IN THE MATTER OF GENERAL RULES AND REGULATIONS WITH RESPECT TO THE CONSERVATION OF OIL AND GAS IN THE STATE OF COLORADO, AND RULES OF PRACTICE AND PROCEDURE PERTAINING THERETO AND IN PARTICULAR WITH REFERENCE TO RULE 323

BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS IN THE WATTENBERG FIELD, THE WATTENBERG GAS SPACED AREA AND THE CODELL-NIOBRARA SPACED AREA, ADAMS AND WELD COUNTIES, COLORADO

)

CAUSE NOS. 499, 232, 407

and 493

ORDER NOS. 499-8, 232-80,

407-115 and 493-17

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on September 21, 1992, in Room 101, State Education Building, 201 East Colfax, Denver, Colorado, after giving Notice of Hearing, as required by law on the verified application of Gerrity Oil and Gas Corporation, for an order to amend Cause Nos. 499, 232, 407 and 493 to establish 320-acre drilling and spacing units for production from the Dakota Formation and further to allow wells drilled to the Dakota Formation to be recompleted to the "J" Sand, Codell, Niobrara, Sussex and Shannon Formations. In addition, the order should allow the downhole commingling of production from the Dakota Formation with production from the "J" Sand, Codell, Niobrara, Sussex and Shannon Formations.

FINDINGS

The Commission finds as follows:

1. Gerrity Oil and Gas Corporation as applicant herein, are interested parties [sic] 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.

4. In Order No. 499-5, the Commission established 320-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Dakota Formation in the Wattenberg Field, with one well allowed for each unit, to be located in the NW1/4, NE1/4, SW1/4 and SE1/4 and no closer than 990 feet to the boundaries of the quarter section. In addition the order allowed wells drilled to the Dakota Formation to be recompleted to the "J" Sand, Codell, Niobrara, Sussex and Shannon Formations and allowed the downhole commingling of production from all zones.

5. In Cause No. 232, the Commission established 320-acre drilling and spacing units for the production of gas and associated hydrocarbons from the "J" Sand Formation in the Wattenberg Field with one well allowed for each unit, to be located in the NE1/4 and SW1/4 and no closer than 990 feet to the boundaries of the quarter section. On August 21, 1979, the Commission issued Order No. 232-20 which allowed a second well to be drilled on each 320-acre unit.

6. In Order No. 407-1, the Commission established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Codell Formation, with wells located in the center of the 40-acre tract or quarter-quarter section with a tolerance of 200 feet in any direction. In Order Nos. 407-10 and 407-13, the Commission amended Order No. 407-1 to include production from the Niobrara Formation in certain lands and to allow the downhole commingling of production from the Codell and Niobrara Formations.

7. In Order No. 493-1, the Commission established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Sussex Formation, with wells located in the center of the 40-acre tract or quarter-quarter section with a tolerance of 200 feet in any direction, in accordance with those rules established in Cause No. 407. In addition, the order allows the downhole commingling of production from the Sussex Formation with production from the Codell and Niobrara Formations.

8. The Commission has not established drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Shannon Formation in the lands included in the application.

9. That in order to prevent the waste of oil and gas, as defined by law, to protect the correlative rights of all parties, concerned; to prevent the drilling of unnecessary wells, and to ensure proper and efficient development and promote conservation of the oil and gas resources of the State, an order should be made establishing 320-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Dakota Formation, a common source of supply, underlying the lands herein described with the units to consist of the E1/2 and the W1/2 or the N1/2 and the S1/2 of each section, according to the governmental survey, and said units should be identical to the 320-acre drilling and spacing units previously established for the "J" Sand Formation required by Cause No. 232, with the permitted well to be located in any quarter section, no closer than 990 feet from the boundary of the quarter section, for the below-listed lands to-wit:

Weld County

Township 1 North, Range 65 West, 6th P.M.

Section 3: All

Township 1 North, Range 68 West, 6th P.M.

Section 8: All

Township 2 North, Range 64 West, 6th P.M.

Section 5: All

Township 2 North, Range 65 West, 6th P.M.

Section 7: All

Section 15: All

Section 20: All

Section 31: All

Township 2 North, Range 66 West, 6th P.M.

Section 3: All

Section 6: All

Section 20: All

Township 2 North, Range 66 West, 6th P.M. (Cont.)

Section 25: All

Section 33: All

Township 2 North, Range 67 West, 6th P.M.

Section 10: All

Township 3 North, Range 64 West, 6th P.M.

Section 8: All

Sections 18 and 19: All

Adams County

Township 1 South, Range 65 West, 6th P.M.

Section 23: All

10. That the Director should be allowed, without further notice and hearing, to approve exceptions to the permitted well locations due to topography or surface hazards or the recompletion or deepening of existing "J" Sand Formation wells previously authorized at an approved exception location.

11. All available geologic and engineering data concerning said Dakota Formation indicates that one well will economically and efficiently drain an area of approximately 320-acres,and [sic] that drilling units the size and shape hereinabove described are not smaller than the maximum area that can be efficiently and economically drained by one well producing from said Dakota Formation.

12. Wells previously permitted and/or drilled to the Dakota Formation prior to the hearing, whether or not in accordance with the herein described well locations, should be designated as the permitted well for the unit. Operators of such wells should file with the Commission a designation of unit declaration within thirty (30) days of the issuance of an order.

13. Evidence at the hearing indicates that the Dakota, "J" Sand, Codell, Niobrara, Sussex and Shannon Formations constitute common sources of supply of oil, gas and associated hydrocarbons underlying the above-described lands in Adams and Weld Counties, Colorado.

14. Engineering testimony presented indicated that prudent production engineering practices would allow commingled production from the various reservoirs resulting in increased recovery of reserves and no irremediable reservoir damage.

15. A protest filed by HS Resources, Inc. was withdrawn upon agreement to certain stipulations at the time of the administrative hearing.

16. Based on the facts stated in the application and the amended application, and having been heard by the Director as Hearing Officer and recommended for approval, the Commission should approve the request and establish 320-acre drilling and spacing units for the lands listed in Finding 9, for the production of oil, gas and associated hydrocarbons from the Dakota Formation. Further, additional rules should be established for the protection of correlative rights and procedures to process recompletion, commingled and dual completion requests.

ORDER

NOW, THEREFORE, IT IS ORDERED, that the following rules and regulations shall apply hereafter to a well or wells drilled, completed or recompleted in the Dakota Formation, where the production is commingled or dually completed with the "J" Sand, Codell, Niobrara, Sussex and Shannon Formations underlying the lands described herein below, in addition to other applicable rules and regulations and orders of the Commission, if any, heretofore adopted and not in conflict herein:

Rule 1. Three hundred and twenty (320) acre drilling and spacing units shall be and the same are hereby established for the production of oil, gas and associated hydrocarbons from the Dakota Formation underlying the following described lands in Adams and Weld Counties, Colorado, to-wit:

Weld County

Township 1 North, Range 65 West, 6th P.M.

Section 3: All

Township 1 North, Range 68 West, 6th P.M.

Section 8: All

Township 2 North, Range 64 West, 6th P.M.

Section 5: All

Township 2 North, Range 65 West, 6th P.M.

Section 7: All

Section 15: All

Section 20: All

Section 31: All

Township 2 North, Range 66 West, 6th P.M.

Section 3: All

Section 6: All

Section 20: All

Township 2 North, Range 66 West, 6th P.M. (Cont.)

Section 25: All

Section 33: All

Township 2 North, Range 67 West, 6th P.M.

Section 10: All

Township 3 North, Range 64 West, 6th P.M.

Section 8: All

Sections 18 and 19: All

Adams County

Township 1 South, Range 65 West, 6th P.M.

Section 23: All

Rule 2. Said drilling units shall consist of the E1/2 and the W1/2 or the N1/2 and the S1/2 of each section, according to governmental survey, and said units shall be identical to the 320-acre drilling and spacing units previously established for the "J" Sand Formation required by Cause No. 232, with the permitted well to be located in any quarter section, no closer than 990 feet from the boundary of the quarter section.

Rule 3. That the Director may, without further notice and hearing, approve exceptions to the permitted well locations due to topography or surface hazards or the recompletion or deepening of existing "J" Sand Formation wells previously authorized at an approved exception location.

Rule 4. Wells previously permitted and/or drilled to the Dakota Formation prior to the hearing, whether or not in accordance with the herein described well locations, are hereby designated as the permitted well for the unit. Operators of such wells shall file with the Commission a designation of unit declaration within thirty (30) days of this order.

Rule 5. That evidence presented at the hearing indicates that the Dakota, "J" Sand, Codell and Niobrara Formations constitute common sources of supply of oil, gas and associated hydrocarbons underlying the following described lands in Adams and Weld Counties, Colorado, to-wit:

Weld County

Township 1 North, Range 65 West, 6th P.M.

Section 3: All

Township 1 North, Range 68 West, 6th P.M.

Section 8: All

Township 2 North, Range 64 West, 6th P.M.

Section 5: All

Township 2 North, Range 65 West, 6th P.M.

Section 7: All

Section 15: All

Section 20: All

Section 31: All

Township 2 North, Range 66 West, 6th P.M.

Section 3: All

Section 6: All

Section 20: All

Township 2 North, Range 66 West, 6th P.M. (Cont.)

Section 25: All

Section 33: All

Township 2 North, Range 67 West, 6th P.M.

Section 10: All

Adams County

Township 1 South, Range 65 West, 6th P.M.

Section 23: All

Rule 6. That evidence presented at the hearing indicates that the Dakota, "J" Sand, Codell, Niobrara and Sussex Formations constitute common sources of supply of oil, gas and associated hydrocarbons underlying the following described lands in Weld County, Colorado, to-wit:

Township 3 North, Range 64 West, 6th P.M.

Section 8: All

Sections 18 and 19: All

Rule 7. The location of all wells drilled to the Dakota Formation underlying areas subject to Cause Nos. 232, 407 and 496, and at a legal location pursuant to Rule 318 or Cause No. 499 shall be automatically approved, without hearing, as a legal location for production from the "J" Sand, Codell, Niobrara, Sussex or Shannon Formations, provided the following conditions are met:

a. The size of the designated unit for production from the "J" Sand Formation is the same size as the unit for production from the Dakota Formation; and

b. The size of the voluntary unit for production from the Codell, Niobrara, Sussex and/or Shannon Formations is either (i) 160-acres or (ii) the same size as the unit for production from the Dakota and "J" Sand Formations, or (iii) equal to the spacing units for the Codell, Niobrara, and Sussex Formations as ordered by Cause Nos. 407 and 493; and

c. The location of the wellbore in the Codell, Niobrara, Sussex or Shannon Formation is not less than 920 horizontal feet from any existing wellbore in the Codell, Niobrara, Sussex or Shannon Formation capable of producing from such formation and, in addition, not less than 920 horizontal feet from any proposed, permitted well for which the Codell, Niobrara, Sussex or Shannon Formation is the identified objective formation.

Rule 8: [sic] If an applicant wishes to produce oil, gas or associated hydrocarbons from the Codell, Niobrara, Sussex or Shannon Formations and the well is not located at a legal location under these rules or under Cause Nos. 407 or 493, the applicant shall file with the Commission waivers or consents signed by the owners toward whom the well is located, including but not limited to owners of interests in other formations not participating in the proposed operation, agreeing that the well may be located where the applicant proposes to drill the well. If written waivers or consents are not obtained from all of said owners, then the applicant shall give written notice of the proposed operation by certified mail to said owners. If an owner of the well is also the owner of a lease toward which the well is located, then the applicant must also obtain a waiver or consent or give written notice by certified mail to the mineral interest owner subject to such lease. The notice and any request for waiver or consent shall state that anyone who objects to the proposed operation should file a protest with the Commission within 30 days of the date of the notice. The applicant shall provide the Director with a copy of the notice and a list of the addressees prior to approval of any exception location under this rule. If the applicant intends to commingle production fro m the well for which an exception location is requested, then the applicant should file contemporaneously with the exception location application the application materials required in Rule 9 below. If no written objections are filed within 30 days after notice is received, the Director is authorized to approve the proposed location as an exception location without a hearing. If a written objection is filed, or upon motion of the applicant or the Director, the application shall be heard in accordance with the rules of the Commission.

Rule 9: [sic] Multiple zone completions and downhole commingling of oil, gas and associated hydrocarbons from the Dakota, "J" Sand, Codell, Niobrara, Sussex and Shannon Formations may be approved by the Director without hearing provided the well is located at a legal location for each formation from which production is obtained; and further that the applicant files with the Commission prior to commencing operations, (1) a complete Application for Permit to Drill, (2) a Sundry Notice setting forth the manner and method of completion proposed, including a diagrammatic sketch of the mechanical installation for multiple zone completion and commingling and (3) an exhibit showing the location of all wells on adjacent premises and all offset wells on adjacent lands. Each application shall also designate the drilling and spacing units within 1/4 mile of the well proposed to be commingled and indicate that the owners have given written consent to the commingling. If the well to be commingled is within a voluntary unit for production from the Codell, Niobrara, Sussex and Shannon Formations and is not less than 460 feet from the boundary of the unit and not less than 920 feet from any well not included in the voluntary unit, then the applicant shall not be required to give notice to owners outside the voluntary unit. In the absence of common ownership, the application shall also include a statement that each person sharing in the costs and/or proceeds from such well has agreed to a method for allocating commingled production.

If an agreement among the necessary parties cannot be reached, then the applicant shall file with the Commission, prior to commencing operations, the same information described in the preceding paragraph, excluding the statement that the parties have agreed, and in addition shall give written notice by certified mail to each person who owns an interest in the tract where production is to be commingled. The notice shall state that anyone who objects to the proposed operation may file a protest with the Commission within 30 days. The applicant shall provide the Director with a copy of the notice and a list of the addressees. If any such owner, or the Commission itself, does not file written objection to the application within 30 days after receiving notice, then the application shall be approved. If any such owner, or the Commission itself, files written objection to the application within 30 days after receiving notice, then the application shall be heard in accordance with the rules of the Commission.

Rule 10: [sic] An operator may allocate the commingled production from the Dakota, "J" Sand, Codell, Niobrara, Sussex and/or Shannon Formations underlying lands subject to these rules, provided the method is equitable to all of the persons sharing in the costs and/or proceeds from the well and a description of the method to be used is provided to all of such persons with notification of their right to object to the Commission within 30 days. The applicant shall provide the Director with a copy of the notice and a list of the addressees. However, any allocation method shall be subject to the Commission's right to object on its own account or upon application of any interested party. Any objection or application filed with the Commission shall be filed within 30 days after receipt of notice. If no such party, nor the Commission itself, objects to the proposed allocation method, then the operator may allocate production without action by the Commission.

Upon objection or application the Commission shall hear the matter in accordance with the rules of the Commission and may approve an allocation method if the method is equitable and has been approved in writing by (1) those persons who own at least 80% of the cost-bearing interests in each formation from which commingled production will be obtained, and (2) by the owners of at least 80% of the cost-free interests, such as royalties, overriding royalties and production payments, in each formation from which commingled production will be obtained.

Rule 11: [sic] Any application, protest or objection filed pursuant to these rules shall be subject to the rules of practice and procedure of the Commission; however, in the event of a conflict between the terms and provisions of these rules and the Commission's rules of practice and procedure, the terms and provisions of these rules shall control.

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 16th day of October, 1992, as of September 21, 1992.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

Patricia C. Beaver, Secretary

Dated at Suite 380

1580 Logan Street

Denver, Colorado 80203

October 9, 1992