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

REPORT OF THE COMMISSION

                        The Commission heard this matter on January 23, 2012, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, upon application for an order to: 1) vacate an existing 360-acre drilling and spacing unit within Section 24, Township 32 North, Range 4 West, N.M.P.M.; 2) modify an existing 352.73-acre drilling and spacing unit within Section 19, Township 32 North, Range 3 West, N.M.P.M., and Section 24,Township 32 North, Range 4 West, N.M.P.M.; 3) establish an exploratory drilling and spacing unit comprised of Section 24, Township 32 North, Range 4 West, N.M.P.M., containing approximately 488.16-acres; and 4) allow up to two horizontal wells to be drilled within the approximate 488.16-acre exploratory drilling and spacing unit for development and production of gas and related hydrocarbons from the Fruitland Coal Seam Formation.

FINDINGS

The Commission finds as follows:

1.    Red Willow Production Company, (“Red Willow” 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 24, Township 32 North, Range 4 West, N.M.P.M., for production of gas from the Fruitland Coal Seam Formation, with the treated interval of the permitted wellbore to be located no closer than 990 feet from the outer boundary of the unit, and no closer than 130 feet to any interior quarter section line.

5.  On December 17, 1990, the Commission issued Order No. 112-85, which among other things, established 320-acre drilling and spacing units for certain lands including Section 24, Township 32 North, Range 4 West, N.M.P.M., for production of gas from the Fruitland Coal Seam Formation.

6.  On May 8, 2008, the Commission issued Order No. 112-210, which among other things: 1) vacated drilling and spacing units established under Order No. 112-85; 2) established a 360-acre drilling and spacing unit and a 352.73-acre drilling and spacing unit including portions of Section 24, Township 32 North, Range 4 West, N.M.P.M.; 3) approved one horizontal well within each unit; and 4) established 660 foot setbacks from the outer unit boundaries, for the production of gas from the Fruitland Coal Seam Formation.

7.  On August 29, 2011, Red Willow, by its attorneys, filed with the Commission a verified application (“Application”) for an order to: 1) vacate  the existing 360-acre drilling and spacing unit covering the W½, and W½ E½, Section 24, Township 32 North, Range 4 West, N.M.P.M.; 2) modify the existing 352.73-acre drilling and  spacing unit covering the E½E½, Section 24, Township 32 North, Range 4 West, N.M.P.M., and the W½, Section 19, Township 32 North, Range 3 West, N.M.P.M by reducing it in size to just the W½, Section 19, Township 32 North, Range 3 West, N.M.P.M. (“Modified Unit”); 3) establish an approximate 488.16-acre exploratory drilling and spacing unit (“Application Lands”) comprised of Section 24, Township 32 North, Range 4 West, N.M.P.M.; 4) approve up to two horizontal wells to be drilled within the 488.16-Acre Unit; 5) provide that the treated interval of a horizontal well shall be located no closer than 100 feet from the north, east, and west side boundaries, and  660 feet from the south boundary of the 488.16-Acre Unit, unless an exception is authorized by the Director; 6) eliminate any internal quarter section line setback for both units; 7) allow one horizontal well within the Modified Unit; and 8) provide that the outer boundary setbacks on the north, east, and west sides of the Modified Unit  be reduced to 100 feet and that the existing 660 foot outer boundary setback on the south side of the Modified Unit be maintained, for production of gas from the Fruitland Coal Seam Formation.

8.  On October 18, 2011, Red Willow, 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.

9. On January 9, 2012, Red Willow, by its attorneys, filed an amended request (“Amended 511 Request”) to approve the Application, withdrawing its request to reduce the outer boundary setbacks from 660 feet to 100 feet. The Amended 511 Request proposes the treated interval of any horizontal well to be no closer than 660 feet from the outer boundary of the unit, and that any internal quarter section setbacks be eliminated.

                        10.  Land testimony and exhibits were submitted in support of the Application by Brooks J. Boedecker, District Landman for Energen Resources Corporation, working directly with Red Willow.  Testimony showed Red Willow owns a leasehold interest in the Application Lands.

                        11.  Geologic testimony and exhibits were submitted in support of the Application by Andrew Benson, Lead Geologist for Energen Resources Corporation, working directly with Red Willow.  Testimony stated the most effective way to produce hydrocarbons from the Fruitland Coal Formation underlying the Application Lands is to form an approximate 488.16-acre spacing unit and produce from two horizontal wells.  The testimony states surface and environmental impact can be minimized by drilling the two wells from a single common well pad.  Testimony concludes reduced setbacks in the Application Lands will provide for more economical production of hydrocarbons.

                        12.  Engineering testimony and exhibits were submitted in support of the Application by Evan Chan, Reservoir Engineer on the North Carracas Area for Energen Resources Corporation, working directly with Red Willow.  The testimony showed that creating a single 488.16-acre spacing unit and allowing for two horizontal wells, will allow Red Willow to engage in a more optimum recovery of hydrocarbons from the Fruitland Coal Seam Formation under the Application Lands.

13.  The Hearing Officer received comments from Commission Permitting Unit staff expressing concerns that the proposed 100 foot setbacks in the original application may not be protective of correlative rights of adjacent owners.  Permitting staff believed that external setbacks should remain at 660 feet until proven otherwise. Red Willow’s Rule 511 submittal revised the external setbacks as requested by staff, and setbacks are no longer an issue.

14.  The above-referenced testimony and exhibits show that granting the Application with 660 foot external setbacks will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of hydrocarbons, and will not violate correlative rights.

15.  The Application was reviewed by the Colorado Department of Public Health and Environment (“CDPHE”) pursuant to consultation provisions of Rule 306.d.  In a letter dated October 21, 2011, the CDPHE Oil & Gas Coordinator indicated that CDPHE does not believe any additional conditions of approval are necessary for approving the amended Application.

16.  Red Willow agreed to be bound by oral order of the Commission. 

                        17.  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: 1) vacate an existing 360-acre drilling and spacing unit within Section 24, Township 32 North, Range 4 West, N.M.P.M.; 2) modify an existing 352.73-acre drilling and spacing unit within Section 19, Township 32 North, Range 3 West, N.M.P.M., and Section 24,Township 32 North, Range 4 West, N.M.P.M.; 3) establish an exploratory drilling and spacing unit comprised of Section 24, Township 32 North, Range 4 West, N.M.P.M., containing approximately 488.16-acres; 4) allow up to two horizontal wells to be drilled within the approximate 488.16-acre exploratory drilling and spacing unit; and 5) maintain the outer boundary setbacks at 660 feet, and eliminate any internal quarter section setbacks, for development and production of gas and related hydrocarbons from the Fruitland Coal Seam Formation.

ORDER

NOW, THEREFORE IT IS ORDERED, that the existing 360 acre drilling and spacing unit covering the W½, and W½ E½, Section 24, Township 32 North, Range 4 West, N.M.P.M. is hereby vacated.

IT IS FURTHER ORDERED, that an approximate 488.16-acre exploratory drilling and spacing unit comprised of Section 24, Township 32 North, Range 4 West, N.M.P.M., is hereby established, and that up to two horizontal wells may be drilled and completed within the Unit for production of gas and associated hydrocarbons from the Fruitland Coal Seam Formation, with the treated interval of a horizontal well to be no closer than 660 feet from unit boundaries, unless an exception is authorized by the Director.

IT IS FURTHER ORDERED, that the existing 352.73-acre drilling and  spacing unit covering the E½ E½, Section 24, Township 32 North, Range 4 West, N.M.P.M., and the W½, Section 19, Township 32 North, Range 3 West, N.M.P.M., is hereby modified, by reducing it in size to just the W½, Section 19, Township 32 North, Range 3 West, N.M.P.M. (Modified Unit), and that one horizontal well may be drilled and completed within the Modified Unit for production of gas and associated hydrocarbons from the Fruitland Coal Seam Formation with the treated interval of the horizontal well to be no closer than 660 feet from the unit boundaries, unless an exception is authorized by the Director.

 IT IS FURTHER ORDERED, that any internal quarter section line setback is hereby eliminated for both units.

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   26^th  day of January, 2012, as of January 23, 2012.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________         

                                                                                    Peter J. Gowen, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

January 26, 2012