BEFORE THE OIL & GAS CONSERVATION COMMISSION
OF THE STATE OF COLORADO
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IN THE MATTER OF THE PROMULGATION AND ESTABLISHMENT OF FIELD RULES TO GOVERN OPERATIONS FOR THE NIOBRARA AND CODELL FORMATIONS, WATTENBERG FIELD, BROOMFIELD COUNTY, COLORADO |
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CAUSE NO. 407
DOCKET NO. 181000799
TYPE: POOLING
ORDER NO. 407-2771 |
REPORT OF THE COMMISSION
The Commission heard this matter on March 12, 2019, at the Ralph L. Carr Colorado Judicial Center, 1300 Broadway, First Floor, Denver, Colorado, upon application for an order pooling all interests in an approximate 1,600-acre drilling and spacing unit established by Order Nos. 407-2256 and 407-2274 covering Sections 18 and 19 and portions of Section 7, Township 1 South, Range 68 West, 6th P.M., for the development and operation of the Niobrara and Codell Formations.
The Commission finds as follows:
1. Extraction Oil and Gas, Inc., Operator No. 10459 (“Extraction” or “Applicant”), as applicant herein, is an interested party in the subject matter of the above referenced hearing.
2. Wildgrass Oil and Gas Committee (“Wildgrass” or “WOGC”) and Affected Coloradans Together (“ACT”), as protestants, are interested parties 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 matter and the parties interested therein, and has authority to promulgate the hereinafter prescribed order pursuant to the Oil and Gas Conservation Act (the “Act”).
PROCEDURAL HISTORY
5. On July 13, 2017, Extraction filed an amended application in Docket No. 170900598 and an application in Docket No. 171000749 to establish an approximate 1,600-acre drilling and spacing unit covering the following lands (“Application Lands” or “Lowell South Unit”), with up to 20 horizontal wells within the unit, for production of oil, gas, and associated hydrocarbons from the Niobrara and Codell Formations:
Township 1 South, Range 68 West, 6th P.M.
Section 7: S½
Section 18: All
Section 19: All
6. On December 11, 2017, the Commission entered Order Nos. 407-2256 and 407-2274, which approved Extraction’s applications in Docket Nos. 170900598 and 171000749, and established an approximate 1,600-acre drilling and spacing unit for the Application Lands.
7. On June 1, 2018, the Commission approved thirteen Form 2 Applications for Permit-to-Drill the following wells (the “Livingston Wells”):
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WELL DESCRIPTION |
API NO. |
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Livingston S19-25-12N |
05-014-20750 |
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Livingston S19-25-10N |
05-014-20748 |
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Livingston S19-25-11C |
05-014-20749 |
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Livingston S19-25-13N |
05-014-20752 |
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Livingston S19-25-14C |
05-014-20757 |
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Livingston S19-25-2C |
05-014-20753 |
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Livingston S19-25-3N |
05-014-20758 |
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Livingston S19-25-4N |
05-014-20756 |
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Livingston S19-25-5C |
05-014-20755 |
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Livingston S19-25-6N |
05-014-20747 |
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Livingston S19-25-7N |
05-014-20751 |
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Livingston S19-25-8C |
05-014-20754 |
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Livingston S19-25-9N |
05-014-20746 |
8. On June 1, 2018, the Commission approved a Form 2A Oil and Gas Location Assessment for the Livingston Pad, Location ID No. 455317 (“Livingston Pad”).
9. On August 30, 2018, Extraction filed its application in Docket No. 181000799 (the “Application”) to pool all interests in the Application Lands for the development and operation of the Niobrara and Codell Formations, to obtain cost-recovery against the nonconsenting owners in the Livingston Wells, and have the order be made effective as of the date of the application, or the date that the costs specified in Section 34-60-116(7)(b)(II), C.R.S., are first incurred for the drilling of the Livingston Wells.
10. On October 15, 2018, WOGC and ACT filed their protest to the Application.
11. On October 15, 2018, Mr. Brian and Ms. Tiffany Kilcoyne filed a protest to the Application.
12. On October 15, 2018, Adams 12 Five Star Schools filed a protest to the Application.
13. On October 15, 2018, pursuant to Extraction’s unopposed request, the hearing officer continued the Application to the December 11-12, 2018 hearing.
14. On December 11, 2018, pursuant to Extraction’s unopposed request, the hearing officer continued the Application to the January 28-29, 2019 hearing.
15. On January 18, 2019, pursuant to Extraction’s unopposed request, the hearing officer continued the Application to the March 11-12, 2019 hearing.
16. On January 23, 2019, Wildgrass filed a Complaint against the Commission in the United States District Court for the District of Colorado in Case No. 1:19-cv-00190 (the “Federal Court Action”). In this federal case, Wildgrass challenges the constitutionality of the Colorado pooling statute.
17. On February 6, 2019, Adams 12 Five Star Schools withdrew its protest to the Application.
18. On February 12, 2019, the presiding judge in the Federal Court Action, the Honorable R. Brooke Jackson, ordered that Extraction’s pooling Application be heard at the March 11-12, 2019 hearing. Judge Jackson further ordered that the Commission hear issues relating to public health, safety, welfare and the environment, economics, and whether Extraction’s proposed development will result in just and equitable shares to all owners.
19. On February 14, 2019, the hearing officer convened the initial prehearing conference, at which representatives for Extraction, WOGC and ACT, and Mr. Brian and Ms. Tiffany Kilcoyne appeared. The Hearing Officer instructed the parties that the case would proceed to the March 11-12 hearing pursuant to Judge Jackson’s February 12 order.
20. On February 14, 2019, the hearing officer issued the case management order, which permitted WOGC and ACT to serve 20 interrogatories, 20 requests for production, and 20 requests for admission. The case management order is attached as Exhibit A.
21. On February 19, 2019, Extraction filed its “Objections to Wildgrass Oil and Gas Committee’s First Set of Written Discovery to Extraction Oil and Gas, Inc.” On February 20, 2019, Wildgrass filed its “Response to Objections to Discovery.” On February 21, 2019, the hearing officer issued an order (attached as Exhibit B) that overruled Extraction’s objections in part and sustained them in part. In the order, the hearing office notes that he interprets Judge Jackson’s order as requiring the Commission to hear such issues as health, safety, welfare, and the environment, the economic viability of Extraction, the economic viability of Extraction’s proposed development in the unit, and whether Extraction’s proposed development will result in just and equitable shares to all owners.
22. On February 28, 2019, Extraction filed a Motion in Limine in which it sought to exclude several of Wildgrass and ACT’s exhibits and strike the testimony of Ann Marie Byers, a witness of Wildgrass and ACT. Also on February 28, 2019, Wildgrass filed “Evidentiary Motions and Objections to Witnesses or Exhibits” in which it sought to exclude several of Extraction’s exhibits and one of Extraction’s expert witnesses. On March 4, 2019, Extraction filed a Response to Wildgrass’s evidentiary motions and objections.
23. On March 4, 2019, Mr. Brian and Ms. Tiffany Kilcoyne withdrew their protest.
24. At the Final Prehearing Conference held on March 5, 2019, the hearing officer ruled on the parties’ evidentiary motions and objections. The Final Prehearing Order, which the hearing officer issued on March 7, 2019, sets forth the results of the hearing officer’s rulings, the analysis of which was articulated on the record during the Final Prehearing Conference. The Final Prehearing Order is attached as Exhibit C.
HEARING
25. The Commission heard this matter at its March 11-12, 2019 hearing, at which Extraction, WOGC, and ACT were present. The hearing lasted approximately seven-hours.
26. At the outset of the hearing, Extraction raised a standing objection to WOGC and ACT presenting issues related to public health, safety, and welfare and environment and economics. Similarly, Wildgrass noted that it had a standing objection to 1) the Commission’s jurisdiction given the theory that the rule of capture does not apply to non-transient minerals, 2) the fact that Wildgrass does not have a full and fair opportunity to present its case because one hour and fifteen minutes is an insufficient amount of time, 3) Extraction has not met the procedural requirements regarding notice in that Extraction only provided unleased landowners 35 days instead of 60 days, and 4) Wildgrass’s discovery as to Extraction’s economics was inappropriately limited to Extraction’s public financial information. The Commission noted the parties’ objections but proceeded with the hearing without ruling on them.
27. In its case-in-chief, Extraction presented testimony from Jason Rayburn, Senior Staff Landman, Extraction Oil & Gas, Inc., Chandler Newhall, Senior Project Manager, Extraction Oil & Gas, Inc., and Clay Doke, Petroleum Engineer, Integrated Petroleum Technologies. Jason Rayburn testified about, inter alia, Extraction’s ownership in the Application Lands, the lease offers that Extraction sent out, and how the terms of the offered leases are commensurate with prevailing lease offers. In particular, Mr. Rayburn testified that Extraction’s final lease offers contained royalties as high as 20%, had minimum bonuses as high as $1,500, and were for a term of three years. In addition, Mr. Rayburn testified that all lease offers made by Extraction included a no surface occupancy provision. Chandler Newhall testified about, inter alia, the process Extraction undertook with Broomfield to address concerns regarding health, safety, welfare, and the environment and various best management practices that the Livingston Wells use. Clay Doke testified about, inter alia, the economics of the project and specifically opined that the project is economic, will prevent waste, and will protect correlative rights. Wildgrass cross examined each of these three witnesses, and the Commission also asked the three witnesses numerous questions.
28. In the case-in-chief of Wildgrass and ACT, they presented testimony from Ann Marie Byers and Mark Lindner. Ann Marie Byers testified about, inter alia, some of the lease offers that Extraction sent out, how some individuals told her that they never received a lease offer or received the lease offer late, how Extraction was unwilling to change any of the terms of the offered lease, and how Extraction’s final lease offer was not reasonable given concerns regarding health, safety, welfare, and the environment. Mark Lindner testified about, inter alia, his concerns about Extraction’s economic viability and how he saw Extraction’s lease offer as a take-it-or-leave-it contract in which he had no ability to negotiate the lease terms. Extraction cross examined these two witnesses, and the Commission also asked the two witnesses numerous questions.
29. After the close of Wildgrass’s and ACT’s case-in-chief, the Commission allowed members of the public to present statements pursuant to Commission Rule 510. Several members of the public gave statements regarding, inter alia, health and safety concerns, deficiencies in the Commission’s Rules, and how some individuals living in the Application Lands felt pressured to sign an oil and gas lease. Ms. Jean Lim, one of Wildgrass’s witnesses, also delivered a 510 statement to the Commission. Wildgrass elected not to call Ms. Lim as a witness due to time constraints, and the Commission permitted Ms. Lim to instead give a 510 statement.
30. Extraction elected to present a rebuttal case in which it called Jason Rayburn, Chandler Newhall, Eric Christ, Extraction’s Vice President, General Counsel, and Corporate Secretary, Dr. Tami McMullin, Senior Toxicologist with the Center for Toxicology & Environmental Health, LLC, and Dollis Wright, President of Quality Environmental Professional Associates, Inc. Jason Rayburn testified that, inter alia, Extraction was willing to change the lease terms and that Extraction had asked Wildgrass to perform a redline of the lease but that Extraction did not receive a response. Chandler Newhall testified that, inter alia, officials from Extraction met with Ann Marie Byers in 2016 but that there was no discussion regarding lease terms at the meeting. Eric Christ testified that, inter alia, Extraction is financially viable. Dr. Tami McMullin testified about, inter alia, the levels of benzene associated with Extraction’s oil and gas activities. Dollis Wright testified that, inter alia, in her opinion some of the studies regarding health risks and oil and gas activities are inconclusive.
31. After Extraction finished its rebuttal case, WOGC and ACT had the opportunity to ask questions of the rebuttal witnesses. However, counsel to WOGC and ACT advised the Commission that it did not have sufficient time left to examine these witnesses. The Commission asked counsel for Wildgrass and ACT how much additional time they would need to question Extraction’s last two rebuttal witnesses, present any rebuttal witnesses for Wildgrass and ACT, and to present their closing statement. Wildgrass and ACT thanked the Commission for offering additional time, but ultimately rejected the offer. Counsel stated that they had already tailored their case to just one hour and fifteen minutes. Accordingly, the Commission proceeded with closing statements without giving Wildgrass and ACT additional time.
32. After the parties finished presenting their closing arguments, the Commission closed the record. The Commission then asked Assistant Attorney General Kyle Davenport for a summary of what a pooling application needs to satisfy. In terms of what constitutes a reasonable lease offer, Mr. Davenport encouraged the Commissioners to look at C.R.S. § 34-60-116(7)(d), which in part provides that the Commission shall not enter a pooling order over the protest of an owner “unless the commission has received evidence that the unleased mineral owner has been tendered, no less than sixty days before the hearing, a reasonable offer to lease upon terms no less favorable than those currently prevailing in the area.” As for the Commission Rules, Mr. Davenport reminded the Commission that Commission Rule 530 sets forth what the Commission should consider when determining whether a reasonable lease has been offered. Specifically, Rule 530 enumerates several specific lease terms that the Commission should examine as well as “[s]uch other lease terms as may be relevant.”
33. Following Mr. Davenport’s summary of the regulations and Act, the Commissioners deliberated. Some of the Commission’s comments made during deliberation are set forth below:
a. Commissioner Jolley noted that Colorado’s pooling statute probably needs some adjustments, but that the Commission is dealing with the statute how it is currently written. Commissioner Jolley also noted that while Extraction probably could have been more forthright early on its lease negotiations, the final lease offers from Extraction were about as good as he had seen, especially as to the 20% royalty amount, lease term, and bonus payment.
b. Commissioner Boigon opined that if the hearing would have been limited to whether the tendered offers were reasonable and complied with the Act and the Commission Rules, the parties could have had a much more focused discussion. Commissioner Boigon opined that—in his view—a lot of extraneous issues were brought into the proceeding, including issues of public health, safety, and welfare, and that such issues were inappropriate for a pooling hearing. Commissioner Boigon went on to state that the pooling process is not very clear and does not work well in a subdivision setting in which there are hundreds and hundreds of homeowners. Pooling was not originally intended to apply in this type of situation and neither the Act nor the Commission Rules were written with this in mind. Commissioner Boigon concluded, however, that Extraction had followed customary practice, had tendered the information and materials that the Rule requires, and had made offers that satisfy the Act. Regarding the issues of public health, safety, and welfare, Commissioner Boigon opined that these issues already had been considered at length and that he had never seen a more detailed, intensive, and admirable process than what the City and County of Broomfield went through in negotiating with Extraction its Operator Agreement.[1] Bringing these issues back in this proceeding, in Commissioner Boigon’s view, is a collateral attack on the permits that the Commission issued after the negotiation of the very detailed Operating Agreement between Extraction and Broomfield.
c. Commissioner Ager similarly concluded that Commission must apply the Act as it is currently written and that Extraction’s lease offers were fair when compared to other leases.
d. Commissioner Overturf expressed concern that Extraction had failed to show that the terms of the offered oil and gas leases were fair and reasonable. Commissioner Overturf argued that Extraction had not produced other nearby leases, between other operators and mineral owners[2] to allow her to determine what lease terms were fair and reasonable. Commissioner Overturf also opined that the jurisdictional issue Wildgrass and ACT raised was interesting but that the briefing by Wildgrass and ACT was inadequate for her to fully consider it. Commissioner Overturf concluded that, on the basis of what was presented, there was insufficient information regarding how a jurisdictional decision like that which Wildgrass was asking the Commission to make would affect the countless other existing pooling orders.
2. After deliberations had concluded, the Commission voted five-to-one to approve Extraction’s Application.
COMMISSION CONCLUSIONS
3. Pursuant to Section 34-60-116(6), C.R.S., a pooling order shall be entered upon terms that are just and reasonable so that each owner in the drilling and spacing unit is afforded the opportunity to receive his just and equitable share of production without unnecessary cost.
4. Commission Rule 530, in effect in 2018, provides that an applicant must demonstrate that it provided the unleased mineral owners in the drilling and spacing unit with a reasonable offer to lease and a well election providing the following information: the location and objective depth of the well, the estimated spud date or range within which the well is to be spud, and the estimated drilling and completion costs of the well. The Rule further provides that the applicant must provide the working interest owners with well elections that satisfy Rule 530.
5. Pursuant to Section 34-60-116, C.R.S., unleased mineral owners must be afforded 60 days to consider the lease offer and well elections.
6. The Commission must approve a pooling application if it complies with Section 34-60-116, C.R.S., and Rule 530. Neither Section 116 or Rule 530 require the Commission to consider in a statutory pooling proceeding project economics, the financial viability of the applicant, or concerns related to public health, safety, and welfare and environment. However, pursuant to the hearing officer’s interpretation of Judge Jackson’s order, WOGC and Act were permitted to present evidence regarding such issues as health, safety, welfare, and the environment, the economic viability of Extraction, the economic viability of Extraction’s proposed development in the unit, and whether Extraction’s proposed development will result in just and equitable shares to all owners.
7. Evidence presented at the hearing showed that Extraction properly complied with Rule 530 and Section 34-60-116, C.R.S., by having provided WOGC members and ACT’s predecessors-in-interest reasonable lease offers and well elections with all the information required by Rule 530.
ORDER
IT IS HEREBY ORDERED:
1. The Protest filed by WOGC and ACT is DENIED;
2. Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in an approximate 1,600-acre drilling and spacing unit established by Order Nos. 407-2256 and 407-2274 for the below-described lands are hereby pooled, for the development and operation of the Niobrara and Codell Formations, 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 Livingston S19-25-14C Well (API No. 05-014-20757), the Livingston S19-25-13N Well (API No. 05-014-20752), the Livingston S19-25-12N Well (API No. 05-014-20750), the Livingston S19-25-11C Well (API No. 05-014-20749), the Livingston S19-25-10N Well (API No. 05-014-20748), the Livingston S19-25-9N Well (API No. 05-014-20746), the Livingston S19-25-8C Well (API No. 05-014-20754), the Livingston S19-25-7N Well (API No. 05-014-20751), the Livingston S19-25-6N Well (API No. 05-014-20747), the Livingston S19-25-5C Well (API No. 05-014-20755), the Livingston S19-25-4N Well (API No. 05-014-20756), the Livingston S19-25-3N Well (API No. 05-014-20758), and the Livingston S19-25-2C Well (API No. 05-014-20753) (the “Wells”):
Township 1 South, Range 68 West, 6th P.M.
Section 7: S½
Section 18: All
Section 19: All
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(s) 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 owners for the owner’s proportionate share of the costs and risks of drilling and operating the Well(s) from the owner’s proportionate share of production, subject to 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(s) 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 drilling and 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 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.
7. The operator of the Wells drilled on the above-described drilling and 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 drilling and 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.
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 22nd day of March 2019, as of March 12, 2019.
OIL AND GAS CONSERVATION COMMISSION
OF
THE STATE OF COLORADO
By___________________________________
Mimi Larsen, Secretary