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

REPORT OF COMMISSION

            This cause came on for hearing before the Commission at 9:00 a.m. on November 29, 2010, in Suite 801, at The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to pool specifically named nonconsenting interests for certain described wells and future wells drilling in designated drilling and spacing units and wellbore spacing units located in Sections 7, 8, 17 through 19 in Township 3 North, Range 66 West, 6^th P.M.

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 October 19, 1981, the Commission issued Order No. 232-23, which among other things, amended Order No. 232-20 to establish additional 320-acre drilling and spacing units and allow a second well to be drilled for the production of gas and associated hydrocarbons from the “J” Sand Formation, for certain lands, including Sections 7, 8, 17, 18, and 19, Township 3 North, Range 66 West, 6^th P.M.

5.     On November 21, 1983, the Commission issued Order No. 407-1, which among other things, established 80-acre drilling and spacing units for certain lands, including Sections 7, 8, 17, 18, and 19, Township 3 North, Range 66 West, 6^th P.M., for the production of gas and associated hydrocarbons from the Codell Formation.

6.     On April 7, 1992 (amended August 23, 1993), the Commission issued Order No. 407-87, which among other things, established 80-acre drilling and spacing units for certain lands including Sections 7, 8, 17, 18, and 19, Township 3 North, Range 66 West, 6^th P.M., for the production of gas and associated hydrocarbons from the Codell-Niobrara Formations.

7.     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 allow, among other things, interior infill and boundary wells to be drilled and wellbore spacing units to be established.  Sections 7, 8, 17, 18, and 19, Township 3 North, Range 66 West, 6^th P.M., are subject to this Rule.

8.     On September 1, 2010, Kerr-McGee, by its attorneys, filed with the Commission a verified application (“Application”) for an order to pool specifically named non-consenting interests for certain described wells and future wells drilled in designated drilling and spacing and wellbore spacing units established for the production of oil, gas and associated hydrocarbons from the Codell, Niobrara and “J” Sand Formations located within portions of Sections 7, 8, 17, 18 and 19 in Township 3 North, Range 66 West, 6^th P.M.

Exhibit “A” (attached hereto), is a compilaton of certain wells that Kerr-McGee has either drilled or is preparing to drill to produce gas from the Codell, Niobrara and “J” Sand Formations.  The compilation also identifies the land description of the designated drilling and spacing or wellbore spacing unit for each well (collectively, the “Application Lands”).

9.     The original Notice of Hearing in this matter (dated November 2, 2010) did not identify the correct unleased mineral interests. Upon further research, Kerr-McGee has identified the following parties as owners of unleased mineral interests in each of the wells described in Exhibit A of this Order: 

Francis Nuckolls Kelly, daughter of Rupert B. Nuckolls and Georgia E. Nuckolls

Peggy Ann Stephenson, daughter of Margaret Mauss Stephenson and Ross Stephenson

(“Specifically Named Parties”).

A Corrected Notice of Hearing was issued on November 12, 2010, with corrected identities of the unleased mineral interests in the Application Lands.

10.   On November 16, 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.  Sworn written testimony and exhibits were submitted in support of the application.

11.   Testimony and exhibits submitted in support of the Application by Nancy McDonald, Landman for Kerr-McGee, showed that Kerr-McGee owns the majority of the leasehold interests within each of the drilling and spacing and wellbore spacing units for which the pooling of nonconsenting interests is requested.  Additional testimony indicated that Kerr-McGee conducted a title review of mineral interests for the Application Lands and determined that ownership of the oil from certain wells is different from the ownership of the gas in those same wells, in that a deed from the early 1900’s created a severance between the oil and gas mineral interests.  Further testimony stated that the gas in the drilling and spacing and wellbore spacing units and their respective wells are leased, as such, no gas interests are being pooled as a result of the Application.  Testimony showed that Kerr-McGee determined that over fifty parties have an interest in the oil produced from the the drilling and spacing and wellbore spacing units under the Application, and that Kerr-McGee has leased the interests of all but two of these parties (the “Specifically Named Parties”).  Further testimony asserted that the Specifically Named Parties own unleased oil interests in each of the drilling and spacing and wellbore spacing units and their respective wells described in Exhibit A, and that it is not known whether the Specifically Named Parties are alive or deceased and Kerr-McGee is unable to determine if they have living heirs. 

12.   For purposes of applications for involuntary pooling orders made pursuant to C.R.S. §34-60-116, Rule 507.b.(2) provides that “notice of the application shall be served on those persons who own any interest in the mineral estate of the tracts to be pooled.”  Kerr-McGee has not provided notice to the owners of the gas interests since that interest is not being pooled.  Furthermore, notice of the force pooling of the oil interests of the Specifically Named Parties has not been provided to owners of the leased oil interests, as the leased oil interests are not “nonconsenting owners” and are not being force pooled.  To the extent that the Commission holds a broader interpretation of the notice rule requiring notice to any mineral interest owner in the drilling and spacing and wellbore spacing units, regardless of whether that party is being force pooled, then as a part of this Application, Kerr-McGee seeks a variance under Rule 502.b., waiving any requirement to give notice of this Application to all such mineral interest owners as otherwise may be required under Rule 507.b.(2). or 507.a.(3).

13.   Kerr-McGee agrees and acknowledges that this Order only serves to pool the oil interests of Francis Nuckolls Kelly, daughter of Rupert B. Nuckolls and Georgia E. Nuckolls, and Peggy Ann Stephenson, daughter of Margaret Mauss Stephenson and Ross Stephenson, or their respective heirs, and no others.

14.   In granting the notice variance requested by Kerr-McGee, the Commission is making no conclusion of law as to whether this variance is required under the facts of this case, as applied under either the Oil and Gas Conservation Act, or Commission rules.

15.   Kerr-McGee agreed to be bound by oral Order of the Commission. 

16.   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 pooling the nonconsenting oil interests of the Specifically Named Parties for certain described wells and future wells drilled in the designated drilling and spacing and wellbore spacing units established for the production of oil from the Codell, Niobrara, and “J” Sand Formations located within the Application Lands and described in Exhibit A.

ORDER

                        NOW, THEREFORE IT IS ORDERED, that  the variance requested by Kerr-McGee in this matter under Rule 502.b., waiving any requirement to give notice of this Application to the owners of the gas estate interests and the leased oil interests in the Application Lands, is hereby granted.

IT IS FURTHER ORDERED, that  

1.   The oil interests in the Codell, Niobrara and “J” Sand Formations of Francis Nuckolls Kelly, daughter of Rupert B. Nuckolls and Georgia E. Nuckolls, and Peggy Ann Stephenson, daughter of Margaret Mauss Stephenson and Ross Stephenson, in the drilling and spacing and wellbore spacing units described in Exhibit A, attached hereto, are hereby pooled.

2.   The wells, well locations, and the drilling and spacing and wellbore spacing units that are subject to this pooling order are those described on Exhibit A of this Order.

3.  The oil production obtained from the drilling and spacing and wellbore spacing units shall be allocated to each owner in the unit on the basis of the proportion that the number of acres in each owner’s tract bears to the total number of oil mineral acres within each drilling and spacing or wellbore spacing unit.  

4.  Any 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 oil wells (including penalties as provided by §34-60-116 (7)(b), C.R.S.) out of production from the drilling and spacing and wellbore spacing units representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.

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

6.  Each nonconsenting unleased owner within the drilling and spacing or 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.

7.  The operator of the wells drilled on the above-described drilling and spacing and wellbore spacing units shall furnish the nonconsenting owners with a monthly statement of all costs incurred, together with the quantity of oil produced, and the amount of proceeds realized from the sale of production during the preceding month.

8.  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.

9.   Nothing in this Order, shall be construed as affecting the gas interests of the Application Lands.

                        IT IS FURTHER ORDERED, the effective date of this involuntary pooling Order is made retroactive to the earlier of either:  (1) the spud date of the respective well, or (2) the date of application for this Order.

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 thirty 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 December 2010, as of November 29, 2010.

                                                            OIL AND GAS CONSERVATION COMMISSION

                                                              OF THE STATE OF COLORADO

                                                                                                                                                                        By__________________________    ________

                                                                        Robert A. Willis, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

December 27, 2010

EXHIBIT A

ORDER NOS. 232-262 and 407-381