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

REPORT OF THE COMMISSION

                        This cause came on for hearing before the Commission at 9:00 a.m. on October 21, 2010, West Garfield Campus, Colorado Mountain College, 3695 Airport Road, Rifle, Colorado, for an order to establish an 80-acre drilling and spacing unit consisting of the E½ SW¼ of Section 31, Township 7 North, Range 63 West, 6th P.M., to accommodate the Heinze 31-23 Well located in the NE¼ SW¼ (API # 05-123-29758), and the Heinze 31-24 Well located in the SE¼ SW¼ (API # 05-123-29759), for the production of oil and gas and associated hydrocarbons from the Codell and Niobrara Formations, and to pool all nonconsenting interests in said unit, for the development and operation of the Codell and Niobrara Formations.

FINDINGS

                        The Commission finds as follows:

                        1.         Great Western Oil and Gas Company, LLC, (“Great Western”), 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.         Rule 318.a. of the Rules and Regulations of the Oil and Gas Conservation Commission requires that wells drilled in excess of 2,500 feet in depth be located not less than 600 feet from any lease line, and located not less than 1,200 feet from any other producible or drilling oil or gas well when drilling to the same common source of supply. The below-listed lands (“Application Lands”) are subject to this Rule for the Codell and Niobrara Formations:

Township 7 North, Range 63 West, 6th P.M.

Section 31:      E½ SW¼

Weld County, Colorado

5.         On April 27, 1998, the Commission adopted Rule 318A, which, among other things, allowed certain drilling locations to be utilized to drill or twin a well, deepen a well or recomplete a well and to commingle any or all of the Cretaceous Age Formations from the base of the Dakota Formation to the surface.  The Application Lands are subject to this Rule for the Codell and Niobrara Formations.

6.         On September 1, 2010, Great Western, by its attorney, filed with the Commission a verified application to establish an 80-acre drilling and spacing unit consisting of the Application Lands, to accommodate the Heinze 31-23 Well (API # 05-123-29758) located in the NE¼ SW¼, and the Heinze 31-24 Well (API # 05-123-29759) located in the SE¼ SW¼, and to pool all nonconsenting interests in said unit, for the development and operation of the Codell and Niobrara Formations:

                        7.         On October 8, 2010, Great Western, by its attorney, 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.         Testimony and exhibits submitted in support of the application by Royce Allen, Land Manager for Great Western, showed that Great Western owns an oil and gas leasehold interest in the Application Lands.

            9.         The Allen testimony states that Great Western has obtained permits for and desires to drill the Heinze 31-23 Well in the NE¼ SW¼ and the Heinze 31-24 Well in the SE¼ SW¼ of Section 31, Township 7 North, Range 63 West, 6^th P.M., to the Codell and/or Niobrara Formations.  In its Applications for Permits-to-Drill for these wells, Great Western has designated the E½ SW¼ of the Application Lands as the drilling and spacing unit for the Codell and Niobrara Formations.

            10.       The Allen testimony states that Great Western offered a lease to and attempted to negotiate a proposed lease with the Missouri Improvement Company covering its unleased oil and gas rights in the Application Lands and states that the terms of the lease offered are reasonable and no less favorable than those prevailing in the area at this time

11.       The Allen testimony states that Great Western has also sent an Authorization for Expenditure to the Missouri Improvement Company, giving it the opportunity to participate in the drilling of the proposed wells.

12.       The Allen testimony further states that the Missouri Improvement Company has failed to agree to lease its interests in the Application Lands or to bear its share of the costs of drilling and completing the proposed wells.

13.       The Allen testimony further states that the establishment of the requested drilling and spacing unit and the pooling of all non-consenting interest owners in the Application Lands will prevent or assist in preventing waste by assuring that all potential locations may be drilled without prejudice to the rights of other leasehold or mineral owners, and ensuring that the pool as a whole may be efficiently and economically develop.

14.       The Allen testimony further states that Mr. Allen believes the establishment of the requested unit will protect the correlative rights of both leasehold and mineral owners.

15.       The Commission takes administrative notice that previous testimony before the Commission has established that an 80-acre drilling and spacing unit is not less than the maximum area than can be efficiently and economically drained by wells producing oil, gas and associated hydrocarbons from the Codell and Niobrara Formations in the general area of the Application Lands, making it reasonable to apply the same spacing considerations to the Application Lands.

16.       Colorado Revised Statute §34-60-116(4) authorizes the Commission to establish drilling units in order to prevent or assist in preventing waste, avoid the drilling of unnecessary wells, and/or protect correlative rights.

17.       The Hearing Officer finds that the establishment of the requested drilling and spacing unit will prevent or assist in preventing waste by assuring that all potential locations may be drilled without prejudice to the rights of other leasehold or mineral owners, and ensuring that the pool as a whole may be efficiently and economically developed.

18.       The Hearing Officer further finds that the establishment of such unit will protect the correlative rights of both leasehold and mineral owners.

19.       Great Western agreed to be bound by oral order of the Commission. 

20.       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 establish an 80-acre drilling and spacing unit consisting of the E½ SW¼ of Section 31, Township 7 North, Range 63 West, 6^th P.M., to accommodate the Heinze 31-23 Well (API # 05-123-29758) located in the NE¼ SW¼, and the Heinze 31-24 Well (API # 05-123-29759) located in the SE¼ SW¼, for the production of oil and gas and associated hydrocarbons from the Codell and Niobrara Formations, and to pool all nonconsenting interests in said unit, for the development and operation of the Codell and Niobrara Formations.

ORDER

                        NOW, THEREFORE IT IS ORDERED, that an approximate 80-acre drilling and spacing unit, is hereby established, consisting of the below-listed lands, to accommodate the Heinze 31-23 Well located in the NE¼ SW¼ (API # 05-123-29758), and the Heinze 31-24 Well located in the SE¼ SW¼ (API # 05-123-29759), for the production of oil and gas and associated hydrocarbons from the Codell and Niobrara Formations:

Township 7 North, Range 63 West, 6th P.M.

Section 31:      E½ SW¼

Weld County, Colorado

                        IT IS FURTHER ORDERED, that,

                        1.         Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, the nonconsenting owners in the above-established 80-acre drilling and spacing unit, are hereby pooled for the development and operation of the Codell and Niobrara  Formations.

                        2.         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.

                        3.         The nonconsenting leased (working interest) owners must reimburse the consenting working interest owners for their share of the costs and risks of drilling and operating the wells (including penalties as provided by §34-60-116 (7)(b), C.R.S.) out of production from the drilling and 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.         The unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the wells and be subject to the penalties as provided for by §34-60-116 (7), C.R.S.

                        5.         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. as amended.  After recovery of such costs, each unleased nonconsenting mineral owner shall then own its proportionate 8/8ths share of the wells, surface facilities and production, and then be liable for its proportionate share of further costs incurred in connection with the wells as if it had originally agreed to the drilling.

                        6.         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.

                        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.

IT IS FURTHER ORDERED, that the provisions contained in the above order, shall become effective forthwith.

                        IT IS FURTHER ORDERED, that the Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.

                        IT IS FURTHER ORDERED, that under the State Administrative Procedure Act the Commission considers this order to be final agency action for purposes of judicial review within thirty (30) days after the date this order is mailed by the Commission.

                        IT IS FURTHER ORDERED, that an application for reconsideration by the Commission of this order is not required prior to the filing for judicial review.

                        ENTERED this__________ day of November 2010, as of October 21, 2010.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Carol Harmon, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

November 22, 2010