BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO

REPORT OF THE COMMISSION

The Commission heard this matter on May 29, 2012, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, upon application for an order to establish an approximate 1272.61-acre exploratory drilling and spacing unit for Sections 6 and 7, Township 7 North, Range 89 West, 6^th P.M., to accommodate one or more horizontal wells within the unit, for the production of oil, gas and associated hydrocarbons from the Mancos and Niobrara Formations.

FINDINGS

The Commission finds as follows:

1.         Axia Energy, LLC (“Axia” 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. Sections 6 and 7, Township 7 North, Range 89 West, 6^th P.M. are unspaced as to the Mancos, Niobrara, Frontier, and Mowry Formations (“Mancos Group Formations”), and are therefore subject to Rule 318.a.

5.         On March 30, 2012, Axia, by its attorneys, filed with the Commission a verified application (“Application”) for an order to establish an approximate 1272.61-acre exploratory drilling and spacing unit for the below-described lands (“Application Lands”), for the production of oil, gas and associated hydrocarbons from the Mancos Group Formations, and authorize one or more horizontal wells, to be located on the surface anywhere within the exploratory drilling and spacing unit, or on adjacent lands, with the treated interval of any horizontal well to be no closer than 600 feet from the boundaries of the unit, without exception being granted by the director:

Township 7 North, Range 89 West, 6^th P.M.

Section 6:        Lots 8-23; a/d/a ALL

Section 7:        Lots 5-20; a/d/a ALL 

6.         On May 15, 2012, Axia, by its attorneys, filed with the Commission a written request to approve the Application based on the merits of the verified Application and the supporting exhibits. Sworn written testimony and exhibits were submitted in support of the Application.

7.         Land testimony and exhibits submitted in support of the Application by Tab McGinley, Vice President of Land for Axia, showed: 1) Axia has a 73.73285% mineral interest in the Application Lands; 2) the Application Lands are private fee leases; 3) interested parties received proper notice of the Application; 4) the treated interval of the Mancos Formation and Niobrara Formation, and the ultimate bottom hole location of the well, will not be closer than 600 feet from the boundaries of the unit; 5) wells will be located downhole no closer than 150 feet from any producing well, without exception being granted by the Director; and 6) wells to be drilled under this application will be drilled from the surface horizontally from no more than one pad located on a given quarter-quarter section (or lots or parcels approximately equivalent thereto) unless exception is granted by the Commission pursuant to application made for such exception.

8.         Geologic testimony and exhibits submitted in support of the Application by Jim Minelli, Senior Geological Advisor for Axia, showed the Mancos Formation and Niobrara Formation to be consistent, continuous, and underlying all the Application Lands, as well as containing a composition of calcareous shale, clay and carbonate, silt and clay sized quartz grains, siltstone and fine grained sandstone among the constituents within the Mancos Formation and Niobrara Formation.  An isopach map of the interval from the top of the Mancos Formation to the base of the Niobrara Formation showed total thickness of the Mancos Formation and Niobrara Formation averages 3150 feet in the Application Lands.  A type log for the Formations showed that the structural dip in the Application Lands is approximately two-degrees to the west-northwest, with no existing wellbores on the Application Lands. 

9.         Engineering testimony and exhibits submitted in support of the Application by Taryn Frenzel, Senior Completions Engineer for the Sand Wash Team of Axia, the average net pay across the Mancos Formation and Niobrara Formation is 1,160 and 1,603 feet of Gross pay.  The average net pay was calculated from open hole logs, from wells that were drilled prior to Axia Energy’s acquisition of the lands.  The average water saturation and porosity is 40% and 6.8% respectively, which allows for determining the average gas in place per section of 496 Bcfe.  Using a 20% recovery factor and a 300 feet frac height for drainage, the estimated amount of gas that can be recovered from a horizontal well is 6.1 Bcfe, compared to only 1.5 Bcfe from a vertical wellbore.  A vertical wellbore cannot access enough gas in these reserves to be economic at this depth, and therefore, unrecoverable without the application of the horizontal well technology.  Additional testimony indicated granting the proposed spacing application will result in efficient and economic development of Application Lands.  

10.       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.

11.       Axia agreed to be bound by oral order of the Commission. 

12.       Based on the facts stated in the verified Application, having received no protests, and based on the Hearing Officer review of the Application under Rule 511., the Commission should enter an order to establish an approximate 1272.61-acre exploratory drilling and spacing unit for Sections 6 and 7, Township 7 North, Range 89 West, 6^th P.M., to accommodate one or more horizontal wells within the unit, for the production of oil, gas and associated hydrocarbons from the Mancos and Niobrara Formations.

ORDER

NOW, THEREFORE IT IS ORDERED, that an approximate 1272.61-acre exploratory drilling and spacing unit for the below-described lands, is hereby established, for the production of oil, gas and associated hydrocarbons from the Mancos and Niobrara Formations, and one or more horizontal wells within the exploratory drilling and spacing unit, are hereby approved, which: 1) shall be located downhole no closer than 150 feet from any producing well, within the boundary or boundaries of the drilling and spacing unit, without exception being granted by the Director of the Oil and Gas Conservation Commission; 2)  shall have the treated interval of the Mancos Formation and Niobrara Formations, and the ultimate bottom hole location of the well, located not closer than 600 feet from the boundaries of the unit; and 3) shall be drilled from the surface horizontally from no more than one pad located on a given quarter-quarter section (or lots or parcels approximately equivalent thereto) unless exception is granted by the Colorado Oil and Gas Conservation Commission pursuant to application made for such exception:

Township 7 North, Range 89 West, 6^th P.M.

Section 6:       Lots 8-23; a/d/a ALL

Section 7:       Lots 5-20; a/d/a ALL 

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   4^th  day of June, 2012, as of May 29, 2012.

CORRECTED this  10^th day of July, 2012, as of May 12, 2012.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Robert J. Frick, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

July 10, 2012