BEFORE THE OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
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IN THE MATTER OF AN APPLICATION BY EXTRACTION OIL & GAS, INC., FOR AN ORDER POOLING ALL INTERESTS IN TWO APPROXIMATE 640-ACRE DESIGNATED HORIZONTAL WELLBORE SPACING UNITS FOR CERTAIN PORTIONS OF SECTIONS 26, 27, 28, 33, 34, AND 35, TOWNSHIP 5 NORTH, RANGE 68 WEST, 6TH P.M., FOR THE DEVELOPMENT/OPERATION OF THE NIOBRARA FORMATION, WATTENBERG FIELD, LARIMER COUNTY, COLORADO |
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CAUSE NO. 407
DOCKET NO. 171000746
TYPE: POOLING
ORDER NO. 407-2547 |
REPORT OF THE COMMISSION
The Commission heard this matter on September 17, 2018, at the Garfield County Sheriff's Annex – Rifle, 106 County Road 333-A, Rifle, Colorado 81650 upon application for an order to pool all interests in two approximate 640-acre horizontal wellbore spacing units established for certain portions of Sections 26, 27, 28, 33, 34, and 35, Township 5 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 Johnsons Corner 2-N and Johnsons Corner 5-N Wells, for the development and operation of the Niobrara Formation.
The Commission finds as follows:
1. Extraction Oil & Gas, Inc. (“Extraction”) (Operator No. 10459) is an interested party in the subject matter of the above-referenced hearing.
2. Bergfeld Land & Minerals Group (“Bergfeld”) is an interested party in the subject matter of the above-referenced hearing.
3. Due notice of 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 has authority to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act (“Act”).
5. On April 27, 1998, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule. Sections 26, 27, 28, 33, 34, and 35, Township 5 North, Range 68 West, 6th P.M. are subject to this Rule for the Niobrara Formation.
STIPULATED PROCEDURAL AND FACTUAL HISTORY
Prior to hearing, Extraction and Bergfeld stipulated to the following facts:
6. Extraction is a corporation duly organized and authorized to conduct business in the State of Colorado, and is a registered operator in good standing with the Commission.
7. Bergfeld is a corporation duly authorized to conduct business and operate in the State of Colorado and is an interested party in the Applications defined below.
8. Extraction designated two approximate 640-acre horizontal wellbore spacing units comprised of the below-described lands (“Application Lands”), for the below-described wells, for production of oil, gas, and associated hydrocarbons from the Niobrara Formation. Extraction notified all owners in the proposed wellbore spacing units pursuant to Rule 318A.e.(5). Extraction did not receive objections to the establishment of the proposed horizontal wellbore spacing units within the 30-day response period:
• Johnsons Corner 2-N Well (API No. 05-069-06460) – Niobrara Formation – WSU #1; and
• Johnsons Corner 5-N Well (API No. 05-069-06461) – Niobrara Formation – WSU #2.
These wells are hereinafter collectively referred to as the “Wells” and individually as “Well”.
Application Lands:
Township 5 North, Range 68 West, 6th P.M.
Section 26: S½SW¼
Section 27: S½S½
Section 28: S½SE¼
Section 33: N½NE¼
Section 34: N½N½
Section 35: N½NW¼
9. On or about August 31, 2017, Extraction submitted a verified application (“Application”) for an order to pool all interests in two approximate 640-acre designated horizontal wellbore spacing units established for the Application Lands, for the development and operation of the Niobrara Formation, and subject any non-consenting interests 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 that any of the costs specified in §34-60-116(7)(b), C.R.S., are first incurred for the drilling of the Wells.
10. Acting pursuant to the relevant provisions of §34-60-116(6) & (7), C.R.S., and Rule 530., Extraction seeks an order pooling all interests, including, but not limited to, any nonconsenting interests, in the horizontal wellbore spacing units established for the Application Lands, for the development and operation of the Niobrara Formation.
11. Extraction requests that the Commission’s pooling order be made effective as of the earlier of the date of this Application, or the date that the costs specified in §34-60-116(7)(b), C.R.S. are first incurred for the drilling of the Wells within WSU Nos. 1-2.
12. Further, Extraction requests that the interests of certain owners, including Bergfeld, with whom the Extraction has been unable to secure a lease or other agreement to participate in the drilling of the Wells, are made subject 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. are first incurred for the drilling of the Wells.
13. On or about October 16, 2017, Extraction tendered Rule 530 well proposal materials to Bergfeld. These materials complied with Rule 530, in that, the materials adequately describe both Wells and the wellbore spacing unit established for each well, the anticipated range of spud of the Wells, and the estimated costs associated with constructing each Well. Bergfeld was given at least 35 days to elect on participating in the drilling of either Well and failed to do so.
14. On April 19, 2018, Extraction filed a Motion to Dismiss alleging that on or about October 23, 2017, Bergfeld was served with Rule 530 well proposal materials. These materials complied with Rule 530, in that, the materials adequately describe both Wells and the wellbore spacing unit established for each well, the anticipated range of spud of the Wells, and the estimated costs associated with constructing each Well. Bergfeld was given at least 35 days to elect on participating in the drilling of either Well and failed to do so (Bergfeld’s 35-day election period tolled on November 27, 2017).
15. On April 26, 2018, Bergfeld filed its Response to the Motion to Dismiss wherein in it concedes not returning well elections for the Wells within 35 days. Bergfeld asserts Extraction’s well proposal materials were deficient and it was uncertain about what was being required of them.
16. On August 21, 2018, the Hearing Officer entered his Order Denying Extraction’s Motion to Dismiss.
17. A Prehearing Conference for Docket No. 171000746 was held on September 5, 2018, from 9:00–9:30 a.m. at the COGCC Offices.
HEARING
18. This matter was heard by the Commission at its September 17-18, 2018 meeting.
19. In advance of hearing, Extraction submitted Rule 511 testimony which demonstrated that Extraction had provided notice of the Application and Rule 530 election materials to all other owners in the Application Lands, which provided examples of the election materials to all other owners, that each owner had received at least 35 days in advance of hearing to choose whether to lease or participate, and identified those owners who had chosen not to participate.
19. At the September 17-18, 2018 meeting, the Commission heard testimony and accepted exhibits from Extraction and Bergfeld.
20. In addition to the facts as stipulated above, the testimony and exhibits submitted by the parties showed the following.
21. Extraction submitted Rule 530 well proposal materials on October 16, 2017, and that those materials were received by Bergfeld on October 23, 2017.
22. The Rule 530 materials submitted to Bergfeld contained a description of both Wells and the wellbore spacing unit established for each well, the anticipated range of spud of the Wells, and the estimated costs associated with constructing each Well. Bergfeld was given at least 35 days to elect on participating in the drilling of either Well.
23. Extraction provided Bergfeld with an extension of time from November 27, 2017 to January 5, 2018 to respond to the well proposal materials.
24. Bergfeld did not respond to the well proposal materials until February 14, 2018, when Bergfeld attempted to accept Extraction’s offer to participate. Extraction refused to accept Bergfeld’s attempted acceptance because it was untimely.
25. The Wells had been drilled, but not completed, when Extraction sent the well proposal materials to Bergfeld. Before the original 35-day respond period had expired, and before the January 5, 2017 extension to respond had expired, Bergfeld contacted Extraction in an attempt to obtain actual costs for drilling the wells. Extraction did not provide actual costs.
26. Extraction did not provide Bergfeld with notice of the Application when it was originally filed. On December 27, 2017, Extraction sent notice of the Application to Bergfeld.
27. Following testimony, presentation of exhibits and closing statements by the parties, the Commission closed the record.
28. Following deliberations, the Commission unanimously (7-0) approved the Application.
COMMISSION CONCLUSIONS
29. Pursuant to Section 34-60-116(6), C.R.S., in the absence of voluntary pooling, the Commission may enter an order pooling all interests in a drilling unit upon the application of any interested person. Each pooling order may be made only after notice and hearing, and upon such terms that are just and reasonable, and that afford to each owner in the spacing unit the opportunity to recover, without unnecessary expense, their just and equitable share. Id.
30. Section 34-60-116(7)(d), C.R.S., provides that no order pooling interests may be entered over the protest of a nonconsenting owner, unless the Commission receives evidence that the unleased mineral owner received a “reasonable offer to lease” as well as the “owner’s share of the estimated drilling and completion cost of the well, the location and objective depth of the well, and the estimated spud date or range of time within which spudding is to occur.” Rule 530.b. contains the same informational requirements.
31. Commission Rule 530.b. provides that an owner is deemed to be a nonconsenting owner, if, after at least 35 days’ written notice of the information listed in Rule 530.b.(1)-(3), the owner does not consent in writing to participate in the cost of the well.
32. The Stipulated Facts in the Final Prehearing Order, as well as testimony and exhibits submitted and accepted by the Commission at hearing show that Extraction complied with all of the requirements of Section 34-60-116(6) and (7) and all requirements of Rule 530.
33. Neither the Act nor the Rules require that an applicant for pooling send actual costs of drilling or completing a well with Rule 530 election materials. The Act and the Rules only require “estimated” costs. Extraction satisfied the requirement to send “estimated” costs.
34. Bergfeld’s testimony and exhibits showed that it was a sophisticated party and had sufficient opportunity to obtain information and choose whether to participate between October 23, 2018, when it received Extraction’s Rule 530 materials, and January 5, 2018, the extended deadline to respond. Bergfeld received significantly more time to respond than is required by the Act or the Rules, and failed to timely accept Extraction’s offer to participate. The Commission was also concerned with fairness to other owners in the Application Lands if Bergfeld were granted the opportunity obtain and review more information than was afforded to all other owners.
35. Under the fact and circumstances of this case, it is just and equitable to enter the pooling order. The Commission presumes that if its rules are followed, the resulting order will be just and reasonable. Bergfeld has not shown sufficient reason to conclude otherwise.
36. While Bergfeld was not provided with notice of the Application when it was originally filed, Extraction cured that defect by sending notice to Bergfeld on December 27, 2017. The Act requires 20-days’ notice before hearing (§34-60-108(2), C.R.S.), and Rule 507.a.(1) requires 35-days’ notice before hearing. Extraction provided notice to Bergfeld over 8 months before hearing.
37. In regard to all other mineral owners in the Application Lands, Rule 511 testimony submitted in advance of the hearing by Extraction showed that Extraction 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 Johnsons Corner 2-N and Johnsons Corner 5-N Wells, but did not provide testimony for any subsequent wells.
38. Based on the above conclusions, the Commission enters the Order set forth below.
ORDER
IT IS HEREBY ORDERED:
1. Extraction’s Application is hereby APPROVED.
2. Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in two approximate 640-acre horizontal wellbore spacing units established for the below-described lands are hereby pooled, for the development and operation of the Niobrara Formation, effective as of the earlier of the date of the Application, or the date any costs specified in §34-60-116(7)(b)(II), C.R.S., are first incurred for the drilling of the of the Johnsons Corner 2-N and Johnsons Corner 5-N Wells (“Wells”):
Township 5 North, Range 68 West, 6th P.M.
Section 26: S½SW¼
Section 27: S½S½
Section 28: S½SE¼
Section 33: N½NE¼
Section 34: N½N½
Section 35: N½NW¼
3. 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 the Wells located on the drilling and spacing unit applicable to its interest in the drilling and spacing unit.
4. Any working interest owner who does not elect to participate in the Well or fails to make a timely election is hereby deemed to be nonconsenting and is subject to the penalties as provided for in §34-60-116(7), C.R.S. The nonconsenting working interest owner must reimburse the consenting owner for the owner’s proportionate share of the costs and risks of drilling and operating the Well from the owner’s proportionate share of production, subject to royalties or other non-cost bearing interests, if and to the extent that the royalty is consistent with the lease terms prevailing in the area and is not designed to avoid the recovery of costs provided for in §34-60-116(7)(b), C.R.S., until costs and penalties are recovered as set forth in §34-60-116(7), C.R.S.
5. Any unleased owner who does not elect to participate in the Well or fails to make a timely election is hereby deemed to be nonconsenting and is subject to the penalties as provided for in §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 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. After recovery of such costs, each unleased nonconsenting mineral owner shall then own the owner’s 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 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.
8. In accordance with §34-60-116(7)(a)(III), C.R.S., a nonconsenting owner is immune from liability for costs arising from spills, releases, damage, or injury resulting from oil and gas operations on the designated horizontal wellbore spacing unit.
9. 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.
10. 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 16th day of October, 2018, as of September 17, 2018.
OIL AND GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
By________________________________
Julie Spence Prine, Secretary
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on the ___ day of October, 2018, a true and correct copy of this Order was served on the following by email and U.S. Mail, first-class postage prepaid, at the addresses shown below:
Attorneys for Extraction Oil & Gas, Inc.
Robert A. Willis
Poulson, Odell & Peterson, LLC
Attorneys for Extraction
1775 Sherman Street, Suite 1400
Denver, CO 80203
rwillis@popllc.com
Attorneys for Bergfeld Land & Minerals Group
Christopher Hayes
Joe Gilmore
Hayes Law Firm LLC
Attorneys for Bergfeld
1580 Lincoln Street, Suite 1280
Denver, CO 80203
chayes@hayeslawfirmllc.com
jgilmore@hayeslawfirmllc.com
_______________________________
Margaret Humecki