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 NIOBRARA AND CODELL FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO
|
) ) ) ) ) ) ) |
CAUSE NO. 407
DOCKET NO. 151000666
ORDER NO: 407-1676
TYPE: POOLING |
REPORT OF THE COMMISSION
The Commission heard this matter on October 26, 2015, and April 18, 2016, 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 eight designated horizontal Wellbore Spacing Units established in certain lands in Township 5 North, Range 66 West, 6th P.M. and Township 6 North, Range 66 West, 6th P.M. for the development and operation of the Niobrara and Codell Formations.
Jurisdictional Findings:
1. Synergy Resources Corporation (“Synergy” or “Applicant”) is an interested party in the subject matter of the above-referenced hearing.
2. Briller, Inc., and Robert W. Loveless, d/b/a R.W.L. Enterprises (collectively “Briller” or “Protestant”) is an interested party in this matter.
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 the parties interested therein, and jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act.
Procedural History:
5. On December 19, 1983, the Commission entered Order No. 407-1 (amended on March 29, 2000 in accordance with Order No. 407-17, entered November 18, 1985), which, among other things, established 80-acre drilling and spacing units for the production of oil and/or gas and associated hydrocarbons from the Codell Formation underlying certain lands.
6. On February 19, 1992, the Commission entered Order No. 407-87 (amended August 20, 1993), 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.
7. On April 27, 1998, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule.
8. On September 15, 2014, the Commission entered Order No. 407-1112, which pooled all non-consenting interests in four approximate 400-acre Wellbore Spacing Units in the NW¼ of Section 3 and the NE¼, E½NW¼ of Section 4, Township 5 North, Range 66 West, 6th P.M. for the Kelly Farms #A-4-3CHZ Well (API No. 05-123-38138), Kelly Farms #A-4-3NHZ Well (API No. 05-123-38136), Kelly Farms #22-4-3-CHZ Well (API No. 05-123-38133), and Kelly Farms #12-4-3CHZ Well (API No. 05-123-38134), and imposed the statutory cost recovery provisions of §34-60-116(7)(b), C.R.S., upon all non-consenting parties for the wells.
9. In 2014, Synergy submitted applications for permits to drill eight horizontal wells in Townships 5 and 6 North, Range 66 West, 6th P.M., Weld County, Colorado. Synergy certified that it had notified all the owners(s) within each proposed wellbore spacing unit and that it received no objections within the thirty day notice period.
10. On August 19, 2014, the Commission approved and issued drilling permits for seven of Synergy’s applications for permits to drill eight horizontal wells: the SRC Wiedeman A-5-3NBHZ Well, the SRC Wiedeman 11-5-3NCHZ Well, the SRC Wiedeman 21-5-3NBHZ, the SRC Wiedeman 22-5-4NBHZ Well, the SRC Wiedeman 12-5-4CHZ Well, the SRC Wiedeman 22-5-4CHZ Well, and the SRC Wiedeman 12-5-4NCHZ Well. The Commission approved and issued a drilling permit for the eighth well, the SRC Wiedeman 21-5-3CHZ Well, on November 7, 2014. The eight wells are collectively referred to as the “Wells.” Under Rule 318A, issuing the drilling permits administratively created eight horizontal Wellbore Spacing Units as proposed by Synergy.
11. Between September and December 2014, Synergy drilled and cased the eight Wells. Synergy has not completed the Wells, nor have any of the Wells ever produced.
12. On March 27, 2015, Briller objected to all eight of the Wellbore Spacing Units, on grounds that it was an owner within each Wellbore Spacing Unit, and that Synergy had failed to notify it of the proposed units.
13. On April 14, 2015, in response to Briller’s objection, COGCC staff suspended approval of the eight Wellbore Spacing Units.
14. Synergy and Biller dispute whether Briller owns the working interest in an Oil and Gas Lease dated December 3, 1985, recorded in the Weld County Clerk and recorder’s Office on February 18, 1986, in Book 1103, Page 0792, Reception No. 02043218 (“Lease”). The Lease, which covers the E1/2NE1/4 of Section 5 of Township 5 North, Range 66 West, 6th P.M., includes lands in each of the eight suspended Wellbore Spacing Units. Synergy and Briller currently are litigating the validity of the Lease in the United States District Court for the District of Colorado, Civil Action No. 1:15-cv-01337-RBJ (“Lease Dispute”).
15. On September 11, 2015, Synergy filed with the Commission a verified application (“pooling application”) for a Commission order to pool all interests within Wellbore Spacing Units Nos. 1-8, for the development and production of oil, gas, and associated hydrocarbons from the Niobrara and Codell Formations, for the below-described lands (“Application Lands”):
Wellbore Spacing Unit Nos. 1-3
Township 5 North, Range 66 West, 6th P.M.
Section 5: NE¼
Section 4: N½
Section 3: NW¼
Corresponding Wells:
SRC Wiedeman A-5-3NBHZ (API No. 05-123-40064)
SRC Wiedeman 11-5-3NCHZ (API No. 05-123-40066)
SRC Wiedeman 21-5-3NBHZ (API No. 05-123-40069)
Wellbore Spacing Unit Nos. 4-7
Township 5 North, Range 66 West, 6th P.M.
Section 5: NE¼
Section 4: NW¼
Corresponding Wells:
SRC Wiedeman 22-5-4NBHZ (API No. 05-123-40063)
SRC Wiedeman 12-5-4CHZ (API No. 05-123-40065)
SRC Wiedeman 22-5-4CHZ (API No. 05-123-40067)
SRC Wiedeman 12-5-4NCHZ (API No. 05-123-40068)
Wellbore Spacing Unit No. 8
Township 5 North, Range 66 West, 6th P.M.
Section 5: N½NE¼
Section 4: N½N½
Section 3: N½NW¼
Township 6 North, Range 66 West, 6th P.M.
Section 32: S½SE¼
Corresponding Well:
SRC Wiedeman 21-5-3CHZ (API No. 05-123-40560)
16. On September 11, 2015, Synergy concurrently filed an application pursuant to §34-60-116, C.R.S., for a Commission order to reestablish and maintain the eight Wellbore Spacing Units in Docket No. 151000665 (“spacing application”).
17. On October 9, 2015, Briller protested both Synergy’s spacing and pooling applications alleging various improper actions by Synergy and requesting that Synergy’s applications either be denied or approved with modifications.
18. On October 14, 2015, a prehearing conference was held at which the Hearing Officer consolidated Synergy’s two applications for purposes of hearing and filings.
19. On October 22, 2015, the Hearing Officer issued a recommendation to approve Synergy’s spacing and pooling applications and require Synergy to hold proceeds attributable to the production from the E1/2NE1/4 of Section 5 of Township 5 North, Range 66 West, 6th P.M. until the United States District Court or any other court with appropriate jurisdiction enters a final order adjudicating the Lease Dispute and send a new Authority for Expenditure using actual costs and a 35-day election period pursuant to Rule 530.b. to the proper owner(s) as determined by the Court. The recommendation also stated that the Enforcement Unit would investigate Synergy’s Wellbore Spacing Unit application notices and certifications to determine if any violations occurred.
20. On October 26, 2015, the Commission heard Synergy’s spacing and pooling applications. The Commission closed the record and voted unanimously to continue the hearing to a future date pending receiving a report from a staff investigation into Synergy and Briller.
21. Pending staff’s investigation, the hearing was first continued to the Commission’s January hearing, then its March hearing, and finally to its April 18, 2016 hearing date.
22. After receiving a confidential memorandum summarizing staff’s investigation, the Commission resumed deliberations on Synergy’s spacing and pooling applications on April 18, 2016.
23. On April 18, 2016, the Commission approved Synergy’s spacing application establishing Wellbore Spacing Units Nos. 1-7 as of August 19, 2014, and Wellbore Spacing Unit No. 8 as of November 7, 2014. See Order No. 407-1675
Testimony:
24. Land testimony and exhibits presented by Craig Rasmuson, Chief Operating Officer for Synergy, showed Synergy’s interests in the application lands, the process by which Synergy applied for wellbore spacing units under Rule 318A, and his understanding of the contested Briller lease. Land testimony further 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 fair and reasonable estimates of the costs of the proposed drilling operations and were received at least 35 days prior to the October 26, 2015 hearing date.
25. Land testimony showed the Applicant complied with the requirements of Rule 530 and is entitled to the cost recovery provisions pursuant to §34-60-116(7), C.R.S., for the SRC Wiedeman A-5-3NBHZ Well, the SRC Wiedeman 11-5-3NCHZ Well, the SRC Wiedeman 21-5-3NBHZ Well, the SRC Wiedeman 22-5-4NBHZ Well, the SRC Wiedeman 12-5-4CHZ Well, the SRC Wiedeman 22-5-4CHZ Well, the SRC Wiedeman 12-5-4NCHZ Well, and the SRC Wiedeman 21-5-3CHZ Well, subject to complying with Paragraph 2 of the Order, below, but did not provide testimony for any subsequent wells.
26. Engineering testimony and exhibits presented by Andrew Peterson, petroleum engineer and the senior vice president of operations for Integrated Petroleum Technologies, Inc., showed the predicted performance and rate of return for Synergy’s wellbore proposals.
27. Geologic testimony and exhibits presented by Steven Goolsby, petroleum geologist for Vecta Oil & Gas, Ltd., showed that the Niobrara Formation underlying the Application Lands is approximately 300 feet thick, and the thickness of the Codell Formation underlying the Application Lands is approximately 20 feet thick. Further testimony showed that the Codell and Niobrara Formations are a common source of supply underlying the Application Lands.
28. Testimony and exhibits presented by Robert W. Loveless, Owner of Briller and R.W.L. Enterprises, showed production reporting at the Greeley Tech Center Well within the Application Lands, and further testified to lack of notice from Synergy as to its proposed wellbore spacing units.
October 26, 2015 Commission Deliberation Comments:
29. Commissioner Compton asked whether Briller or the proper mineral interest owner would have a 35-day election period after the federal court determines the lease issue. Staff confirmed that the Hearing Officer recommendation includes such language based on actual costs. Also, he asked for the Briller production issue to be investigated.
30. Commissioner Benton asked if the Wells had been drilled and completed and whether it put any of the leases into jeopardy if we wait to resolve this matter. He expressed concern that a lot of money is wasted if the Wells just sit there.
31. Commissioner Spielman noted that there is a lot going on in this matter, several allegations, and difficulty assessing the veracity of a witness by telephone, and that he was inclined to stay this matter until these allegations of misrepresentation can be addressed. Also, he commented that this is primarily a commercial dispute between two parties, while our role is fostering orderly development of the resource.
32. Commissioner King asked if any of the issues to be investigated would impact the Hearing Officer’s recommendation, and made a motion to hold the applications in abeyance pending a Commission investigation, to receive a report from Staff, and to consider the applications at the January or March hearing. The motion passed unanimously.
April 18, 2016 Commission Deliberation Comments:
33. Commissioner Randall recused.
34. Commissioner Benton moved to approve the Hearing Officer recommendation, which passed unanimously.
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 eight designated horizontal wellbore spacing units 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 SRC Wiedeman A-5-3NBHZ Well (API No. 05-123-40064), the SRC Wiedeman 11-5-3NCHZ Well (API No. 05-123-40066), the SRC Wiedeman 21-5-3NBHZ Well (API No. 05-123-40069), the SRC Wiedeman 22-5-4NBHZ Well (API No. 05-123-40063), the SRC Wiedeman 12-5-4CHZ Well (API No. 05-123-40065), the SRC Wiedeman 22-5-4CHZ Well (API No. 05-123-40067), the SRC Wiedeman 12-5-4NCHZ Well (API No. 05-123-40068), and the SRC Wiedeman 21-5-3CHZ Well (API No. 05-123-40560):
Wellbore Spacing Unit Nos. 1-3
Township 5 North, Range 66 West, 6th P.M.
Section 5: NE¼
Section 4: N½
Section 3: NW¼
Corresponding Wells:
SRC Wiedeman A-5-3NBHZ (API No. 05-123-40064)
SRC Wiedeman 11-5-3NCHZ (API No. 05-123-40066)
SRC Wiedeman 21-5-3NBHZ (API No. 05-123-40069)
Wellbore Spacing Unit Nos. 4-7
Township 5 North, Range 66 West, 6th P.M.
Section 5: NE¼
Section 4: NW¼
Corresponding Wells:
SRC Wiedeman 22-5-4NBHZ (API No. 05-123-40063)
SRC Wiedeman 12-5-4CHZ (API No. 05-123-40065)
SRC Wiedeman 22-5-4CHZ (API No. 05-123-40067)
SRC Wiedeman 12-5-4NCHZ (API No. 05-123-40068)
Wellbore Spacing Unit No. 8
Township 5 North, Range 66 West, 6th P.M.
Section 5: N½NE¼
Section 4: N½N½
Section 3: N½NW¼
Township 6 North, Range 66 West, 6th P.M.
Section 32: S½SE¼
Corresponding Well:
SRC Wiedeman 21-5-3CHZ (API No. 05-123-40560)
2. Synergy will hold proceeds attributable to the production from the E1/2NE1/4 of Section 5 of Township 5 North, Range 66 West, 6th P.M. until the United States District Court or any other court with appropriate jurisdiction enters a final order adjudicating the status of the Lease Dispute and, once a final order adjudicates ownership, Synergy will send a new Authority for Expenditure using actual costs and a 35-day election period pursuant to Rule 530.b. to the proper owner(s) as determined by the Court.
3. The production obtained from the designated horizontal wellbore spacing units 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 designated horizontal wellbore spacing unit; each owner of an interest in the designated horizontal wellbore spacing unit shall be entitled to receive its share of the production of the Well located on the designated horizontal wellbore spacing unit applicable to its interest in the designated horizontal wellbore spacing unit.
4. The nonconsenting working interest owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating each of the Wells (including penalties as provided by §34-60-116(7)(b), C.R.S.) out of production from the designated horizontal wellbore spacing unit representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.
5. 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).
6. Each nonconsenting unleased owner within the designated horizontal wellbore spacing units 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.
7. The operator of the Wells drilled on the above-described designated horizontal wellbore spacing units 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.
8. 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.
9. The designated horizontal wellbore spacing units described above shall be considered drilling and spacing units 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 2016, as of April 18, 2016.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By________________________________
Julie Murphy, Secretary