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 June 1, 2010, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to pool all nonconsenting interests for a designated 160-acre wellbore spacing unit for certain lands located in Sections 25 and 36, Township 5 North, Range 66 West, 6^th P.M., for the development and operation of the Codell and Niobrara Formations.

FINDINGS

The Commission finds as follows:

1.    Kerr-McGee Oil & Gas Onshore LP (“Kerr-McGee”), 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.    On December 19, 1983, the Commission issued Order No. 407-1 (amended on March 29, 2000 in accordance with Order No. 407-17, entered November 18, 1985), which among other things, established 80-acre drilling and spacing units for the production of oil and/or gas and associated hydrocarbons from the Codell Formation underlying certain lands, including Sections 25 and 36, Township 5 North, Range 66 West, 6^th P.M., with the drilling and spacing unit to be designated by the operator drilling the first well in the quarter section, (or the Director, if the operator fails to designate).  The permitted well shall be located in the center of either 40-acre tract within the wellbore spacing unit with a tolerance of 200 feet in any direction.  The operator shall have the option to drill an additional well on the undrilled 40-acre tract in each 80-acre wellbore spacing unit.

5.    On February 19, 1992, the Commission issued Order No. 407-87 (amended August 20, 1993), which among other things, established 80-acre wellbore spacing units for the production of oil and/or gas from the Codell and Niobrara Formations underlying certain lands, including Sections 25 and 36, Township 5 North, Range 66 West, 6^th P.M., with the permitted well locations in accordance with the provisions of Order No. 407-1.

6.    On April 27, 1998, the Commission adopted Rule 318A., which, among other things, allowed certain drilling locations to be utilized to drill or twin a well, deepen a well or recomplete a well and to commingle any or all of the Cretaceous Age Formations from the base of the Dakota Formation to the surface.  On December 5, 2005, Rule 318A. was amended to, among other things, allow interior infill and boundary wells to be drilled and wellbore spacing units to be established.  Sections 25 and 36, Township 5 North, Range 66 West, 6^th P.M. are subject to this Rule for the Codell and Niobrara Formations.

7.    On or about December 31, 2009, Kerr-McGee designated a 160-acre wellbore spacing unit for the below-described lands for the production of oil and associated hydrocarbons from the Codell and Niobrara Formations and notified the appropriate parties under Rule 318A.e.(6).  Kerr-McGee did not receive any objections to such 160-acre wellbore spacing unit designation and certified the same to the Commission.

8.    On April 12, 2010, Kerr-McGee, by its attorneys, filed with the Commission a verified application to pool all nonconsenting interests in the designated 160-acre wellbore spacing unit, for the below-listed lands (“Application Lands,” to accommodate the bottomhole location of the proposed Curtis #36-25 Well, with a planned bottomhole location of 60 feet FSL and 2,620 feet FEL in Section 25, Township 5 North, Range 66 West, 6^th P.M.), for the development and operation of the Codell and Niobrara Formations, effective as of the spud date of the well:

Township 5 North, Range 66 West, 6^th P.M.

9.  On May 18, 2010, Kerr-McGee, by its attorneys, filed with the Commission a written request to approve the application based on the merits of the verified application and the supporting exhibits as is provided for by Rule 511.  Sworn written testimony and exhibits were submitted in support of the application.

10.  Testimony and exhibits submitted in support of the application showed that Kerr-McGee is the majority leaseholder of lands underlying the Application Lands, and that Kerr-McGee is planning to drill the Curtis #36-25 Well within the designated wellbore spacing unit for the SW¼ SE¼ and the SE¼ SW¼ of Section 25 and the NW¼ NE¼ and the NE¼ NW¼ of Section 36, Township 5 North, Range 66 West, 6^th P.M., for the production of gas and associated hydrocarbons from the Codell and Niobrara Formations.  Additional testimony and exhibits showed a list of nonconsenting owners for the proposed pooled wellbore spacing unit.  Further testimony indicated that offers to lease or to participate were sent to the nonconsenting owners, and that said offers were sent via U.S. Mail, at least 30 days prior to the June 1, 2010 hearing.  Testimony showed that the offers to lease/participate and the Authorizations for Expenditures are fair and reasonable, and similar to those prevailing in the area, and that Kerr-McGee has complied with the requirements of Rule 530.a. and §34-60-116(7)(d), C.R.S.

11.  The above-referenced testimony and exhibits showed 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.

12.  Kerr-McGee agreed to be bound by oral order of this Commission.

13.  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 pool all nonconsenting interests for a designated 160-acre wellbore spacing unit consisting of the SW¼ SE¼ and the SE¼ SW¼ of Section 25 and the NW¼ NE¼ and the NE¼ NW¼ of Section 36, Township 5 North, Range 66 West, 6^th P.M., for the development and operation of the Codell and Niobrara Formations.

ORDER

NOW, THEREFORE IT IS 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 previously designated 160-acre wellbore spacing unit consisting of the SW¼ SE¼ and the SE¼ SW¼ of Section 25 and the NW¼ NE¼ and the NE¼ NW¼ of Section 36, Township 5 North, Range 66 West, 6^th P.M., for the production of gas and associated hydrocarbons from the Codell and Niobrara Formations, are hereby pooled for the development and operation of the Codell and Niobrara Formations, effective as of the spud date of the Curtis #36-25 Well (API No. 05-123-31207).

2.    The production obtained from the wellbore 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 wellbore spacing unit; each owner of an interest in the wellbore spacing unit shall be entitled to receive its share of the production of the well located on the wellbore spacing unit applicable to its interest in the wellbore 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(s) (including penalties as provided by §34-60-116 (7)(b), C.R.S.) out of production from the wellbore spacing unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.

4.    The 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 wellbore 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 wellbore 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 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 June, 2010, as of June 1, 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

June 29, 2010