BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

REPORT OF THE COMMISSION

The Commission heard this matter on July 29, 2013, at offices of the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Denver, Colorado, upon application for an order to pool all interests in an approximate 480-acre designated horizontal drilling and spacing unit established for Sections 5 and 6, Township 5 North, Range 65 West, 6^th P.M., for the development and operation of the Codell and Niobrara Formations.

FINDINGS

The Commission finds as follows:

1.         Mineral Resources, Inc. (“Mineral” 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 December 19, 1983, the Commission issued Order No. 407-1 (amended March 29, 2000) which, among other things, established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Codell Formation, with the unit to be designated by the operator drilling the first well in the quarter section.  The permitted well shall be located in the center of either 40-acre tract within the 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 drilling and spacing unit.  Sections 5 and 6, Township 5 North, Range 65 West, 6^th P.M. are subject to this Order for the Codell Formation.

5.         On February 19, 1992, the Commission issued Order No. 407-87 (amended August 20, 1993) which, among other things, established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Codell and Niobrara Formations, with the permitted well locations in accordance with the provisions of Order No. 407-1.  Sections 5 and 6, Township 5 North, Range 65 West, 6^th P.M. are subject to this Order for the Codell and Niobrara Formations.

6.         On April 27, 1988, 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 Cretaceous Age Formations from the base of the Dakota Formation to the surface.  Rule 318A supersedes all prior Commission drilling and spacing orders affecting well location and density requirements of Greater Wattenberg Area wells.   On December 5, 2005, Rule 318A was amended, among other things, to allow interior infill and boundary wells to be drilled and wellbore spacing units to be established.  On August 8, 2011, Rule 318A was again amended, among other things, to address drilling of horizontal wells.  Sections 5 and 6, Township 5 North, Range 65 West, 6^th P.M. are subject to Rule 318A for the Codell and Niobrara Formations.

7.         On March 15, 2013, Mineral, by its attorneys, filed with the Commission pursuant to §34-60-116 C.R.S., a verified application (“Application”) for an order to pool all interests in an approximate 480-acre designated horizontal drilling and spacing unit established for the below-described lands (“Application Lands”), for the development and operation of the Codell and Niobrara Formations, effective as of the earlier of the date of the Application, or the date that any of the costs specified in C.R.S. §34-60-116(7)(b)(II) were first incurred for the drilling of the DT-Forbes 1-5-6, DT-Forbes 2-5-6, DT-Forbes 3-5-6, DT-Forbes 4-5-6, DT-Forbes 5-5-6 Wells (“Initial Wells” or “Well”), and to subject any nonconsenting interests to the cost recovery provisions of C.R.S. §34-60-116(7):

                        Township 5 North, Range 65 West, 6^th P.M.

                        Section 5:        SW¼

                        Section 6:        S½

Applicant requested the treated interval of the wellbore to be located no closer than 460 feet from the unit boundaries and no closer than 150 feet from the treated interval of any other wellbore located in the unit, without exception being granted by the Director.

Applicant did not request any change to the approximate 80-acre drilling and spacing units established by Order No. 407-87 or the established distribution of proceeds from any existing vertical Niobrara formation well.  Applicant will allocate and distribute proceeds from the horizontal wells on a 480-acre basis.

Applicant requested to locate the surface facilities for the proposed horizontal wells on adjacent lands in the NW¼ NE¼ of Section 5, Township 5 North, Range 66 West, 6^th P.M.

8.         On May 24, 2013, Great Western Operating Company, LLC (“Great Western” or “Protestant”), by its Land Manager, K. Wade Pollard, CPL, filed a Protest to the Application, alleging Mineral had not provided information required by Rule 530.

9.         On June 4, 2013, Mineral, 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.

10.       On June 5, 2013, Great Western and Mineral entered into an agreement whereby Great Western agreed to withdraw its Protest to the Application.

11.       On June 17, 2013, Mineral requested and Commission staff granted, a continuance to the July 29, 2013 hearing.

12.       Land testimony and exhibits submitted in support of the Application by Logan Richardson, Vice President of Land for Mineral Resources, showed that all nonconsenting interest owners were notified of the Application and received an Authority for Expenditure ("AFE") and offer to participate in the Wells.  Further testimony concluded that the AFE sent by the Applicant to the interest owners was a fair and reasonable estimate of the costs of the proposed drilling operation and was received at least 30 days prior to the July 29, 2013 hearing date.

13.       Land testimony showed Applicant complied with the elements of Rule 530 for each of the Initial Wells.  For purposes of pooling and cost recovery pursuant to C.R.S. §§ 34 60-116(6), (7), Applicant requests the Commission:

                        a.     require each interest owner who is not pooled voluntarily to make an election to participate or be pooled by statute in all the Initial Wells collectively, rather than in each Initial Well individually; and

                        b.     for each nonconsenting owner, apply the cost recovery provisions of C.R.S. § 34-60-116(7) to each of the Initial Wells that Applicant (or a successor in interest) drills and completes (or abandons) within two years of the date of this Order; and

                        c.     require Applicant to re-comply with Rule 530 and allow each nonconsenting owner to make a new election to participate or be pooled by statute in each Initial Well, if any, that is not drilled to total depth (or abandoned) within two years of the date of this Order; and

                        d.     require Applicant to re-comply with Rule 530 and allow each interest owner who is not pooled voluntarily to make an election to participate or be pooled by statute in any subsequently approved well(s) within the drilling and spacing unit.

14.       Applicant stated it will begin drilling the Initial Wells within one year from the date of entry of this Order, by obtaining the necessary approvals and permits to drill.  Failure to obtain the necessary permits shall not relieve Mineral from this requirement or extend the time period approved by this Order.

15.       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 hydrocarbons, and will not violate correlative rights.

16.       Mineral agreed to be bound by oral order of the Commission. 

17.       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 interests in an approximate 480-acre designated horizontal drilling and spacing unit established for Sections 5 and 6, Township 5 North, Range 65 West, 6^th P.M., for the development and operation of the Codell and Niobrara Formations.

ORDER

IT IS HEREBY ORDERED:

1.         Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in the approximate 480-acre designated horizontal drilling and spacing unit established for the below-described lands, are hereby pooled, for the development and operation of the Codell and Niobrara Formations, effective as of the earlier of the date of the Application, or the date that any of the costs specified in C.R.S. §34-60-116(7)(b)(II) are first incurred for the drilling of the DT-Forbes 1-5-6, DT-Forbes 2-5-6, DT-Forbes 3-5-6, DT-Forbes 4-5-6, DT-Forbes 5-5-6 Wells:

                        Township 5 North, Range 65 West, 6^th P.M.

                        Section 5:        SW¼

                        Section 6:        S½

2.         The treated interval of the wellbore shall be located no closer than 460 feet from the unit boundaries and no closer than 150 feet from the treated interval of any other wellbore located in the unit, without exception being granted by the Director.

3.         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.

4.         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.

5.         Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the Initial Wells and be subject to the penalties as provided for by §34-60-116 (7), C.R.S.  The Initial Wells shall be drilled to total depth (or abandoned) within 2 years from the date of entry of this Order for the cost recovery provisions to apply.  Thereafter, Applicant shall recomply with Rule 530 by providing a new AFE and election letter to the nonconsenting owners providing an opportunity to participate for each subsequent well.

6.         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.

7.         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.

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.

IT IS FURTHER ORDERED:

1.         The provisions contained in the above order shall become effective immediately.

2.         The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

3.         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.

4.         An application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

ENTERED this   27   day of August, 2013, as of July 29, 2013.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

By____________________________________                    Robert J. Frick, Secretary