BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

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

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CAUSE NO.  407

 

DOCKET NO.  160800347

 

ORDER NO. 407-1793

 

TYPE: SPACING

 

REPORT OF THE COMMISSION

 

The Commission heard this matter on October 24, 2016, Northeastern Junior College, 100 College Avenue, Sterling, CO 80751, upon an application for an order establishing an approximate 640-acre drilling and spacing unit Section 23, Township 5 North, Range 63 West, 6th P.M., and approve the drilling of 11 horizontal wells within the proposed unit, for the production of oil, gas and associated hydrocarbons from the Codell-Niobrara Formation.

 

Jurisdictional Findings:

 

            The Commission finds as follows:

 

1.            Bonanza Creek Energy Operating Company, LLC (“Bonanza” or “Applicant”), as applicant herein, is an interested party in the subject matter of the above-referenced hearing.

 

2.            Noble Energy, Inc. (“Noble 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 herein, 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 June 30, 2016, Bonanza filed with the Commission an application (“Application”) for an order to establish an approximate 640-acre drilling and spacing unit for the below-described lands (“Application Lands”), and approve up to 11 horizontal wells within the unit, for the production of oil, gas and associated hydrocarbons from the Codell-Niobrara Formation (“Application Lands”), with the productive intervals of any horizontal wellbore to be located no closer than 460 feet from unit boundaries and no closer than 150 feet from any other well producing from the Codell or Niobrara Formation, without exception being granted by the Director:

 

Township 5 North, Range 63 West, 6th P.M.

Section 23:

All

 

7.            On August 10, 2016, Fritzler Resources, Inc. (“Fritzler”), by its attorneys, filed a Protest and Motion to Intervene of the Application. Fritzler argued that it had filed an application to recomplete the Farr #1 Well and Bonanza had failed to address the Well in its Application. Fritzler owns a substantial leasehold interest in the SE¼ of the Application Lands. Fritzler further argued that Bonanza’s Application would harm its correlative rights, cause waste, and will interfere with Fritzler’s current operations, including recompletion of the Farr #1 Well in the Codell-Niobrara Formation. 

 

8.            On August 15, 2016, Noble filed its Protest of Bonanza’s Application on the grounds that Bonanza’s plan impacted its plans to develop its acreage within the unit and in the adjacent unit.  Noble owns 100% of the working interest in the NE¼ of the Application Lands and a substantial leasehold in Section 14, Township 5 North, Range 63 West, 6th P.M., which is north of the Application Lands.  Noble claims Bonanza’s plan to drill one-mile laterals will result in waste of Noble’s leasehold in the Application Lands and adjacent acreage because it will restrict horizontal drilling in this area to short laterals, which are less economic and efficient than longer horizontal laterals, will strand the minerals underlying the section line separating the Application Lands from the adjacent acreage as a result of the 460 foot setback requirements, and will create substantial impacts to the environment and the public.

 

9.         On October 14, 2016, a prehearing conference was held at which the parties discussed time allocations for hearing, witnesses, and exhibits.

 

10.       On October 19, 2016, the Hearing Officer filed a Hearing Officer Recommendation, which included Staff’s analysis of the Application and recommendation to approve Bonanza’s pooling application.

 

11.       On October 21, 2016, Bonanza and Fritzler reached a Stipulation and Fritzler withdrew its Protest to the Application. As part of its Stipulation, Bonanza and Fritzler agreed that the following language should be included in the Final Order:

 

Fritzler presently operates the Farr 1 well (API #05-123-10772), a vertical well with its surface / bottomhole location located in the SW¼ SW¼ of Section 23, Township 5 North, Range 63 West, 6th P.M., and allocates production on a 160-acre unit area basis designated the SW¼ of said Section 23, Township 5 North, Range 63 West, 6th P.M., for the production of oil, gas and associated hydrocarbons from the J-Sand Formation.  Fritzler has submitted for an application for permit to recomplete this well in the Niobrara and Codell Formations; the application is currently pending review by Commission staff and approval by the Director.  Based on the information provided at the prehearing conference, the Hearing Officer recommends that the proceeds from the Farr # 1 well be allocated according to the unit area designated by the approved recompletion permit, for the production of oil, gas and associated hydrocarbons from the Niobrara and Codell Formations.  This recommendation is based on Commission practice as well as [Bonanza’s] willingness to accommodate the existing Noble wells in the NE¼ of the Application Lands.

 

In its Application, Bonanza has requested that the allocation for proceeds for existing Noble wells, located in the NE¼ of Section 23, Township 5 North, Range 63 West, 6th P.M., should not be altered by any Commission Order stemming from today’s hearing.  Acting in a similar vein, [Bonanza] agrees it will not oppose Fritzler obtaining its APD to recomplete the Farr # 1 well and any associated spacing unit designated by Rule (or Order) for the Farr # 1 well, for production from the Codell and/or Niobrara Formation.  Further, Bonanza agrees to locate any planned productive intervals for any permitted Codell or Niobrara horizontal well 150 feet, or more, from the bottomhole location of the Farr 1 well.

 

By [Bonanza] and Fritzler making the above agreement, Fritzler agrees to abandon its Protest, effectively withdrawing the same.

Testimony:

12.          On October 24, 2016, the Commission conducted an adjudicatory hearing.  After considering sworn testimony, the Commission deliberated and approved the Application.  Specific findings in support of approval of the Application are included below.

 

13.          Alexander Newell, Landman for Bonanza, presented land exhibits in support of the Application and testified that Bonanza owns leasehold interests underlying the Application Lands.

 

14.          Jeffrey Schroeder, Development Geologist for Bonanza, presented geologic exhibits in support of the Application and testified that the Niobrara Formation is a sequence of chalks, marls and limestones that were deposited in the Western Interior Seaway during Cretaceous time; the Niobrara Formation underlies the entirety of the Application Lands and is a common source of supply with the Codell Formation; the Codell Formation is a sequence of siltstones and sandstones that were also deposited in the Western Interior Seaway during Cretaceous time; and that the Codell Formation underlies the entirety of the Application Lands and is a common source of supply with the Niobrara Formation.

 

15.          Joe Dill, Engineer for Bonanza, presented engineering exhibits in support of the Application and testified that the estimated drainage areas for the Niobrara and Codell Formations in the vicinity of the Application Lands is 38 and 113 acres per section, respectively; and that based on Bonanza’s economic inputs, its estimated rate of return for this project is approximately 19.9% for short laterals drilled from existing pads and using existing facilities, and 13.2% for short laterals drilled from new facilities.     

 

16.          Lesley Sachen, Landman for Noble, presented exhibits in support of Noble’s protest of the Application and testified that Noble owns 100% leasehold interest in the NE¼ of the Application Lands and substantial leasehold interests adjacent to the Application Lands; Noble plans to drill two-mile horizontal wells within the Application Lands and Section 14, Township 5 North, Range 63 West, 6th P.M., which is adjacent to the Application Lands; and that Noble submitted an application to establish an approximate 1,280-acre drilling and spacing unit that is pending before the Commission at the December 12, 2016 hearing.

 

17.          Mike Marini, Prospect Development Engineer for Noble, presented reservoir planning exhibits in support of Noble’s protest of the Application and testified that approval of the Application will result in inefficient development of the resource, and will strand reserves, thereby harming Noble’s correlative rights; Bonanza’s planned wells are uneconomic and will further harm Noble’s correlative rights; and that approval of Bonanza’s Application will create additional impacts to public health, safety and welfare, in violation of the Act.

 

18.          The Commissioners questioned the Hearing Officer regarding the Recommendation.

 

19.          Commissioner Benton inquired whether Staff considered Bonanza’s proposed use of one-mile laterals compared to the use of two-mile laterals when making its recommendation to approve Bonanza’s application. Hearing Officer Dorancy responded that Staff did consider both proposed development plans and determined that given all information available, Bonanza’s Application is sufficient and Staff therefore recommends approval.

 

20.           Commissioner Pearce requested clarification on the information that Staff considered in making its recommendation to approve Bonanza’s application and whether the potential waste or stranding of minerals resulting from shorter laterals was considered. Jane Stanczyk, Permitting Manager, responded that Bonanza’s application for a 640-acre drilling and spacing unit complies with Commission’s rules and requirements for development of the Niobrara and Codell Formations in the Greater Wattenberg Area (“GWA”). A number of operators have and continue to drill and complete one-mile laterals to the Niobrara and Codell Formations.   Although Staff does consider waste when reviewing an application, there is potential waste or stranding of minerals with every unit boundary and setback; but Staff also recognizes that there is a greater potential for that waste with shorter laterals compared to longer laterals. Further, a wellbore spacing unit boundary well could capture such minerals, as is common practice in the GWA to maximize resource recovery along the unit boundaries.

 

21.          Joel Dill testified in rebuttal testimony that Bonanza does have plans to drill boundary wells between Sections 14 and 23 concurrently with the rest of the lateral wells proposed in the Application Lands.

 

22.          Commissioner Pearce asked when Noble’s Application for the proposed 1280-acre drilling and spacing unit, which included the Application Lands, would be heard under the normal course of business. Hearing Officer Dorancy responded that Noble’s Application would likely be continued and heard at the January 2017 hearing to allow all interested parties adequate time to prepare and participate.

 

23.          Commissioner Pearce moved to continue Docket No. 160800347 to January 2017 and to leave the record open for remaining Commissioner questions for Staff and for the Parties’ closing statements to include additional information from the Parties on the analysis of 22 one-mile lateral with predicted returns and production as proposed by Bonanza compared to the return and expected production on the 11 two-mile laterals proposed by Noble; and an analysis on the potential waste created by the shorter laterals and any proposed boundary wells.

 

24.          The Motion to continue the hearing to January 2017 failed.

 

25.          The parties presented their closing arguments.

 

26.          Commissioner Benton asked Director Lepore whether Bonanza could have submitted an application for a 1280-acre unit to include both Sections 14 and 23 to which Director Lepore answered affirmatively.

 

27.          Commissioner Ager inquired of Senior Assistant Attorney General, Jake Matter, whether the Commissioners should consider only the application as submitted and as it applies to the application lands or whether impacts on adjacent lands should be considered, and what waste should be considered.

 

28.          Mr. Matter responded that there is not a hard and fast rule regarding the consideration of impacts on adjacent lands and that waste can be considered as negative impacts to the surface environment as well as the drilling of unnecessary wells.

 

29.          Hearing Officer Dorancy read into the record the definition of “waste” under the Colorado Oil and Gas Conservation Act at Section 34-60-113, C.R.S.

 

30.          Commissioner Holton inquired whether Staff took into consideration the prevention of waste when making their recommendation. Hearing Officer Dorancy answered Staff takes the prevention of waste as defined in the Act into consideration when making a recommendation to approve or deny any application.

 

31.          The Commission closed the record.

 

Commission Deliberation Comments:

 

32.          Commissioner Benton noted his concern between balancing the potential benefits of two-mile laterals as proposed by Noble with the consideration of Bonanza’s application that Staff has declared both adequate and consistent with development in the GWA.

 

33.          Commissioner Pearce noted that approving Bonanza’s Application in light of evidence in the record before the Commission would create waste and stranded minerals and that the procedural rights of an applicant that has filed an otherwise proper application should not outweigh the Commission’s requirement to prevent waste.

 

34.          Commissioner Holton moved to approve Bonanza’s application as recommended by Staff. Commissioner Wolk seconded the Motion. Commissioners Wolk, Holton, Ager and Jolley voted for the motion.  Chairman Spielman, Commissioners Benton and Pearce voted against the motion.  The motion carried and the application was approved.

 

CONCLUSIONS OF LAW

 

            The Commission finds, concludes, and orders as follows:

 

1.            An approximate 640-acre drilling and spacing unit for the Application Lands is hereby established, and a total of up to 11 horizontal wells are hereby approved, for the production of oil, gas, and associated hydrocarbons from the Codell-Niobrara Formation. 

 

2.            The proceeds from the Farr# 1 well shall be allocated according to the unit area designated by the approved recompletion permit, for the production of oil, gas and associated hydrocarbons from the Niobrara and Codell Formations. 

3.            Bonanza will not oppose Fritzler obtaining its APD to recomplete the Farr # 1 well and any associated spacing unit designated by Rule (or Order) for the Farr# 1 well, for production from the Codell and/or Niobrara formation.  Further, Bonanza will locate any planned productive intervals for any permitted Codell or Niobrara horizontal well 150 feet, or more, from the bottomhole location of the Farr #1 well.


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 23rd day of November, 2016, as of October 24th, 2016.

 

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

 

 

By___________________________________

            Julie Murphy, Secretary