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 CODELL AND NIOBRARA FORMATIONS, WATTENBERG FIELD, WELD COUNTY, COLORADO

 

)

)

)

)

)

)

)

)

CAUSE NO. 407

 

DOCKET NO. 180400305

 

TYPE: SPACING

 

ORDER NO. 407-2761

 

REPORT OF THE COMMISSION

 

The Commission heard this matter on January 29, 2019, at the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Suite 801, Denver, Colorado, upon application for an order to establish an approximate 1,280-acre drilling and spacing unit for Sections 4 and 5, Township 7 North, Range 64 West, 6th P.M., and to approve up to 27 horizontal wells within the unit, for the production of oil, gas, and associated hydrocarbons from the Niobrara and Codell Formations.

 

FINDINGS

 

The Commission finds as follows:

 

1.                   Confluence DJ LLC, Operator No. 10518 (“Confluence” or “Applicant”), is an interested party in the subject matter of the above referenced hearing.

 

2.                   Noble Energy, Inc., Operator No. 100322 (“Noble” or “Protestant”), 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.

 

5.                   On April 27, 1988, the Commission adopted Rule 318A, the Greater Wattenberg Area Special Well Location, Spacing and Unit Designation Rule, which was amended on August 8, 2011 to, among other things, address the drilling of horizontal wells and requires that a horizontal wellbore spacing unit include any governmental quarter-quarter section that is located less than 460 feet from the completed interval of the wellbore lateral. The Rule does not, however, prohibit the establishment of drilling and spacing units within the Greater Wattenberg Area.  Sections 4 and 5, Township 7 North, Range 64 West, 6th P.M., are subject to this Rule for the Niobrara and Codell Formations.

 

 

 

PROCEDURAL HISTORY

 

6.            On February 27, 2018, Confluence filed an application with the Commission in the above-captioned docket (the “Application”) for an order to, among other things, (1) establish an approximate 1,280-acre drilling and spacing unit for the below-described lands (“Application Lands”), and approve up to 27 horizontal wells in the proposed unit for production of oil, gas and associated hydrocarbons from the Codell and Niobrara Formations, (2) require the productive interval of the wellbore of any permitted wells in the unit to be located no closer than 460 feet from the unit boundaries, and no closer than 150 feet from the productive interval of any other wellbore located in the unit, (3) provide that the wells shall be drilled on a maximum of two well pads within the unit subject to Rule 318A or on adjacent lands, unless an exception is granted by the Director, and (4) maintain allocation of proceeds from any existing wells located within the proposed unit and producing from the Codell and Niobrara Formations:

 

Township 7 North, Range 64 West, 6th P.M.

Section 4:        All 

Section 5:        All

 

7.         The records of the Commission reflect that one horizontal well is producing from the Niobrara Formation on the Application Lands, the Dillard USX AB #05-99HZ (API No. 05-123-31254), which has been designated as a wellbore spacing unit under Rule 318.A. Confluence requested in its Application that the Dillard USX AB #05-99HZ well (the “Dillard Well”) be excluded from the proposed 1,280-acre unit and continue to be allocated pursuant to Rule 318.A for purposes of payment of proceeds.

 

8.            On April 16, 2018, Noble filed a Protest to Confluence’s Application asserting it is the 100% “Owner,” as defined by the Oil and Gas Conservation Act (the “Act”), of Section 5 of the Application Lands and the majority Owner in the Application Lands overall, that Noble has its own development plans for the Applications Lands, and that Noble is the Operator of the Dillard Well. 

 

9.            Confluence’s Application was continued for various reasons over multiple hearing cycles, including for reasons of substitution of counsel for Confluence, and was eventually scheduled for hearing at the January 28-29, 2019 Commission hearing.

 

10.         On January 8, 2019, the parties participated in an Initial Prehearing Conference.

 

11.         On January 10, 2019, the Hearing Officer entered a Case Management Order.

 

12.         On January 11, 2019, the Parties filed Prehearing Statements, proposed Exhibits and designations of Witnesses.

 

13.         On January 17, 2019, the Parties filed Responses to Prehearing Statements, Rebuttal Exhibits, and designation of Rebuttal Witnesses.

 

14.         On January 17, 2019, the Parties participated in a Final Prehearing Conference.

 

15.          On January 22, 2019, the Hearing Officer issued a Final Prehearing Order setting forth disputed issues, identifying witnesses and exhibits, and setting forth the time and order of case presentation to the Commission.

 

HEARING

 

16.         On January 29, 2019, the Commission heard Docket No. 180400305. At hearing the Commission heard testimony and accepted exhibits from Confluence and Noble.

 

17.         At hearing, land testimony and exhibits submitted in support of the Application by Angela Mallon, Regional Land Manager for Confluence, showed that Confluence holds an approximate seven percent oil and gas leasehold interest and has a right to drill in the Application Lands. Ms. Mallon also testified that the Applications were within Confluence’s core development area, that Confluence would minimize surface impacts by using one site to drill both east and west, that Noble has only drilled one well in the area since 2013, that Confluence has filed permits for 135 wells in the area, that 510 statements from landowners were filed in support of Confluence, and that Confluence has experience with the development of oil and gas resources in the area surrounding the Application Lands.

 

18.         At hearing, geology testimony and exhibits submitted in support of the Application by Robert Sterling, Senior Vice President of Geosciences for Confluence, showed that the Niobrara and Codell Formations are present throughout the Applications Lands and are a common source of supply for hydrocarbons. Mr. Sterling also testified that Confluence’s proposed wells were 150 feet or more apart when viewed in three dimensions, that Confluence’s proposed development would protect correlative rights, prevent waste, and minimize surface impacts.

 

19.         Counsel for Noble stated that Noble’s position was that the nature of geology in the Applications Lands was worthy of stipulation.

 

20.         At hearing, engineering testimony and exhibits submitted in support of the Application by Mike Dickenson, Senior Vice President of Operations for Confluence, showed that the estimated drainage areas for a 2-mile horizontal Niobrara Formation well and a 2-mile horizontal Codell Formation well are 35 acres and 137 acres, respectively, and an approximate 1,280-acre drilling and spacing unit is therefore not less than the maximum area that can be efficiently, economically and effectively drained by 27 horizontal wells producing oil, gas, and associated hydrocarbons from the benches of the Niobrara and Codell Formations. Mr. Dickenson testified that Confluence’s proposed development may negatively impact the Dillard Well, but Confluence would take all precautions to avoid impacts and that Noble would benefit from production from Confluence’s proposed development. Mr. Dickenson also testified that it was not unusual for development to occur over previously existing wells, that the Applications Lands were a core development area for Confluence, and that Confluence had a surface use agreement in place for development.

 

21.         At hearing, land testimony and exhibits submitted in support of Noble by Brian Bolton, Staff Landman for Noble, showed that Noble has 100 percent leasehold in Section 5, and has approximately 94 percent leasehold in the Application Lands. Mr. Bolton further testified that Noble drilled an appraisal well in the area, and is evaluating the data from the well before filing applications for drilling and spacing units and for permits to drill additional wells.

 

22.         In response to a Commission question regarding 510 statements in support of Confluence, Mr. Bolton testified that Noble was holding a lease in Section 4 with shut-in payments.

 

23.         At hearing, Mike Marini, Reservoir Engineer for Noble, submitted testimony and exhibits that Noble has development plans for the Application Lands, that Noble will bear the majority of costs for development of the Application Lands, that Noble will lose the value of its acreage in the Application Lands, that the Dillard Well was economic, that Confluence’s development plan would cause waste, that Confluence could develop its own leasehold in the Application Lands with two wells, and that Confluence does not actually drill wells which it permits.

 

24.         Upon request by the Commission, the Hearing Officer provided his recommendation that the Commission approve Confluence’s Application because the Commission has previously found in favor of a smaller operator who is ready to develop, that Confluence has shown that its proposed unit meets the requirements of the Act, and that it would not be efficient or economic for Confluence to develop only its leasehold in the Application Lands.  

 

25.            Following testimony, presentation of exhibits and closing statements by the parties, the Commission closed the record.

 

26.            Following deliberations, the Commission voted unanimously to approve Confluence’s Application.

 

COMMISSION CONCLUSIONS

 

27.            Pursuant to Section 34-60-116(1), C.R.S., any spacing unit approved by the Commission must prevent waste, avoid the drilling of unnecessary wells, and protect correlative rights.

 

28.            Section 34-60-116(2), C.R.S., authorizes the Commission, when necessary for any of the purposes mentioned in Section 34-60-116(1), to divide a pool into zones, and establish drilling units for each zone, so that the pool as a whole will be efficiently and economically developed.

 

29.            The Commission has broad authority under Section 34-60-105(1), C.R.S. to regulate the spacing of wells and to do whatever is reasonably necessary to carry out the provisions of Section 116.

 

30.            Based on the facts stated in the Application and testimony and exhibits received at hearing, which the Commission determined were credible, Confluence’s Application meets the requirements of the Section 116 in that it will prevent waste, protect correlative rights, and prevent the drilling of unnecessary wells.

 

31.            Commissioner Ager found that Confluence is developing the Application Lands in good faith and is not merely a permitting shop. Noble has not shown the same readiness to develop, and that the Commission does not consider percentage ownership in Applications Lands when considering an application for a spacing unit. Commissioner Ager expressed appreciation for the 510 statements from landowners in support of Confluence’s development.

 

32.            Chairman Benton agreed with Commissioner Ager that the 510 statements from the landowners in support of Confluence carried weight with the Commission. Chairman Benton found that Confluence had established that it was financially capable of drilling wells and that further development is preferable to continued shut-in payments. Chairman Benton also found that Noble’s suggestion that Confluence could develop its leasehold in the Application Lands through wellbore spacing units was not persuasive and that Confluence’s development plan was more economic.

 

33.            Commissioner Boigon found that Noble was holding acreage in the Applications Lands with shut-in royalties and the Commission should encourage development and not erect barriers to entry by operators who are ready to develop. Commissioner Boigon found that Confluence’s Application would prevent waste and allow for development of the resource.

 

34.            Commissioner Jolley expressed that shut-in payments are disfavored and he supports further development in the Application Lands.

 

35.            Commissioner Overturf distinguished this Application from the application heard in Docket No. 180300184 because Noble does not have a competing plan. Commissioner Overturf also stated that challenges to applications for drilling and spacing units must be based on the requirements of the Act.

 

36.            Commissioner Hawkins found that correlative rights would not be implicated by Confluence’s Application and the consideration of the financial burdens are not appropriate to consider in the spacing context.

 

ORDER

 

IT IS HEREBY ORDERED:

1.            An approximate 1,280-acre drilling and spacing unit is hereby established for the below-described lands with an approved total of up to 27 horizontal wells within the unit for the production of oil, gas, and associated hydrocarbons from the Niobrara and Codell Formations:       

 

Township 7 North, Range 64 West, 6th P.M.

Section 4:        All

Section 5:        All

 

2.            The productive interval of wellbores in the unit shall be no closer than 150 feet from the productive interval of any other wellbore located in the unit, and no closer than 460 feet from the unit boundaries, unless an exception is granted by the Director.

 

3.            The wells will be drilled no more than two surface locations within the unit or at a legal location(s) on adjacent lands, subject to Rule 318A, unless an exception is granted by the Director.

 

4.            The Dillard USX AB #05-99HZ (API No. 05-123-31254) is hereby excluded from the approved 1,280-acre unit and production will continue to be allocated pursuant to Rule 318.A for purposes of payment of proceeds.

 

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 25th day of February, 2019, as of January 29, 2019.

 

OIL AND GAS CONSERVATION COMMISSION OF THE STATE OF COLORADO

 

 

By                                                                        

Mimi C. Larsen, Secretary

 

CERTIFICATE OF SERVICE

On March 7, 2019 a true and correct copy of the foregoing Report of the Commission was sent by electronic mail to the following:

 

Christopher G. Hayes

The Hayes Law Firm, LLC

Attorney for Confluence DJ LLC 

chayes@hayeslawfirmllc.com

 

Michael T. Jewell

Burns, Figa & Will, P.C.

Attorney for Noble Energy, Inc.

mjewell@bfwlaw.com

           

 

 

 

 

____________________________________