BEFORE THE OIL AND GAS CONSERVATION COMMISSION

OF THE STATE OF COLORADO

IN THE MATTER OF ALLEGED VIOLATIONS OF ) CAUSE NO. 1V

THE RULES AND REGULATIONS OF )

THE COLORADO OIL AND GAS CONSERVATION ) ORDER NO. 1V-276

COMMISSION BY ENCANA OIL & GAS (USA) INC., )

GARFIELD COUNTY, COLORADO )

REPORT OF THE COMMISSION

This cause came on for hearing before the Colorado Oil and Gas Conservation Commission (“COGCC”) on August 16 and 17, 2004 at 10:00 a.m. and 7:30 a.m. in the Birch Room at the Ramada Inn, 124 W. 6^th Street, Glenwood Springs, Colorado, after giving Notice of Hearing as required by law, as to why the COGCC should find EnCana Oil & Gas (USA) Inc. in violation of certain of the COGCC’s rules and regulations (2 CCR-404-1, “Rules”) and why it should impose penalties for those violations pursuant to § 34-60-121, C.R.S., as amended.

FINDINGS

1. On July 29, 2003, the COGCC Director approved an Application for Permit-to-Drill (“APD”), Form 2, for the Schwartz 2-15B Well (the “Schwartz 2-15B Well”) located in the SW¼ SE¼ of Section 2, Township 7 South, Range 92 West, 6^th P.M. submitted by EnCana Oil & Gas (USA) Inc. (“EnCana”).

2. COGCC’s “Notice to All Operators Drilling Williams Fork Formation Wells in Garfield County - Surface Casing Depth and Modification of Leakoff Test Requirements” dated May 3, 2001 (“2001 Notice”) which amended a notice to operators dated September 22, 1998, specified drilling permit conditions applicable to all wells drilled in Garfield County to the Williams Fork Formation. The 2001 Notice was not attached to or referenced by EnCana’s copy of the APD for the Schwartz 2-15B Well, although it was on the COGCC’s copy. Among the permit conditions in the 2001 Notice was the requirement to report to the COGCC Northwest Colorado Area Engineer as soon as feasible within twenty-four (24) hours, all lost circulation zones and gas kicks, together with depths, mud volumes lost, mud weights before and after kicks, and procedures used to control kicks.

3. While drilling the well on January 20, 2004 EnCana lost circulation at the depth of 1543'. EnCana continued drilling without circulation to a depth of 1589', and the well began to flow requiring the well to be shut-in for one (1) hour to control the kick. The lost circulation and kick were not reported to COGCC staff. It is uncommon to encounter kicks this shallow in the Wasatch Formation.

4. While drilling the well on January 27, 2004 EnCana lost circulation at a depth of 4328'. The well began to kick shortly thereafter and was shut-in for eight (8) hours to control the kick and reestablish circulation with kill mud. The lost circulation and kick were not reported to COGCC staff.

5. On February 6, 2004, the Schwartz 2-15B Well had been drilled to total depth and was logged. EnCana had difficulty breaking circulation after logging. EnCana also lost circulation while running casing and had to shut down for seven (7) hours to build pit volume and re-establish circulation.

6. Casing was run to total depth and the well was cemented on February 9, 2004. Cement was circulated to surface with twenty-five (25) barrels excess and was witnessed by EnCana supervisors and by Schlumberger personnel.

7. On February 16, 2004 EnCana ran a cement bond log (“CBL”) on the Schwartz 2-15B Well which showed the apparent top of competent cement had fallen to approximately 4050’, far below the level required on the permit conditions and far below what was observed at the end of the cementing job. At the time, EnCana engineers interpreted the CBL as showing the top of cement at approximately 3500’; EnCana acknowledges that the CBL can be interpreted to show incomplete cement coverage above 4050’.

8. On February 16, 2004 EnCana ran a temperature survey in conjunction with the CBL. The temperature survey showed cooling beginning at the approximate depth of 4328' and upward. The survey demonstrated upward gas migration was occurring under shut-in conditions. The flow originated below the apparent top of cement and suggested the cement was not competent above that depth.

9. On February 18, 2004 EnCana ran a series of Cased Hole Dynamics Tests to measure formation pressures. The tests showed formation pressure gradients averaged 0.591 psi/ft below a depth of 4711' and averaged 0.232 psi/ft above that depth. The tests suggest the formations below 4711' are over pressured and that a geologic feature could exist that allowed the intervals at and above 4711' to be extremely under pressured.

10. EnCana performed completion operations between February 16, 2004 and April 1, 2004 that included cased hole logging, perforating, fracturing and flowing back four (4) different intervals without notifying the COGCC staff that the cement top had fallen to approximately 4050’ and without disclosing the well conditions.

11. On March 23, 2004 at 5:07 pm EnCana e-mailed a Sundry Notice, Form 4 to COGCC staff requesting approval to remedially cement the Schwartz 2-15B Well.

12. Staff reviewed the Sundry Notice on March 30, 2004 and called an EnCana engineer to inquire why the sundry proposed perforating at 3800' and circulating cement to surface on the well since there had been no previous discussion of a problem. COGCC staff asked the EnCana engineer what the bradenhead pressure was, and he responded that it was five hundred (500) pounds per square inch (psi). COGCC staff approved the Sundry Notice that same day.

13. On April 1, 2004 COGCC staff received a complaint of the recent appearance of gas bubbles in West Divide Creek where none had been observed previously. COGCC staff inspected and confirmed the existence of the gas bubbles in West Divide Creek, notified EnCana of the complaint and its validity, and scheduled sampling to begin to determine the cause.

14. On April 2, 2004, as part of the investigation to determine the cause of the seep, COGCC staff obtained samples of the bradenhead gas from two (2) wells adjacent to the West Divide Creek seep (Schwartz 2-15B Well and Brown 11-2C Well), one (1) sample of Williams Fork Formation produced gas (Twin Creek 1-15B Well), and one (1) sample of gas seeping into West Divide Creek. EnCana personnel and Cordilleran Compliance Services (“Cordilleran”) were present during this investigation.

15. On April 2, 2004 the COGCC staff and Cordilleran took water samples from West Divide Creek to determine whether benzene, toluene, ethylbenzene, xylenes (“BTEX”), or inorganic compounds were discharging from the seep. Cordilleran also sampled a pond on Pepi Langegger’s (“Langegger”) property.

16. On April 7, 2004 COGCC staff and Cordilleran obtained a sample of the bradenhead gas from one (1) additional well (Morgan 12-14B Well) adjacent to the West Divide Creek seep.

17. On April 8, 2004 the COGCC staff collected water and gas samples from two (2) stock ponds (Langegger upper and lower ponds) located in the valley of West Divide Creek.

18. Isotopic and compositional analysis indicated the bradenhead gas from two (2) of the wells (Schwartz 2-15B Well and Brown 11-2C Well) and the produced gas (Twin Creek 1-15B Well) were very similar and were from the Williams Fork Formation. The bradenhead gas from one (1) of the wells (Morgan 12-14B Well) was not similar to the Williams Fork Formation. The isotopic values and composition of the gas seeping into West Divide Creek and into the Langegger lower pond also were very similar to the produced gas from the Twin Creek 1-15B Well and the bradenhead gas from the Schwartz 2-15B Well and the Brown 11-2C Well indicating that gas seeping into the West Divide Creek and into the Langegger lower pond was Williams Fork Formation gas.

19. Analysis of a water sample taken from West Divide Creek on April 2, 2004 showed impact to the surface waters of the state by the presence of benzene at the concentration of 99.0 micrograms per liter (µg/l). The Water Quality Control Commission (WQCC) has classified West Divide Creek as ”aquatic life cold water 1, recreation 1a, water supply, agriculture” and has established 1.2 µg/l as the numeric standard for benzene for surface waters so classified. From April 13, 2004 through April 19, 2004, EnCana collected water samples from six (6) locations along West Divide Creek on a daily basis for analysis of benzene, toluene, ethylbenzene, and xylenes (BTEX). On April 19, 2004 benzene, at a concentration of 1.4 µg/l, was detected in only one (1) of the six (6) samples collected at these locations. None of the BTEX compounds were detected in any samples collected from EnCana’s six (6) surface water monitoring locations in West Divide Creek after April 19, 2004. In addition, BTEX compounds were never detected in any of the thirty-three (33) water wells, eleven (11) ponds, or four (4) springs sampled by EnCana or the COGCC staff in the vicinity of the West Divide Creek gas seep.

20. On May 19, 2004 the COGCC staff took a water sample from a spring on the eastern cut bank approximately four (4) feet above the surface of the water level of West Divide Creek in the gas seep area. Analysis of the May 19, 2004 spring sample showed impact to the ground water by the presence of benzene at the concentration of 200 µg/l. The WQCC has established a ground water standard for benzene of 5 µg/l.

21. At the direction of the COGCC staff, EnCana initiated a ground water investigation. As part of the investigation, EnCana installed nine (9) ground water monitoring wells between June 28 and July 9, 2004, and began a program of sampling and analysis of ground water from the wells.

22. On July 26, 2004, the COGCC received the results from the first samples taken from the ground water monitoring wells. Six (6) of the samples contain benzene at concentrations ranging from 65 µg/l to 240 µg/l. These levels exceed the WQCC standard of 5 µg/l for benzene in ground water. The extent of the ground water impact has not been defined.

23. After the gas from the seep in West Divide Creek was identified as Williams Fork Formation gas, EnCana promptly responded to the COGCC staff with a plan of action to address the environmental and safety concerns of nearby residents and the community. Among other things, the plan called for placing charcoal booms in West Divide Creek, implementing an air sparging system to enhance natural volatilization of benzene in the creek water, and supplying drinking water to nearby residents. In addition to implementing this plan, EnCana also voluntarily agreed to cease drilling and completion operations within a two (2) mile radius of the seep until new drilling and completion procedures can be developed to prevent any similar occurrence in the future.

24. On April 5, 2004 the Schwartz 2-15B Well was remedially cemented. Within eight (8) days of the repair, the gas seep in West Divide Creek had visibly decreased. Within twelve (12) days the benzene concentration in West Divide Creek had decreased.

25. The decrease in gas seepage corresponding to the remedial cementing of the Schwartz 2-15B Well indicates that the failure of the primary cementing of the Schwartz 2-15B Well was the most likely reason that seepage of Williams Fork Formation gas and the associated release of benzene into West Divide Creek and into the ground water of the shallow alluvium in the seep area occurred.

26. Impact to the surface and ground water by the presence of benzene and methane indicate that Williams Fork Formation gas and benzene are still present in the gas seep area and continue to be a threat to the waters of the state; however, the amount of Williams Fork Formation gas and the associated release of benzene appear to have decreased since April 5, 2004 when EnCana remedially cemented the Schwartz 2-15B Well. After April 19, 2004 benzene was not detected in surface waters of West Divide Creek at EnCana’s six (6) surface water monitoring locations. It is likely that the remedial cementing sealed the annulus of the Schwartz 2-15B Well and halted any further migration of gas from the wellbore into fractures or surrounding rock. It is also likely that levels of Williams Fork Formation gas and benzene in the ground water will continue to decrease as a result of the elimination of the gas source.

27. The COGCC staff reviewed the completion reports, bond logs and bradenhead pressures of all other wells within a two (2) mile radius of the seep area. No other well exhibited a top of cement low enough to allow pressure to build above the strength of the formation below the surface casing shoe. No other well exhibited bradenhead pressure high enough to exceed the strength of the formation below the surface casing shoe. No other well had been completed in a manner that would allow it to be the source of the seep. Neighboring operators’ wells were cemented into the surface casing or to surface and exhibited low or no bradenhead pressures.

28. EnCana is the owner and operator of all Williams Fork Formation gas wells underneath and adjacent to the West Divide Creek seep. As operator of the Schwartz 2-15B Well EnCana has accepted and continues to accept responsibility for monitoring and addressing the environmental and public health and safety effects of the release. The COGCC staff has required and continues to require testing, analyses, delineation, monitoring and reporting by EnCana to address the environmental and public health and safety effects of the release.

29. The COGCC staff hand-delivered a Notice of Alleged Violation (“NOAV”) to EnCana on April 23, 2004. The NOAV had an abatement deadline of May 8, 2004. The NOAV cited Rule 209., failure to prevent the contamination of fresh water by gas, Rule 301., failure to notify the Director when public health or safety is in jeopardy, Rule 317.i., failure to pump cement 200’ above the top of the shallowest producing horizon, Rule 324A., impacts to water quality and Rule 906.b.(3), failure to report a release to the Director.

30. The NOAV required EnCana to submit a Site Investigation and Remedial Workplan, Form 27 for COGCC staff approval, outlining monitoring and mitigation measures to be taken to ensure protection of public safety and to mitigate impacts to water resources, submit a letter detailing how the Schwartz 2-15B Well was drilled and completed, along with an explanation of what occurred that caused Williams Fork Formation gas, benzene, and other hydrocarbon compounds to seep into West Divide Creek and Williams Fork Formation gas to seep into a nearby pond on the Langegger property.

31. EnCana responded to the NOAV by letter dated May 7, 2004 with a Form 27 Workplan. The workplan was approved by the COGCC staff on May 13, 2004. EnCana submitted an amended response to the NOAV on May 18, 2004.

32. Rule 209. states that “Special precautions shall be taken in drilling and abandoning wells to guard against … the contamination of fresh water by objectionable water, oil, or gas. Before any oil or gas well is completed as a producer, all oil, gas and water strata above and below the producing horizon shall be sealed or separated in order to prevent the intermingling

of their contents.” EnCana’s failure to seal all gas and water strata above the producing horizon resulted in impacts to West Divide Creek and adjacent ground water by benzene. EnCana acknowledges that it should be found in violation of Rule 209.

33. The APD approved for the Schwartz 2-15B Well required the production casing to be cemented to surface. During the production casing cementing procedure on February 9, 2004, twenty-five (25) barrels of cement were circulated to the surface. On February 16, 2004 EnCana ran a CBL and temperature survey log prior to beginning completion operations on the well. The CBL indicated that the top of cement had fallen to approximately 4050’, well below the level observed at the end of the cementing job and the level required by the permit conditions. EnCana acknowledges that it violated the permit conditions for failure to cement to surface.

34. Rule 317.i. states that “…cement shall be pumped behind the production casing two hundred (200) feet above the top of the shallowest known producing horizon.” EnCana indicated the top of gas in the Schwartz 2-15B Well to be at approximately 4132’. EnCana’s completion report dated February 16, 2004 indicates that an onsite EnCana employee or contractor read the CBL to show top of cement at 4050’, with which the COGCC staff concurs, and which is less than 200 feet above the top of the shallowest known producing horizon. EnCana engineers interpreted the CBL to show good cement coverage up to 3500’, but nonetheless, EnCana acknowledges that it should be found in violation of Rule 317.i. for failure to pump cement 200 feet above the top of the shallowest known producing horizon.

35. On February 16, 2004 a temperature survey log was run on the Schwartz 2-15B Well in conjunction with the CBL. The logs were run seven (7) days after the well was cemented and were run under shut-in conditions. The temperature survey indicates gas entry into the annular space between the production casing and the wellbore at approximately 4300' and gas migration behind the pipe exiting into shallower formations (i.e., crossflow). Rule 327. states “The operator shall take all reasonable precautions, in addition to fully complying with Rule 317., to prevent any oil, gas or water well from blowing uncontrolled and shall take immediate steps and exercise due diligence to bring under control any such well….” EnCana acknowledges that it did not take all reasonable precautions to avoid an underground blowout, in violation of Rule 327., and that as a result there was an unanticipated and unintended release of gas from the well. EnCana acknowledges that it should be found in violation of Rule 327.

36. The release of gas from the Schwartz 2-15B Well occurred from the date of the attempted cementing of production casing (February 9, 2004) until the remedial cementing operation (April 5, 2004), a period of fifty-five (55) days. This release of gas for fifty-five (55) days resulted in waste of natural gas resources as defined by §34-60-103(11) (“Waste” as applied to gas includes the escape, blowing or releasing, directly or indirectly into the open air…) and §34-60-10313(a), C.R.S. (“Waste” in addition…means [p]hysical waste, as that term is generally understood in the oil and gas industry) and is prohibited under §34-60-107, C.R.S. EnCana acknowledges that it should be found in violation of §34-60-107, C.R.S. because the release of natural gas for fifty-five (55) days is a waste of resources, which is prohibited by statute.

37. Rule 301. states that “Immediate notice shall be given to the Director when public health or safety is in jeopardy. Notice shall also be given to the Director of any other significant downhole problem or mechanical failure within ten (10) days.” EnCana ran a CBL and a temperature survey on February 16, 2004 which indicated significant downhole problems. EnCana’s notification on March 30, 2004 during the phone call with the COGCC staff was neither immediate notification of the high bradenhead pressure nor within ten (10) days of the downhole problem or mechanical failure as required by Rule 301. COGCC staff was notified on March 23, 2004 of the lack of cement coverage and on March 30, 2004 of the bradenhead pressure. EnCana should be found in violation of Rule 301. for each omission (failure to report cement top falling 2/16/04-3/23/04, thirty-six (36) days; failure to report bradenhead pressure 2/16/04-3/30/04, forty-three (43) days).

38. Rule 324A. states that “The operator shall take precautions to prevent significant adverse environmental impacts to air, water, soil, or biological resources to the extent necessary to protect public health, safety and welfare, by using cost-effective and technically feasible measures to protect environmental quality and to prevent the unauthorized discharge of oil, gas, E&P waste, chemical substances, trash, discarded equipment or other oil field waste.” The rule also states that “No operator, in the conduct of any oil or gas operation shall perform any act or practice which shall constitute a violation of the water quality standards or classifications established by the [WQCC]… for waters of the state….” Based on the benzene levels measured in West Divide Creek on April 2, 2004 which exceed the WQCC surface water standards established for benzene, EnCana acknowledges that it should be found in violation of Rule 324A.

39. Rule 910.a. and Table 910-1 specify the allowable concentrations for soil and ground water based on standards and classifications established by the WQCC. Based on the benzene levels measured in six (6) of the nine (9) ground water monitoring wells on July 9, 2004 which exceed the WQCC ground water standards established for benzene, EnCana acknowledges that it should be found in violation of Rule 910.a.

40. On June 14, 2004, COGCC staff requested the COGCC Director make an application to the Commission for an OFV against EnCana. The matter was docketed for the August 16-17, 2004 hearing.

41. On July 14, 2004, a Notice of Conflicts Counsel was filed with the Commission which stated that Assistant Attorney General Carol J. Harmon would be the legal advisor to the COGCC staff in the OFV matter, and that Assistant Attorney General Tim Monahan would be the legal advisor for the Commission.

42. On July 14, 2004, an Entry of Appearance was filed by Erika Z. Enger, Attorney for EnCana, indicating EnCana’s intent to present testimony, arguments and exhibits in the enforcement proceeding.

43. On July 14, 2004, Don DeFord, County Attorney for the Board of County Commissioners of Garfield County (“BOCC”), filed with the Commission a Motion for Intervention under Rule 509.a.

44. On July 14, 2004, Sean McAllister, Attorney for Western Colorado Congress (“WCC”) and Grand Valley Citizens’ Alliance (“GVCA”) filed with the Commission a Motion for Intervention under Rule 509.a.

45. On July 14, 2004, an email was sent to the Commission from Robert Eicher describing the manner in which he would like to participate in the OFV hearing.

46. On July 16, 2004, a document titled “Testimony ref. West Divide Creek was filed with the Commission by Steven R. Thompson.

47. On July 21, a prehearing conference was held with the parties to discuss procedural issues, submittal of documents and scheduling.

48. On August 6, 2004, the parties exchanged exhibits and expert reports.

49. On August 9, 2004, COGCC staff and EnCana reported to the Hearing Officer that progress was being made on reaching a stipulated recommended order and they requested that the prehearing conference scheduled for August 10, 2004 be rescheduled to allow additional time for negotiations. The Hearing Officer rescheduled the prehearing conference for Thursday, August 12, 2004.

50. On August 12, 2004, the third prehearing conference was held at which time COGCC staff and EnCana presented a stipulated recommended order for review by the parties. In addition, case management was discussed for proceeding with the August 16-17, 2004 hearing.

51. At the time of the hearing, Commissioner Klish recused himself from the proceedings as a voting Commissioner.

52. After comments provided by Mr. DeFord and an objection by Ms. Enger to participation in the violation phase, the Commission voted unanimously to accept the BOCC’s Motion for Intervention to allow the County to intervene in both the violation phase and the penalty phase of the hearing.

53. After comments provided by Mr. McAllister, an objection by Ms. Enger stating a lack of showing that the intervention is in the public interest, and a concern raised by Ms. Harmon, regarding the scope of participation, the Commission voted unanimously to accept the WCC/GVCA Motion for Intervention to allow WCC/GVCA to intervene in both the violation phase and the penalty phase of the hearing.

54. After discussion on EnCana’s Motion in Limine to exclude evidence regarding WCC/GVCA’s requested relief which it believes goes beyond the scope of the hearing, the Commission determined that rather than make a ruling at the beginning of the hearing, they would address these issues as they arise during the course of the hearing.

55. After opening statements were presented by the parties, COGCC staff witnesses Jaime Adkins, COGCC Northwest Engineer and Debbie Baldwin, COGCC Environmental Supervisor presented the stipulated recommended order, including supporting exhibits, to the Commission.

56. COGCC staff witness Scott Klarich, Colorado Department of Public Health and Environment Water Quality Control Division (“WQCD”) Enforcement Team Leader testified as to the Memoranda of Agreements between the WQCD, WQCC and the COGCC. He indicated his agency’s agreement with the actions taken in response to the gas seep by COGCC staff.

57. COGCC staff witness Greg Nagle, WQCD Ground Water Quality Coordinator testified as to the standards established by the WQCC and his agency’s agreement with the COGCC staff’s recommended order.

58. COGCC staff witness Mark Beeunas, a gas isotope expert, testified regarding interpretation of stable isotopes and compositional analysis collected from water wells and gas wells which corroborated COGCC staff’s interpretation of the source of the gas seeping into West Divide Creek.

59. COGCC staff witness Richard Moore, consulting geologist, testified that he had no changes to the data and conclusions presented in his expert report after his review of the other expert reports provided. He concluded that there was a strong likelihood that the West Divide Creek gas seep was caused by improper completion procedures at the Schwartz Well.

60. Ms. Enger indicated EnCana’s concurrence with the COGCC’s staff presentation. Mr. DeFord indicated the BOCC had no objections to the Commission accepting Finding Nos. 1 through 39 of the stipulated recommended order, although the BOCC objected to the number of days EnCana was found in violation of Rules 324A. and 207. Mr. McAllister presented a written objection to the stipulated recommended order.

61. After discussion, Ms. Harmon proposed that Finding No. 38 be amended to include both Rule 324A.a. and Rule 324A.b. This amendment was agreed to by the parties and the Commission.

62. Commissioner Ashby asked Mr. Adkins if he had reviewed the CBL run after the remedial cementing was performed. Mr. Adkins testified that the CBL showed a good cement job and that the bradenhead test showed no pressure. All exhibits presented, including the second CBL, were admitted.

63. After comments from BOCC and WCC/GVCA on the number of days of violation of Rules 324A. and 910.a., the Commission deliberated and voted unanimously to accept Finding Nos. 1 through 39 and previous Finding No. 41 (now Finding No. 64), including the revision to Finding No. 38.

64. EnCana should be found in violation of Rule 209. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of Rule 301. from February 16, 2004 until March 30, 2004 for forty-three (43) days of violation (failure to report bradenhead pressure) and from February 16, 2004 until March 23, 2004 for thirty-six (36) days of violation (failure to report fall of cement top). EnCana should be found in violation of Rule 317.i. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of Rule 324A. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of Rule 327. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of Rule 910.a. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of the permit conditions from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation. EnCana should be found in violation of §34-60-107, C.R.S. from February 9, 2004 until April 5, 2004 for fifty-five (55) days of violation.

65. Having determined that violations existed, the Commission moved into the penalty phase of the hearing by having testimony presented first by WCC/GVCA witness Herman Lucero to accommodate his schedule. Mr. Lucero testified about the sampling process he utilized in the West Divide Creek area, the results from his water sampling and his observations in the area.

66. Mr. Adkins described the penalty and remedial action proposed in the stipulated recommended order, previous Finding Nos. 40, and 42 through 45 (now Finding Nos. 67 through 71 below).

67. Rule 523. specifies a base fine of One Thousand dollars ($1000) per day for violations of Rules 209., 301., 317.i., 324A., 327., and 910. No base fine is listed in Rule 523.a.(4) for violation of the Permit Conditions or §34-60-107, C.R.S. Fines for these two (2) violations (i.e., Permit Conditions and §34-60-107, C.R.S.) are limited to One Thousand dollars ($1,000) per day in accordance with Rule 523.a.(1).

68. Rule 523.a.(1) specifies that “…no fine for any single violation shall exceed One Thousand dollars ($1,000) per day.” EnCana does not admit liability for causing significant waste or significant adverse impact on public health, safety or welfare. However, it agrees to pay the following fines as adjusted pursuant to Finding No. 69 in order to resolve this matter without the necessity of an extended contested hearing:

Item Violated Number of Violation/Days Total Fine/Rule

Rule 209. 55 $55,000.00

Rule 301. Bradenhead 43 $43,000.00

Rule 301. Cement 36 $36,000.00

Rule 317.i. 55 $55,000.00

Rule 324A. 55 $55,000.00

Rule 327. 55 $55,000.00

Rule 910.a. 55 $55,000.00

Permit Conditions 55 $55,000.00

§34-60-107, C.R.S. 55 $55,000.00

Total Maximum Allowable Fine Amount $464,000.00

69. The following mitigating factors were considered in reducing the maximum allowable fine amount by ten percent (10%) per mitigating factor, for a total of twenty percent (20%) fine reduction: Rule 523.d.(2), the violator demonstrated prompt, effective and prudent response to the violation, including assistance to any impacted parties, and Rule 523.d.(3). the violator cooperated with the Commission with respect to the violation. These mitigating factors were applied to actions taken by EnCana once the gas seep was discovered.

70. A monetary penalty of Three Hundred Seventy-one Thousand, Two Hundred dollars ($371,200.00) should be assessed against EnCana, in accordance with Rule 523.a. and Rule 523.d., for the above-described violations of the Rules, Permit Conditions and the Oil and Gas Conservation Act. The fine should be suspended until the Commission’s next regularly scheduled hearing on September 20, 2004 to give the parties an opportunity to propose a public project in lieu of the fine. The Commission will hear and consider the proposal of the public project and may approve, modify, or condition the proposal or reinstate the fine.

71. EnCana should proceed under the Site Investigation and Remediation Workplan, Form 27 approved by COGCC staff on May 13, 2004. EnCana should submit to the COGCC staff for approval a Site Investigation and Remediation Workplan, Form 27, for the investigation, remediation, and monitoring of ground water to meet the required allowable concentrations. The COGCC staff should evaluate EnCana’s compliance with both Form 27 Workplans submitted. In addition, the COGCC should direct the staff to maintain the moratorium on drilling and completion operations within a two (2) mile radius of the seep at West Divide Creek until the COGCC staff evaluates the effectiveness of the Notice to All Operators Drilling Wells to the Mesaverde Group or Deeper in the Mamm Creek Field, Garfield County drafted and implemented July 23, 2004 (“2004 Notice”) and determines when the moratorium can be lifted. The 2004 Notice contains the following requirements that require operators in the Mamm Creek Field to obtain COGCC staff approval prior to completion of a well and will prevent the unusual set of circumstances that caused the West Divide Creek seep from happening again:

1. A drilling prognosis showing projected top of gas and formation tops shall be required with the Application for Permit-to-Drill, Form 2. This information shall be provided in the form of a wellbore diagram showing the top of gas, formation tops, and top of cement for each stage.

2. Upon completion of the primary cementing operation, the annular fluid level around the production casing shall be monitored for a minimum of four (4) hours prior to the installation of the casing slips.

3. The bradenhead pressure shall be measured at intervals of six (6), twelve (12), twenty-four (24) and seventy-two (72) hours after the production casing is cemented. If bradenhead pressures greater than one hundred fifty (150) psig are observed, such pressures shall be immediately reported to the COGCC and a remediation procedure shall be prepared for COGCC approval.

4. Following the cementing operation, a combination temperature/cement bond log shall be run within twelve (12) to forty-eight (48) hours to locate the actual cement top. If the cement top does not conform to this notice (500 feet above the top of gas), the COGCC shall be immediately notified and a remediation procedure shall be prepared for COGCC approval.

5. The bradenhead pressure record, cement bond log, temperature survey log, and revised formation tops shall be provided to the COGCC Northwest Area Engineer within seven (7) days of cementing the production casing.

6. The COGCC shall review the casing and cementing operations and approval shall be obtained by the operator from the COGCC prior to commencement of completion operations.

7. The bradenhead pressure shall be monitored and recorded when performing fracturing operations.

72. EnCana witness Kimberley Kaal, Senior Geologist for Cordilleran Compliance Services, testified as to the environmental sampling and monitoring conducted at the West Divide Creek gas seep area to date and the plan for future studies.

73. EnCana witness Karmen King, Program Administrator, Natural Resource Management Institute, Colorado Mountain College, testified on the study she conducted on aquatic life in the West Divide Creek after the discovery of the gas seep. She testified about the scope, purpose, and four (4) sampling events (between May 10 and July 21, 2004) of the study. Ms. King testified about BTEX and methane measurements of surface water samples and seep samples. She also testified that one (1) of the four (4) data sets of benthic macroinvertebrates had been analyzed and showed no impact attributable to the seep. Ms. King further testified that a fifth sampling event was scheduled for August, 2004 and that three (3) data sets of benthic macroinvertebrates were still to be analyzed.

74. BOCC witness Doug Dennison, Garfield County Oil & Gas Auditor testified about the photographs he had taken at the West Divide Creek gas seep and its impact on public health, safety and the environment of Garfield County citizens, and on the number of Notices of Alleged Violation issued by the COGCC staff to EnCana in the past year.

75. BOCC witness Jeffery Thyne, Research Professor in the Department of Geology and Geological Engineering at the Colorado School of Mines testified about his independent review of the data available at the COGCC office and his belief that the gas seep was caused by incomplete cementation during completion of the Schwartz well, that the longer term impacts of contamination have not been evaluated, nor the extent of the contamination been determined, and that Garfield County should be involved in the review of additional data gathered.

76. WCC/GVCA witness Pepe Langegger testified about his personal experience with the gas seep on his property and potential impacts affecting his elk herd population, and his belief that there is not enough oversight of drilling.

77. WCC/GVCA witness Nancy Jacobsen testified about living in proximity to four (4) gas wells, the need to hold EnCana accountable for the gas seep, and her belief that EnCana should be required to comply with the relief requested in the WCC/GVCA intervention.

78. WCC/GVCA witness Bill Griffin, spokesperson for the neighborhood association, testified that he wants the moratorium on drilling and completion to be extended until a complete study can be performed. He testified that it may be necessary to curtail drilling completely throughout the area, and that COGCC staff should inspect all EnCana wells prior to completion.

79. WCC/GVCA witness Matt Sura, Director of Western Colorado Congress testified about his experience working with oil and gas issues over the past two (2) years, his belief that additional monitoring and mitigation of the gas seep at West Divide Creek are needed prior to lifting the moratorium on drilling, and his preference for a joint effort with EnCana to determine potential public projects in lieu of a fine.

80. A sworn statement was made pursuant to Rule 510. by Hermann Stauffer who testified to express his concern about preserving the land and water.

81. A sworn statement was made pursuant to Rule 510. by Ken Wonstolen, General Counsel for the Colorado Oil and Gas Association who testified that he believes Rule 209. and Rule 324A. address the same issue. He testified that he had concern over the penalty calculations but would not bring it up because of the stipulated recommended order.

82. A sworn statement was made pursuant to Rule 510. by Sher Long, Community Relations Consultant for EnCana who testified that she lives on the Deitrich property and feels comfortable using the water from the well and living in the area near the gas seep.

83. A sworn statement was made pursuant to Rule 510. by Matt Sura, Director of Western Colorado Congress to describe why there were so few Rule 510. statements made at the hearing, indicating that citizens for the most part could only attend one day of the hearing and the time for making Rule 510. statements was not determined well in advance of the hearing.

84. Lisa Bracken and her father Robert Eicher had wished to make a sworn statement pursuant to Rule 510. but had to leave early. They asked Ms. Harmon to relay to the Commission their approval with the process occurring over the two (2) days of hearing, and their concurrence with the direction the hearing seemed to be headed.

85. EnCana response witness Anthony Gorody, Consulting Geologist, testified on his analysis of gas samples gathered from the West Divide Creek seep, from surface water, from the Schwartz Wells and from other wells in the vicinity of the seep. He testified about methods for identifying the source of gas seeping into West Divide Creek, the localized impact of the seep on aquifers, the influence of fractures in the a1rea on the extent and direction of the seep, and EnCana’s plan to conduct a nine (9) square mile study to detect methane at the surface, including the corridor between the Schwartz 2-15B Well and West Divide Creek.

86. EnCana response witness Eric Marsh, Vice President-Southern Rockies, testified about his company’s corporate philosophy, new procedures put in place regarding cementing practices and bradenhead testing, and the plan to provide more oversight from field personnel, the amount of money EnCana has spent to date on investigating, mitigating, and monitoring the seep, and EnCana’s commitment to continue following the program required by the COGCC staff until it is complete.

ORDER

NOW, THEREFORE, IT IS ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found in violation of the Permit Conditions requiring the cementing of production casing to the surface on the Schwartz 2-15B Well located in the SW¼ SE¼ of Section 2, Township 7 South, Range 92 West, 6^th P.M.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found in violation of Rule 209. failure to prevent the contamination of fresh water by gas, Rule 301., failure to notify the Director when public health or safety is in jeopardy and failure to notify the Director of significant downhole problems or mechanical failure, Rule 317.i., failure to pump cement 200’ above the top of the shallowest producing horizon, Rule 324A., impacts to water quality, Rule 327., loss of well control and allowing an underground blowout of gas, and Rule 910.a., failure to meet ground water standards in Table 910-1.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found in violation of §34-60-107, C.R.S., waste due to the loss of gas resources.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be found to be responsible for the release of Williams Fork Formation gas, benzene, and other hydrocarbon compounds from the Schwartz 2-15B Well resulting in the subsequent impacts to the surface and ground waters of the state and for monitoring and addressing the environmental and public health and safety effects of the release.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall be assessed a fine of Three Hundred Seventy One Thousand Two Hundred dollars ($371,200.00) which fine shall be suspended until the Commission’s next regularly scheduled hearing on September 20, 2004 to give the parties an opportunity to propose a public project in lieu of the fine. The Commission will hear and consider the proposal of the public project and may approve, modify, or condition the proposal or reinstate the fine.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall proceed under the Site Investigation and Remediation Workplan, Form 27 approved by COGCC staff on May 13, 2004. In addition, Encana shall proceed under the Notice to All Operators Drilling Wells to the Mesaverde Group or Deeper in the Mamm Creek Field, Garfield County implemented and effective July 23, 2004.

IT IS FURTHER ORDERED, that EnCana Oil & Gas (USA) Inc. shall submit to the COGCC staff for approval a Site Investigation and Remediation Workplan, Form 27, to delineate the extent of contamination to ground water and to continue the investigation, remediation, and monitoring of ground water to meet the required allowable concentrations.

IT IS FURTHER ORDERED, that the COGCC staff shall maintain the moratorium on drilling and completion operations within a two (2) mile radius of the seep at West Divide Creek until the COGCC staff evaluates (1) the effectiveness of the Notice to All Operators Drilling Wells to the Mesaverde Group or Deeper in the Mamm Creek Field, Garfield County, effective July 23, 2004 (“notice”), and (2) EnCana’s compliance with any applicable Site Investigation and Remediation Workplan, Form 27, as approved or amended by the COGCC staff (“investigation and remediation requirements”), related to the gas seep in the area of West Divide Creek. After the COGCC staff evaluates the effectiveness of the notice and EnCana’s compliance with investigation and remediation requirements, it shall make any modifications it deems necessary and lift the moratorium when, in the COGCC staff’s determination, the appropriate safety precautions are set forth in the notice and EnCana has complied with all investigation and remediation requirements related to the gas seep in the area of West Divide Creek.

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 September, 2004, as of August 16, 2004.

OIL AND GAS CONSERVATION COMMISSION

By

Patricia C. Beaver, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado 80203

September 16, 2004