BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF THE PROMULGATION AND                             )                 CAUSE NOS. 479 and 510

ESTABLISHMENT OF FIELD RULES TO GOVERN                         )

OPERATIONS IN THE GRAND VALLEY FIELD,                                )                 ORDER NOS. 479-15 and 510-13

GARFIELD COUNTY, COLORADO                                                      )

REPORT OF THE COMMISSION

                        This cause came on for hearing before the Commission at 9:00 a.m. on March 22, 2005 in Room 201, Las Animas County Courthouse, 200 East First Street, Trinidad, Colorado for an order to increase the number of wells which can be optionally drilled into and produced from the Williams Fork Formation for certain lands, the equivalent of one Williams Fork Formation well per 10 acres.

FINDINGS

                        The Commission finds as follows:

                        1. On April 20, 1990, the Commission issued Order No. 479-2, which amended Order No. 479-1, to allow the drilling of an additional well on the established 320-acre drilling and spacing units, for the production of gas from the Mesaverde Formation, with the permitted well to be located no closer than 600 feet from the boundaries of the unit and no closer than 1200 feet from any well in the same formation, including Section 1, Township 6 South, Range 96 West, 6^th P.M.

                        2. On May 16, 1994, the Commission issued Order No. 510-1, which established new setback rules for production of gas and associated hydrocarbons from the Williams Fork Formation of the Mesaverde Group for the below-described lands, with the permitted well to be located no closer than 400 feet from the boundaries of any lease line and no closer than 800 feet from any existing Williams Fork Formation well or wells:

                        3. Rule 318.a. of the Rules and Regulations of the Commission requires that wells drilled in excess of two thousand five hundred (2,500) feet in depth be located not less than six hundred (600) feet from any lease line, and located not less than one thousand two hundred (1,200) feet from any other producible or drilling oil or gas well when drilling to the same common source of supply, unless authorized by order of the Commission upon hearing. The below-listed lands are subject to Rule 318.a.:

                        4. On November 22, 2004, EnCana Oil and Gas (USA) Inc. ("EnCana"), by its attorney, filed with the Commission a verified application for an order to increase the number of wells which can be optionally drilled into and produced from the Williams Fork Formation in the above-described lands, the equivalent of one Williams Fork Formation well per 10 acres. All future Williams Fork Formation wells should be located downhole anywhere upon the Application Lands, no closer than 100 feet from the boundaries of any drilling unit or lease line unless such drilling unit or lease line abuts or corners lands in respect of which the Commission has not at the time of drilling permit application granted the right to drill 10 acre density wells in which event the wells should be drilled downhole no closer than 200 feet from the lease line which so abuts or corners the lands in respect of which 10 acre density downhole drilling for Williams Fork Formation wells has not been ordered by the Commission. EnCana does not intend to drill more than four (4) Williams Fork Formation wells downhole per governmental quarter quarter section, and if topographically feasible, one well pad per quarter quarter section will be used.

                        5. On February 28, 2005, Williams Production RMT Company ("Williams") filed with the Commission a protest to the application. On March 9, 2005, the protest was withdrawn and an administrative hearing on the application was held.

                        6. Testimony and exhibits presented at the administrative hearing showed that EnCana owns or has leased the surface and minerals on all but 1,907 acres of federal lands which are leased to Williams. Additional testimony showed that the S½ and SW¼ NE¼ of Section 8, Township 6 South, Range 96 West, 6^th P.M. were included in Order No. 510-12 issued February 14, 2005, and these lands should be removed from the application lands. It was acknowledged that the lands in the proposed Story Gulch Federal Unit will be suspended from any order issued by the Commission upon approval of the federal unit by the Bureau of Land Management.

                        7. Testimony and exhibits presented at the administrative hearing showed that similar orders to EnCana’s request for an order have been approved to the west and south of the application lands by the Commission. Additional testimony indicated EnCana intends to locate one (1) well pad per 40 acre tract, however, due to the steep topography in the application lands, there may be a need to locate two (2) well pads per 40 acre tract in certain situations.

                        8. Testimony and exhibits presented at the administrative hearing showed the many vertically stacked fluvial, meander belt point bar sand bodies present in the Williams Fork Formation in the application area. Additional testimony showed the discontinuous channel sandstone bodies that comprise less than thirty percent (30%) of the Williams Fork Formation.

                        9. Testimony and exhibits presented at the administrative hearing showed the steep topography surrounding the well pad and the difficulty in locating well pads in this terrain. Additional testimony showed how a typical well pad may be located in the steep topography in some of the application lands.

                        10. Testimony and exhibits presented at the administrative hearing showed the results of outcrop mapping indicating that sandstone bodies are isolated and encased in mudstone. The sandstone bodies range in thickness from 0.5 to 45 feet, with an average of 15 feet, and width ranges from 40 to 2800 feet, with an average of 525 feet.

                        11. Testimony and exhibits presented at the administrative hearing showed that wells drilled as close as six hundred sixty (660) feet, which is equivalent to ten (10) acre density, would not penetrate the same sand bodies, even though they would appear to correlate on cross sections created from logs.

                        12. Testimony and exhibits presented at the administrative hearing showed an average net pay of 572 feet and gas-in-place of 208 MMCF/acre, with an estimated 2 BCF per well for 10 acre density. Additional testimony showed that an average estimated ultimate recovery of 1.1 BCF per well can be predicted for wells drilled to the Williams Fork Formation in the application lands.

                        13. Testimony and exhibits presented at the administrative hearing showed the average gas-in-place per 40 acres is 8.3 BCF and the average estimated ultimate recovery is 1.1 BCF for the Williams Fork Formation. Additional testimony showed that only thirteen percent (13%) of the gas-in-place is recovered with 40 acre well density, while forty-nine percent (49.4%) is recovered with 10 acre well density. Further testimony showed that 10 acre well density will allow better recovery of the gas resources and will prevent waste.

                        14. Testimony and exhibits presented at the administrative hearing showed payout for wells drilled on 10 acre density would occur in 1.5 years, with a rate of return of sixty-seven percent (67%), making these wells economic for EnCana.

                        15. The above-referenced testimony and exhibits show that the proposed density will allow more efficient drainage, will prevent waste, will not violate correlative rights and will assure a greater ultimate recovery of gas and associated hydrocarbons.

                        16. EnCana does not intend to drill more than four (4) Williams Fork Formation wells downhole per governmental quarter quarter section, and if topographically feasible, one well pad per quarter quarter section will be used.

                        17. EnCana Oil and Gas (USA) Inc. agrees to be bound by oral order of the Commission.

                        18. 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 enter an order to increase the number of wells which can be optionally drilled into and produced from the Williams Fork Formation in the above-described lands, the equivalent of one Williams Fork Formation well per 10 acres. All future Williams Fork Formation wells should be located downhole anywhere upon the Application Lands, no closer than 100 feet from the boundaries of any drilling unit or lease line unless such drilling unit or lease line abuts or corners lands in respect of which the Commission has not at the time of drilling permit application granted the right to drill 10 acre density wells in which event the wells should be drilled downhole no closer than 200 feet from the lease line which so abuts or corners the lands in respect of which 10 acre density downhole drilling for Williams Fork Formation wells has not been ordered by the Commission. The order should specify that no more than four (4) Williams Fork Formation wells should be drilled downhole per governmental quarter quarter section, and if topographically feasible, one well pad per quarter quarter section will be used.

                        NOW, THEREFORE, IT IS ORDERED, that Order Nos. 479-2 and 510-1 are hereby amended to increase the number of wells which can be optionally drilled into and produced from the Williams Fork Formation in the below-described lands, the equivalent of one Williams Fork Formation well per 10 acres:

                        IT IS FURTHER ORDERED, that all future Williams Fork Formation wells shall be located downhole anywhere upon the above-described lands, no closer than 100 feet from the boundaries of any drilling unit or lease line unless such drilling unit or lease line abuts or corners lands in respect of which the Commission has not at the time of drilling permit application granted the right to drill 10 acre density wells in which event the wells shall be drilled downhole no closer than 200 feet from the lease line which so abuts or corners the lands in respect of which 10 acre density downhole drilling for Williams Fork Formation wells has not been ordered by the Commission.

                        IT IS FURTHER ORDERED, that no more than four (4) Williams Fork Formation wells shall be allowed to be drilled downhole per governmental quarter quarter section, and if topographically feasible, one well pad per quarter quarter section shall be used.

                        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 April, 2005, as of March 22, 2005.

                                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

April 1, 2005