REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on May 17, 1985 at 9:00 A.M., in Suite 380, Logan Tower Building, 1580 Logan Street, Denver, Colorado, after giving Notice of Hearing as required by law, on the application of R. E. Hibbert to the Commission for reconsideration of its Order No. 420-2 entered in this cause on January 7, 1985, nunc pro tunc as of November 19, 1984, pursuant to Section 34-60-116, C.R.S., as amended, pooling interests in the 40-acre unit consisting of the SW/4NW/4 of Section 26, Township 2 South, Range 53 West, 6th P.M., for the development of the oil and associated hydrocarbons from the "J" Sand underlying said unit.

FINDINGS

The Commission finds as follows:

1. R. E. Hibbert, as applicant herein (hereinafter "Applicant"), is an interested party in the subject matter of the above-referenced hearing, by virtue of his present ownership of a leasehold working interest in the subject lands.

2. Sundance Exploration Company, as Protestant herein (hereinafter "Protestant"), is an interested party in the subject matter of the above-referenced hearing by virtue of its present ownership of a leasehold working interest in the subject lands. 3. The Commission has jurisdiction over the subject matter embraced in the notice of the aforesaid hearing, and of the parties interested therein, as well as jurisdiction to promulgate the order hereinafter provided for.

4. The Commission has previously established a 40-acre drilling and spacing unit for "J" Sand production covering the SW/4NW/4 of Section 26, Township 2 South, Range 53 West, 6th P.M. (hereinafter the "Spacing Unit") .

5. Applicant, at its sole cost and expense has drilled, equipped and completed and is operating a well, the Nickerson 1-26 well, in the spacing unit, which well has been completed as a producer of oil and gas.

6. At a hearing held in this cause on November 19, 1984, Applicant applied for an order pooling all interests in the Spacing Unit and imposing a penalty on Protestant's share of production pursuant to 34-60-116 (7)(b), C.R.S., as amended.

7. Evidence was presented at the hearing held on November 19, 1984, and the parties agree, that there are separately and undividedly owned interests in the Spacing Unit and the interest of each working interest owner in the Spacing Unit is as follows: R. E. Hibbert, Applicant, undivided 50%; Sundance Exploration Company, Protestant, undivided 50%.

8. At the November 19, 1984 hearing, Protestant has consented to the pooling of the interests with the Spacing but objected to the imposition of any penalty under 34-60-116 (7) (b), C.R.S., as amended, on the grounds that it was not offered an opportunity to elect whether to participate in the proposed drilling operation, nor was it given sufficient information in the form of an AFE or other document on which to base such an election, prior to the drilling of the Nickerson 1-26 well.

9. As a result of the November 19, 1984 hearing, Order No. 420-2 was entered on January 7, 1985, nunc pro tunc as of November 19, 1984, which order pooled all interests in the Spacing Unit without penalty to Protestant. 10. On December 20, 1984, Applicant filed with the Commission a petition for rehearing asking the Commission to reconsider Order No. 420-2 on the grounds that proper notice was not given of the November 19, 1984, hearing and that additional evidence would indicate that said order was contrary to law.

11. On February 18, 1985, after hearing arguments presented by counsel for the parties, the Commission granted Applicant's request for a reheating, which reheating was held on April 15, 1985.

12. On April 15, 1985, after the presentation of certain additional evidence by Applicant, and after the presentation of arguments by counsel for the parties, the Commission requested briefs from the parties on the following legal issues.

A. Whether as a condition to entitlement under 34-60-116 (7)(b), C.R.S., as amended, to the recoupment of that portion of costs attributable to the interest of Protestant, Applicant was legally obligated to make a formal offer to Protestant to participate in the drilling of the Nickerson 1-26 well on the Spacing Unit. B. Whether as a co-tenant and prior to completion of the well, Protestant had the legal right to elect to participate pro rata in accordance with its leasehold interest in the drilling of the Nickerson 1-26 well. C. Whether a formal offer by Applicant and a formal refusal by Protestant were necessary where protestant possessed the legal right to elect to participate in the drilling of the well pro rata in accordance with its leasehold interest at any time prior to completion of the well.

13. Counsel for the parties each filed a brief on the above three issues and on the matters in dispute in this cause generally. Counsel for Protestant filed an additional brief in response to the Appli-cant's brief. The briefs were read by th Commission and on May 17, 1985, a hearing was held in this cause in which hearing the Commissioners present were polled and voted for the order hereinditer provided for.

14. Due notice of the time, place and purpose of the November 19, 1984, hearing was given in all respects as required by law, except that it is not clear whethersuch notice wasgiven to all overriding royalty interest owners inthe lease ownedby Applicant covering the Spacing Unit.

15. .Due notice of the time, place and purpose of all hearings in this cause, subsequent to the November 19, 1984, hearing was given in all respects as required by law.

16. An order by the Commission pooling all interests in the Spacing Unit has been applied for and is necessary in order to protect correlative rights and to afford each owner of an interest in the spacing Unit the opportunity to recover and receive his just and equitable share of the oil and gas and associated hydrocarbons from the common source of supply underlying said unit.

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17. Production obtained from the Spacing Unit should be allocated to each working interest owner therein on the basis of the proportion that the number of net mineral acres owned by each owner bears to the total number of mineral acres within said unit.

18. Applicant did not offer Protestant the opportunity to participate in the drilling of the Nickerson 1-26 well, nor did Applicant notify Protestant of the estimated cost of drilling such well or of supervision and storage. The only offer made to Protestant was an oral offer that Protestant "farmout" its interest in the Spacing Unit.

19. Protestant knew of the drilling of the Nickerson 1-26 well and may have had some general knowledge of the cost of drilling wells in the area.

CONCLUSIONS Of LAW

1. Applicant did not make a formal offer to Protestant to participate in the drilling of the Nickerson 1-26 well or formally notify Protestant of the estimated cost of such well.

2. The making of a formal offer to participate, which offer includes notice of the estimated cost of the proposed well, and a rejection of the offer are mandatory before the Commission may declare a non-developing co-tenant in the Unit to be a non-consenting owner and impose a penalty on such party's share of production as provided in 34-60-116 (7), C.R.S., as amended.

3. Protestant is not a non-consenting owner subject to the imposition of a penalty on its production interest under 34-60-116 (7)(b), C.R.S., as amended.

4. The Protestant, as a mineral co-tenant, had a legal right to participate in the Nickerson 1-26 well on a pro rata basis in accordance with its leasehold interest, which legal right could have been asserted through the mechanism of 34-60-116 (7), C.R.S., as amended; however, the existence of such legal right does not mean that the Protestant is a non-consenting owner within the meaning of 34-60-116 (7)(a), C.R.S., as amended, by virtue of its failure to assert such legal right until after the well is drilled.

5. It is just and reasonable, within the meaning of 34-60-116 (6), C.R.S., as amended, that, under the circumstances of this cause, Protestant reimburse Applicant for 50% of Applicant's actual costs of drilling, equipping and completing the Nickerson 1-26 well, including interest on the amounts comprising such costs at the prevailing prime rate as established by the United Bank of Denver, such interest to be calculated on a cost-by-cost basis from the date each such cost was incurred by Applicant.

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 of the State of Colorado, all interests in the drilling and spacing unit (the Spacing Unit) consisting of the SW/4NW/4 Section 26, Township 2 South, Range 53 West,6th P.M., Midnight Field, Washington County, Colorado, are hereby pooled for the operations and development of oil and associated hydrocarbons from the "J" Sand underlying said unit, the effect of such pooling to be retroactive to August 8, 1984.

2. Applicant owns fifty percent (50%) of the total working interest in the Spacing Unit by virtue of a lease from its lessor, and Protestant owns fifty percent (50%) of the total working interest in the Spacing by virtue of a lease from its lessor.

3. The production obtained from the Spacing Unit shall be allocated to each mineral owner in the unit in proportion to the total number of mineral acres within said unit; each owner of an interest in the Spacing Unit shall be entitled to receive his share of the production

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(420-3) of the well located in the unit applicable to his mineral ownership interest in said unit.

4. The cost of the well already drilled in the Spacing Unit, the Nickerson 1-26 well, including any supervision and storage cc and all future operations, shall be borne fifty percent (50%) Applicant and fifty percent (50%) by Protestant, without penalty to Protestant, and subject to the requirement that such costs shall be reasonable as required by law. In addition to such fifty percent (50%) amount, Protestant shall pay to Applicant interest on Protestant's fifty percent 150%) share of the actual costs of drilling, equipping and completing such well including interest on such costs at the prevailing prime rate established by the United Bank of Denver, such interest to be calculated on a cost-by-cost basis from the date each such cost was incurred by Applicant. Applicant shall furnish Protestant an accounting showing such costs and the calculation of interest thereon.

5. Applicant shall be the operator of the Nickerson 1-26 well.

IT IS FURTHER ORDERED, that this Order shall supersede and replace Order No. 420-2.

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/all of the above orders.

ENTERED this 3rd day of 1985, as of May 17, 1985.

THE OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

By Frank J. Piro, Secretary

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(420-3)