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

REPORT OF THE COMMISSION

The Commission heard this matter on August 20, 2012, at the offices of the Colorado Oil and Gas Conservation Commission, 1120 Lincoln Street, Denver, Colorado, upon application for an order to: 1) affirm Order No. 407-562, specifically for eight of the ten designated wellbore spacing units; and 2) pooling all interests in eight designated wellbore spacing units established for Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M., to accommodate eight drilled Highpointe Wells, for the development and operation of the Codell and Niobrara Formations.

FINDINGS

The Commission finds as follows:

1.         PDC Energy, Inc. (“PDC” 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 December 19, 1983, the Commission issued Order No. 407-1 (amended March 29, 2000) which, among other things, established 80-acre drilling and spacing units for the production of oil, gas and associated hydrocarbons from the Codell Formation, with the unit to be designated by the operator drilling the first well in the quarter section.  The permitted well shall be located in the center of either 40-acre tract within the 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. Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M. are subject to this Order for the Codell Formation.

5.         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, gas and associated hydrocarbons from the Codell and Niobrara Formations, with the permitted well locations in accordance with the provisions of Order No. 407-1. Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M. are subject to this Order for the Codell and Niobrara Formations.

6.         On April 27, 1988, 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 Cretaceous Age Formations from the base of the Dakota Formation to the surface. Rule 318A supersedes all prior Commission drilling and spacing orders affecting well location and density requirements of Greater Wattenberg Area wells.  On December 5, 2005, Rule 318A was amended to, among other things, allow interior infill and boundary wells to be drilled and wellbore spacing units to be established.  On August 8, 2011, Rule 318A was again amended, among other things, to address drilling of horizontal wells. Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M. are subject to Rule 318A for the Codell and Niobrara Formations.

7.         On March 5, 2012, the Commission entered Order No. 407-562 which, among other things, pooled all interests in each of ten designated wellbore spacing units, for the development and operation of the Codell and Niobrara Formations.  Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M. are subject to Order No. 407-562 for the Codell and Niobrara Formations.

8.         Subsequent to the March 5, 2012 hearing, PDC, learned of additional mineral interest owners within eight of the ten designated wellbore spacing units subject to Order No. 407-562, to whom notice of the Pooling Application, as well as an AFE and offer to lease and/or participate, had not been provided.  Applicant has sent an appropriate offer to lease or participate, and an AFE containing the required information under Rule 530.a., to the previously unnoticed interested parties.

9.     On June 21, 2012, PDC, by its attorneys, filed with the Commission pursuant to § 34-60-116 C.R.S., a verified application (“Application”) for an order to: 1) affirm Order No. 407-562, specifically for eight of the ten designated wellbore spacing units; and 2) pooling all interests in eight designated wellbore spacing units established for the below-described lands (“Application Lands”), to accommodate eight drilled Highpointe Wells (“Wells”), for the development and operation of the Codell and Niobrara Formations, effective as of the earlier of the date of the Application, or the date that any of the costs specified in C.R.S. § 34-60-116(7)(b)(II) were first incurred for the drilling of each respective well, and to subject any nonconsenting interests, and previously unnoticed interest owners, to the cost recovery provisions of C.R.S. § 34-60-116(7):

Township 5 North, Range 67 West, 6^th P.M.

Section 10:      SW¼                           (Highpointe 10B – API No. 05-123-28033)

Section 10:      NE¼                            (Highpointe 10C – API No. 05-123-26975)

Section 10:      S½ NW¼, N½ SW¼ (Highpointe 10KD – API No. 05-123-28029)

Section 10:      S½ SW¼

Section 15:      N½ NW¼                    (Highpointe 10LD – API No. 05-123-28024)

Section 10:      W½ NE¼, E½ NW¼             

(Highpointe 10ND – API No. 05-123-26976)

Section    10:        SE¼ NW¼, SW¼ NE¼, NE¼ SW¼, NW¼ SE¼                                                                                                                     (Highpointe 10OD – API No. 05-123-28125)

Section 10:      E½ SW¼, W½ SE¼ (Highpointe 10PD – API No. 05-123-28025)

Section 10:      S½ NE¼, N½ SE¼    (Hightpointe 10SD – API No. 05-123-26977)

10.       On August 7, 2012, PDC, 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.  Sworn written testimony and exhibits were submitted in support of the Application.

11.       Land testimony and exhibits submitted in support of the Application by John Krattenmaker, Landman for PDC, showed that all nonconsenting interest owners were notified of the Application and received an Authority for Expenditure (“AFE”) and an offer to participate in the Wells.  Further testimony concluded that the AFE sent by the Applicant to the interest owners was a fair and reasonable estimate of the costs of the proposed drilling and operation and was received at least 30 days prior to the August 20, 2012 hearing date.

12.       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 hydrocarbons, and will not violate correlative rights.

13.       PDC agreed to be bound by oral order of the Commission. 

14.       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: 1) affirm Order No. 407-562, specifically for eight of the ten designated wellbore spacing units; and 2) pooling all interests in eight designated wellbore spacing units established for Sections 10 and 15, Township 5 North, Range 67 West, 6^th P.M., to accommodate eight drilled Highpointe Wells, for the development and operation of the Codell and Niobrara Formations.

ORDER

NOW, THEREFORE IT IS ORDERED, that:

1.            Order 407-562 is hereby affirmed. Previously unnoticed owners are subject to the terms of the Order No. 407-562 in the same manner as those owners already subject to Order No. 407-562.

2.             Pursuant to the provisions of §34-60-116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in eight designated wellbore spacing units established for the below-described lands, are hereby pooled, for the development and operation of the Codell and Niobrara Formations, effective as of the earlier of the date of the Application, or the date that the costs specified in C.R.S. §34-60-116(7)(b)(II) are first incurred for the drilling of each respective Well:

Township 5 North, Range 67 West, 6^th P.M.

Section 10:      SW¼                           (Highpointe 10B – API No. 05-123-28033)

Section 10:      NE¼                            (Highpointe 10C – API No. 05-123-26975)

Section 10:      S½ NW¼, N½ SW¼ (Highpointe 10KD – API No. 05-123-28029)

Section 10:      S½ SW¼

Section 15:      N½ NW¼                    (Highpointe 10LD – API No. 05-123-28024)

Section 10:      W½ NE¼, E½ NW¼             

(Highpointe 10ND – API No. 05-123-26976)

Section 10:      SE¼ NW¼, SW¼ NE¼, NE¼ SW¼, NW¼ SE¼                                                                                                                     (Highpointe 10OD – API No. 05-123-28125)

Section 10:      E½ SW¼, W½ SE¼ (Highpointe 10PD – API No. 05-123-28025)

Section 10:      S½ NE¼, N½ SE¼    (Hightpointe 10SD – API No. 05-123-26977)

3.         The production obtained from the wellbore spacing units 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 wellbore spacing units; each owner of an interest in the wellbore spacing units shall be entitled to receive its share of the production of the Well located on the wellbore spacing units applicable to its interest in the wellbore spacing units.

4.         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 Well (including penalties as provided by §34-60-116(7)(b), C.R.S.) out of production from the wellbore spacing units representing the cost-bearing interests of the nonconsenting working interest owners as provided by §34-60-116(7)(a), C.R.S.

5.         Any unleased owners are hereby deemed to have elected not to participate and shall therefore be deemed to be nonconsenting as to the Well and be subject to the penalties as provided for by §34-60-116 (7), C.R.S.

6.         Each nonconsenting unleased owner within the wellbore spacing units 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 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 wellbore spacing units 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.         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 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, 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                         day of August, 2012, as of August 20, 2012.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________       

                                                                                    Robert J. Frick, Secretary

Dated: August 30, 2012