REPORT OF THE COMMISSION

This cause came on for hearing before the Commission on January 7, 2003 at 8:30 a.m. in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado for an order to establish 160-acre drilling and spacing units for certain lands for the production of oil and gas from the Vermejo Coal Formation and for an order pooling all non-consenting interests in the unit.

SUMMARY OF PROCEEDINGS

1. Robert L. Bayless, Producer LLC ("Bayless") 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 the Memorandum of Understanding ("MOU") between the Commission and the Bureau of Land Management ("BLM").

4. On October 31, 2000, the Commission established 160-acre drilling and spacing units for certain lands in Townships 30 and 31 South, Range 65 West, 6th P.M., Townships 29, 30 and 31 South, Range 66 West, 6th P.M. and Township 31 South, Range 67 West, 6th P.M. for the production of coalbed methane gas from the Raton and Vermejo Coal Formations. On March 25, 2002, the Commission established a 160-acre drilling and spacing unit consisting of the SW1/4 o f Section 15, Township 33 South, Range 67 West, 6th P.M. for the production of coalbed methane gas from the Raton and Vermejo Formations and pooled all non-consenting interests in the unit.

5. On November 19, 2002, Bayless, by its attorney filed with the Commission a verified Application for an order to establish 160-acre drilling and spacing units for the below-listed lands for the production of gas and associated hydrocarbons from the Vermejo Coal Formation.

Township 34 South, Range 65 West, 6th P.M. Section 7: NW1/4

Township 34 South, Range 66 West, 6th P.M. Section 1: SE1/4 Section 12: NE1/4

The following wells, operated by Evergreen Operating Company, have been drilled and are producing from the Vermejo Coal Formation. Bayless requested that the Commission designate these wells as the permitted wells for the drilling and spacing units and that an order pooling all interests in the proposed units be approved for the development and operation of the Vermejo Coal Formation.

Well Location Unit Road Runner #12-7 Well SW1/4 NW1/4 Section 7-34S-65W NW1/4 Gladiator (a/k/a Ernest) #21-7 Well NE1/4 NW1/4 Section 7-34S-65W NW1/4 Bobcat #33-1 Well NW1/4 SE1/4 Section 1-34S-66W SE1/4 Bullsnake #34-1 Well SW1/4 SE1/4 Section 1-34S-66W SE1/4 Doe #42-12 Well SE1/4 NE1/4 Section 12-34S-66W NE1/4

6. On December 19, 2002, a protest was filed by Evergreen Resources, Inc. ("Evergreen"). On December 23, 2002, a protest was filed by B.F. Hill and Amy Laura Hill Trust (collectively, the "Hills").

7. On December 26, 2002, a letter in support of the application was filed by BLM.

8. A prehearing conference was held on this matter on December 30, 2002.

APPLICANT'S EVIDENCE

9. The Commission heard expert testimony from Mr. Matthew Silverman, Consulting Petroleum Geologist, regarding the geologic development in the Lorencito Field, who opined that the drilling of additional wells in the application lands would yield increasingly small amounts of gas because the existing wells produce a total of approximately 2.8 million cubic feet of gas per day.

10. The Commission heard expert testimony from Mr. John Seidle, Consulting Senior Reservoir Engineer, on the existing wells in and surrounding the application lands regarding production data, drainage areas and the economics of drilling additional wells. Mr. Seidle opined that the average drainage area for wells in the area is 104 acres, that the coalbed methane gas has been fully developed in the application lands, that drilling additional wells in th e application lands would be wasteful, and that the application is necessary to protect correlative rights.

11. The Commission heard expert testimony from Ms. C Jay Turner, Land Manager, regarding the terms of the federal lease acquired by Bayless and ownership of the surrounding minerals and surface.

12. The Commission heard expert testimony from Mr. Robert Bayless, Engineer and President of Bayless, regarding the BLM's concerns about potential drainage of the lease and the negotiations between Bayless and Evergreen to address these concerns.

EVERGREEN'S EVIDENCE

13. The Commission heard expert testimony from Mr. John Buckley, Landman, regarding the history of the wells drilled on the application lands prior to the acquisition of the federal lease by Bayless, access to the federal lease, and the number of working interest and royalty owners who would be affected by a pooling order.

14. The Commission heard expert testimony from Mr. Dennis Carlton, Geologist and Senior Vice-President, regarding the geologic development in and surrounding the application lands,, who opined that only some individual coal seams can be correlated throughout the area, that compartmentalization of the coal seams is likely in the area, and that it is necessary to have flexibility to drill additional wells in each section to recover the gas reserves.

15. The Commission heard expert testimony from Mr. Paul Onsager, Senior Reservoir Engineer, regarding production data, volumetric calculations, drainage areas, and the economics for drilling additional wells. He opined that locating wells on 40-acre tracts would be beneficial for production, that additional wells are justified based on decline curve data and strong gas prices, and that incremental recovery and accelerated production would be economic f rom wells drilled on the Bayless federal lease.

16. The Commission heard expert testimony from Mr. Mark Sexton, Engineer and President, regarding well economics, the infrastructure of the gathering system in the area, and negotiations with Bayless to address the BLM's concerns about potential drainage.

PUBLIC COMMENT

17. A Rule 510 Statement was made by Ms. Diana Dedde, Petroleum Engineer, who expressed her concern about the protection of mineral owners' rights in cases of isolated leases.

FINDINGS

18. Based on the testimony and exhibits presented at the hearing, the Commission finds that drilling additional wells on the application lands would be economic to recover incremental reserves and accelerate production, that the drilling of additional wells on the application lands would not result in waste, that the protection of correlative rights on the application lands are best achieved by the drilling of additional wells, and that the applicant di d not meet its burden of proof to establish 160-acre drilling and spacing units for the lands described above in Finding No. 5.

ORDER

NOW, THEREFORE IT IS ORDERED, that the application for an order to establish 160-acre drilling and spacing units for the below-listed lands for the production of gas and associated hydrocarbons from the Vermejo Coal Formation is hereby denied:

Township 34 South, Range 65 West, 6th P.M. Section 7: NW1/4

Township 34 South, Range 66 West, 6th P.M. Section 1: SE1/4 Section 12: NE1/4

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.

ENTERED this day of February, 2003, as of January 6, 2003.

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 February 4, 2003 (#517-9)

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