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 March 25, 2010, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to establish an approximate 40-acre drilling and spacing unit for the NW¼ SW¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M., and to pool all nonconsenting interests in said unit.

FINDINGS

The Commission finds as follows:

1.  Red Mesa Holdings/O&G, LLC (“Red Mesa”), 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 Commission (2 CCR 404-1) 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 NW¼ SW¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M. is subject to this Rule for the Gallup and Dakota Formations.

                        5.  On January 28, 2010, Red Mesa, by its attorney, filed with the Commission a verified application, as amended on or around February 9, 2010, to establish an approximate 40-acre drilling and spacing unit for the NW¼ SW¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M., for the production of oil and gas and associated hydrocarbons from the Gallup and Dakota Formations, and to pool all nonconsenting interests in said unit, for the development and operation of the Gallup and Dakota Formations.  Further, it is alleged by Red Mesa that it intends to drill and produce the Ferguson #1 BT-1 Well within said unit.

                        6.  Testimony and exhibits submitted in support of the application showed that the Gallup and Dakota Formations exist as separate and distinct reservoirs within the application lands, and each is a common source of supply of oil and associated gas in the Red Mesa field.  Further testimony indicated that the low permeability Dakota and Gallup Formations are comprised of northwest trending shoreface, distributary channel and delta-front sandstones that trap hydrocarbons along the Red Mesa anticline.  Additional testimony showed that the Red Mesa field has been developed, traditionally, on 40-acre spacing for each of the Dakota and Gallup Formations.  Further testimony showed that the proposed Ferguson #1 BT-1 Well will be drilled at a location not less than 600 feet from any lease line and not less than 1,200 feet from any other well as prescribed by Rule 318.a.

                         7.  Testimony and exhibits submitted in support of the application showed that the net productive interval of the Gallup Formation averages approximately 42 feet in thickness across the application lands, and the net productive interval of the Dakota formation averages approximately 30 feet in thickness across the application lands, with an estimated original oil-in-place of approximately 402 thousand barrels of oil (“MBO”) and 261 MBO, respectively, and a recovery factor of approximately 12.5% based on a history match with existing wells in the field.  Further testimony showed that marketable amounts of oil and associated gas can be produced from the Gallup and Dakota Formations in the application area.  Additional testimony showed estimated primary recovery volumes from the Dakota interval are approximately 53.7 MBO with 73.5 million cubic feet (“MMCF”) of associated gas and from the Gallup interval are approximately 26 MBO with 23.4 MMCF of associated gas.

8.  Further testimony and exhibits submitted in support of the application showed that the proposed well, in which production from the Dakota and Gallup Formations would be commingled, is economic with an average rate of return that is greater than 100% and would efficiently recover 72 MBO and 87 MMCF of gas reserves that would not be recovered under any existing well in the vicinity of the proposed well.  Further testimony showed that single interval production from the Dakota Formation is also economic with a rate of return greater than 100% and 53.7 MBO and 73.5 MMCF of gas being recovered that would not be recovered under any existing well in the vicinity of the proposed well.

                        9.  Further testimony showed that, given the low permeability of the subject formations, 40-acres is the maximum area that can be efficiently and economically drained by the one proposed well.

10.  Testimony and exhibits submitted in support of the application showed a list of all mineral owners and working interest owners within the 40-acre drilling and spacing unit and that all mineral owners in the application area have executed oil and gas leases.  Further testimony and exhibits submitted showed that Reynolds Metal Company (“Reynolds”) owns an undivided 50% of the oil and gas leasehold and working interest in the application lands; Red Mesa owns 25%, and Red Willow Production Company owns the remaining 25%.

                        11.  Further testimony and exhibits submitted in support of the application showed that an offer to participate was sent to Reynolds, that the offer and the Authorization for Expenditure were fair and reasonable and similar to those prevailing in the area, that the offer was sent via U.S. mail on or around November 10, 2009, that it was received at least thirty (30) days prior to the date of the filing of the application, and that Reynolds has not responded to the offer. 

                        12.  The testimony and exhibits submitted in support of the application indicate that Red Mesa has complied with the requirements of Rule 530.a. and C.R.S. §34-60-116. 

13.  The above-referenced testimony and exhibits show that the granting of the application will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of oil/gas, and will not violate correlative rights.

14.  Red Mesa agreed to be bound by oral order of the Commission. 

15.  Based on the facts stated in the verified application, having received no protests, and based on the Hearing Officer review of the application under Rule 511., the Commission should enter an order to establish an approximate 40-acre drilling and spacing unit for the NW¼ SW¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M., for the production of oil and gas and associated hydrocarbons from the Gallup and Dakota Formations, and to pool all nonconsenting interests in said unit for the development and operation of the Gallup and Dakota Formations. The Commission should also approve the location of the proposed Ferguson #1 BT-1 Well to be drilled not less than 600 feet from the outside boundary of the said unit and not less than 1,200 feet from any other producible or drilling oil and gas well in or to the Gallup or Dakota Formation unless authorized by order of the Commission.

ORDER

NOW, THEREFORE IT IS ORDERED, that an approximate 40-acre drilling and spacing unit is hereby established for the NW¼ SW¼ of Section 34, Township 33 North, Range 12 West, N.M.P.M., for the production of oil and associated hydrocarbons from the Gallup and Dakota Formations.

IT IS FURTHER ORDERED, that the proposed Ferguson #1 BT-1 Well shall be drilled at a location on said drilling and spacing unit not less than 600 feet from the outside boundary of the unit and not less than 1,200 feet from any other producible or drilling oil and gas well in or to the Gallup or Dakota Formation unless authorized by order of the Commission and that,

1.  Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act of the State of Colorado, all nonconsenting interests in said drilling and spacing unit, described above, are hereby pooled for the development and operation of the Gallup and Dakota Formations.

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

3.    Each owner being involuntarily pooled is hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the well; and, the consenting owners shall be entitled to recover costs from each nonconsenting owner’s share of production as provided for by §34-60-116(7), C.R.S.

4.    Any nonconsenting unleased owner within the drilling and spacing unit shall be treated as the owner of a 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 the 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 nonconsenting unleased 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.

5.    The operator of the well drilled on the above-described unit shall furnish each nonconsenting owner 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.

6.    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 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 April, 2010, as of March 25, 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

April 24, 2010