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

REPORT OF COMMISSION

This cause came on for hearing before the Commission on April 4, 2011, in Suite 801, The Chancery Building, 1120 Lincoln Street, Denver, Colorado, for an order to establish an approximate 640-acre exploratory wellbore spacing unit for Section 15, Township 3 North, Range 65 West, 6^th P.M., and approve of two horizontal wells within the unit, for the production to oil, gas and associated hydrocarbons from the Niobrara Formation.

FINDINGS

The Commission finds as follows:

1.     Kerr-McGee Oil & Gas Onshore LP (“Kerr-McGee” or “Applicant”), 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.     On February 19, 1992, the Commission issued Order No. 407-87 (amended August 20, 1993), which among other things, established 80-acre drilling and spacing units for the production of oil and/or gas from the Codell and Niobrara Formations underlying certain lands, including Section 15, Township 3 North, Range 65 West, 6^th P.M. (the “Application Lands”), with the permitted well locations in accordance with the provisions of Order No. 407-1.  On December 19, 1983, the Commission issued Order No. 407-1 (amended on March 29, 2000 in accordance with Order No. 407-17, entered November 18, 1985), which among other things, established 80-acre drilling and spacing units for the production of oil and/or gas and associated hydrocarbons from the Codell Formation underlying certain lands, including the Application Lands, with the drilling and spacing unit to be designated by the operator drilling the first well in the quarter section, (or the Director, if the operator fails to designate).  The permitted well shall be located in the center of either 40-acre tract within the drilling and spacing unit with a tolerance of 200 feet in any direction.  The operator shall have the option to drill an additional well on the undrilled 40-acre tract in each 80-acre drilling and spacing unit.

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.  Pursuant to Rule 318A.j., Rule 318A. supersedes all prior Commission drilling and spacing orders affecting well location and density requirements of Greater Wattenberg Area wells.  Rule 318A.d. provides that an operator may allocate production to any drilling and spacing unit with respect to a particular Cretaceous Age Formation consistent with the provisions of Rule 318A.  The Application Lands are subject to Rule 318A., for the production of oil, gas and associated hydrocarbons from the Niobrara Formation.

6.     On February 2, 2011, Kerr-McGee, by its attorneys, filed with the Commission a verified application (the “Application”) for an order to establish an approximate 640-acre exploratory wellbore spacing unit for the below-listed lands, and approve of two horizontal wells within the unit, for the production to oil, gas and associated hydrocarbons from the Niobrara Formation, with the initial perforation, lateral and terminus of the permitted well to be located no closer than 460 feet from the boundary of the unit, without exception being granted by the Director of the Commission:

Township 3 North, Range 65 West, 6^th P.M.

Kerr-McGee plans to drill the Frico #1-15HZ Well and Frico #2-15HZ Well on the Application Lands.  Kerr-McGee states that the Application is not requesting the change of any established 80-acre drilling and spacing units or the established distribution of proceeds for any existing vertical Niobrara Formation wells.  Kerr-McGee will allocate and distribute proceeds from the horizontal wells on a 640-acre basis.

7.     On March 22, 2011, Kerr-McGee, by its attorneys, filed with the Commission a written request to approve the Application based on the merits of the verified Application and the supporting exhibits as is provided for by Rule 511. Sworn written testimony and exhibits were submitted in support of the Application.

8.     Testimony and exhibits submitted in support of the Application by Nancy McDonald, Landman for Kerr-McGee, showed that Kerr-McGee is the majority leasehold owner of the Application Lands.  Additional testimony indicated that Kerr-McGee plans to drill the Frico #1-15HZ Well and Frico #2-15HZ Well on the Application Lands, and that it is not requesting the change of any established 80-acre drilling and spacing units or the established distribution of proceeds for any existing vertical Niobrara Formation wells.  Kerr-McGee will allocate and distribute proceeds from the horizontal wells on a 640-acre basis.

9.     Testimony and exhibits submitted in support of the Application by Matthew Ritter, Geologist for Kerr-McGee, showed that the Niobrara Formation underlies the entirety of the Application Lands with a total thickness ranging from about 150 to 270 feet and is a very tight marl and shale that forms a common source of supply.

10.   Testimony and exhibits submitted in support of the Application by Brian Smith, Engineer for Kerr-McGee, showed that in respect to the drainage of the Application Lands, the volumetric calculations indicate there is 38.7 BCF original gas-in-place (“OGIP”) in the Niobrara Formation underlying the Application Lands, while analog data shows about 153 MMCF total recoverable gas would be recovered from each vertical well drilled would yield a 7% recovery of the estimated OGIP in this section from the existing currently producing vertical wells.  Additional testimony indicated it is estimated that each additional horizontal well would recover an additional 1,772 MMCF gas boosting the estimated total recovery of the section to about 16% with the addition of the two proposed wells.  The Smith testimony concludes that the drilling, completion and operation of the Frico wells on the Application Lands will prevent waste, will protest correlative rights, will ultimately lead to an increased recovery of hydrocarbons underlying the Application Lands, and that it is economical and efficient.

11.   The above-referenced testimony and exhibits show that granting the Application will allow more efficient reservoir drainage, will prevent waste, will assure a greater ultimate recovery of gas, and will not violate correlative rights.

12.   Kerr-McGee agreed to be bound by oral order of the Commission. 

13.  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 establishing an approximate 640-acre exploratory wellbore spacing unit for Section 15, Township 3 North, Range 65 West, 6^th P.M., and approve of two horizontal wells within the unit, for the production to oil, gas and associated hydrocarbons from the Niobrara Formation.

ORDER

NOW, THEREFORE IT IS ORDERED, that an approximate 640-acre exploratory wellbore spacing unit is hereby established for the below-listed lands, and two horizontal wells are hereby approved within the unit, for the production of oil, gas and associated hydrocarbons from the Niobrara Formation:

Township 3 North, Range 65 West, 6^th P.M.

IT IS FURTHER ORDERED, that the initial perforation, perforated lateral and terminus of the permitted well to be located no closer than 460 feet from the boundary of the unit, without exception being granted by the Director of the Commission.

IT IS FURTHER ORDERED, that this Order shall not change of any established 80-acre drilling and spacing units or the established distribution of proceeds for any existing vertical Niobrara Formation wells.  The operator shall allocate and distribute proceeds from the horizontal well on a 320-acre basis.

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

                        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 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  15^th   day of April, 2011, as of April 4, 2011.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Robert A. Willis, Acting Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

April 15, 2011