BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

IN THE MATTER OF THE APPLICATION OF NIGHTHAWK PRODUCTION, LLC FOR AN ORDER ESTABLISHING THE ARIKAREE CREEK PILOT UNIT FOR ENHANCED RECOVERY FROM THE SPERGEN FORMATION FOR CERTAIN DESCRIBED LANDS IN THE ARIKAREE CREEK FIELD, LINCOLN COUNTY, COLORADO

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CAUSE NO.  556

 

DOCKET NO. 160600242

 

TYPE: UNITIZATION

 

ORDER NO.  556-2

REPORT OF THE COMMISSION

 

The Commission heard this matter on June 7, 2016, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln St., Suite 801, Denver, Colorado, 80203, upon application for an order to contract the unit area of the Arikaree Creek State Unit and approve the Arikaree Creek Pilot Unit for enhanced recovery from portions of Sections 14 and 15, Township 6 South, Range 54 West, 6th P.M. for unitized operations for the production of oil, gas, and associated hydrocarbons from the Mississippian Spergen Formation.

 

FINDINGS

 

Jurisdictional Findings:

 

1.         Nighthawk Production, LLC (Operator No. 10399) (“Nighthawk”) is an interested party in the subject matter of the above-referenced hearing.

                                                                                          

2.         Running Foxes Petroleum Inc. and Mr. Steven Tedesco (collectively “Running Foxes”) are interested parties in the subject matter of the above-referenced hearing.

 

3.         Donald L. Knutson and Della M. Knutson, individually and as Co-Trustees of the Donald L. Knutson Trust and as Co-Trustees of the Della M. Knutson Trust, and Carla M. Knutson, (collectively the Knutsons”) are interested parties in the subject matter of the above-referenced hearing.

 

4.         Due notice of the time, place and purpose of the hearing has been given in all respects as required by law.

 

5.         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.

 

Procedural History:

 

6.         On March 7, 2016, the Commission approved Order No. 556-1, which conditionally approved unitization of the Arikaree Creek Field and established the Arikaree Creek State Unit for the below described lands in Lincoln County, Colorado.  Order No. 556-1 was to become effective upon the Commission finding in a supplemental order, after application, notice, and hearing, that Nighthawk had satisfied two requirements.  First, Nighthawk was required to present a unit agreement that would be a just and fair allocation of production in the unit and included a two-phased formula. Phase one must compensate royalty interest owners based on estimated remaining primary recovery and phase two must compensate royalty interest owners based on secondary recovery. Second, Nighthawk was required to present written approval of the plan of unit operations by those persons who, under the Commission's Order, will be required to pay at least eighty-percent (80%) of the costs of unit operation, and also by the owners of at least eighty-percent (80%) of the production or proceeds thereof that will be credited to interests which are free of cost, such as royalties, overriding royalties, and production payments.

 

Township 6 South, Range 54 West, 6th P.M.

Section 2:   SW¼SW¼

Section 10: NE¼NE¼, S½NE¼, SE¼

Section 11: W½

Section 14: W½NE¼, NW¼, N½SW¼, SW¼SW¼

Section 15: NE¼, E½SE¼

 

7.         On April 28, 2016, Nighthawk filed a verified Amended Application for Unitization seeking an order determining that the conditions set forth in Order No. 556-1 have been satisfied; or in the alternative, amending the description of the unit area in Order No. 556-1, and determining that the conditions set forth therein have been satisfied.  The verified Amended Application for Unitization also requested that in the event that the plan of unit operations has not been approved in writing by the owners of at least eighty-percent (80%) of the production or proceeds thereof that will be credited to interests which are free of cost, such as royalties, overriding royalties, and production payments, the Commission enter an order: 1) Contracting the Unit Area of the Arikaree Creek State Unit to the below described lands (“Pilot Unit Area”); 2) changing the name of the Unit as approved in Order 556-1 from the “Arikaree Creek State Unit” to the “Arikaree Creek Pilot Unit”; and 3) determining that the conditions set forth in Order No. 556-1 have been satisfied as to the Arikaree Creek Pilot Unit and the Pilot Unit Area.

Township 6 South, Range 54 West, 6th P.M.

Section 14:        W½NE¼, NW¼, N½SW¼,

                          SW¼SW¼

Section 15:        NE¼, E½SE¼

8.         On May 11, 2016, Nighthawk withdrew its request for approval of the Arikaree Creek State Unit and elected to request only that the Commission approve the contracted Pilot Unit Area and affirm that Nighthawk satisfied the Order 556-1 requirements as to the Arikaree Creek Pilot Unit.

 

9.         On May 23, 2016, Running Foxes timely filed a protest of Nighthawk’s Amended Application for Unitization.

 

10.       On May 23, 2016, the Knutsons timely filed a protest of Nighthawk’s Amended Application for Unitization.

 

11.       On June 1, 2016, a final prehearing conference was held after which the Hearing Officer issued the Final Prehearing Order.

 

12.       Commission Staff did not formally take a position on the Amended Application for Unitization.

 

Testimony:

 

13.       Nighthawk asked the Commission to take administrative notice of the geologic testimony from the hearing that resulted in Order 556-1.

 

14.       Engineering testimony and exhibits presented by David Faulder, Reservoir Engineering Manager for Nighthawk, showed how Nighthawk designed the waterflood recovery for the Pilot Unit Area, including placement of its injection wells and jet pumps for producing wells in the north of the Pilot Unit Area, and that fluids would not migrate across the north boundary of the Pilot Unit Area. Mr. Faulder further testified that the anticipated revenue from enhanced recovery will exceed the cost of the waterflood operation.

 

15.       Land testimony and exhibits presented by Ryan Sullivan, Senior Landman for Nighthawk, showed that Nighthawk had not been able to obtain the approval in writing by the owners of at least eighty-percent (80%) of the production or proceeds thereof that will be credited to interests which are free of cost, such as royalties, overriding royalties, and production payments for the Arikaree Creek State Unit.  And, Nighthawk was requesting that the lands of the Arikaree Creek State Unit be contracted to the lands within the Pilot Unit Area.

 

16.       Testimony and exhibits presented by Scott Stinson, Petroleum Engineer and consultant to Nighthawk, showed the two phase formula and the methodology of the proposed unit allocation of proceeds of production for each phase for the Arikaree Creek Pilot Unit agreementPhase one compensates royalty interest owners based on estimated remaining primary recovery and phase two compensates royalty interest owners based on secondary recovery. 

 

17.       Nighthawk advised the Commission that phase one will continue until all tracts in the Pilot Unit Area have received their estimated remaining primary recovery, at which time phase two would commence.

 

18.       Geologic testimony and exhibits presented by Steven Tedesco, President and CEO of Running Foxes, questioned the necessity and risks of the proposed waterflood recovery project.  Further testimony proffered that the proposed project for the Pilot Unit Area may be premature and that Running Fox’s correlative rights would be violated.  Mr. Tedesco proposed two smaller areas for the pilot waterflood.

 

19.       Engineering testimony and exhibits presented by Naing Moe Aye, Reservoir Engineer for Tiorco, Inc., on behalf of Running Foxes criticized the allocation formula for phase one, and said the formula for phase 2 was “not bad, but could be better.”  He proposed that when primary recovery was finished that a tracer test and a sweep efficiency test should be required. 

 

20.       Donald Knutson, mineral interest owner in the Arikaree Creek State Unit, testified regarding his property which is located in the W½ of Section 11 Township 6 South, Range 54 West, 6th P.M., and his concerns about the way Nighthawk has conducted operations on his lands.

 

21.       Testimony by Carla Knutson confirmed that the Kuntsons had not and would not approve the Arikaree Creek State Unit agreement, had no objections to the contraction of the Arikaree Creek State Unit to the Pilot Unit Area, were concerned about inaccuracies in production figures provided by Nighthawk, and were concerned that the plan of unit operations for the Arikaree Creek Pilot Unit would violate their correlative rights by causing fluids to migrate accross the north boundary of the Arikaree Creek Pilot Unit.  She requested that the Commission order a tracer program to track the injected fluids.

 

22.       Julie Sullivan, mineral interest owner in the proposed Arikaree Creek Pilot Unit gave a Rule 510 Statement expressing that she did approve the unit agreement and her support for establishing the Arikaree Creek Pilot Unit.

 

23.       Staff analysis presented by Stuart Ellsworth, Engineering Manager, summarized Staff’s understanding of the Arikaree Creek Pilot Unit proposed operation and the need for a waterflood program.  Staff stated it was concerned about the waterflood creating water pathways to the producing wells causing a premature watering out of the producing wells, and that Nighthawk should be required to monitor for preferential water pathways.  Staff did not have any concerns about wells in the Arikaree Creek Pilot Unit pulling fluids across the north boundary of the proposed pilot unit.

 

24.       David Faulder, Reservoir Engineering Manager for Nighthawk, testified on rebuttal regarding Nighthawk’s willingness to add tracer to injected fluids and monitor the progress of the waterflood, and report on those matters.

 

25.       Ryan Sullivan, Senior Landman for Nighthawk, testified on rebuttal regarding conversations with Donald Knutson.

 

Commission Deliberation Comments:

 

26.       Commissioner Hawkins expressed concern about the producing wells with jet pumps pulling water.  There is no correlative rights problem if the wells on both sides of the north boundary of the Pilot Unit Area are the same.  It makes sense to monitor the wells on both sides.

 

27.       Chairman Compton agreed, and along with monitoring of the wells that should protect the Knutson’s correlative rights. 

 

28.       Commissioner Benton agreed with Commissioner Hawkins.  If jet pumps are put in the Pilot Unit Area, they may draw from the north.  Production capacity needs to be maintained the same on wells on both sides of the north line of the Pilot Unit Area until production stabilizes.  He also stated that there needs to be a low-cost chemical tracer, not a radioactive tracer, used to see where injection water is going.

 

29.       Commissioner Craig stated that she agrees with Commissioners Benton and Hawkins, and the unitization of the Pilot Unit Area needs to proceed.

 

Findings:

 

30.       The proposed water-flood unit operations for the Arikaree Creek Pilot Unit are reasonably necessary to increase ultimate recovery of oil, gas and associated hydrocarbons, and the proposed waterflood operations will prevent waste, protect correlative rights.

 

31.       The value of the estimated additional recovery of oil, gas, and associated hydrocarbons exceeds the estimated additional cost incident to conducting the proposed waterflood operations.

 

32.       The Applicant has secured approval in writing of the plan of unit operations for the Arikaree Creek State Unit by those persons who, under the Commission's Order, will be required to pay at least eighty-percent (80%) of the costs of unit operation, and also by the owners of at least eighty-percent (80%) of the production or proceeds thereof that will be credited to interests which are free of cost, such as royalties, overriding royalties, and production payments, and a finding by the Commission in a supplemental order.

 

33.       The two-phase formula proposed by the Applicant is a fair and reasonable method of allocating production to the various tracts in the Arikaree Creek Pilot Unit, and that Phase one of the allocation formula should continue until all tracts in the Pilot Unit Area have received their estimated remaining primary recovery, at which time phase two should commence.

 

34.       The unit operator must monitor production and fluid levels in the producing wells immediately off-setting the north boundary of the Arikaree Creek Pilot Unit in order to ensure that the correlative rights of owners of interests in the minerals in tracts north of the north boundary are not violated.

 

35.       The unit operator must use a non-radioactive chemical tracer to track and monitor the water put into the injection wells in the Arikaree Creek Pilot Unit.

 

36.       All other conditions required by statute for authorization of unit operations have been met for the Arikaree Creek State Unit.

 

 

ORDER

 

IT IS HEREBY ORDERED:

 

1.         The Arikaree Creek State Unit previously approved in Order 556-1 is hereby reduced in size to approximately 600 acres to include only the lands described below, and unitized operations are hereby approved, for the production of oil, gas, and associated hydrocarbons from the Mississippian Spergen Formation:  

 

Township 6 South, Range 54 West, 6th P.M.

Section 14:      W½NE¼, NW¼, N½SW¼, SW¼SW¼

Section 15:      NE¼, E½SE¼

 

2.         The name of the Arikaree Creek State Unit is hereby changed to the Arikaree Creek Pilot Unit.

 

3.         Phase one of the allocation formula shall continue until all tracts in the Arikaree Creek State Unit have received their estimated remaining primary recovery, at which time phase two shall commence.

 

4.         The unit operator shall monitor production and fluid levels in the producing wells immediately off-setting the north boundary of the Arikaree Creek Pilot Unit to ensure that the correlative rights of owners of interests in the minerals in tracts north of the north boundary are not violated.

 

5.         The unit operator shall use a non-radioactive chemical tracer to track and monitor the water put into the injection wells in the Arikaree Creek Pilot Unit.

 

6.         All operations, including, but not limited to, the commencement, drilling, or operation of a well upon any portion of the Arikaree Creek State Unit shall be deemed for all purposes the conduct of such operations upon each separately owned tract in the Arikaree Creek State Unit by the several owners thereof. The portion of the unit production allocated to a separately owned tract in the Arikaree Creek State Unit shall, when produced, be deemed, for all purposes, to have been actually produced from such tract by a well drilled thereon. Operations conducted pursuant to this Order shall constitute a fulfillment of all the express or implied obligations of each lease or contract covering lands in the Arikaree Creek State Unit to the extent that compliance with such obligations cannot be had because of this Order.

 

7.         The portion of the unit production allocated to any tract, and the proceeds from the sale thereof, shall be the property and income of the several persons to whom, or to whose credit, the same are allocated or payable under this Order.

 

8.         No division order or other contract relating to the sale or purchase of production from a separately owned tract shall be terminated by this Order, but shall remain in force and apply to oil and gas allocated to such tract until terminated in accordance with the provisions hereof.

 

9.         Except to the extent that the parties affected so agree, this Order shall not be construed to result in a transfer of all or any part of the title of any person to the oil and gas rights in any tract in the Unit Area.  All property, whether real or personal, that may be acquired in the conduct of unit operations under this Order, shall be acquired for the account of the owners within the Arikaree Creek State Unit, and shall be the property of such owners in the  proportion that the expenses of unit operations are charged.

 

IT IS FURTHER ORDERED:

 

1.         The provisions contained in the above order shall become effective immediately.

 

2.         The Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above Orders.

 

3.         Under the State Administrative Procedure Act, the Commission considers this Order to be final agency action for purposes of judicial review within 35 days after the date this Order is mailed by the Commission.

 

4.         An application for reconsideration by the Commission of this Order is not required prior to the filing for judicial review.

 

 

 

 

ENTERED this 28th day of June, 2016, as of June 7, 2015.           

 

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

 

 

                                                                        By__________________________________

Julie Murphy, Secretary