file with the Commission, within forty-five (45) days after the month in which production occurs, a report on Operator's Monthly Report of Operations, Form 7, containing all information required by said form, for the Newman #1-7 Well, located in the SW¼ NE¼ Section 7, Township 32 South, Range 41 West, 6^th P.M., and the Hume #17-1 Well, located in the SW¼ SE¼ Section 17, Township 32 South, Range 41 West, 6^th P.M.; Rule 319.b.(3), a well that has ceased production shall be abandoned within six (6) months unless the time is extended by the Director upon application by the owner, and Rule 326.b., a mechanical integrity test shall be performed within two (2) years of initial shut-in date, for the Watkins #1 Well, located in the SE¼ NW¼ Section 20, Township 32 South, Range 41 West, 6^th P.M.

IT IS FURTHER ORDERED, that Wallace Oil and Gas Inc. shall be assessed a total fine of Six Thousand dollars ($6,000.00) for the above violations, payable within thirty (30) days of the date the order is entered by the Commission.

IT IS FURTHER ORDERED, that Wallace Oil and Gas Inc. shall be required to abate the above-listed violations for the Newman #1-7 and Hume #17-1 Wells within thirty (30) days of the date the order is entered by the Commission.

IT IS FURTHER ORDERED, that if Wallace Oil and Gas Inc. does not abate the above-listed violations for the Newman #1-7 and Hume #17-1 Wells within thirty (30) days of the date the order is entered by the Commission, then the Commission shall suspend the Certificates of Clearance for the Wells, thereby revoking the authorization to gather gas for sales from the Newman #1-7 and Hume #17-1 Wells, until such time as Wallace Oil and Gas Inc. brings the two (2) wells into compliance.

IT IS FURTHER ORDERED, that Wallace Oil and Gas Inc. shall be required to abate the above-listed violations for the Watkins #1 Well within ninety (90) days of the date the order is entered by the Commission.

IT IS FURTHER ORDERED, that if Wallace Oil and Gas Inc. does not abate the above-listed violations for the Newman #1-7, Hume #17-1, and Watkins #1 Wells within one hundred and eighty (180) days of the date the order is approved by the Commission, COGCC staff shall be authorized to make a claim on the respective five thousand dollar ($5,000) plugging bond posted by Wallace for any or all of the three (3) wells, in order to plug, abandon, and reclaim any or all of the three (3) wells not in compliance with Commission Rules.

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.

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 day of July, 2006, as of July 10, 2006.

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

Patricia C. Beaver, Secretary

Dated at Suite 801

1120 Lincoln St.

Denver, Colorado 80203

July 28, 2006