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

IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS FOR THE CODELL AND NIOBRARA FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO

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CAUSE NO. 1

DOCKET NO. 1410-GA-06

ORDER NO. 407-1234

REPORT OF THE COMMISSION

The Commission heard this matter on March 2, 2015 at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for an order to approve the Applications for Permit to Drill (“APDs”) for wells proposed to be drilled over the objection of an owner pursuant to Commission Rule 318A within Section 2, Township 1 North, Range 65 West, 6^th P.M., for the production of oil, gas and associated hydrocarbons within the Codell and Niobrara Formations.

FINDINGS

Jurisdictional Findings:

1. Encana Oil & Gas (USA) Inc., acting by and through its authorized agent, Encana Services Company, Ltd. (“Encana” or “Applicant”) is an interested party in the subject matter of the above-referenced hearing.

2. K.P. Kauffman Company, Inc. (“KPK” or Objector”) is an interested party in the subject matter of the above-referenced hearing.

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

4. 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:

5. On June 9, 2014, Encana sent notices of 318A proposals to establish designated horizontal wellbore spacing units (“WSUs”) and nine proposed horizontal wells (“Proposed Wells”) for the above-described Application Lands (“Proposal”).

6. On July 24, 2014, KPK filed a timely objection pursuant to Rule 318A.e.(6), objecting to Encana’s proposed designated horizontal wellbore spacing units (“Objection”).

7. On August 28, 2014, Encana filed a verified application pursuant to 318A.e.(6) for a hearing before the Commission on the objection filed by KPK to the following proposed wells (“Wells”):

Well Name/Number	Surface Location	Bottomhole Location	Target Fm.
McGill 1A-2H-B165	280’ FNL & 2,115’ FEL	460’ FSL & 2,640’ FWL	Niobrara
McGill 1B-2H-B165	280’ FNL & 2,105’ FEL	460’ FSL & 2,450’ FEL	Niobrara
McGill 1C-2H-B165	280’ FNL & 2,095’ FEL	460’ FSL & 2,225’ FEL	Codell
McGill 1D-2H-B165	280’ FNL & 2,085’ FEL	460’ FSL & 2,000’ FEL	Niobrara
McGill 1E-2H-B165	280’ FNL & 2,075’ FEL	460’ FSL & 1,775’ FEL	Niobrara
McGill 1G-2H-B165	280’ FNL & 2,055’ FEL	460’ FSL & 1,325’ FEL	Niobrara
McGill 1H-2H-B165	281’ FNL & 2,045’ FEL	460’ FSL & 1,100’ FEL	Niobrara
McGill 1I-2H-B165	281’ FNL & 2,035’ FEL	460’ FSL & 875’ FEL	Codell
McGill 1L-2H-B165	281’ FNL & 2,005’ FEL	460’ FSL & 200’ FEL	Codell

8. On October 10, 2014, KPK filed a Protest to the Application and a Motion to Dismiss the Application.

9. On October 15, 2014, a prehearing conference was held with the parties to address the issues identified in the parties’ pleadings. An administrative hearing was scheduled before the Hearing Officer pursuant to Rule 318A.e.(5)C. on October 23, 2014.

10. On October 21, 2014, the parties mutually agreed to continue the matter to the December 15, 2014 hearing.

11. On December 12, 2014, Encana filed an Amended Application (“Amended Application”) requesting an order to establish an approximate 960-acre drilling and spacing unit for certain lands, including the Application Lands.

12. On December 24, 2014, Encana filed a second Amended Application (“Second Amended Application”) requesting an approximate 640-acre drilling and spacing unit for the Application Lands.

13. On or about January 14, 2015, KPK filed a Second Motion to Dismiss and a Protest to the Second Amended Application.

14. On February 11, 2015, the Hearing Officer issued an Order denying KPK’s Motion to Dismiss Encana’s Application and Encana’s Second Amended Application.

15. On February 16, 2015, KPK file a Motion for Reconsideration the Hearing Officer’s Order.

16. On February 26, 2015, Encana responded to the Motion for Reconsideration of the Hearing Officer’s Order

17. On February 24, 2015, the parties, by their attorneys, filed with the Commission their prehearing statements and the supporting exhibits. Sworn written testimony and exhibits were submitted in support of the Application and Protest.

18. At the hearing, Encana argued that the Commission did not have subject matter jurisdiction to enter an Order regarding this matter. The Commission denied its request to dismiss the matter.

19. KPK argued its Motion for Reconsideration of the Hearing Officer’s Order. The Commission denied the Motion for Reconsideration.

Testimony:

20. Land testimony and evidence presented by Avi Mehler, Land Manager for KPK, showed that KPK holds almost 100% of the leasehold interest in the S½ of the Application Lands. Testimony further showed that KPK provided an objection to the wellbore spacing units proposed by Encana and that approval of the Application would prevent or severely reduce development of their interest in the S½ of the proposed unit where it proposed wells on an east-west orientation, and thereby harming correlative rights.

21. Geologic and Engineering testimony and evidence presented by Ken Cooper, Engineering Manager and Principal at Petrotek Engineering Corporation, showed that he had reviewed technical and public information available on our website. The result was that KPK’s proposed development plan was reasonable and consistent with the development of other wellbore spacing units in the area with 460 foot offsets. He further testified that based on the data significant variability exists on a localized basis and variability on a well basis and that it is a reasonable approach to develop with east-west orientation.

22. Land testimony and evidence presented by Jack Croom, Senior Land Negotiator, DJ Chief Land Negotiation for Encana, showed that Encana holds oil and gas leasehold interests and has a right to drill in the Application Lands. Mr. Croom testified that he had met with representative from KPK prior to the filing of the Application and that it was Encana’s intention to develop the entire unit.

23. Geologic testimony and evidence presented by Kerstan Wallace, Petroleum Geologist for Western Operations, showed that north-south orientation wells in the area is approximately 95% based on the comparable reservoir and geologic characteristics in the area. He further testified that the reason for the preference for most of the north-south well orientation wells because of the stress within the area.

24. The Commission closed the record.

Commission Deliberation Comments:

25. Commissioner Hawkins commented that it is important to know whether the owner is someone who has the right to drill prior to the wellbore spacing unit or after. He wondered if there was any verification of that rule.

26. Commissioner Craig stated that she was seriously struggling with the idea of the viability of going east west as opposed to north south. She indicated that she was concerned about waste.

27. Commissioner Hawkins stated that we should be looking at maximum recovery going north south. He questioned whether the wellbore spacing units are the best way to develop this area and indicated that maybe a drilling and spacing unit was a better way to developing these minerals and wondered whether the WSU are legal from Encana’s point of view.

28. Commissioner King stated that this is the complex connection between business, engineering, geology and politics. Every time is comes up he is very uncomfortable because we are being asked to pick winners and losers because he doesn’t thing that this is role of government we have an obligation to fulfill but need to be judicious at going down this road. The system is set up intentionally not to create stress and uncertainty but to encourage operators to resolve these issues and determine their own strategy. He is leaning towards a narrow ruling and upholding the objection filed by KPK and that while it was not perfect, it was enough to require Encana to do what it

29. Chairman Compton commented that it appears that there is a high likelihood that there will be resources stranded.

30. Commissioner Hawkins stated that under the questions we have to answer today, he was leaning towards Commissioner’s King’s proposal and allowing the objection to stand.

31. Commissioner Craig does not like the question and would prefer if this were 60-acre with north-south orientation

32. Commissioner Holton indicated that he was uncomfortable with the narrow issue and uncomfortable with not including the entire section and doesn’t like being put in this position.

33. Chairman Compton summarized the question to be decided as whether the objection filed by KPK should stand and be upheld.

34. Hawkins doesn’t feel too bad about upholding the objection and moved to uphold the objection. Commissioner Craig seconded the motion and the object was upheld by the Commissioners. Commissioner Holton voted against the motion.

CONCLUSIONS OF LAW

The Commission finds and concludes:

1. The application for an order to approve the APDs for wells proposed to be drilled over the objection of an owner pursuant to Rule 318A within Section 2, Township 1 North, Range 65 West, 6^th P.M., is hereby denied. The objection is upheld.

ORDER

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 18^th day of April, 2015, as of March 2, 2015.

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

Jill Dorancy, Acting Secretary