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

REPORT OF THE COMMISSION

The Commission heard this matter on March 5, 2012, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, upon application for an order to grant a variance from a Permit to Drill, and extend the expiration of the Permit to Drill from April 8, 2012 to April 8, 2014.

FINDINGS

The Commission finds as follows:

Jurisdiction

1.         Magpie Operating, Inc. (“Magpie” or “Applicant”), as applicant herein, is an interested party in the subject matter of the above-referenced hearing. Protestants, Laura W. Chase and Mike Sutak (“Chase-Sutak”) are also interested parties in this matter.

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.

Procedural History

4.         On March 25, 2010, the Commission issued Order No. 1-149, which, among other things, designated the location for the State Chase 33-36 Well (“Well”) within the SE¼ of Section 36, Township 5 North, Range 68 West, 6th P.M., and created conditions of approval to be applied to the Application for Permit-to-Drill.

5.         On April 9, 2010, the Commission issued Permit No. 20084004 (“Permit”), for the State Chase 33-36 Well, including the conditions of approval as stated in Order No. 1-149.  The Permit expires by its own terms on April 8, 2012.

6.         Following the Commission’s approval of Order 1-149 and the Permit, Chase-Sutak filed an action in Denver District Court challenging the Permit.  The District Court ruled in favor of Magpie, and Chase-Sutak appealed.  The matter is currently pending appeal before the Colorado Court of Appeals.

7.         On January 11, 2012, Magpie filed with the Commission a verified application (“Application”) for an order granting a variance from the Permit, and extending the expiration of the Permit from April 8, 2012 to April 8, 2014. 

8.         On February 17, 2012, Chase-Sutak, filed a protest to the variance request.

Applicable Rules

9.         Rule 502.b.(1) of the Rules and Regulations of the Oil and Gas Conservation Commission states variances to any Commission rules, regulations, or orders may be granted in writing by the Director without a hearing upon written request by an operator to the Director, or by the Commission after hearing upon application. The operator or the applicant requesting the variance shall make a showing that it has made a good faith effort to comply, or is unable to comply with the specific requirements contained in the rules, regulations, or orders, from which it seeks a variance, including, without limitation, securing a waiver or an exception, if any, and that the requested variance will not violate the basic intent of the Oil and Gas Conservation Act.

Background Facts

10.       On February 22, 2012, a prehearing conference (PHC) was held in this matter. Counsel for both Magpie and Chase-Sutak summarized their respective positions. Chase-Sutak wanted to be on record as opposing the requested variance on the same basis as their protest of the original application for permit to drill (APD).  Chase-Sutak also insisted on Magpie showing that it meets the requirements for the variance.

                        11.       The parties stipulated that there was no intent to introduce new evidence in support of the APD that was the subject of their district court action and now subject of their Colorado Court of Appeals case. The Chase-Sutak protest is limited to sustaining their ongoing objection to the issuance of the APD that is the subject to the Court of Appeals litigation, and requiring Magpie to prove that it is entitled to the proposed Variance.

                        12.       The Commission heard this matter at its March 5, 2012 meeting. The Commission  heard  testimony from two Magpie witnesses, Ryan Warner, Magpie Vice President, and Pete Milonas, Minerals Director of the State Land Board. The Warner testimony explained Magpie Exhibits A through F attached to the Magpie Prehearing Statement. The Warner testimony also elaborated on the efforts Magpie has taken to secure and defend the Permit as described in part II of the Magpie Prehearing Statement. The Milonas testimony largely repeated comments made in his letter dated January 23, 2012 and submitted pursuant to Rule 510. Chase-Sutak presented no witnesses, but cross examined Ryan Warner, primarily with regards to Exhibit R-4 attached to the Chase-Sutak Prehearing Statement. Chase-Sutak sought to prove that the reason  Magpie has not drilled the subject well within the term of the Permit, was that Magpie lacked the financial means to drill the Well.

                        13.       The record in this proceeding includes the following: 1) Magpie Application; 2) Notice of Hearing; 3) Chase-Sutak Protest; 4) Magpie Prehearing Statement with Exhibits; 5) Chase-Sutak Prehearing Statement with Exhibits; 6) Prehearing Conference Report and Order; 7) Hearing Officer Recommendation; 8) Rule 510 Statement of Pete Milonas, Minerals Director, State Land Board; 9) Magpie’s Notice of Objection; 10) Chase-Sutak Response to Magpie’s Notice of Objection; 10) Testimony and Counsel’s argument at the Commission’s March 5, 2012 hearing.

Commission Analysis

14.       Rule 502.b.(1) states the operator or the applicant requesting the variance shall make a showing that it has made a good faith effort to comply, or is unable to comply with the specific requirements, in this case Permit # 20084004. 

15.       In support of the Application, Magpie explained that it has been in litigation with Chase-Sutak in two contested administrative proceedings before the Commission, two district court actions, and one appeal presently pending before the Colorado Court of Appeals. The Commission concludes that it is economically and practically infeasible for Magpie to proceed with drilling a well until the pending appeal is resolved.  The Commission finds that Magpie’s expectation that proceeding with its proposed drilling program would trigger additional legal action to frustrate its drilling program is well founded. The Warner testimony described the inability to secure supplemental financing to drill the Well in the face of the uncertainty surrounding the ongoing litigation. The Commission accepts this testimony as evidence of Magpie’s good faith efforts to pursue its drilling program within the term of the Permit.

                        16.       Chase-Sutak raised an allegation that the reason Magpie has not drilled the well during the Permit term is that Magpie lacks financial resources to do so. While this may be true, the Commission finds that the litigation initiated by Chase–Sutak in opposition to the Magpie drilling is a significant contributing cause of Magpie’s inability to secure supplemental financing necessary to proceed with its drilling program. Chase-Sutak should not be rewarded for “running out the clock” on the two-year Permit term, when they are primarily responsible for Magpie’s inability to proceed with its drilling program.

                        17.       Chase-Sutak also raised a question as to whether the Commission can grant this variance in the face of the fact that Magpie has outstanding deficiencies in providing adequate financial assurance pursuant to Rule 707 for its inactive wells. (See, Chase-Sutak Prehearing Statement Exhibit R-4 (Request for Variance to Rule 707.a).)  While the underlying issue behind the Request for Variance to Rule 707.a. remains unresolved (as explained by Acting Director Thom Kerr at the hearing), the Commission finds this issue does not control whether the Rule 502.b.1 variance should be granted.  This case turns on whether Magpie has met its burden pursuant to Rule 502.b.1. concerning its Application for an extension of the term of the Permit, and not for a variance to Rule 707.a which was not noticed for hearing in this matter.

                        18.       Litigation in this matter has been ongoing and continuous since legal action was first initiated by Chase-Sutak.  The Commission accepts Magpie’s showing that it has made a good faith effort to comply with the terms of the Permit, but has either been unable to do so, or determined that it would be financially and legally imprudent to proceed with drilling activities approved by the Permit. The Commission concludes that granting this variance will not violate the basic intent of the Oil & Gas Conservation Act (Act), and further, that failing to grant the requested variance would frustrate the purposes of the Act, and the State Land Board as mineral lessor.

ORDER

NOW, THEREFORE IT IS ORDERED, that a variance to Permit No. 20084004 (“Permit”), for the State Chase 33-36 Well, is hereby granted, and the expiration date of the Permit is hereby extended to April 8, 2014.

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   9th  day of March, 2012, as of March 5, 2012.
           
                                                                        OIL AND GAS CONSERVATION COMMISSION
                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________         
                                                                                    Peter J. Gowen, Acting Secretary