BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS IN THE GRAND VALLEY FIELD, GARFIELD COUNTY, COLORADO |
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CAUSE NO. 510 ORDER NO. 510-59 |
REPORT OF THE COMMISSION
The Commission heard this matter on April 16, 2012, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, upon application for an order to: (1) establish an approximate 2,605.97-acre exploratory drilling and spacing unit for Sections 22, 23, 26, and 27, Township 7 South, Range 96 West, 6th P.M., and authorize one or more vertical/directional and one or more horizontal wells, for the production of oil, gas and associated hydrocarbons from the Mancos, Niobrara, Frontier, Mowry, and Dakota Formations; and (2) pool all interests in the exploratory drilling and spacing unit, for the development and operation of the same formations.
FINDINGS
The Commission finds as follows:
1. WPX Energy Rocky Mountain, LLC (“WPX” 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. Rule 318.a. of the Rules and Regulations of the Oil and Gas Conservation Commission requires that wells drilled in excess of 2,500 feet in depth be located not less than 600 feet from any lease line, and located not less than 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. Sections 22, 23, 26, and 27, Township 7 South, Range 96 West, 6th P.M. are subject to Rule 318.a. for the Mancos, Niobrara, Frontier, Mowry, and Dakota Formations (“Deep Formations”).
5. On February 16, 2012, WPX, by its attorneys, filed with the Commission pursuant to § 34-60-116 C.R.S., a verified application (“Application”) for an order to: 1) establish an approximate 2,605.97-acre exploratory drilling and spacing unit for the below-described lands (“Application Lands”) for horizontal and vertical well development of the Application Lands, and authorize one or more vertical/directional and one or more horizontal wells, for the production of oil, gas and associated hydrocarbons from the Deep Formations; with the bottomhole or treated interval of the permitted wellbore(s) to be located no closer than 600 feet from the outer boundaries of the proposed exploratory unit, and not less than 600 feet from any other well or treated interval of a well producing from the same common source of supply, without exception being granted by the Director:
Township 7 South, Range 96 West, 6th P.M.
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and; 2) pool all interests in the Application Lands, for the development and operation of the Deep 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 well, and to subject any nonconsenting interests to the cost recovery provisions of C.R.S. § 34-60-116(7).
6. WPX also stated all wells to be drilled under this Application, whether horizontal, vertical or directional, shall be drilled from a new, common or existing well pad, with no more than four well pads per quarter section, without exception being granted by the Director.
7. On April 2, 2012, Encana Oil & Gas (USA) Inc. (“Encana”) filed a protest in this matter. Encana claimed it did not receive the opportunity to participate in the drilling of the well and did not receive the information required by Rule 530 at least 30 days prior to the scheduled Commission hearing on this matter, and did not have sufficient time to negotiate an agreement for participation in the proposed well. Encana further objected to the WPX’s request to have the proposed pooling order apply to wells drilled in the future for which information required by Rule 530.b. has not been provided.
8. On April 5, 2012, a telephonic prehearing conference (“PHC”) was convened in this matter.
9. At the PHC, WPX stated it wanted to proceed to hearing as noticed at the April 16, 2012 Commission meeting. WPX also confirmed that the intent of its Application was have the requested pooling order apply nonconsenting owner penalties of § 34-60-116 (7)(b) C.R.S. not only the initial well proposed for the unit, (SG 701-23-HN1 Well) for which Rule 530.b required information was shared with Encana, but also all future wells drilled within the unit for which no Rule 530.b required information was shared with Encana. WPX further stated that it was willing to consider Encana offers to participate in wells in the proposed exploratory unit up until the time that the Commission considers the pooling component of the case.
10. At the PHC, Encana confirmed that it had no objection to the spacing portion of the Application. Encana’s protest was limited to the pooling portion of the Application, questioning whether WPX had satisfied requirements of Rule 530, and whether the Oil & Gas Conservation Act (“Act”) authorized imposition of nonconsenting owner penalties for all future wells drilled within the spacing unit, for which no Rule 530.b. information was provided to Encana.
11. On April 5, 2012, WPX, by its attorneys, filed with the Commission a written request to approve that portion of the Application requesting the establishment of a 2,605.97-acre exploratory drilling unit for the Application Lands, for the production of oil, gas and associated hydrocarbons from the Deep Formations, based on the merits of the verified Application and the supporting exhibits. Sworn written testimony and exhibits were submitted in support of the spacing portion of the Application.
12. On April 7, 2012, the Hearing Officer issued his Prehearing Conference Report and Order arising from the April 5, 2012 PHC. That order: 1) bifurcated the case into the spacing component and the pooling component; 2) provided that the spacing component of the case be submitted to the Commission at its April 16, 2012 meeting pursuant to Rule 511 as an unprotested matter; 3) continued the pooling component of this case to the Commission’s May 29, 2012 meeting: 4) established a briefing schedule for the contested pooling legal issue; and 5) set oral arguments on the briefs at the May 29, 2012 Commission meeting.
13. On April 13, 2012, Encana, by its attorney, submitted a written letter withdrawing its protest.
14. Land testimony and exhibits submitted in support of the Application by Christopher M. Walsh, Senior Staff Landman for WPX, showed that WPX owns a majority of the leasehold interest for the Deep Formations underlying the Application Lands. Additional sworn testimony and exhibits were presented at hearing which demonstrated that all nonconsenting interest owners were served with a reasonable offer to lease their interests and/or an Authority for Expenditure (“AFE”) and a letter advising them of their rights to participate in the proposed operations within the exploratory drilling unit. Further testimony showed 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 April 16, 2012, hearing date.
15. Geologic testimony and exhibits submitted in support of the Application by Ryan J. Kowalski, Petroleum Geologist for WPX, showed that the Application Lands were in a depositional setting for the marine shales and siltstones comprising the Mancos Group (consisting of the Sego, Mancos, Niobrara, Frontier, and Mowry Formations) of the Cretaceous Interior Seaway which serve as present-day source and reservoir. Additional testimony showed that the Niobrara Formation underlying the Application Lands dips approximately 360 feet per mile to the northeast, and that the Mancos Groups underlie the entirety of the Application Lands. Further testimony showed that the Mancos Group has low effective porosity and very low permeability with an average total organic content of approximately 1.5-2%, which is high enough to be a source rock for hydrocarbon.
16. Engineering testimony and exhibits submitted in support of the Application by Tyler Peters, Reservoir Engineer for WPX, showed that the estimated drainage area of approximately 12.3 acres for a horizontal Niobrara well drilled on the Application Lands, with the original gas-in-place of 460 BCF and an estimated ultimate recovery of 6.2 BCF gas. Additional testimony showed that a horizontal Niobrara well drilled on the Application Lands would be economical.
17. On April 16, 2012, the Commission considered the spacing portion of the Application as a Consent Agenda item, as provided in the Hearing Officer’s Prehearing Conference Report and Order. WPX presented hearing testimony to the Commission in support of the pooling portion of the Application.
18. 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.
19. WPX agreed to be bound by oral order of the Commission.
20. Based on the facts stated in the verified Application, having received no protests relevant to the spacing component of the Application, based on the Hearing Officer review of the Application under Rule 511., and testimony presented at the hearing, the Commission should enter an order: (1) establishing an approximate 2,605.97-acre exploratory drilling unit for Sections 22, 23, 26, and 27, Township 7 South, Range 96 West, 6th P.M., for horizontal and vertical well development, for the production of oil, gas and associated hydrocarbons from the Deep Formations; and (2) pooling all interests in the said exploratory drilling unit, for the development and operation of the Deep Formations.
ORDER
NOW, THEREFORE IT IS ORDERED, that an approximate 2,605.97-acre exploratory drilling and spacing unit for the below-described lands, is hereby established, for horizontal and vertical well development of the Application Lands, and one or more vertical/directional and one or more horizontal wells, are hereby approved, for the production of oil, gas and associated hydrocarbons from the Deep Formations; with the bottomhole or treated interval of the permitted wellbore(s) to be located no closer than 600 feet from the outer boundaries of the proposed exploratory unit, and not less than 600 feet from any other well or treated interval of a well producing from the same common source of supply, without exception being granted by the Director:
Township 7 South, Range 96 West, 6th P.M.
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IT IS FURTHER ORDERED, that wells drilled under this Application, whether horizontal, vertical or directional, shall be drilled from a new, common or existing well pad, with no more than four well pads per quarter section, without exception being granted by the Director.
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 2,605.97-acre exploratory drilling unit established for Sections 22, 23, 26, and 27, Township 7 South, Range 96 West, 6th P.M., are hereby pooled, for the development and operation of the Deep Formations, effective as of the date of the Application, or the date that the costs specified in §34-60-116(7)(b)(II), C.R.S., are first incurred for the drilling of any permitted well, whichever is earlier.
2. The production obtained from the exploratory drilling unit shall be allocated to each owner in the unit on the basis of the proportion that the number of acres in such owner’s tract bears to the total number of mineral acres within the exploratory drilling unit; each owner of an interest in the exploratory drilling unit shall be entitled to receive its share of the production of the Wells located on the exploratory drilling unit applicable to its interest in the exploratory drilling unit.
3. 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 wells (including penalties as provided by §34-60-116 (7)(b), C.R.S.) out of production from the exploratory drilling unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.
4. Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the wells and be subject to the penalties as provided for by §34-60-116 (7), C.R.S.
5. Each nonconsenting unleased owner within the exploratory drilling 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 wells, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with the wells as if it had originally agreed to the drilling.
6. The operator of the wells drilled on the above-described exploratory drilling 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.
7. 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, that the provisions contained in the above order shall become effective immediately.
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 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 18th day of April, 2012, as of April 16, 2012.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By____________________________________
Peter J. Gowen, Acting Secretary
Dated at Suite 801
1120 Lincoln Street
Denver, Colorado 80203
April 18, 2012