BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO

report of the commission

This cause came on for hearing before the Commission at 9:00 a.m. on October 21, 2010, at the West Garfield Campus, Colorado Mountain College, 3695 Airport Road, Rifle, Colorado, upon application for an order to allow the equivalent of one well per 10 acres consisting of the SW¼ of Section 36, Township 8 South, Range 95 West, 6^th P.M. (unspaced), and the W½  of Section 13 (spaced 160s), Township 9 South, Range 95 West, 6th P.M., for the production of gas and associated hydrocarbons from the Williams Fork and Iles Formations.

FINDINGS

The Commission finds as follows:

1.            Axia Energy, LLC (Axia 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.         Rule 318.a. of the Rules and Regulations of the Oil and Gas Conservation Commission requires that wells drilled in excess of 2,500 feet in depth be located not less than 600 feet from any lease line, and located not less than 1,200 feet from any other producible or drilling oil or gas well when drilling to the same common source of supply.  The below-listed lands are subject to this Rule for the Williams Fork and Iles Formations:

Parcel One

Township 8 South, Range 95 West, 6^th P.M.

Section 36:      SW¼

Mesa County, Colorado

5.         On May 21, 1981, the Commission issued Order No. 371-1, which established 160-acre drilling and spacing units for the production of gas and associated hydrocarbons from the Mesaverde Formation underlying described lands and further ordered that the permitted well shall be located no closer than 660 feet from the boundaries of the unit, and the wells drilled and completed in the Mesaverde Formation prior to the order shall be the permitted wells for the units upon which they are located.  The below-listed lands are subject to this spacing order:

Parcel Two

Township 9 South, Range 95 West, 6^th P.M.

Section 13:      W½

Mesa County, Colorado

            6.         On September 1, 2010, Applicant, by its attorneys, filed with the Commission a verified application (Application) covering the following lands (Application Lands):

Parcel One

Township 8 South, Range 95 West, 6^th P.M.

Section 36:      SW¼

Mesa County, Colorado

and

Parcel Two

Township 9 South, Range 95 West, 6^th P.M.

Section 13:      W½

Mesa County, Colorado

7.         With regard to Parcel One, Applicant requests the equivalent of one well per 10 acres to be optionally drilled for the production of gas and associated hydrocarbons from the Williams Fork Formation and Iles Formation of the Mesaverde Group, with permitted wells to be located no closer than 100 feet from lease lines, unless an exception is granted by the Director of the Commission. However, in cases where Parcel One lands abut or corner lands where the Commission has not granted the right to drill 10 acre density wells in the Williams Fork Formation or Iles Formation of the Mesaverde Group at the time of drilling permit application, the wells should be located downhole no closer than 200 feet from lease lines abutting or cornering such lands unless an exception is granted by the Director of the Commission.

8.         With regard to Parcel Two, Applicant requests the equivalent of one well per 10 acres to be optionally drilled for the production of gas and associated hydrocarbons from the Williams Fork Formation and Iles Formation of the Mesaverde Group, with permitted wells to be located no closer than 100 feet from the drilling and spacing unit boundary where immediately adjacent or cornering (Contiguous) lands have 10-acre drilling density, and no closer than 200 feet from the drilling and spacing unit boundary where Contiguous lands do not have 10-acre drilling density, unless an exception is granted by the Director of the Commission. 

9.         With regard to the Iles Formation, Applicant further asserts that the Commission should allow 10-acre density for the Iles Formation because the option to complete a well to the Iles Formation is economic and efficient when completed within a Williams Fork Formation wellbore.  Applicant asserts that the Iles Formation would not be exploited or developed without this option. 

10.       Applicant requests that the Commission allow wells drilled under this Application to be drilled from the surface either vertically or directionally from no more than one pad located on a given quarter-quarter section (or lots or parcels approximately equivalent thereto) unless exception is granted by the Commission pursuant to application made for such exception.

11.       The Application was referred to the Colorado Department of Public Health and Environment (CDPHE) and the Colorado Division of Wildlife (DOW) for comments.  CDPHE commented positively on the Application, stating: “CDPHE believes that the addition of this proposed drilling and spacing unit will result in appropriate protection of public health, safety, welfare and environment.”  No comment has been received as of the hearing date from DOW.

12.       The Application was protested by Laura Amos and Larry Amos (Protestants).  The Protestants have an unleased mineral interest in a related matter (Docket No. 1010-SP-32) near the Application Lands, but have no interest in the Application Lands. The basis of the protest was: 1) concern that 10-acre density would increase possibilities for emergencies and increase pressure on the resources of the local Emergency Response Team; 2) concerns about notice requirements under a Memorandum of Understanding between the Commission and Bureau of Land Management (BLM) and the U.S. Forest Service; 3) alleged defects in the BLM leasing program; and 4) concerns about the lack of operating history of the Applicant.

13.       The Applicant moved for dismissal of the protest (Motion) on several grounds, requesting that the protest be treated as a Rule 510 Statement.

14.       On October 13, 2010, the Hearing Officer considered the Motion and the Protestants’ argument in opposition to the Motion at a prehearing conference held in the offices of the Commission. The Hearing Officer recommended granting the Motion and treating the protest as a Rule 510 Statement. The primary basis for recommending dismissal of the protest was that the protest was directed towards matters irrelevant to a spacing decision.  

15.       At hearing, the Commission dismissed the protest, treated the protest as a Rule 510 Statement, and proceeded with hearing the matter. The Commission heard live testimony and considered previously submitted written testimony that was already part of the record.

16.       Land testimony and exhibits in support of the Application showed that the Application Lands are in close proximity to other areas where the COGCC has entered orders approving 10-acre density for the Williams Fork and Iles Formations.  Applicant holds a majority leasehold ownership interest in the Application Lands and the 10-acre drilling density request is based on Applicant’s leasehold ownership interest.  The surface and mineral estates are owned in fee or are federally owned.  No more than one surface pad per quarter-quarter section will be utilized for the Application Lands and, if possible, Applicant will utilize existing or common pads for development. Applicant will use reasonable efforts to limit pad surface disturbance and the number of pads to develop the acreage efficiently.   

17.       Geologic testimony and exhibits in support of the application showed that:

(a)          The outcrop of the Williams Fork and Iles Formations at Coal Canyon near Palisade, Colorado (as an example) reveals exposures of the Williams Fork Formation that allow for (i) geologic mapping and statistical analysis of the complex Williams Fork stratigraphy, and (ii) evaluating the nature of Williams Fork stratigraphy and its effect on reservoir discontinuities. 

(b)          The scaled stratigraphic cross section of the outcrop illustrates the vertical and horizontal complexity of the Williams Fork sand bodies with respect to width, height and lateral discontinuity. 

(c)          The descriptive classification of the fluvial sand bodies in the Williams Fork Formation at Coal Canyon, with a corresponding statistical summary of the dimensions of each sand body type, shows that the sand bodies have a mean average height of 9.3 feet and an average width of 526 feet.  This characterization of the Williams Fork Formation is relevant to the entire Piceance Basin and applies to the Application Lands.

(d)          The various density of wells drilled through the Coal Canyon outcrop (as an example) shows that most of the individual sands would be penetrated on 10-acre well density, but significantly fewer would be penetrated on 20-acre well density.  There is varying sand thickness and lateral discontinuity. 

(e)          The structure map illustrated the top of the Rollins Member of the Iles Formation, the Application Lands, and wells drilled into the Mesaverde Group.  The map noted three wells referred to in subsequent exhibits.  The wells are the Dan Kenney Estate #1, the CH Four Ltd #1, and the Aitken 23-11.

(f)           Gas column thicknesses for the three wells range between 996 and 1,044 feet. Net pay for the three wells ranges from 129 to 197 feet. Porosity of the three wells ranges from 9.1% to 10.5%. Percent saturation of water from the three wells ranges from 35% to 47%.

(g)          The Iles Formation cross section for the Aitken 23-11 and the CH Four Ltd #1 Wells, both closely spaced, illustrates the gross sand thicknesses in the Rollins, Cozzette and Corcoran members of the Iles Formation and the gas-filled effective porosity.  The gross sand packages appear to correlate between wells, but the cross section demonstrates that a significant percentage of the gas-filled effective porosity does not correlate between wells. 

(h)          The complex vertical and horizontal stratigraphy of the sandstone reservoirs in both the Williams Fork Formation and Iles Formation necessitates 10-acre density drilling to efficiently drain the respective reservoirs.  

(i)            The ultimate recovery of gas in place in the Williams Fork Formation and Iles Formation underlying the Application Lands will be maximized by 10-acre density drilling.  

18.       Engineering testimony and exhibits showed that:

            (a)  The average net pay across the Williams Fork and Iles Formations is 322 feet.  The average net pay was calculated from open hole logs from wells that were drilled prior to Axia’s acquisition of the lands.  The average water saturation and porosity is 45% and 10%, respectively.  These numbers can be used to determine the average gas in place on 10 acres.  Using standard gas in place calculations, the minimum gas-in-place for 10 acres is 1.424 billion standard cubic feet (bscf).  Based upon a recovery factor of 85%, it is expected the Williams Fork and Iles Formations will contribute 1.21 billion cubic feet (bcf) per 10 acres.

                        (b)  Average well costs for drilling and completing a well in the Williams Fork and Iles Formations in the Kimball Creek Field are expected to be $1,500,000.  The average working interest is 100% and the average net revenue interest is 80%.  Based on Axia’s completion practices and experience in the Piceance Basin, Axia used an average initial production of 1,100 thousand cubic feet per day (mcf/d) and an average gross estimated ultimate recovery of 1.21 bcf.  Axia also used specific variables for market price and price differentials along with deductions for compression, gathering, royalties, lease operating expenses, marketing and shrink.  Using these parameters, the expected rate of return is 26%; the net present value at 20% is $228,000; and the discounted payout is 4.5 years.  The reserve life is 34.6 years.  This meets Axia’s economic hurdles.

                        (c)  The Iles Formation type curve illustrated the average production normalized to time zero for 225 wells in the area with Iles only production.  These wells are in close proximity to Applicant’s Kimball Creek Field and represent a good sample.  The average initial production was 166 mcf/day.  Applicant matched this production with decline analysis to find an average estimated ultimate recovery for economics.

            (d)  A single well drilled to the Iles Formation alone would cost approximately $1,300,000.  Assuming the same 100% working interest and 80% net revenue interest, at this well cost and expected recovery, the economic results would be negative and do not meet Applicant’s standards.  The wells would not be drilled solely for the Iles Formation.  In order to prevent waste and reduce the potential number of surface locations, the Iles Formation will be developed in conjunction with the Williams Fork Formation.  If the Iles Formation is developed and comingled with the Williams Fork Formation, it can be developed economically and prevent waste.

(e)        With 10-acre density approval, Applicant can minimize rig moves and re-disturbance of pads.  The Commission’s approval of this Application will allow the ability to optimally place bottom hole locations that will in turn maximize ultimate recovery of gas-in-place and provide community benefits by lessening operational time per well location and reduce road traffic.

19.       Testimony and exhibits showed that granting the Application will promote efficient reservoir drainage, will prevent waste, will allow greater ultimate recovery of oil and gas, and will protect correlative rights.

20.       Multiple wells have been drilled upon lands in close proximity to the Application Lands with the result that geological and engineering evidence indicates that Williams Fork and Iles Formation wells in the Mesaverde Group on the Application Lands should be allowed to be drilled on a 10-acre density basis.  Based on the testimony and exhibits submitted in support of the Application, the Commission should allow 10-acre density for the Iles Formation because the option to complete a well to the Iles Formation is economic and efficient only when completed within a Williams Fork Formation wellbore, and the Iles Formation would not be exploited or developed without this option.      

21.       Axia agreed to be bound by oral order of the Commission.

22.       Based on the facts stated in the Application, the one protest having been dismissed and converted to a Rule 510 Statement, and testimony and exhibits considered by the Commission at the hearing, the Commission should enter an order to allow the equivalent of one well per 10 acres in the unspaced lands in the SW¼ of Section 36 Township 8 South, Range 95 West, 6^th P.M., and in the 160-acre drilling and spacing units in the W½  of Section 13, Township 9 South, Range 95 West, 6th P.M., Mesa County, Colorado, for the production of gas and associated hydrocarbons from the Williams Fork Formation and the Iles Formation.

ORDER

NOW, THEREFORE IT IS ORDERED that the equivalent of one well per 10 acres density is established for the Williams Fork and Iles Formations in the Application Lands described as follows:

Parcel One

Township 8 South, Range 95 West, 6^th P.M.

Section 36:      SW¼

Mesa County, Colorado

and

Parcel Two

Township 9 South, Range 95 West, 6^th P.M.

Section 13:      W½

Mesa County, Colorado

IT IS FURTHER ORDERED, with regard to Parcel One, permitted wells are to be located no closer than 100 feet from lease lines, unless an exception is granted by the Director of the Commission. However, in cases where Parcel One lands abut or corner lands where the Commission has not granted the right to drill 10-acre density wells in the Williams Fork Formation or Iles Formation of the Mesaverde Group at the time of drilling permit application, the wells should be located downhole no closer than 200 feet from lease lines abutting or cornering such lands unless an exception is granted by the Director of the Commission.

IT IS FURTHER ORDERED, with regard to Parcel Two, permitted wells are to be located no closer than 100 feet from the drilling and spacing unit boundary where immediately adjacent or cornering (“Contiguous”) lands have been approved by the Commission for 10-acre drilling density, and no closer than 200 feet from the drilling and spacing unit boundary where Contiguous lands do not have 10-acre drilling density approved by the Commission, unless an exception is granted by the Director of the Commission. 

                        IT IS FURTHER ORDERED, that any well drilled pursuant to this Order shall be drilled from the surface either vertically or directionally from no more than one pad located on a given quarter-quarter section (or lots or parcels approximately equivalent thereto) unless exception is granted by the Commission pursuant to application made for such exception.

                        IT IS FURTHER ORDERED, that nothing in this Order shall change the unspaced spacing status of Parcel One, nor modify the existing 160 acre spacing status of Parcel Two.

IT IS FURTHER ORDERED, 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.

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.

ENTERED this _____ day of November 2010, as of October 21, 2010.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Carol Harmon, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

November 22, 2010