before the oil and gas conservation commission

of the state of colorado

IN THE MATTER OF THE PROMULGATION                                             )                     CAUSE NO. 7

AND ESTABLISHMENT OF FIELD RULES TO                                        )

GOVERN OPERATIONS IN THE PADRONI                                              )                     ORDER NO. 7-4

WEST FIELD, LOGAN COUNTY, COLORADO                                         )

report of the commission

                        This cause came on for hearing before the Commission at 9:00 a.m. on November 27, 2006, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to allow an exception to the permitted location in Order No. 7-3, for a horizontal well to be drilled from a surface location in the SW SE of Section 6, Township 9 North, Range 52 West, 6th P.M. at a location 337 feet, more or less, from the south line and 1,743 feet, more or less, from the east line of Section 6 in a southeasterly direction with a proposed bottom hole location in the NE NE of Section 7 in Township 9 North, Range 52 West, 6th P.M., no closer than two hundred (200) feet to the south boundary of the NE NE of Section 7 and not closer than four hundred (400) feet to the wellbore of any existing well producing from the Dakota O-Sand Formation.

FINDINGS

                        The Commission finds as follows:

                        1. Citation Oil & Gas Corporation ("Citation"), 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. On August 15, 2005, the Commission issued Order No. 7-3 which established 20-acre drilling and spacing units for the following described lands, with the permitted well to be located in the NW and SE of each quarter quarter section, no closer than two hundred (200) feet from the boundary of the quarter quarter section where the well is located, for production of oil, gas and associated hydrocarbons from the Dakota O-Sand Formation:

Township 9 North, Range 52 West, 6th P.M.

Section 6: All

Section 7: N N, S NE

Township 9 North, Range 53 West, 6th P.M.

Section 1: E E

Township 10 North, Range 52 West, 6th P.M.

Section 31: W, SE

                        5. On September 8, 2006, Citation, by its attorney, filed with the Commission a verified application for an order to allow an exception to the permitted locations in Order No. 7-3 to drill the DuBois 7H Well as a horizontal well from a surface location in the SW SE of Section 6 in Township 9 North, Range 52 West, 6th P.M. at a location 337 feet, more or less, from the south line and 1,743 feet, more or less, from the east line of Section 6 in a southeasterly direction with a proposed bottom hole location in the NE NE of Section 7 in Township 9 North, Range 52 West, 6th P.M., no closer than two hundred (200) feet to the south boundary of the NE NE of Section 7, such that the wellbore of the well will not be located closer than four hundred (400) feet to the wellbore of any existing well producing from the Dakota O-Sand Formation.

                        6. Testimony and exhibits presented at the administrative hearing on November 16, 2006, showed the proposed horizontal well has a proposed surface location of 245 feet from the south line and 1,843 feet from the east line of said Section 6 and a bottom hole location in the NE NE of said Section 7 no closer than 200 feet to the south boundary of the NE NE of said Section 7 and no closer than four hundred (400) feet to the wellbore of any existing well producing from the Dakota O-Sand Formation.

                        7. Testimony and exhibits presented at the administrative hearing showed that a voluntarily pooled unit, by which all of the lands covered by Commission Order No. 7-3, except the lands described as the N N, SE NE of Section 7 in Township 9 North, Range 52 West, 6th P.M., was previously established by the owners of the oil and gas interests therein; that the lands described as the N N, SE NE of said Section 7 are covered by a separate oil and gas lease; and that the productive leg of the proposed horizontal well would produce oil from the Dakota O-Sand Formation of lands within both the voluntarily pooled unit and the separate lease.

                        8. Testimony and exhibits presented at the administrative hearing showed that an Agreement for Allocation of Production providing for allocation of production from the proposed horizontal well between the owners of oil and gas interests in the voluntarily pooled unit and the owners of interests in the leasehold of the separate oil and gas lease had been prepared; that the owners of oil and gas interests of 92.5% in interest in the voluntarily pooled unit and the separate oil and gas lease combined had executed the allocation agreement at the time of the administrative hearing; and that execution of the agreement by the remaining owners of such oil and gas interests would be obtained.

                        9. Geologic testimony and exhibits presented at the administrative hearing showed the existence of the Dakota O-Sand Formation in the lands to be drained by the proposed horizontal well and the locations of the existing vertical wells producing from the Dakota O-Sand Formation offsetting the proposed horizontal well.

                        10. Engineering testimony and exhibits presented at the administrative hearing showed that an equitable manner for allocating production to the voluntarily pooled unit and the separate oil and gas lease was to estimate the current oil production acre feet of the Dakota O-Sand Formation within the productive zone of the horizontal well and then determine the relative portions of such acre feet within the voluntarily spaced unit and the separate lease; that, based upon geologic and engineering data available from existing producing wells in the field, 60% of the production from the horizontal well should be allocated to the separate lease and 40% of such production should be allocated to the voluntarily pooled unit; and that such allocation and provision for redetermination of the allocation in the event of deviation of the wellbore from its proposed location by a specified amount are set forth in the agreement for allocation of production.

                        11. Engineering testimony also presented at the administrative hearing showed that incremental recovery in excess of two hundred fifty thousand (250,000) barrels of additional oil would be produced through the proposed horizontal well and that the proposed horizontal well would achieve greater than a 100% rate of return to the working interest before taxes.

                        12. Engineering testimony and exhibits presented at the administrative hearing showed the engineered path of the proposed horizontal wellbore through the Dakota O-Sand Formation from the proposed point of entry into the formation to the bottom hole location and showed that there would be approximately nine hundred (900) feet of the wellbore located in the Dakota O-Sand Formation.

                        13. Engineering testimony presented at the administrative hearing showed that there would be less than ten (10) percent interference between the proposed horizontal well and the current vertical wells producing from the Dakota O-Sand Formation.

                        14. No protests to the application have been filed with the Commission or the applicant.

                        15. Citation Oil & Gas Corporation agreed to be bound by oral order of the Commission.

                        16. Based upon the facts stated in the verified application, having received no protests, and having been heard by the Hearing Officer who recommended approval, the Commission should enter an order to allow an exception to the permitted location in Order No. 7-3 for a horizontal well to be drilled from a surface location in the SW SE of Section 6, Township 9 North, Range 52 West, 6th P.M. to a bottom hole location in the NE NE of Section 7 in Township 9 North, Range 52 West, 6th P.M. for production from the Dakota O-Sand Formation.

                        17. On November 22, 2006, Citation filed with the Commission written confirmation indicating that another owner had executed consents such that 96.25% of the owners have agreed to the allocation of production.

ORDER

                        NOW, THEREFORE, IT IS ORDERED, that an exception to the permitted location in Order No. 7-3 is hereby approved, for a horizontal well to be drilled from a surface location in the SW SE of Section 6, Township 9 North, Range 52 West, 6th P.M. at a location 245 feet from the south line and 1,843 feet from the east line of said Section 6 in a southeasterly direction with a bottom hole location in the NE NE of Section 7 in Township 9 North, Range 52 West, 6th P.M., no closer than two hundred (200) feet to the south boundary of the NE NE of said Section 7 such that the wellbore of the well will not be located closer than four hundred (400) feet to the wellbore of any existing well producing from the Dakota O-Sand Formation.

                        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.

                        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 thirty (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 filing for judicial review.

                        ENTERED this__________day of December, 2006, as of November 27, 2006.

                                                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

December 11, 2006