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 on June 27, 2011, Elbert County Fairgrounds, Ag Building, 95 Ute Avenue, Kiowa, Colorado, for an order to pool all nonconsenting interests in the approximate 320-acre drilling and spacing unit which may be established for the N½ S½ and S½ N½ of Section 26, Township 3 North, Range 68 West, 6^th P.M., for the development and operation of the Greenhorn and Graneros Formations.

FINDINGS

The Commission finds as follows:

1.     Kerr-McGee Oil & Gas Onshore LP, (“Kerr-McGee” or “Applicant”), 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 June 27, 2011, the Commission, acting pursuant to an application filed by Kerr-McGee on May 3, 2011, will consider establishing an approximate 320-acre drilling and spacing unit, with the authority to drill one horizontal well within the unit, for the N½ S½ and S½ N½ of Section 26, Township 3 North, Range 68 West, 6^th P.M., for the production of oil, gas and associated hydrocarbons from the Greenhorn and Graneros Formations.

5.     On May 3, 2011, Kerr-McGee, by its attorneys, filed with the Commission a verified application (the “Application”) for an order to pool all nonconsenting interests in the approximate 320-acre drilling and spacing unit which may be established for the below-described lands wherein Kerr-McGee plans to drill and complete the Douthit #32-26HZ Well (the “Well”), API #05-123-32978, for the development and operation of the Greenhorn and Graneros Formations, retroactive to the earliest date costs are incurred for the Well as allowed by §34-60-116(7), C.R.S., or the date of the Application, whichever is earlier:

Township 3 North, Range 68 West, 6^th P.M.

6.     On June 14, 2011, 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.

7.     Testimony and exhibits submitted in support of the Application by Brett Torina, Landman for Kerr-McGee, showed that the surface location of the Well is not located within an established drilling window pursuant to Commission Rule 318A.a.  However, Kerr-McGee holds an approved Application for Permit to Drill for the Well and has a surface use agreement from the surface owner.

8.     Further testimony revealed, as of June 14, 2011, that Kerr-McGee seeks an order, pursuant to C.R.S. §34-60-116 (6) and (7), to involuntarily pool the following interested parties: William Edwards Trust, and Robert and Diane Rademacher.  The testimony further reveals that each of the above-listed parties own mineral interests in the lands underlying the Drilling and Spacing Unit and such mineral interests are 100% leased to Kerr-McGee.  The current leases, however, have certain limitations on pooling and unitization and Kerr-McGee is currently seeking amendments to the respective leases.

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

10.   Kerr-McGee agreed to be bound by oral order of the Commission. 

11.   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 all nonconsenting interests in the approximate 320-acre drilling and spacing unit which may be established for the N½ S½ and S½ N½ of Section 26, Township 3 North, Range 68 West, 6^th P.M., for the development and operation of the Greenhorn and Graneros 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, all nonconsenting interests in the approximate 320-acre drilling and spacing unit to be established for the below-listed lands, are hereby pooled, for the development and operation of the Greenhorn and Graneros Formations, retroactive to the earliest date costs are incurred for the Well as allowed by §34-60-116(7), C.R.S., or the date of the Application, whichever is earlier:

Township 3 North, Range 68 West, 6^th P.M.

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.     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 drilling and 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.     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 drilling and 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 drilling and 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    30^th    day of June, 2011, as of June 27, 2011.

                                                                        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

June 30, 2011