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

REPORT OF COMMISSION

This cause came on for hearing before the Commission on April 4, 2011, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to establish a 160-acre wellbore drilling and spacing unit, and to pool all nonconsenting interests in a designated approximate 160-acre drilling and spacing unit for the NE¼ of Section 32, Township 6 North, Range 66 West, 6^th P.M. (to accommodate the AG #32-65D Well), for the development and operation of the Codell, Niobrara, and “J” Sand Formations.

FINDINGS

The Commission finds as follows:

1.         Orr Energy LLC (“Orr”), as applicant herein, is an interested party in the subject matter of the above‑referenced hearing.  Noble Energy, Inc (“Noble”), as protestant, 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.

Procedural History

                        1.         On October 8, 2010, Orr filed with the Commission a verified application (Application 2 - Docket No. 1101-UP-04) for an order to pool all nonconsenting interests in a designated approximate 160-acre drilling and spacing unit for the NE¼ of Section 32, Township 6 North, Range 66 West, 6^th P.M. (to accommodate the AG #32-65D Well (API No. 05-123-31347)), for the development and operation of the Codell, Niobrara, and “J” Sand Formations.

                        2.         Also on October 8, 2010, Orr filed with the Commission a verified application (Application 1 - Docket No. 1101-UP-03) for an order to pool all nonconsenting interests in a designated approximate 80-acre drilling and spacing unit for the W½ NE¼ of Section 32, Township 6 North, Range 66 West, 6^th P.M. (to accommodate the AG #32-31D Well (API No. 05-123-31456) and the AG #32-32D Well (API No. 05-123-31345)), for the development and operation of the Codell, Niobrara, and “J” Sand Formations.  Collectively, Application 1 and Application 2 shall be referred to as the “Collective Applications”.

3.         On December 30, 2010, Noble Energy, Inc (“Noble”) filed protests in the Collective Applications, raising issues with Orr’s compliance with Rule 530 as related to Noble’s leasehold interest in the lands subject to the Orr applications, and seeking alternative forms of relief.

4.         On January 4, 2011, a prehearing conference was held where the parties agreed to continue the hearings on the Collective Applications from January 13, 2011 to February 22, 2011, and Orr agreed to cure the  complained of defects under Rule 530 and send Noble  Authorizations for Expenditure’s with the information that Noble requested.

                        5.         On February 2, 2011 a second prehearing conference was held simultaneously in the Collective Applications.  This resulted in the issuance of a Corrected Prehearing Conference Report and Order on February 3, 2011 (“February Order”).  The February Order identified legal issues to be briefed and argued at the February 22, 2011 Commission meeting.  The issues identified were:

                        a)         When an operator fails to provide a date certain in a force pooling application and corresponding notice of hearing that it intends the force pooling order to apply retroactively, at what date do the penalty provisions of C.R.S. § 34-60-116(7) apply to a non-consenting party under the statute and Colorado Oil and Gas Conservation Commission Rule 530?

                        b)         When an operator fails to provide a date certain in a force pooling application and corresponding notice of hearing that it intends the force pooling order to apply retroactively, is the retroactive application of C.R.S. § 34-60-116 "just and reasonable"?

                        6.         On February 15, 2011, the Hearing Officer issued a Hearing Officer Recommendation (“First HO Recommendation”) on the two legal issues that were briefed for legal argument at the February 22, 2011 Commission hearing.  With regard to the issue described in paragraph 5. a above, the Hearing Officer recommended section 34-60-116(b), C.R.S., establishes a consistent methodology for calculation of eligible recoverable costs that is unaffected by the effective date of the forced pooling order.  With regard to the issue described in paragraph 5. b above, the Hearing Officer recommended against a conclusion that retroactive allocation of costs incurred before the date of forced pooling application is unjust and unreasonable in this case.

7.         On February 18, 2011, three days before the scheduled hearing, Noble filled a Notice of Election to Participate in Orr Energy’s AG 31-32D Well, AG 32-32D Well and AG 32-65D Well (“Noble February 18 Filing”) with the Commission and Orr. 

8.         On February 22, 2011, the Commission heard oral arguments on the legal issues defined in the February Order.  Counsel for Noble argued that the Noble February 18 Filing rendered moot any consideration of a forced pooling application, arguing that Noble was no longer a nonconsenting owner, subject to a forced pooling application.  Orr disputed the effect of the Noble February 18 Filing, and claimed that Noble remained nonconsenting.  The Commission determined that this new disputed legal issue needed to be briefed and argued.  The Commission continued the matter to the April 4, 2011 Commission meeting for purposes of allowing the parties to brief and further develop the issue.

9.         On March 10, 2011 a third prehearing conference was held in the Denver offices of the Commission. The primary purposes of the prehearing conference were to ascertain the current status of the case, identify with particularity the legal issues in dispute, establish a sequential briefing schedule, and establish a protocol for the hearing before the Commission on April 4, 2011. The Third Prehearing Conference Report and Order, issued March 14, 2011, identified the following two issues to be briefed:

a)         Was Noble’s election to participate filed on February 18, 2011 timely under Rule 530?

                                    b)         Is the first sentence of Rule 530.b. which reads:

“an owner shall be deemed a nonconsenting owner in the area to be pooled if, after at least thirty (30) days’ written notice of the following information, the owner does not elect in writing to consent to participate in the cost of the well concerning which the pooling order is sought:…”

consistent with forced pooling language of section 34-60-116(6) and (7) C.R.S.?

                        10.       On March 29, 2011, the Hearing Officer issued his Hearing Officer Recommendation (“Second HO Recommendation”). With regard to the issue described in paragraph 9. a above, the Hearing Officer recommended a finding that the Noble February 18, 2011 Filing was not timely, and as a result, the Commission should retain jurisdiction in this matter and proceed to decide the case on its merits.  With regard to the issue described in paragraph 9. b above, the Hearing Officer recommended a finding that the first sentence of Rule 530.b. is consistent with forced pooling statutory language of section 34-60-116(6) and (7) C.R.S., and that there is no incongruity between the statute and Rule 530.

                        11.       On April 4, 2011, the Commission heard oral arguments on the issues described in paragraphs 9. a and 9. b above, then proceeded to decide the full case on the merits.

Stipulated Facts.                 

                        The parties produced a series of stipulated facts and each incorporated the stipulated facts into its prehearing statement.  The Commission adopts and incorporates the parties’ stipulated facts by reference.

Summary of Party Positions

A.        Nonconsenting Owner Status

                        1.         Noble argued the February 18 Filing makes it a consenting owner with respect to the Collective Applications, and the Commission no longer has jurisdiction over Noble, thus the Orr Collective Applications for forced pooling are moot. 

2.         Orr argued the Noble February 18 Filing was untimely under Rule 530, and thus Noble should be considered a nonconsenting owner for purposes of the Orr’s Collective Applications.

B.        Calculation of Allocation of Costs and Production Revenues

                        1.         Orr interprets the statute as allocating production revenues back to the beginning of production, based on the parties’ proportionate surface acreage ownership in the pooling unit. Orr interprets the statute as allocating costs back to the commencement of operations on the same basis. Eligible costs include (from section 34-60-116(7)(b) C.R.S.):

 (I) One hundred percent of the nonconsenting owner's share of the cost of surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment, and piping) plus one hundred percent of the nonconsenting owner's share of the cost of operation of the well commencing with first production and continuing until the consenting owners have recovered such costs. It is the intent that the nonconsenting owner's share of these costs of equipment and operation will be that interest which would have been chargeable to the nonconsenting owner had he initially agreed to pay his share of the costs of the well from the beginning of the operation.

(II) Two hundred percent of that portion of the costs and expenses of staking, well site preparation, obtaining rights-of-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing the well, after deducting any cash contributions received by the consenting owners, and two hundred percent of that portion of the cost of equipment in the well, including the wellhead connections.

                        2.         Noble’s view of the allocation of costs depends on whether it is deemed consenting or nonconsenting.  If deemed consenting, Noble would expect to pay its proportionate share of costs retroactive to the commencement of operations, and begin sharing in production revenues back to the date of first production, without any penalty under section 34-60-116(7)(b)(II).  If deemed nonconsenting, Noble believes that it would be subject to section 34-60-116(7)(b) costs only for those costs incurred after the date of application.  Noble would further expect to participate in production revenues back to the date of first production.

Commission Analysis

A.        Pooling

                        1.         The Hearing Officer recommended the plain language of Rule 530 states an owner becomes non-consenting if it fails to elect in writing to participate in the cost of the well within 30 days following written notice of the information set forth in Rule 530.b.(10-(3).  Noble did not elect to participate within the 30 days of receipt of that information.  Accordingly, the Commission retains jurisdiction and Noble should be considered a nonconsenting owner.  The Hearing Officer also recommends the Commission find Rule 530 is not inconsistent with the Oil and Gas Conservation Act (“Act”).  The Commission agrees with the Hearing Officer recommendation, and incorporates the conceptual analysis and rationale contained in the Second HO Recommendation on this issue.

                        2.         The second threshold question is whether the Commission has the authority to enter an involuntary pooling order that is retroactive to a date prior to the application date.  This question was briefed and argued at the February hearing, but no decision was made.  Orr’s position is that the Commission has the authority to make the pooling order retroactive to the date of commencement of operations.  Noble argues that the Commission can only make the order retroactive to the date of application.  The Hearing Officer recommended that the Commission has the discretion under the Act to enter a pooling order that is retroactive to a date that precedes the pooling application. The Commission agrees with the Hearing Officer recommendation, and incorporates the conceptual analysis and rationale contained in the First HO Recommendation on this issue.

                        3.         The third step in the analysis is a balancing of the equities in this case as to what terms and conditions are “just and reasonable” for the pooling order in this case.  The Commission finds the facts support retroactive application of the pooling order such that all costs specified in section 34-60-116(7)(b) C.R.S. are allocable back to the date of commencement of operations and revenues are allocable back to first production.

B.        Spacing

                        The spacing request in this case was not subject to the Noble protest.  Orr submitted its initial request for Approval of Application under Rule 511 on December 30, 2010, and a corrected version of the same on January 4, 2011. The submitted testimony adequately supports the uncontested spacing unit request.

CONCLUSIONS OF LAW

                        1.         Section 34-60-116 (6) and (7) C.R.S. authorizes retroactive application of allocated costs and revenues in a pooling order, which may include costs incurred and production revenues generated prior to the date of application of the pooling order.

                        2.         Rule 530. b. declares an owner to be a “nonconsenting owner” for the area to be pooled if the owner does not elect in writing to participate in the area to be pooled within 30 days after receiving written notice of the required information.  An application for involuntary pooling may be filed upon expiration of the 30 day period.  An owner’s attempt to consent after 30 days and after an application for involuntary pooling has been filed is ineffective and does not divest the Commission of jurisdiction. 

                        3.         Section 34-60-116(6) C.R.S. provides the Commission with broad discretion  to determine terms of the pooling order that are “just and reasonable”, depending of the facts of a specific case.

                        4.         The Oil and Gas Conservation Act authorizes the Commission to grant the spacing relief and pooling order relief as set forth in this Order.

ORDER

NOW, THEREFORE IT IS ORDERED, that an approximate 160-acre drilling and spacing unit is hereby established for the NE¼ of Section 32, Township 6 North, Range 66 West, 6^th P.M., for the development and operation of the Codell, Niobrara, and “J” Sand Formations.

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, the nonconsenting owners in the designated 160-acre drilling and spacing unit consisting of the below-listed lands, are hereby pooled, for the development and operation of the Codell, Niobrara, and “J” Sand Formations, to accommodate the AG #32-65D Well (API No. 05-123-31456):

            Township 6 North, Range 66 West, 6^th P.M.

            Section 32:    NE¼

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

3.  The nonconsenting leased (working interest) owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating the well (including penalties as provided by §34-60-116 (7)(b), C.R.S.) out of production from the spacing unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S. Noble is considered a nonconsenting leased owner for purposes of this Order.

4.         Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the well and be subject to the penalties as provided for by §34-60-116 (7), C.R.S.

5.         Each nonconsenting unleased owner within the spacing unit shall be treated as the owner of the landowner's royalty to the extent of 12.5% of its record title interest, whatever that interest may be, until such time as the consenting owners recover, only out of each nonconsenting owner's proportionate 87.5% share of production, the costs specified in §34-60-116(7)(b), C.R.S. as amended.  After recovery of such costs, each unleased nonconsenting mineral owner shall then own its proportionate 8/8ths share of the well, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with the well as if it had originally agreed to the drilling.

6.         The operator of the well drilled on the above-described spacing unit shall furnish the nonconsenting 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.         Nothing in this order is intended to conflict with §34-60-116, C.R.S., as amended.  Any conflict that may arise shall be resolved in favor of the statute.

IT IS FURTHER ORDERED, that the provisions contained in the above order shall become effective immediately.

                        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 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  15^th  day of April, 2011, as of April 4, 2011.

                        CORRECTED this 7^th day of October, 2011 as of April 4, 2011.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________         

                                                                                    Peter J. Gowen, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

April 15, 2011

October 7, 2011