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

REPORT OF THE COMMISSION

The Commission heard this matter on October 1, 2012, at the Routt County Justice Center, 1955 Shield Drive, Steamboat Springs, Colorado, upon application for an order to: 1) confirm an approximate 320-acre designated horizontal wellbore spacing unit established for Section 24, Township 5 North, Range 63 West, 6^th P.M.; and 2) pool all interests in the designated horizontal wellbore spacing unit, to accommodate the North Platte 24-21-24HZ Well, for the development and operation of the Niobrara Formation.

FINDINGS

The Commission finds as follows:

1.         Bonanza Creek Energy Operating Company LLC (“Bonanza” 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 25, 2008, the Commission issued Order No. 1-122 which, among other things, established two approximate 160-acre drilling and spacing units, and pooled all nonconsenting interests within each unit.  The NW¼ and SW¼ of Section 24, Township 5 North, Range 63 West, 6^th P.M. are subject to this Order for the Niobrara Formation.

5.         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, among other things, to 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. Section 24, Township 5 North, Range 63 West, 6^th P.M. is subject to Rule 318A for the Niobrara Formation.

6.         On June 21, 2012 (amended July 27, 2012), Bonanza, by its attorneys, filed with the Commission pursuant to § 34-60-116 C.R.S., a verified amended application (“Amended Application”) for an order to: 1) confirm an approximate 320-acre horizontal wellbore spacing unit designated by the operator pursuant to Rule 318A(I)(a)(4)(D) for the below-described lands (“Application Lands”), for the production of oil, gas and associated hydrocarbons from the Niobrara Formation, with the treated interval of the permitted wellbore to be located no closer than 460 feet from the boundaries of the proposed unit, without exception being granted by the Director; and 2) pool all interests in the Application Lands, to accommodate the North Platte 24-21-24HZ Well (API No. 05-123-35663) (“Well”), for the development and operation of the Niobrara Formation, 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 the Well, and to subject any non-consenting interests to the cost recovery provisions of C.R.S. § 34-60-116(7):

Township 5 North, Range 63 West, 6^th P.M.

Section 24:    W½

7.         On August 6, 2012, Bonanza requested, and Commission Staff granted a continuation to the October 1, 2012 hearing.

8.         On September 18, 2012, Bonanza, by its attorneys, filed with the Commission a written request to approve the Amended Application based on the merits of the verified Amended Application and the supporting exhibits.  Sworn written testimony and exhibits were submitted in support of the Amended Application.

9.         Land Testimony and exhibits submitted in support of the Amended Application by Jared Rush RPL, Landman for Bonanza, showed that Bonanza has oil and gas leasehold interests in the Application Lands, and all non-consenting interest owners received a proposed lease and an Authority for Expenditure (AFE) and offer to participate in the Well containing the information required by COGCC Rule 530(b).  Further testimony concluded that the AFE sent by the Applicant was a fair and reasonable estimate of the costs of the proposed drilling operation, the terms of the lease offered were reasonable and no less favorable than those prevailing in the area, and both were received at least 30 days prior to the October 1 hearing date.  The non-consenting owners have failed or refused to sign a lease or agree to join in the drilling of the well.

10.       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.

11.       Bonanza agreed to be bound by oral order of the Commission. 

12.       Based on the facts stated in the verified Amended Application, having received no protests, and based on the Hearings Officer review of the Amended Application under Rule 511., the Commission should enter an order to: 1) confirm an approximate 320-acre designated horizontal wellbore spacing unit established for Section 24, Township 5 North, Range 63 West, 6^th P.M.; and 2) pool all interests in the designated horizontal wellbore spacing unit to accommodate the North Platte 24-21-24HZ Well, for the development and operation of the Niobrara Formation.

ORDER

NOW, THEREFORE IT IS ORDERED, that an approximate 320-acre designated horizontal wellbore spacing unit established for the below-described lands, is hereby confirmed, for the production of oil, gas and associated hydrocarbons from the Niobrara Formation, with the treated interval of the permitted wellbore to be located no closer than 460 feet from the boundaries of the proposed unit, without exception being granted by the Director:

Township 5 North, Range 63 West, 6^th P.M.

Section 24:    W½

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, all interests in an approximate 320-acre designated horizontal wellbore spacing unit established for the below-described lands, are hereby pooled, for the development and operation of the Niobrara Formation, 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 the North Platte 24-21-24HZ Well:

Township 5 North, Range 63 West, 6^th P.M.

Section 24:    W½

2.         The production obtained from the horizontal wellbore 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 horizontal wellbore spacing unit; each owner of an interest in the horizontal wellbore spacing unit shall be entitled to receive its share of the production of the Well located on the horizontal wellbore spacing unit applicable to its interest in the horizontal wellbore 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 Well (including penalties as provided by §34-60-116(7)(b), C.R.S.) out of production from the horizontal wellbore 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.         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.

5.         Each nonconsenting unleased owner within the horizontal wellbore 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 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.

6.         The operator of the well drilled on the above-described horizontal wellbore 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 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 October, 2012, as of October 1, 2012.

                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                        OF THE STATE OF COLORADO

                                                                        By____________________________________         

                                                                                    Robert J. Frick, Secretary