REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on June 30, 1997 in Suite 801, 1120 Lincoln Street, Denver, Colorado on the protest filed by Joan L. Savage, John W. Savage Jr., Roy E. Savage, Marshall T. Savage, and Daniel W. Savage (hereinafter collectively referred to as "Savage") to the application of TBI Production Company ("TBI") for an order amending Cause Nos. 139 and 440 to allow the optional drilling of additional wells, up to sixteen (16) wells per 640-acre drilling and spacing unit and up to eight (8) wells per 320-acre drilling and spacing unit, for certain lands in the Rulison and Parachute Fields for the production of gas and associated hydrocarbons from the Williams Fork Formation of the Mesaverde Group (the "Application"). The Commission being fully informed of the facts and briefed on the legal issues which were argued before the Commission finds as follows:

FINDINGS

1. TBI, as applicant herein, is an interested party in the subject matter of the above-referenced hearing.

2. Savage, as Protestants herein, are interested parties in the subject matter of the above-referenced hearing.

3. Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

4. 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.

5. On April 7, 1997, TBI, by its attorney, filed with the Commission a verified application, for an order amending Cause Nos. 139 and 440 to allow the optional drilling of additional wells, up to sixteen (16) wells per 640-acre drilling and spacing unit and up to eight (8) wells per 320-acre drilling and spacing unit, for certain lands in the Rulison and Parachute Fields for the production of gas and associated hydrocarbons from the Williams Fork Format ion of the Mesaverde Group with the permitted well to be located no closer than 400 feet from the outer boundaries of the drilling unit and no closer than 800 feet to any well or wells producing from the same formation. (The lands subject to the Application are referred to as the "Application Area".)

6. TBI filed the Application pursuant to  34-60-116(4), C.R.S. which provides as pertinent:

The commission, upon application, notice, and hearing may decrease or increase the size of the drilling units or permit additional wells to be drilled within the established units in order to prevent or assist in preventing waste, or to avoid the drilling of unnecessary wells, or to protect correlative rights, and the commission may enlarge the area covered by the order fixing drilling units, if the commission determines that the common source of supply u nderlies an area not covered by the order.

7. In accordance with Rule 508.a. of the Rules and Regulations of the Oil and Gas Conservation Commission (the "Rules"), TBI served notice of the Application on "all owners within the existing drilling units to be affected by the application." "Owners" is defined by statute to mean all persons who "have the right to drill into and produce from a pool and to appropriate the oil and gas he produces therefrom either for himself or others or for himself a nd others, including the owner of a well capable of producing oil or gas, or both."  34-60-103.(7) (1996), C.R.S.

8. The Commission set the Application for hearing on May 20-21, 1997.

9. On May 9, 1997, Savage filed a Protest To Application by Joan L. Savage, John W. Savage, Jr., Roy E. Savage, Marshall T. Savage, and Daniel W. Savage (the "Protest"). The Protest states that Savage family members own varying interests in the Application Area, including ownership of the surface estate underlying approximately 360 acres, more or less, the surface estate and unleased minerals underlying approximately 120 acres, more or less and the min eral estate subject to a farmout agreement underlying approximately 160 acres, more or less. The Savage interests are more fully described in the Protest.

10. As grounds for the Protest Savage contended that the Application constitutes: (a) "an unreasonable use of the surface and fails to give due regard to the respective rights of the surface and mineral owners to enjoy and maximize the value of their respective estates"; (b) "an unreasonable and unconscionable expansion of the mineral estate's use of the surface from what was originally contemplated by the parties"; and (c) "a significant and unaccepta ble adverse impact on the areas of environment, air, water, soil, and biological resources." Savage also claimed the Application fails to address the impact of future drilling to additional productive zones and the cumulative impacts of drilling on the scale and density requested by TBI.

11. On May 9, 1997, Savage filed a Motion for Continuance asking the Commission to continue the Application to the Commission's June hearings to allow Savage "additional time to prepare for hearing and retain appropriate technical witnesses."

12. On May 20, 1997, at the Commission's regularly scheduled hearing, in accordance with Rule 506.a., the Commission found good cause to grant Savage's request for a continuance, and continued the Application to the Commission's June hearing.

13. On June 11, 1997, the Commission issued a Prehearing Order directing both parties to participate in a prehearing conference on June 17, 1997, to provide a Prehearing Statement on or before June 20, 1997 and to provide the Commission, on or before June 25, 1997, legal arguments addressing the threshold issue of whether evidence related to surface impact is competent evidence for consideration when the Commission acts on an application filed pursuant t o 34-60-116(4), C.R.S.

14. On June 23, 1997 and June 24, 1997, TBI Production Co. and the Savages, respectively, filed their pre-hearing statements.

15. On June 25, 1997, TBI Production Co. filed with the Commission a Motion to Dismiss, a Brief in Support of the Motion to Dismiss, and a Supplemental Brief.

16. On June 27, 1997, the Savages filed with the Commission a Brief re: Competent Evidence to be Admitted.

17. On June 19, 1997, Mesa Ridge Townhome Association ("Mesa Ridge") filed with the Commission a letter requesting intervenor status for the Application. The stated basis for the intervention was "the physical impact" of the Application on the Mesa Ridge Townhome Community.

18. On June 24, 1997, the Colorado Oil & Gas Association filed with the Commission a motion to intervene in Cause Nos. 139 and 440 and a statement of response in the Savage protest.

19. On June 25, 1997, the Rocky Mountain Oil & Gas Association filed with the Commission a motion to intervene in Cause Nos. 139 and 440 and a brief in response to the Savage protest.

20. Letters of concern were filed with the Commission by Ralph G. Irwin, Mike & Susan Braverman, Gary & Sheralyn Hoof, Anita & Gus Limbach, Pam & Jim Mershon, Raymond & Marie Willey, Holly Klinzman, Milt & Artha Hornbostel, Jeffrey & Sylvia Hartman, James & Elsie Burkhart, Ken & Ann Robar, John & Elaine Shepherd et. al., R.L. Bowers, Garfield County School District 16, Richard & Jeri Doran, Estate of Lena Blanche Wehr, Garfield County Commissioners and Thomas & Carol Mathias.

21. On June 30, 1997, the Commission conducted a hearing on the threshold legal issue of whether evidence related to surface impact is competent evidence for consideration when the Commission acts on an application filed pursuant to  34-60-116(4), C.R.S.

22. At the June 30, 1997 hearing Savage sought leave to file with the Commission Protestants' Response Brief to TBI's Motion to Dismiss. Although the Brief was filed outside of the response date set by the Commission, the Commission accepted the Response Brief into the record. The Commission's consideration of the Response Brief was limited by the restricted time afforded for its review.

23. At the June 30, 1997 hearing Savage argued that the Commission should consider surface impacts in conjunction with an application for increased well density. Savage based his argument on the changes to the Commission's statutory charge effected by S.B. 94-177 adopted in 1994 obligating the Commission to regulate the production of oil and gas "in a manner consistent with protection of public health, safety, and welfare."  34-60-102(1), C.R.S. In addition, Savage argued that the Commission should consider surface impacts in this context based on its authority to regulate "oil and gas operations so as to prevent and mitigate significant adverse environmental impacts on any air, water, soil or biological resource resulting from oil and gas operations to the extent necessary to protect public health safety, and welfare, taking into consideration cost-effectiveness and technical feasibility."  34-6 0-106(2)(d), C.R.S. Savage contended that the hearing on the Application is the only forum in which the cumulative effects of drilling operations may be considered.

24. At the June 30, 1997 hearing TBI argued that the Commission should not consider surface impacts in conjunction with an application for increased well density. TBI did not dispute the Commission's public health, safety and welfare charge, but argued that in the context of a hearing on an increased density application that the Commission must apply established legal standards and Commission policy to decide the technical issues of whether a common so urce of supply exists and the area most economically and efficiently drained by a single well. TBI argued that the Commission's public health, safety and welfare regulatory authority is limited to the promulgation of rules and regulations to protect the public interest relying on  34-60-106(11), C.R.S. TBI also challenged Savage's standing as a surface owner to protest the spacing decision because spacing determinations affect only the rights of the un derlying mineral owners.

25. At the June 30, 1997 hearing the Rocky Mountain Oil & Gas Association ("RMOGA") and the Colorado Oil & Gas Association ("COGA"), as Intervenors, argued that surface issues were not appropriate matters for consideration at a spacing hearing. COGA challenged Savage's standing, argued that the Commission fulfills its public interest and environmental charge by enacting regulations to protect these interests, and that issues of cumulative impact are m ore appropriately addressed in the rulemaking context. RMOGA argued that cumulative impacts should not be addressed in the technical adjudicatory process of a specific spacing decision. RMOGA also argued that any Commission decision that affected surface interests would inappropriately interfere with the private contractual rights of the surface and mineral owner.

26. At the June 30, 1997 hearing Mr. Welton Francis, President of the Mesa Ridge appeared to intervene on behalf of Mesa Ridge, and to testify regarding the alleged local impacts of the Application.

27. Rule 517. provides that only natural persons may appear before the Commission on their own behalf; all parties other than natural persons must be represented by counsel. Mr. Francis testified that he is not a lawyer and that he did not intend to provide legal argument regarding the relevancy of the evidence. The Commission thus disallowed Mr. Francis' testimony as an intervenor with respect to the legal issue of whether cumulative surface impac t is a relevant consideration in a hearing on spacing or increased well density.

28. The Commission did allow Mr. Francis and three area residents to present testimony about the perceived surface and environmental impacts of increased well density. These individuals stated that Commission approval of the Application would have, among other things, an adverse visual impact on the community, would adversely impact area traffic, would negatively affect residents' health and would disrupt wildlife habitat. The Commission heard this t estimony with the understanding that it would not be part of the record for the Application if the Commission decided surface related evidence was not competent in the context of this increased well density application filed pursuant to  34-60-116(4), C.R.S.

CONCLUSIONS

29. A majority of potentially productive formations, in addition to the Williams Fork Formation, underlying the Application Area are not spaced. Based on established state-wide set-back requirements these potentially productive horizons may currently be developed on a 40-acre basis. Accordingly, allowing additional wells within the established Williams Fork spacing units would not increase potential drilling density beyond what it would be in the abse nce of spacing.

30. The approval of a spaced area, a specific spacing pattern or an increase in well density for a spaced area for any particular formation does not create the right to drill on any of the spaced lands. Such rights are created by private contract between mineral owners and mineral lessees.

31. The Commission's consideration of well spacing applications has historically been limited to evidence to establish geologic support for the proposed spacing pattern, including technical data on the productivity of a formation and the most efficient drainage pattern to maximize resource recovery and to minimize resource waste. These considerations are in accord with the Commission's statutory charge in  34-60-116(4), C.R.S. to prevent waste, avoi d drilling of unnecessary wells and to protect correlative rights.

32. Testimony related to surface impacts is not therefore appropriate when considering the technical merits of an application to increase well density pursuant to  34-60-116(4), C.R.S.

33. The Commission's authority however does not end when it determines the appropriate spaced area for a pool or a well pursuant to  34-60-116, C.R.S. The Commission has additional authority to regulate, inter alia, the issuance of drilling permits, the conduct of drilling operations and surface reclamation. Surface impact questions, if not sufficiently addressed by the existing rules relating to drilling and reclamation and the permits and orders i ssued under those rules, should be addressed through additional rule-making.

ORDER

NOW, THEREFORE, IT IS ORDERED, that the Commission hereby dismisses the protest filed by Joan L. Savage, John W. Savage Jr., Roy E. Savage, Marshall T. Savage, and Daniel W. Savage to the extent Savage protests on the grounds that Commission approval of the Application will adversely affect public health, safety and welfare or have a significant adverse environmental impact.

IT IS FURTHER ORDERED, that the application filed by TBI Production Company for increased well density shall be subject to an administrative hearing on July 1, 1997 at 7:00 a.m. The hearing will be open to the public and Savage and other interested parties may attend.

IT IS FURTHER ORDERED, that the Commission will take public testimony regarding oil and gas operations within Garfield County and the Battlement Mesa Area for the purpose of informing the Commission of public concerns and to allow public comment on July 1, 1997 at 1:00 p.m.

IT IS FURTHER ORDERED, that the provisions contained in the above order shall become effective forthwith, as the parties have agreed to accept the verbal order of the Commission.

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.

ENTERED this day of July 1997, as of July 1, 1997.

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

By Patricia C. Beaver, Secretary Dated at Suite 801 1120 Lincoln Street Denver, Colorado 80203 July 30, 1997

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