Order No. 517-2

IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS IN THE LORENCITO FIELD, LAS ANIMAS COUNTY, COLORADO

Cause No. 517 Order No. 517-2

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 8:30 a.m. on February 23, 1999, the Holiday Inn, Raton Room, 3125 Toupal Drive, Trinidad, Colorado on the application of Chandler & Associates, LLC, for an order pooling all interests in twenty-one (21) 160-acre drilling and spacing units for the development and operation of the Vermejo Formation in the Lorencito Field of the Raton Basin, Las Animas County, Colorado, pursuant to the provisions of 3 4-60-116, C.R.S., 1984.

FINDINGS

The Commission finds as follows:

1. Chandler & Associates, LLC ("Chandler") 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 terms of a Memorandum of Understanding between the Commission and the Bureau of Land Management.

4. On December 3, 1998 the Commission issued Order No. 517-1 which established 160-acre drilling and spacing units for certain lands in Townships 34 South, Range 66 West, 6th P.M. for the production of gas and associated hydrocarbons from the Vermejo Formation defined as the stratigraphic equivalent found between the measured depths of 876 feet and 1,194 feet in the wellbore of the Amoco Production Company MPG A #1 Well located in the SW1/4 SE1/4 of Sect ion 4, Township 34 South, Range 66 West, 6th P.M., Las Animas County, Colorado. The permitted well shall be located in each quarter section no closer than 600 feet from the boundaries of the unit with existing or permitted wells approved as exception locations as necessary or required.

5. On January 4, 1999, Chandler, by its attorney, filed with the Commission a verified application for an order pooling all interests in certain 160-acre drilling and spacing units for the development and operation of the Vermejo Formation in the Lorencito Field, pursuant to the provisions of 34-60-116, C.R.S., 1984. The applicant proposes to drill twenty-one (21) wells in the following locations for the specified 160-acre drilling and spacing units:

160-ACRE DRILLING AND WELL NAME LOCATION SPACING UNIT

1) Lorencito 5-3-34-66 SW1/4NW1/4 Sec. 3, T34S-R66W NW1/4 2) Lorencito 12-3-34-66 NW1/4SW1/4 Sec. 3, T34S-R66W SW1/4 3) Lorencito 2-8-34-66 NW1/4NE1/4 Sec. 8, T34S-R66W NE1/4 4) Lorencito 4-8-34-66 NW1/4NW1/4 Sec. 8, T34S-R66W NW1/4 5) Lorencito 9-8-34-66 NE1/4SE1/4 Sec. 8, T34S-R66W SE1/4 6) Lorencito 14-8-34-66 SE1/4SW1/4 Sec. 8, T34S-R66W SW1/4 7) Lorencito 2-9-34-66 NW1/4NE1/4 Sec. 9, T34S-R66W NE1/4 8) Lorencito 10-9-34-66 NW1/4SE1/4 Sec. 9, T34S-R66W SE1/4 9) Lorencito 12-9-34-66 NW1/4SW1/4 Sec. 9 T34S-R66W SW1/4 10) Lorencito 4-10-34-66 NW1/4NW1/4 Sec. 10, T34S-R66W NW1/4 11) Lorencito 12-10-34-66 NW1/4SW1/4 Sec. 10, T34S-R66W SW1/4 12) Lorencito 6-15-34-66 SW1/4SE1/4 Sec. 15, T34S-R66W SE1/4 13) Lorencito 11-15-34-66 NE1/4SW1/4 Sec. 15, T34S-R66W SW1/4 14) Lorencito 8-16-34-66 SE1/4NE1/4 Sec. 16, T34S-R66W NE1/4 15) Lorencito 4-16-34-66 NW1/4NW1/4 Sec.16, T34S-R66W NW1/4 16) Lorencito 15-16-34-66 SW1/4SE1/4 Sec. 16, T34S-R66W SE1/4 17) Lorencito 14-16-34-66 SE1/4SW1/4 Sec. 16, T34S-R66W SW1/4 18) Lorencito 1-17-34-66 NE1/4NE1/4 Sec. 17, T34S-R66W NE1/4 19) Lorencito 4-17-34-66 NW1/4NW1/4 Sec. 17, T34S-R66W NW1/4 20) Lorencito 9-17-34-66 NE1/4SE1/4 Sec. 17, T34S-R66W SE1/4 21) Lorencito 3-22-34-66 NE1/4NW1/4 Sec. 22, T34S-R66W NW1/4

6. Testimony presented at the administrative hearing indicated that Chandler has an undivided 46.54% of the working interests within the twenty-one (21) drilling and spacing units. There are also undivided mineral interests of 35% held by Evergreen Resources, Inc. ("Evergreen") and undivided mineral interests of 18.46% held by CIS Oil and Gas, Inc. ("CIS").

7. Testimony also presented at the administrative hearing indicated Evergreen and CIS were offered Authorizations for Expenditures and Election to Participate forms on or around December 14, 1998 with fair, reasonable and typical actual costs for Vermejo Formation wells in the area. The information provided to the mineral interest owners included the location and objective depths of the wells, the estimated drilling and completion costs of the wells an d the estimated spud dates for the wells in accordance with Rule 530. A Joint Operating Agreement was sent Evergreen and CIS on or around December 21, 1998 and there has been no formal response from either mineral interest owner to elect to participate in the drilling of any of the proposed wells.

8. 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 recommends approval, the Commission should enter an order pooling all interests in the twenty-one (21) 160-acre drilling and spacing units as listed in Finding #5 above for the development and operation of the Vermejo Formation in the Lorencito Field.

9. That an order of the Commission pooling all interests in said drilling unit is necessary in order to afford each owner of interest in each said drilling unit the opportunity to recover and receive their just and equitable share of the oil and/or gas from the common source of supply underlying said drilling unit.

10. That production obtained from said drilling unit should be allocated to each tract therein on the basis of the proportion that the number of acres in each tract bears to the total number of acres with said drilling unit.

11. That Chandler should be designated as the operator for the twenty-one (21) wells described above in Finding #5.

ORDER

NOW, THEREFORE IT IS ORDERED that, 1. Pursuant to the provisions of 34-60-116, C.R.S., 1984, of The Oil and Gas Conservation Act of the State of Colorado, all interests in the twenty-one (21) 160-acre drilling and spacing units described below are hereby pooled for the development and operation of the Vermejo Formation in the Lorencito Field:

160-ACRE DRILLING AND WELL NAME LOCATION SPACING UNIT

2. The production obtained from said drilling unit shall be allocated to each owner in the unit on the basis of the proportion that the number of acres in such tract bears to the total number of mineral acres within said drilling unit; each owner of an interest in said drilling unit shall be entitled to receive his share of the production of the well located on said drilling unit applicable to his interest in said drilling unit.

3. The owner of the unleased tract should be afforded the opportunity to elect whether to participate in the drilling and operation of said well, and pay a proportionate share of the actual costs thereof, which proportionate share shall be determined by dividing the number of acres in each unleased tract to the total number of acres within said drilling unit.

4. Within thirty (30) days from the date of receipt of said A.F.E. by the owner of said tract, such owner shall indicate whether he consents to the cost of the drilling of the well and agrees to participate in such costs. Such election shall be made in writing either by executing the AFE or similar document. In the event a written election to participate is not made by said owner within such time period, said owner shall be deemed to have elected not to participate and shall therefore be deemed to be non-consenting as to the well and be subject to the penalties as provided for by 34-60-116 (7).

5. Any non-consenting unleased mineral owner within the spacing unit shall be treated as the owner of the landowner's royalty to the extent of 12.5% of his or her record title interest, whatever that interest may be, until such time as the consenting owner recovers, only out of the non-consenting 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, the non-consenting mineral owner shall then own his proportionate 8/8ths share of the well, surface facilities and production, and then be liable for his proportionate share of further costs incurred in connection with the well as if he had originally agreed to the drilling.

6. The operator of any well drilled on the above described unit shall furnish all non-consenting 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. That Chandler shall be designated as the operator for the twenty-one (21) wells described above.

IT IS FURTHER ORDERED that the provisions contained in the above order shall become effective forthwith, as the party 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.

RECOMMENDED this day of March, as of February 23, 1999.

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 March 8, 1999 ??

(517#2)