STATE OF COLORADO OIL AND GAS CONSERVATION COMMISSION

IN THE MATTER OF THE PROMULGATION AND ) CAUSE NOS. 232 and 499

ESTABLISHMENT OF FIELD RULES TO GOVERN )

OPERATIONS IN THE WATTENBERG GAS ) ORDER NOS. 232-238 and

SPACED AREA, WELD COUNTY, COLORADO ) 9; 499-76

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 9:00 a.m. on September 20, 2004, in Suite 801, 1120 Lincoln Street, Denver, Colorado on the application of Blue Chip Oil, Inc., for an order to segregate the 320-acre drilling and spacing unit consisting of the N½ of Section 22, Township 5 North, Range 67 West, 6^th P.M. into two 160-acre drilling and spacing units consisting of the NW¼ and the NE¼ for the production of oil, gas and associated hydrocarbons from the "J" Sand and Dakota Formations.

FINDINGS

The Commission finds as follows:

1. Blue Chip Oil, Inc. ("Blue Chip") 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.

4. In Cause No. 232, the Commission established 320-acre drilling and spacing units for the production of gas from the "J" Sand Formation in the Wattenberg Field with one well allowed for each unit to be located in the NE¼ and the SW¼ and no closer than 990 feet to the boundaries of the quarter section. Subsequent orders allowed an additional well to be located on the 320-acre drilling and spacing unit. Section 22, Township 5 North, Range 67 West, 6^th P.M. was included in this Cause.

5. On December 2, 1992, the Commission issued Order No. 499-15 which established 320-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Dakota Formation, including Section 22, Township 5 North, Range 67 West, 6^th P.M.

6. 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. Section 22, Township 5 North, Range 67 West, 6^th P.M. was included in this Rule.

7. On August 6, 2004, Blue Chip by its attorney filed with the Commission a verified Application for an order to segregate the 320-acre drilling and spacing unit consisting of the N½ of Section 22, Township 5 North, Range 67 West, 6^th P.M. into two 160-acre drilling and spacing units consisting of the NW¼ and the NE¼ for the production of oil, gas and associated hydrocarbons from the "J" Sand and Dakota Formations. The Applicant intends to drill one or more wells to the "J" Sand or Dakota Formations in the NW¼ of said Section 22.

8. Testimony presented at the administrative hearing showed that Blue Chip has just acquired both the minerals and the surface in the NW¼ of Section 22, and that five (5) wells are planned to be drilled in accordance with Rule 318A. for production of gas and associated hydrocarbons from the "J" Sand Formation. Additional testimony indicated that some of those wells will also test the Dakota Formation although currently there is no Dakota Formation production within approximately three (3) miles.

9. Testimony presented at the administrative hearing indicated that upon review of the title and lease information provided by Prima Oil & Gas Company for the E½ of Section 22, Blue Chip

confirmed the parties to whom notice should be provided for this matter. Additional testimony indicated that Prima Oil & Gas Company owns the leasehold in the NE¼ of Section 22. No protests to the application have been filed with the Commission or the applicant.

10. At the time of the administrative hearing, Blue Chip Oil, Inc. agreed to be bound by an oral order of the Commission.

11. Based on the facts stated in the verified application, having received no protests to the application and having been heard by the Hearing Officer who recommended approval, the Commission should approve an order to allow the request to segregate the 320-acre drilling and spacing unit consisting of the N½ of Section 22, Township 5 North, Range 67 West, 6^th P.M. into two 160-acre drilling and spacing units consisting of the NW¼ and the NE¼ for the production of oil, gas and associated hydrocarbons from the "J" Sand and Dakota Formations.

ORDER

NOW, THEREFORE IT IS ORDERED, that Order Nos. 232-3 and 499-15 are hereby amended to allow the 320-acre drilling and spacing unit consisting of the N½ of Section 22, Township 5 North, Range 67 West, 6^th P.M. to be segregated into two 160-acre drilling and spacing units consisting of the NW¼ and the NE¼ for the production of oil, gas and associated hydrocarbons from the "J" Sand and Dakota Formations underlying said lands.

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/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 (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 __________ day of September, 2004 as of September 20, 2004.

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

September 27, 2004