BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
|
IN THE MATTER OF AN APPLICATION BY INCLINE NIOBRARA PARTNERS, LP, FOR AN ORDER VACATING, OR IN THE ALTERNATIVE AMENDING, COMMISSION ORDER NO. 407-1547 FOR PRODUCTION FROM THE CODELL-NIOBRARA FORMATION, FOR SECTION 8, TOWNSHIP 3 NORTH, RANGE 68 WEST, 6TH P.M., WATTENBERG FIELD, WELD COUNTY, COLORADO |
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CAUSE NO. 407
DOCKET NO. 170900619
TYPE: POOLING
Order No. 407-2374 |
REPORT OF THE COMMISSION
The Colorado Oil and Gas Conservation Commission (“Commission”) heard this matter on March 20, 2018, at the Commission’s Offices at 1120 Lincoln St., Suite 801, Denver, Colorado, upon the Application of Incline Niobrara Partners, LP (“Incline” or “Applicant”)) for an order amending Commission Order No. 407-1547 (“Incline Application”) to provide that: (a) Incline is not a nonconsenting party for purposes of § 34-60-116, C.R.S. and Commission Rule 530 with respect to certain oil and gas wells located in Weld County and (b) Incline is entitled to the issuance of offers to participate in the same by Cub Creek Energy, LLC (“Cub Creek” or “Protestant”).
FINDINGS OF FACT
The Commission finds the following:
1. Incline is an interested party in the subject matter of the above-referenced hearing.
2. Cub Creek 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 concerning the above-captioned matter 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 has jurisdiction to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act (“Act”), § 34-60-101, C.R.S., et seq.
FACTUAL AND PROCEDURAL HISTORY
5. The above-captioned matter involves the following lands in Weld County, Colorado, lying within the Greater Wattenberg area as defined by Commission Rules (collectively, “Application Lands”):
Township 3 North, Range 68 West, 6th P.M.
Section 8: All
6. Cub Creek filed a spacing and pooling application with the Commission on October 25, 2015, for an order to: (a) establish an approximate 640-acre drilling and spacing unit comprised of the Application Lands, with authority to drill 19 Litzenberger Wells within the proposed drilling and spacing unit, for the production of oil, gas and associated hydrocarbons from the Codell-Niobrara Formation; and (b) pool all interests in the Application Lands as to the Litzenberger Wells for the development of the Codell-Niobrara Formations and subject any nonconsenting owners to the cost recovery and statutory risk penalties under § 34-60-116, C.R.S. (“Pooling Application”).
7. St. Vrain Properties, Inc. (“St. Vrain”) was an owner of mineral interests in the Application Lands at the time the Pooling Application was filed by Cub Creek and at the time Cub Creek sent offers to participate in the drilling, completion and operation of the 19 Litzenberger Wells.
8. Cub Creek sent an offer to participate in the drilling, completion and operation of the 19 Litzenberger Wells to St. Vrain on or about October 27, 2015 (“St. Vrain Offers to Participate”).
9. The St. Vrain Offers to Participate: a) set forth estimated dates for drilling the Litzenberger Wells between April 1, 2016 and July 1, 2016, and noted that such dates were subject to change; and (b) did not set forth St. Vrain’s proportionate share of the Litzenberger Wells’ costs and expenses.
10. Cub Creek filed its testimony and other evidence in support of the 2015 Application, pursuant to § 34-60-116, C.R.S. and Commission Rule 530, in November, 2015 (collectively, “511 Materials”), which contained an example of offers to participate for a certain working interest owner and did not contain a copy of the St. Vrain Offers to Participate.
11. St. Vrain did not provide Cub Creek with notice of its elections concerning the St. Vrain Offers to Participate within the 35-day period under Rule 530 following St. Vrain’s receipt of the Offers to Participate. St. Vrain was listed as a putative nonconsenting owner under the Cub Creek’s exhibits supporting the uncontested Pooling Application.
12. The Commission approved the 2015 Application, and on December 8, 2015 issued Commission Order No. 407-1547 which, among other things: (a) established the Application Lands as a drilling and spacing unit; (b) pooled all interests in the Application Lands for the production of oil, gas and associated hydrocarbons from the Codell-Niobrara Formations; (c) authorized the drilling of the Litzenberger Wells within the Application Lands for the development of the Codell-Niobrara Formations; and (d) subjected nonconsenting owners, including without limitation St. Vrain, to the cost recovery and statutory risk penalties recovery under § 34-60-116, C.R.S for the drilling, completion and operation of the Litzenberger Wells.
13. Commission Form 2 – Applications for Permit to Drill concerning the Litzenberger Wells were approved by the Commission on or about February 12, 2016 (“APDs”).
14. In April, 2016, St. Vrain conveyed all of its right, title and interest in the Application Lands to PK Mead, LLC (“PK”).
15. PK leased all of its right, title and interest in the Application Lands to Wolf Resources, LLC (“Wolf”) in or about October, 2016.
16. Incline acquired all of Wolf’s right, title and interest in the Application Lands pursuant to an assignment in or about March, 2017.
17. Cub Creek was advised of the assignment to Incline, and Incline’s desire to participate in the 19 Litzenberger Wells, via electronic correspondence on March 24, 2017.
18. Cub Creek refused to allow Incline to participate in the Litzenberger Wells.
19. Cub Creek commenced operations for the drilling, completion and operation of the Litzenberger Wells in May 2017, within the 2-year time limit set by the approved APDs.
20. On July 13, 2017, Incline filed the Incline Application with the Commission, requesting an order amending Order No. 407-1547 to provide that: (a) Incline is not a nonconsenting party for purposes of § 34-60-116, C.R.S. and Commission Rule 530 with respect to the Litzenberger Wells and (b) Incline is entitled to the issuance of offers to participate in the same by Cub Creek.
21. On August 25, 2017, Cub Creek filed its protest of the Incline Application with the Commission.
22. On September 22, 2017, Cub Creek filed a Motion to Dismiss Application.
23. On September 29, 2017, Incline filed a Response to the Motion to Dismiss Application, with Cub Creek submitting a Reply to Incline’s Response to the Motion to Dismiss Application on October 6, 2017.
24. On November 13, 2017, the Hearing Officer issued an Order Denying Motion to Dismiss Application.
25. A Final Prehearing Conference was held at the Commission’s office on March 5, 2018.
26. The Hearing Officer issued a Final Prehearing Order on March 12, 2018. The Final Prehearing Order included stipulated facts, set forth the remaining disputed issues, deemed authentic and admitted the parties’ exhibits, identified witnesses, and set the order and time for case presentation.
HEARING
1. The Commission conducted an adjudicatory hearing on this matter on March 20, 2018. At the hearing, the parties presented testimony, exhibits, and argument to the Commission.
2. Incline argued that the St. Vrain Offers to Participate did not meet the requirements of the Act or Rule 530. Incline also argued that a 15-month delay in spudding the Litzenberger wells was unreasonable, and required the issuance of new or updated offers to participate in the wells.
3. Cub Creek argued that the St. Vrain Offers to Participate met the requirements of the Act and Rule 530, and that Incline’s Application was an improper collateral attack on Order No. 407-1547.
4. Incline called two witnesses at hearing; Mr. William Francis, the Managing Partner of Incline, and Mr. Ed Holloway. Mr. Francis was presented as an expert in the content of offers to participate, industry custom in offers to participate, and the staleness of offers to participate. Mr. Holloway was presented as an expert in the staleness of offers to participate and the improper use of the compulsory pooling process. Cub Creek stipulated to certification of Incline’s witnesses as experts.
5. Mr. Francis testified that: a) the St. Vrain Offers to Participate were ambiguous and could have been read to ask for a prepayment of $58 million; b) that Cub Creek submitted offers to participate to the Commission that were materially different than those provided to St. Vrain; c) that the spud dates in the authorizations for expenditure (“AFEs”) which were provided with the Offers to Participate were different than the actual spud dates of the Litzenberger wells; d) and the AFEs submitted to St. Vrain were materially different from later AFEs in that the days of drilling changed, drilling costs changed, and the payout estimate was different. Finally, Mr. Francis provided an expert opinion that AFEs can become stale. He requested that the Commission rule on when an AFE may become stale as early pooling may allow an operator to create a monopoly on leasing and creates an unfair business advantage.
6. Chairman Benton asked Mr. Francis about a provision in the St. Vrain Offers to Participate which state that each owner would pay its proportionate share. Mr. Francis responded that the St. Vrain Offers to Participate do not state the ownership share of each owner, and an unsophisticated owner could read the materials as requiring prepayment of the entire cost of the well.
7. Chairman Benton also asked Mr. Francis why Incline obtained leases when it knew a pooling order was in place. Mr. Francis responded that other operators allowed Incline to participate.
8. Commissioner Jolley asked Mr. Francis if a pooling order was modified in situations where Incline was allowed to participate after a pooling order was entered. Mr. Francis responded that the pooling order was not modified in those situations.
9. Commissioner Overturf asked Mr. Francis to clarify Incline’s request to the Commission as to when an AFE becomes stale. Mr. Francis responded that Incline requested the Commission find that an 18-month delay was too long, and that 6 to 15 months was more appropriate. Counsel for Incline commented that this issue might be an appropriate subject for rulemaking.
10. Upon questioning from Commissioner Boigon, Counsel for Incline confirmed there was no longer an issue regarding the lease taken, and subsequently released, by Encana Oil & Gas (USA), Inc. Counsel for Incline also confirmed the only remaining issues were whether the St. Vrain Offers to Participate complied with the Act and Commission rules, and whether AFEs become stale so that new offers to participate were required of an operator.
11. Commissioner Holton recused himself as, during a recess, Commission microphones were still on and he had heard a private conversation between Counsel for Incline and Mr. Francis, as well as his being personally acquainted with Incline’s witness, Mr. Holloway.
12. Mr. Holloway testified as to the staleness of offers to participate, the need for a rule on when offers to participate become stale, and improper use of compulsory pooling to create a monopoly on lands in a pooled unit.
13. Cub Creek called Mr. Scott Baily, Vice President of Land and Business Development for Cub Creek. Mr. Baily testified that Cub Creek attempted to negotiate a lease with St. Vrain and PK, and that the parties agreed in principal to the terms of the lease, but never entered into a lease. Mr. Baily also testified to Cub Creek’s attempt to drill the Litzenberger wells, but that due to rig availability, Cub Creek was not able to drill the wells in 2016.
14. Upon questioning by Commissioner Hawkins, Mr. Baily took the position that, if wells are drilled within the two-year window provided by approved APDs, then offers to participate are not stale.
15. Commissioner Jolley asked Mr. Baily why Cub Creek did not allow Incline to participate in the Litzenberger wells. Mr. Baily responded that Cub Creek would have lost 10% of ownership in the wells.
16. The Commission closed the record following closing statements from both parties.
COMMMISSION DELIBERATIONS
17. Chairman Benton stated Mr. Baily was credible when he testified that Cub Creek made a good faith offer to lease and that it was reasonable Cub Creek did not want to lose 10% of their working interest ownership. Chairman Benton was inclined to deny the application because Cub Creek’s Rule 530 materials satisfied Commission Rules and Cub Creek offered opportunities to participate to the mineral owners at the time. Chairman Benton also stated that Incline obtained a lease from a party that was nonconsenting, and was trying to modify a pooling order to participate.
18. Commissioner Ager stated that the COGCC does not have any requirements for the content of a letter sent with Offers to Participate, and even if the offer letter was ambiguous or deficient in some way, none of the parties objected at the time Order No. 407-1547 was entered. While the issues raised may deserve to be addressed on a larger scale, Commissioner Ager was not interested in modifying the pooling order.
19. Commissioner Jolley stated that Incline was the successor in interest to the nonconsenting mineral owner, St. Vrain, and must take into account St. Vrain’s position as a nonconsenting.
20. Commissioner Boigon stated that Order No. 407-1547 provided that all requirements of the Act and Commission Rules were met, that the Offers to Participate were fair and reasonable, and that land testimony showed that requirements of Rule 530 were met. In addition, the Cub Creek’s pooling application was not contested or protested. In order to revisit Order No. 407-1547, the Commission would need to go behind the Order and conclude the recitals were not supportable, obtained by fraud, or substantial abuse of process occurred. Commissioner Boigon stated the Commission had the discretion to modify a pooling order, but he had not seen anything in the testimony, exhibits, or argument presented by Incline that rose to the level of abuse necessary to modify the order. To modify Order No. 407-1547 in this case would result in a parade of applications challenging 530 materials and pooling orders. A two-year requirement from the time an APD is entered, as proposed by Cub Creek, is reasonable, as neither the Act, Rule 530, nor Order No. 407-1547, speak to when an AFE becomes stale.
21. Commissioner Overturf stated it was important to consider that Cub Creek’s pooling application was consistent with rules, unprotested, and unappealed. A significant amount of time had passed since Order No. 407-1547 was entered, and to change the order now would require a significant problem or change in circumstances. Unreasonableness in offers to participate is not a sufficient reason to modify Order No. 407-1547 as the Commission cannot determine what was reasonable at the time, and the parties are different. Commissioner Overturf believed Cub Creek had met the requirements of Rule 530, and the Act required a protest before the Commission was to examine the offers made. Incline had not articulated a sufficient basis to modify the pooling order and Commissioner Overturf was also concerned that, if the Commission were to approve Incline’s application, it would be entertaining many new requests to modify pooling order.
22. Regarding the staleness of AFEs, Commissioner Overturf commented that no clear standard had been provided by the parties, and this hearing was not a rulemaking. It would be inappropriate to set a precedent now without participation from a variety of stakeholders not present.
23. On a 7-1 vote, the Commission approved a motion to deny Incline’s application.
CONCLUSIONS OF THE COMMISSION
1. Order No. 407-1547 was entered in accordance with the Act and Commission Rules.
Section 34-60-116, C.R.S., and Rule 530, provide the requirements for offers to participate in the drilling of wells. Order No. 407-1547 provided that Cub Creek had met all requirements of the Act and Rule 530 for entry of a pooling order. Order No. 407-1547 was not protested and no evidence was presented that notice to mineral owners was not sufficient.
Incline did not present any evidence that the mineral owners who at the time were entitled to offers to participate actually misunderstood the materials. As no mineral owner protested Cub Creek’s pooling application, the Commission finds that Incline failed to present sufficient evidence to compel a conclusion that the St. Vrain Offers to Participate were misleading or ambiguous.
2. Order No. 407-1547 is a final order of the Commission.
A Commission order becomes “final,” and subject to judicial review, when it is entered by the Commission. Richmond Petroleum, Inc. v. Oil & Gas Conservation Comm'n of State of Colo., 907 P.2d 732, 734 (Colo. App. 1995). Order No. 407-1547 was entered on December 8, 2015. Colorado’s Administrative Procedure Act (“APA”) provides that a person may commence judicial review within 35 days of the date the agency action became effective. §24-4-106(4), C.R.S. This 35-day period begins on the date that the Commission order is mailed. Richmond Petroleum, 907 P.2d at 734. Order No. 407-1547 was not appealed and is final.
3. Change in mineral ownership, or a delay in
drilling, are not sufficient change in circumstances to justify reopening or
modifying Order No. 407-1547.
A final pooling order is a determination of the rights and obligations of mineral interest holders subject to the order. Modification of any final pooling order may cast those rights and obligations into disarray. The change in ownership of mineral interests in this case is not a sufficient change in circumstances to justify modification of a pooling order. See Harding & Shelton, Inc. v. Sundown Energy, Inc., 130 P.3d 776 (Okla. Civ. App. 2004) (holding that to modify a pooling order upon change in ownership would cast the status of mineral owners in the pool into “chaos.”)
Cub Creek’s spudding of the Litzenberger wells 18 months after Order No. 407-1547 is also not sufficient change in circumstances to justify modification of Order No. 407-1547. Neither the Act, Commission Rules, nor Order No. 407-1547 required that Cub Creek spud the Litzenberger wells within any specific time. Further, no party objected to the Pooling Application. The St. Vrain Offers to Participate also stated that the spud date was an estimate.
ORDER
IS HEREBY ORDERED:
1. That the Incline Application is DENIED.
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 10th day of April, 2018, as of March 20, 2018.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By____________________________________
Julie Spence Prine, Secretary