BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
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IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS FOR THE NIOBRARA FORMATION, WATTENBERG FIELD, WELD COUNTY, COLORADO |
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CAUSE NO. 407
DOCKET NO. 150100032
ORDER NO. 407-1277 |
REPORT OF THE COMMISSION
The Commission heard this matter on April 13, 2015 at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for an order to pool all interests within an approximate 320-acre designated horizontal wellbore spacing units established for Section 28, Township 1 North, Range 65 West, 6th P.M., and to subject any nonconsenting interests to the cost recovery provisions of §34-60-116(7), C.R.S. for the Young 01N-65W-28-8N, for the development and operation of the Niobrara Formation.
FINDINGS
Jurisdictional Findings:
1. Verdad Oil & Gas Corporation (Operator No. 10485) (“Verdad” or “Applicant”) is an interested party in the subject matter of the above-referenced hearing.
2. Renegade Oil and Gas Company, LLC (Operator No. 74165) (“Renegade” or “Protestant”) 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 November 17, 2014 (Amended February 27, 2015), Verdad, by its attorneys, filed a verified application (“Application”) pursuant to §34-60-116, C.R.S. for an order to pool all interests in an approximate 320-acre designated horizontal wellbore spacing unit established for the below-described lands (“Application Lands”), for the development and operation of the Niobrara Formation, and to subject any nonconsenting interests to the cost recovery provisions of §34-60-116(7), C.R.S., effective as of the date of the Application, or the date that any of the costs specified in §34-60-116(7)(b), C.R.S., were first incurred for the drilling of the Young 01N-65W-28-8N (API No. 05-123-40511) (“Well”):
Township 1 North, Range 65 West, 6th P.M.
Section 28: E½
6. On or about January 12, 2015, Renegade filed a Protest to the Application alleging that Verdad drilled the Well solely for the purpose of lease preservation knowing that the Well would not payout. As a result, Renegade contended it would never receive its just and reasonable share of the hydrocarbons attributable to the working interest ownership in the Application Lands. Renegade is a working interest owner of 50% of the minerals in the Application Lands.
7. On February 2, 2015, Verdad filed a Motion to Dismiss the Protest alleging that it had complied with Commission Rule 530 by providing all the required information within the requisite 35 days.
8. On February 4, 2015, a prehearing conference was held at which time deadlines for the Response was established.
9. On February 11, 2015, Renegade, by its attorneys, filed a Response to the Motion to Dismiss stating that pursuant to § 34-60-116, C.R.S., the pooling shall be made upon terms and conditions that are just and reasonable and that afford the interest owner in the unit the opportunity to recover or receive, its just and equitable share of production.
10. On February 19, 2015, Verdad filed a Request for Leave to file a Reply and a Reply in Support of its Motion to Dismiss contending Renegade misunderstands the designation process set forth in Rule 318A.
11. On February 25, 2015, the Hearing Officer entered an Order denying Verdad’s Motion to Dismiss the Protest.
12. On February 26, 2015, the parties requested, and Staff granted, a continuance to the April 13, 2015 hearing.
13. On March 30, 2015, a second prehearing conference was held at which time the parties stipulated to facts in preparation for the hearing.
14. The parties stipulated to the following facts:
· Renegade was provided a Horizontal Well Proposal with an Authority for Expenditures (“AFE”) with the estimated costs of the well in November 2014.
· Renegade did not object to the well proposal within the 30-day period set forth in Commission Rule 318A.e.(5).B.
· After the expiration of the 30-day period, the Director administratively approved the Application for Permit to Drill (“APD”) creating the wellbore spacing unit.
· The Young 01N-65W-28-8N Well was drilled in January 2015.
· The Well is currently shut-in and has been shut-in since mid-January after flowback operations concluded in mid-January.
· Verdad has provided an AFE with the actual costs of the well.
· Verdad provided the information as required under Commission Rule 530 to Renegade at least 35 days prior to the date of the hearing.
Testimony:
15. Land testimony and exhibits provided in support of the Application by Phillip Davis, Vice President of Land for Verdad, showed that Verdad started its operation in June of 2013 and began drilling on October of 2014 and have drilled four horizontal wells and have begun operations on 5 new wells and plans to continue to operate if economically beneficial. Verdad owns minerals in the NE¼ and the E½SE¼. Mr. Davis also testified it had come to his attention that the validity of a lease executed by Verdad and Jordan filed in March 2015 for the E½SE¼ was disputed by Renegade.
16. Testimony was provided by Arthur Beecherl, Vice President of Operations for Verdad. The current status of the well in question is that it was drilled, completed and shut in waiting on pipeline. Mr. Beecherl testified as to the economic projections of the Young 01N-65W-28-8N Well. During cross-examination, Mr. Beecherl testified that he was a working interest owner in the well and that he was paying his share of the costs in the well. Type curves were submitted as exhibits with horizontal wells in the area.
17. Testimony was provided by Ed Ingve, Owner and Manager of Renegade. Mr. Ingve testified that he has discussion with Verdad going back almost a year ago. He first started having discussion regarding the economics in approximately November when oil prices started to decline. He spoke with Mr. Beecherl regarding whether this well could stand its weight considering the prices. He testified that they discussed the economic viability of the well.
18. Testimony was provided by Mr. Jack McCartney, Petroleum Consultant, who testified that he reviewed production history of all horizontal wells drilled within three miles of the Young well, the operating expenses submitted to Renegade and the economics presented to Renegade and developed and ran his own economics and type curves based on the information. He also reviewed the well costs to date. He testified that there are costs that were excluded from the costs which may add an additional $200,000 to the costs. He stated that based on his information, he did not believe that the well would payout.
19. On rebuttal, Mr. Beecherl testified that he had concern with the completion techniques of the one well that Mr. McCartney used for his type curve. As rebuttal exhibits, Verad provided copies of the scout cards for all of the 19 wells it used for the its type curve and relied on previous exhibits for the type curve.
20. Commissioner Craig asked about the precedent set if they were vacating pooling orders or denying pooling orders based on current commodity prices.
21. Commissioner Benton asked questions to Mr. Beecherl and Mr. McCartney regarding the wells used for the type curve.
22. Commissioner Craig requested information regarding the numbers of the incremental analysis for the well based on the numbers provided in November and the current numbers.
23. Commissioner Alward questioned Renegade regarding the evidence supporting the motive behind Verdad’s intention to drill an economic well. Additionally, he stated that the Act requires that the Commission foster responsible development not promote responsible development because if the Act required it, there would be a conflict.
24. The Commission closed the record.
Commission Deliberation Comments:
25. Chairman Compton summarized the question as whether to approve the pooling application.
26. Commissioner Benton moved to approve the pooling application. Commissioner Craig seconded the motion.
27. Commissioner Holton stated he doesn’t like the idea that the Commissioners have to review the oil prices every time they come in here. He also believes that the pooling rules need to be tweaked a little; he doesn’t believe that the rules are quite where they should be in this case. Additionally, he asked Mr. Matter whether there was a civil remedy in this in either direction.
28. Jake Matter, Assistant Attorney General, stated that he is sure that the parties will find a lawsuit in this whichever way it goes. Additionally, there have been some discussions regarding a previous case. There is a math component to the pooling statute §34-60-116, C.R.S., and the Protestant is not asking to tinker with the math only a yes or no. However, the math section of the statute is preceded by the word “shall” which makes the penalities mandatory.
29. Commissioner Holton commented that he wasn’t suggesting that we change that part but only that the Act does not apply in this situation in his mind.
30. Commissioner Alward stated that we do not want this to be determined by how many times a phrase is mentioned in the statute to determine whether it is important or not. The phrase “protection of public health and welfare” is mentioned 6 times, “reclamation” is mentioned 7 times and “protecting and avoiding adverse impacts to wildlife” is mentioned 11 times. If that is how we determine what is important, we are focusing on the less important things too often. Also, we should focus on if, whether there is potential for externalizing costs for those that will not share in the benefits, then that is a practice that the COGCC should actively discourage or penalize. That might be something to think about in the future.
31. Commissioner Benton commented that it is worth considering but how do you do the forecast. There is a 30-35% reduction in well costs from November until now. But here it comes down to Verdad made an economic decision and decided that it wanted to proceed to develop the resource and the other company says we don’t see it that way. But we are being asked to evaluate economics and he doesn’t believe we should be doing that.
32. Commissioner Hawkins stated when an operator evaluated their economics and another company saw it a different way than the other company, they will not necessarily agree on whether a well should be drilled so the company can either participate in an agreement or be force pooled. But he doesn’t believe that this situation before the Commission is significantly different than any forced pooling application. This is about business risks. We don’t need to change for this application.
CONCLUSIONS OF LAW
The Commission finds and concludes:
1. The application for an order to approve the application to pool all interests within the unit in the E½ of Section 28, Township 1 North, Range 65 West, 6th P.M., is hereby approved.
ORDER
IT IS HEREBY ORDERED:
1. Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in an approximate 320-acre designated horizontal wellbore spacing unit established for the below-described lands, are hereby pooled, for the development and operation of the Niobrara Formation, effective as of the date of the Application, for the drilling of Young 01N-65W-28-8N (API No. 05-123-40511):
Township 1 North, Range 65 West, 6th P.M.
Section 28: E½
2. The production obtained from the drilling and spacing unit shall be allocated to each owner in the unit on the basis of the proportion that the number of acres in such tract bears to the total number of mineral acres within the drilling and spacing unit; each owner of an interest in the drilling and spacing unit shall be entitled to receive its share of the production of the Well located on the drilling and spacing unit applicable to its interest in the drilling and spacing unit.
3. The nonconsenting (unleased) owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating the Well (including penalties as provided by §34-60-116(7)(b), C.R.S.) out of production from the drilling and spacing unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.
4. Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the Well and be subject to the penalties as provided for by §34-60-116(7), C.R.S. Any party seeking the cost recovery provisions of §34-60-116(7), C.R.S., shall first comply with subsection (d) for any subsequent well(s).
5. Each nonconsenting unleased owner within the drilling and spacing unit shall be treated as the owner of the landowner's royalty to the extent of 12.5% of its record title interest, whatever that interest may be, until such time as the consenting owners recover, only out of each nonconsenting owner's proportionate 87.5% share of production, the costs specified in §34-60-116(7)(b), C.R.S., as amended. After recovery of such costs, each unleased nonconsenting mineral owner shall then own its proportionate 8/8ths share of the Well, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with the Well as if it had originally agreed to the drilling.
6. The operator of the well drilled on the above-described drilling and spacing unit shall furnish the nonconsenting owners with a monthly statement of all costs incurred, together with the quantity of oil and gas produced, and the amount of proceeds realized from the sale of production during the preceding month.
7. Nothing in this order is intended to conflict with §34-60-116, C.R.S., as amended. Any conflict that may arise shall be resolved in favor of the statute.
8. Any wellbore spacing unit described above shall be considered a drilling and spacing unit established by the Commission for purposes of Rule 530.a.
IT IS FURTHER ORDERED:
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 11th day of May, 2015, as of April 13, 2015.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By__________________________________
Julie Murphy, Acting Secretary