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

 

REPORT OF THE COMMISSION

 

The Commission heard this matter on May 1, 2017, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for an order to apply Order No. 407-1667 and the cost recovery provisions of § 34-60-116(7), C.R.S., to non-consenting working interest owners who have failed to bear their proportionate share of the costs and risks of drilling and operating the Guest 30N-12HZ, within an approximate 640-acre designated horizontal wellbore spacing unit established for portions of Sections 1, 2, 11, 12, 13, and 14, Township 2 North, Range 65 West, 6^th P.M., for the development and operation of the Niobrara Formation.

 

FINDINGS

 

The Commission finds as follows:

 

1.         Kerr-McGee Oil & Gas Onshore LP (Operator No. 47120) ("Kerr-McGee" or "Applicant"), as applicant herein, is an interested party in the subject matter of the above-referenced hearing.

 

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

 

3.         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.

 

4.         On April 27, 1998, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule.  Sections 1, 2, 11, 12, 13, and 14, Township 2 North, Range 65 West, 6^th P.M., are subject to this Rule for the Niobrara Formation.

 

5.         On March 7, 2016, the Commission entered Order No. 407-1667 which, among other things, pooled all interests in an approximate 640-acre designated horizontal wellbore spacing unit established for portions of Sections 1, 2, 11, 12, 13, and 14, Township 2 North, Range 65 West, 6^th P.M., for the development and operation of the Niobrara Formation, and subjected any owners with whom the Applicant had been unable to secure a lease or other agreement to participate in the drilling of the Guest 30N-12HZ Well (API No. 05-123-42459) to the cost recovery provisions of §34-60-116(7), C.R.S., effective as of the earlier of the date of the Application, or the date the costs specified in §34-60-116(7)(b), C.R.S. were first incurred for the drilling of the Guest 30N-12HZ Well.

6.         On March 2, 2017, Kerr-McGee, by its attorneys, filed a verified application (“Application”) pursuant to §34-60-116, C.R.S., for an order to subject non-consenting working interest owners who have failed to bear their proportionate share of the costs of drilling and operating the Guest 30N-12HZ Well (API No. 05-123-42459) (“Well”) to Order No. 407-1667 and the cost recovery provisions of §34-60-116(7), C.R.S., 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), C.R.S., were first incurred for the drilling of the Well in an approximate 640-acre designated horizontal wellbore spacing unit established for the below-described lands (“Application Lands”) for the development and operation of the Niobrara Formation:

 

Township 2 North, Range 65 West, 6^th P.M.

Section   1:      SW¼SW¼

Section   2:      SE¼SE¼

Section 11:      E½E½ 

Section 12:      W½W½

Section 13:      W½NW¼, NW¼SW¼

Section 14:      E½NE¼, NE¼SE¼

 

7.         On April 4, 2017, Kerr-McGee, by its attorneys, filed with the Commission a written request to approve the Application based on the merits of the verified Application and the supporting exhibits.  Sworn written testimony and exhibits were submitted in support of the Application.

 

8.         Land testimony and exhibits submitted in support of the Application by Joseph Kmetz, Landman for Kerr-McGee, showed that all nonconsenting interest owners, Including Martin Harrington and Swan Exploration LLC, were notified of the Application and received an Authority for Expenditure ("AFE") and offer to participate in the Well.  Further testimony concluded that the AFE sent by the Applicant to the interest owners was a fair and reasonable estimate of the costs of the proposed drilling operation and was received at least 35 days prior to the May 1, 2017 hearing date.

 

9.         Land testimony showed that Martin Harrington and Swan Exploration LLC originally agreed to participate in the Wells, but have failed to pay their proportionate share of the costs of drilling and operating the Wells.  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 Guest 30N-12HZ Well, but did not provide testimony for any subsequent wells.

 

10.       The above-referenced testimony and exhibits show that granting the Application will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of hydrocarbons, and will not violate correlative rights.

 

11.       Kerr-McGee agreed to be bound by oral order of the Commission. 

 

12.       Based on the facts stated in the verified Application, having received no protests, and based on the Hearing Officer review of the Application under Rule 511., the Commission should enter an order to apply Order No. 407-1667 and the cost recovery provisions of § 34-60-116(7), C.R.S., to non-consenting working interest owners who have failed to bear their proportionate share of the costs and risks of drilling and operating the Guest 30N-12HZ, within an approximate 640-acre designated horizontal wellbore spacing unit established for portions of Sections 1, 2, 11, 12, 13, and 14, Township 2 North, Range 65 West, 6^th P.M., for the development and operation of the Niobrara Formation.

 

 

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, Martin Harrington and Swan Exploration LLC, non-consenting working interest owners who have failed to bear their proportionate share of the costs and risks of drilling and operating the Guest 30N-12HZ Well (API No. 05-123-42459), are hereby subjected to Order No. 407-1667 and the cost recovery provisions of §34-60-116(7), C.R.S., 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), C.R.S., are first incurred for the drilling of the Guest 30N-12HZ Well (API No. 05-123-42459) in an approximate 640-acre designated horizontal wellbore spacing unit established for the below-described lands for the development and operation of the Niobrara Formation:

 

Township 2 North, Range 65 West, 6^th P.M.

Section   1:      SW¼SW¼

Section   2:      SE¼SE¼

Section 11:      E½E½ 

Section 12:      W½W½

Section 13:      W½NW¼, NW¼SW¼

Section 14:      E½NE¼, NE¼SE¼

 

2.         The production obtained from the designated horizontal wellbore 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 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.

 

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 Well (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.

 

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 designated horizontal wellbore 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 unleased 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 nonconsenting unleased 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 designated horizontal wellbore 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.         The designated horizontal 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 8th day of May, 2017, as of May 1, 2017.

           

OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

 

 

By____________________________________

Peter Gowen, Acting Secretary