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

REPORT OF THE COMMISSION

This cause came on for hearing before the Commission at 9:00 a.m. on June 11, 2009, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to allow up to two additional wells, for a total of up to four, to be drilled in the 320-acre drilling and spacing unit established for the S½ of Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams.

FINDINGS

The Commission finds as follows:

1.     McElvain Oil & Gas Properties, Inc. (“McElvain” 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.     On June 17, 1988, the Commission issued Order No. 112-60, which among other things, established 320-acre drilling and spacing units for certain lands, including Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams, with the permitted well to be located no closer than 990 feet to any outer boundary of the unit nor closer than 130 feet to any interior quarter section line.

5.     On October 21, 1997, amended August 28, 1998, the Commission issued Order No. 112-136, which among other things, allowed an optional additional second well to be drilled in the 320-acre drilling and spacing unit designated for the S½ of Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams, with the permitted well to be located in the center of the NW¼ and the SE¼ of the section, and no closer than 990 feet to any outer boundary of the unit nor closer than 130 feet to any interior quarter section line.

6.     On March 16, 2009, McElvain, by its attorney, filed with the Commission a verified application for an order to allow two optional additional infill wells, for a total of up to four, to be drilled in the 320-acre drilling and spacing unit established for the S½ of Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams.

The application further requests that either or both of the proposed optional additional infill wells should be permitted to be drilled and completed as vertical, directional or horizontal wells, at the operator’s discretion, with the bottomhole location no closer than 660 feet to any outer boundary of the unit and no setback required to any interior quarter section line.

7.     On April 22, 2009, La Plata County, by its attorney, filed with the Commission an intervention raising environmental and public health, safety and welfare concerns to the application.  McElvain has negotiated a Memorandum of  Understanding (“MOU”) with La Plata County regarding proposed conditions for the Commission to place upon this proposed increased well density application.  Consequently, on June 3, 2009, La Plata County conditionally withdrew its intervention provided the Commission inserts the conditions of the negotiated MOU set forth hereinafter in this Order.

8.     On May 29, 2009, McElvain, by its attorney, filed with the Commission a written request to approve the application based on the merits of the verified application and the supporting exhibits as provided for by Rule 511.c.  Sworn written testimony and exhibits were submitted in support of the application.

9.     Testimony and exhibits submitted in support of the application showed that the application lands are over ten miles from the Fruitland Outcrop, and that the application lands are surrounded by lands that have been approved for 80-acre well density, for the production of gas and associated hydrocarbons from the Fruitland coal seams.  Additional testimony showed that the McElvain and other related entities are leasehold owners of approximately 50% of the mineral estate underlying the application lands.  Further testimony indicated that McElvain intends to drill the optional wells directionally from existing or proposed well pads which will minimize surface disturbance as dictated by topography, engineering and other factors.

10.   Testimony and exhibits submitted in support of the application showed that the Fruitland coal seams underlie the entirety of the application lands, which exhibits variable thickness ranging from less than 55 feet to over 70 feet, and that wells less than a mile apart show exceptionally variable production.

11.   Testimony and exhibits submitted in support of the application showed that increased well density, for the Fruitland coal seams underlying the application lands, is necessary to more efficiently drain gas reserves and to protect correlative rights.  Additional testimony demonstrated that the original gas-in-place is 7.1 BCF per 160 acres for the Fruitland coal seams underlying the application lands, with an estimated recovery factor of 35% under the existing well density order, supporting an additional well to efficiently drain the reservoir.

12.   The above-referenced testimony and exhibits show that the proposed increased well density will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of gas, and will not violate correlative rights.

13.   McElvain Oil & Gas Properties, Inc. agreed to be bound by oral order of the Commission. 

14.   Based on the facts stated in the verified application, having received one intervention which was conditionally withdrawn, and based on the Hearing Officer review of the application under Rule 511.c., the Commission should enter an order to allow up to two additional wells, for a total of up to four, to be drilled in the 320-acre drilling and spacing unit established for the S½ of Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams, with the permitted well to be located no closer than 660 feet from the unit boundary and no setback to interior quarter section line.

ORDER

                        NOW, THEREFORE IT IS ORDERED, that up to two additional wells, for a total of up to four, are hereby approved, in the 320-acre drilling and spacing unit established for the S½ of Section 20, Township 33 North, Range 8 West, N.M.P.M., for the production of gas and associated hydrocarbons from the Fruitland coal seams.

IT IS FURTHER ORDERED, that either or both of the proposed optional additional infill wells shall be permitted to be drilled and completed as vertical, directional or horizontal wells, at the operator’s discretion, with the bottomhole location no closer than 660 feet to any outer boundary of the unit and no setback required to any interior quarter section line.

IT IS FURTHER ORDERED, that wells drilled on the above-described lands shall comply with the terms and provisions of all of the Commission’s health, safety, welfare and environmental rules and regulations now or hereafter in effect.

IT IS FURTHER ORDERED, that wells drilled in the above-described lands shall comply with all applicable regulations of the BLM, Bureau of Indian Affairs and the Southern Ute Indian Tribe when conducting operations on lands subject to the respective jurisdiction of each agency or government.

IT IS FURTHER ORDERED, that wells drilled in the above-described lands shall comply with applicable provisions of the MOU between the Applicants and La Plata County, and shall comply with all terms, conditions and provisions of prior Commission Orders in Cause No. 112, including without limitation, the specific provisions of Order No. 112-157 including the Rule 508.j.(3)B. conditions attached thereto, to the extent they do not duplicate the provisions of the MOU.  For convenience and ease of reference, the relevant conditions of the MOU and Order No. 112-157, including Rule 508.j.(3)B. conditions, are set forth below.  Conflicts between the conditions of the MOU set forth herein and the terms, conditions and provisions of Order No. 112-157 shall be resolved in favor of the MOU.

IT IS FURTHER ORDERED, that the following provisions of the proposed MOU between McElvain and La Plata County shall be applied to additional wells where the surface location is proposed to be sited on lands subject to Commission jurisdiction, in addition to any requirements of applicable existing Commission Rules and Regulations or orders, and to the extent that the following provisions have not already been completed pursuant to the McElvain’s operations subject to the Commission’s order entered under Cause No. 112, Order No. 112-209, McElvain agrees:

Surface Density  The density of Fruitland Coal Well Pads within the Infill Application Area shall not exceed two (2) wthin the existing drilling and spacing units of 320 acres for the Fruitland Coal Seam formation.  Notwithstanding the foregoing, nothing contained in this provision shall be construed so as to require the closure or abandonment of any existing gas well.

Storm Water Management and Spill Prevention Containment and Control  Even if not required to do so by any applicable regulation or law, the Applicants agree to utilize best management practices for all pad expansions and new pads and for road and pipeline development or improvements.

Well Location; Exceptions  The Commission may grant a special exception allowing for a greater density of Fruitland Coal Well Pads (i.e., more than four (4) per 640-acre section), at the request of the Applicant and after consultation with the Local Government Designee (“LGD”), based upon a finding by the Commission that one or more of the following factors apply in a manner such that use of an existing well pad is rendered impractical:

a.      Topographic characteristics of the site;

b.      Natural resource constraints (e.g., wetlands);

c.      The location of utilities or similar services;

d.      Geologic factors or where issues concerning distances between wells are present;

e.      Other site conditions beyond the control of the Applicants; or

f.       Safety concerns.

Water Well Monitoring  If a conventional gas well exists within one quarter (1/4) mile of the bottom hole location of a Proposed Infill Well, then the two (2) closest water wells within a one-half (½) mile radius of the conventional gas well shall be sampled by McElvain as water quality testing wells. If possible, the water wells selected shall be on opposite sides of the existing conventional gas well not exceeding one-half (½) mile radius. If water wells on opposite sides of the conventional gas well cannot be identified, then the two (2) closest wells within one-half (½) mile radius shall be sampled. If two (2) or more conventional gas wells are located within one quarter (¼) mile of the bottom hole location of the Proposed Infill Well, then the conventional gas well closest to a Proposed Infill Well shall be used for selecting wells for sampling.

If no conventional gas wells are located within one quarter (1/4) mile radius of the bottom hole location of the Proposed Infill Well, then the selected water wells shall be within one quarter (¼) mile of the bottom hole location of the Proposed Infill Well. In areas where two (2) or more water wells exist within one quarter (¼) mile of the bottom hole location of the Proposed Infill Well, then the two (2) closest water wells shall be sampled by McElvain. Ideally, if possible, the water wells selected should be on opposite sides of the bottom hole location of the Proposed Infill Well. If water wells on opposite sides of the bottom hole location of the Proposed Infill Well cannot be identified, then the two (2) closest wells within one quarter (¼) mile radius shall be sampled by McElvain. If two (2) water wells do not exist within one quarter (¼) mile radius, then the two closest single water wells within a one-half (½) mile radius shall be selected.

If no water well is located within a one quarter (¼) mile radius area or if access is denied, a water well within one-half (½) mile of the bottom hole location of the Proposed Infill Well shall be selected. If there are no water quality testing wells meeting the foregoing criteria, then sampling shall not be required. If the BLM or the COGCC have already acquired data on a water well within one quarter (¼) mile of the conventional gas well, but it is not the closest water well, it shall be given preference in selecting a water quality testing well. The “initial baseline testing” described in this paragraph shall include all major cations and anions, TDS, iron and manganese, nutrients (nitrates, nitrites, selenium), dissolved methane, pH, presence of bacteria and specific conductance and field hydrogen sulfide.

If free gas or a methane concentration level greater than 2 mg/L is detected in a water quality testing well, compositional analysis and carbon isotopic analyses of methane carbon shall be performed to determine gas type (thermogenic, biogenic or an intermediate mix of both). If the testing results reveal biogenic gas, no further isotopic testing shall be done. If the carbon isotope test results in a thermogenic or intermediate mix signature, annual testing shall be performed thereafter and an action plan shall be drafted by McElvain to determine the source of the gas. If the methane concentration level increases by more than 5 mg/L between sampling periods, or increase to more than 10 mg/L, an action plan shall be drafted to determine the source of the gas.

The initial baseline testing shall occur prior to the drilling of the Proposed Infill Well. Within one (1) year after completion of the Proposed Infill Well, a “post completion” test shall be performed for the same parameters above and repeated three (3) and six (6) years thereafter. If no significant changes from the baseline have been identified after the third test (the six year test), no further testing shall be required. The testing schedule will restart after the drilling of a new Infill Well on an existing Well Pad if the wells to be tested include those tested for the 160 acre infill program. Additional “post completion” test(s) may be required if changes in water quality are identified during follow-up testing. The Director of the COGCC may require further water well sampling at any time in response to complaints from water well owners.

Within three (3) months of collecting the samples used for the test, copies of all test results described above shall be provided to the COGCC and the surface owner where the water quality testing well is located

Plugged and Abandoned Wells/Soil Gas Vapor Survey  A soil gas vapor-monitoring program is designed to determine a possible lack of zonal isolation along wellbores of plugged and abandoned wells. McElvain will attempt to identify any plugged and abandoned wells located within 0.25 miles of the bottom hole location of any Proposed Infill Well. Any plugged and abandoned well within 0.25 miles of the bottom hole of a Proposed Infill Well will be assessed for risk, taking into account cementing practices reported in the plugged and abandoned reports. McElvain shall notify the COGCC of all results of all risk assessments of plugging procedures. The COGCC may appropriate funds under Rule 701 (the Environmental Response Fund) to conduct soil gas monitoring tests to further define the risks. If the monitoring reveals a possible lack of zonal isolation, the COGCC may then conduct or order any necessary remediation or other authorized activities.

IT IS FURTHER ORDERED, that the following terms, conditions and provisions of this Order No. 112-217 shall be applied to additional wells where the surface location is proposed to be sited on lands subject to Commission jurisdiction, in addition to any requirements of applicable existing Commission Rules and Regulations:

Well Permit Limitations  A Commission hearing shall be required before a drilling permit may be issued for a well site located within one and one-half (1½) miles of the outcrop contact between the Fruitland and Pictured Cliffs Formations.  The purpose of the hearing shall be to address potential adverse impacts to the Fruitland outcrop.

Annual Drilling Plan  The Director shall survey the operator as to its drilling plans annually.  The survey results shall be reported to the Commission for its consideration with respect to the conditions attached to this order.

Wildlife  The operator shall notify the Colorado Division of Wildlife ("CDOW") of the location of any proposed additional well site and advise the Director of the date such notice was provided. If the Director receives comments from the CDOW within ten (10) days of the date notice was provided, such comments may be considered in applying Rule 508.j.(3)B. conditions.

Emergency Preparedness Plan  The operator submitting an Application for Permit-to-Drill for a proposed additional well under this order shall file and maintain a digital Emergency Preparedness Plan ("EPP") with La Plata County.  The EPP shall include as-built facilities maps showing the location of wells, pipelines and other facilities, except control valve locations that which may be held confidential. The EPP shall include an emergency personnel contact list.

Gas and Oil Regulatory Team  The Director shall ensure that the La Plata County Gas and Oil Regulatory Team ("GORT") continues to meet as appropriate, but no less than semiannually.  GORT meetings may be scheduled more frequently if the members believe a meeting is appropriate. (GORT includes invited member representatives from La Plata County, BLM, SUIT, industry operators and Commission. Its meetings are open and typically attended by interested area residents.)

3M Mapping, Modeling and Monitoring Project  The Director shall ensure that the 3M Technical Peer Review Team is invited to meet as appropriate, but no less than semiannually to review proposals and results related to the 3M Mapping, Modeling and Monitoring Project. 3M Technical Peer Review Team meetings may be scheduled more frequently if the members believe a meeting is appropriate.

Post Completion Pressure Build-Up Tests  In addition to obtaining a bottom hole pressure on all wells drilled under this order, the operator shall conduct pressure build-up tests two (2) to three (3) months after initial production begins and once every three (3) years thereafter.  The operator shall provide the data acquired, an evaluation of the data and the procedures utilized to conduct the pressure build-up tests to the Director within thirty (30) days of the conclusion of each test.  After reviewing the quality of the pressure buildup data and the adequacy of the geographic distribution of the data, the Director may reduce the number of wells for which pressure build-up testing is required.

IT IS FURTHER ORDERED, that the following Rule 508.j.(3)B. conditions from Order No. 112-157 shall be applied to additional wells where the surface location is proposed to be sited on lands subject to Commission jurisdiction, in addition to any requirements of applicable Commission Rules and Regulations:

Prior to approving any Application for Permit-to-Drill, the Director shall conduct an onsite inspection if the surface well location is proposed to be sited within any subdivision that has been approved by La Plata County.  The Director shall conduct an onsite inspection if the surface well location is within two (2) miles of the outcrop contact between the Fruitland and Pictured Cliffs Formations and an onsite inspection is requested by the surface owner, LGD, operator, or Director.

Prior to approving any Application for Permit-to-Drill, the Director shall conduct an onsite inspection if the operator and the surface owner have not entered into a surface use agreement.  If the reason the surface use agreement has not been executed is related to surface owner compensation, property value diminution, or any private property contractual issues between the operator and the surface owner, then no onsite inspection shall be required.

The purpose of the onsite inspection shall be to identify any potential public health, safety and welfare or significant adverse environmental impacts within Commission jurisdiction regarding the proposed surface location that may not be adequately addressed by Commission rules or orders.  The onsite inspection shall not address matters of surface owner compensation, property value diminution, or any private party contractual issues between the operator and the surface owner.

When the Director conducts onsite inspections under the conditions described in the paragraphs above, the Director shall invite the representatives of the surface owner, the operator and LGD to attend.  The Director shall attempt to select a mutually acceptable time for the representatives to attend.  The inspection shall be conducted within ten (10) days, or as soon as practicable thereafter, of either the date the LGD advises the Director in writing that the proposed surface well site location falls within an approved subdivision or the date the operator advises the Director in writing that a surface use agreement has not been reached with the surface owner.  If requested by the operator, the Director may delay the onsite inspection to allow for negotiation between the operator and surface owner or other parties.

Following the onsite inspection, the Director shall apply appropriate site specific drilling permit conditions if necessary to prevent or mitigate public health, safety and welfare or significant adverse environmental impacts taking into consideration cost-effectiveness and technical feasibility and relevant geologic and petroleum engineering conditions as well as prevention of waste, protection of correlative rights, and promotion of development.

Examples of the types of impacts and conditions that might be applied if determined necessary by the Director include (this list is not prescriptive or all inclusive):

Visual or aesthetic impacts - moving the proposed surface well site location or access road to take advantage of natural features for screening; installing low profile artificial lift methods; constructing artificial features for screening.

Surface impacts – moving or reducing the size, shape, or orientation of the surface well site location or access road to avoid disturbance of natural features or to enhance the success of future reclamation activities; utilizing an existing surface well site location or access road to avoid the impacts of new construction; utilizing a closed drilling fluid system instead of reserve pits to avoid impacts to sensitive areas.

Noise impacts – installing electric motors where practicable; locating or orienting motors or compressors to reduce noise; installing sound barriers to achieve compliance with Commission rules; confining cavitation completion operations (excluding flaring) to the hours of 7 a.m. to 7 p.m. and notifying all area residents within one-half (½) mile at least seven (7) days before cavitation is commenced.

Dust impacts – watering roads as necessary to control dust during drilling and completion operations.

Ground water impacts – collecting and analyzing water and gas samples from existing water wells or springs; installing monitoring wells, collecting samples, and reporting water, gas and pressure data.

Safety impacts – soil gas sampling and analysis; residential crawl space gas sampling and analysis; installing security fencing around wellheads and production equipment.

Outcrop impacts – performing outcrop gas seep surveys; performing produced water quality analysis; periodic pressure transient testing of high water/gas ratio wells; limiting water production in wells with anomalously high water rates and water/gas ratios; funding investigative reservoir modeling under the Director’s supervision.

Wildlife impacts – limiting drilling and completion operations during certain seasonal time periods when specific site conditions warrant.

If the operator objects to any of the conditions of approval applied above, the Director shall stay the issuance of the drilling permit and properly notice and set the matter for the next regularly scheduled Commission hearing at which time the Commission may determine conditions of drilling permit approval.

If the Director has reasonable cause to believe that any existing or proposed oil and gas operations are causing, or are likely to cause, public health, safety and welfare or significant adverse environmental impacts within Commission jurisdiction that may not be adequately addressed by Commission rules or orders, the Director may properly notice and set the matter for the next regularly scheduled Commission hearing to order appropriate investigative or remedial action.  Reasonable cause may include, but is not limited to, information from the 3M Mapping, Modeling and Monitoring Project.

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 the filing for judicial review.

                        ENTERED this__________day of June, 2009, as of June 11, 2009.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Robert A. Willis, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

June 18, 2009