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 AND CODELL FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO |
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CAUSE NO. 407
DOCKET NO. 151000564
TYPE: POOLING
ORDER NO: 407-1458 |
REPORT OF THE COMMISSION
The Commission heard this matter on October 26, 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 in an approximate 320--acre drilling and spacing unit established for N˝ of Section 12, Township 4 North, Range 68 West, 6th P.M., and to subject all nonconsenting interests to the cost recovery provisions of §34-60-116(7), C.R.S. for the drilling of the Vail 01NC Well, Vail 02C Well, Vail 03NC Well, Vail 04NC Well, Vail 05C Well, Vail 06NC Well, Vail 07NC Well, Vail 08C Well, and Vail 09NC Well (“Wells”), for the development and operation of the Niobrara and Codell Formations.
Jurisdictional Findings:
1. Cub Creek Energy, LLC (“Cub Creek” or “Applicant”) is an interested party in the subject matter of the above-referenced hearing.
2. Kerr-McGee Oil & Gas Onshore LP (“Kerr-McGee” 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 April 27, 1998, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule.
6. On February 19, 1992 (amended August 20, 1993), the Commission entered Order No. 407-87 which, among other things, established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Codell and Niobrara Formations, with the permitted well locations in accordance with the provisions of Order No. 407-1. The Application Lands are subject to this Order for the Codell and Niobrara Formations.
7. On September 14, 2015, the Commission entered Order No. 407-1416 establishing an approximate 320-acre drilling and spacing unit for the Application Lands, and approving the drilling of nine horizontal wells within the proposed unit, for the production of oil, gas and associated hydrocarbons from the Niobrara and Codell Formations.
8. On August 27, 2015, Cub Creek, 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 drilling and spacing unit established for the below-described lands (“Application Lands”), for the development and operation of the Niobrara and Codell Formations, and to subject any nonconsenting interests to the cost recovery provisions of §34-60-116(7), C.R.S., for the drilling of the Vail 01NC Well, Vail 02C Well, Vail 03NC Well, Vail 04NC Well, Vail 05C Well, Vail 06NC Well, Vail 07NC Well, Vail 08C Well, and Vail 09NC Well:
Township 4 North, Range 68 West, 6th P.M.
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Section 12: |
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9. On September 29, 2015, Kerr-McGee timely filed a protest of Cub Creek’s Pooling Application, alleging, among other things, that the well proposals would not be just and reasonable and that pooling would constitute mineral trespass beyond the authority of the Commission.
10. On October 8, 2015, a prehearing conference was held at which the parties discussed time allocations for hearing, witnesses, and exhibits.
11. On October 23, 2015, the Hearing Officer filed a recommendation to approve Cub Creek’s pooling application.
Testimony:
12. Land testimony and exhibits presented by Scott Baily, Vice President of Land and Business Development for Cub Creek, showed that all nonconsenting interest owners were notified of the Application and received Authority for Expenditures ("AFEs") and offers to participate in the Wells. Further testimony concluded that the AFEs sent by the Applicant to the interest owners were received at least 35 days prior to the October 26, 2015 hearing date.
13. Engineering testimony and exhibits presented by Andrew Peterson, Consulting Engineer for Cub Creek, showed that Cub Creek prepared an AFE for each well, which detailed an estimate of the costs associated with drilling and completing each planned well.
14. Land testimony and exhibits presented by Shea Kauffman, Land Supervisor for Kerr-McGee showed that Kerr-McGee has pooled nonconsenting owners and that Kerr-McGee often privately settles pooling disputes without need for Commission action.
15. Economics testimony and exhibits presented by David Schnable, Petroleum Reservoir Engineer for Kerr-McGee outlined Kerr-McGee’s economic analysis of two different development scenarios: Cub Creek’s 320-acre development with one mile horizontal lateral wells and Kerr-McGee’s preferred development with two mile horizontal lateral wells.
16. Staff analysis presented by Stuart Ellsworth, Engineering Manager, showed that Cub Creek’s AFEs are within the normal range of costs for horizontal wells. Staff recommended approval of the application.
Commission Deliberation Comments:
20. Commissioner Benton commented that he was considering the bases for just and reasonable expenses, and also noted that Cub Creek would take on all of the risk of drilling and completing the wells if Kerr-McGee is force pooled.
23. Commissioner Hawkins stated that he was disturbed that Cub Creek didn’t present more information on production costs or give more details on economics.
24. Commissioner King commented that the Commission is again in the position of making business determinations, and that he did not see unnecessary expenses in Cub Creek’s application and is therefore inclined to grant Cub Creek’s request.
25. Commissioner Alward asked how a party could reject force pooling and opined that the result would be chaos for oil and gas development.
27. Commissioner Wolk moved to approve Cub Creek’s application for pooling all interests in the 320-acre drilling and spacing unit. Commissioner King seconded the motion. Commissioners King, Wolk, Compton, Alward, and Holton voted for the motion. Commissioners Benton and Hawkins voted against the motion. Commissioner Spielman was absent and did not vote. The motion carried and the application was approved.
CONCLUSIONS OF LAW
The Commission finds and concludes:
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 drilling and spacing unit established for the below-described lands are hereby pooled, for the development and operation of the Niobrara and Codell Formations, effective as of the earlier of the date of the Application, or the date that any of the costs specified in §34-60-116(7)(b)(II), C.R.S., are first incurred for the drilling of the Vail 01NC Well, Vail 02C Well, Vail 03NC Well, Vail 04NC Well, Vail 05C Well, Vail 06NC Well, Vail 07NC Well, Vail 08C Well, and Vail 09NC Well:
Township 4 North, Range 68 West, 6th P.M.
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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 each of the Wells located on the drilling and spacing unit applicable to its interest in the drilling and spacing unit.
3. The nonconsenting working interest owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating the Wells (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 Wells 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 each Well, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with each Well as if it had originally agreed to the drilling.
6. The operator of the Wells 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.
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 __ day of November, 2015, as of October 26, 2015.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By____________________________________
Julie Murphy, Secretary