EVOLUTION OF SPACING AND POOLING IN COLORADO Denver

EVOLUTION OF SPACING AND POOLING IN COLORADO Denver Association of Division Order Analysts July 21, 2014 Denver, Colorado Steve Sullivan Welborn Sullivan Meck & Tooley, P. C. 1125 17 th Street, Suite 2200 Denver, CO 80202 (303) 830 -2500 ssullivan@wsmtlaw. com www. wsmtlaw. com

Development of oil and gas fields prior to state regulation

SPACING “The order establishing drilling units shall permit only one well to be drilled and produced from the common source of supply on a drilling unit, and shall specify the location of the permitted well thereon. ” C. R. S. § 34 -60 -116(3). 3

SPACING “No drilling unit shall be smaller than the maximum area that can be efficiently and economically drained by one well. ” CRS § 34 -60 -116(2). 4

SPACING Ø Only one well could be drilled in each spacing unit. Ø First person to apply receives permit to drill. Ø Setbacks established to protect surface rights and prevent excessive draining of adjacent spacing units. Ø Well would produce oil and gas from other properties in spacing unit. 5

SPACING Ø Some people could not develop their oil and gas when they wanted to or without involving other owners in the spacing unit. Ø For a variety of operational reasons (geologic uncertainty, the desire to hold acreage, need to ensure a viable surface location, etc. ) oil and gas operators would sometimes seek the largest drilling unit they could justify. 6

SPACING COGCC Order No. 407 -1 (1983) Codell formation One well per 80 acres. Option to drill second well Additional wells could be drilled to other formations. Niobrara and Codell formations Weld, Adams and other counties Section 1: W 2 NW Optional Well Vertical wells - Production from both wells allocated to mineral owners in W 2 NW (80 acres) 7

SPACING Williams Fork formation Garfield County Ø U. S. Department of Energy Multi-well Experiment Ø COGCC Order No. 139 -28 (1995) 1 well per 80 acres Ø COGCC Order No. 139 -31 (1997) 1 well per 40 acres Ø COGCC Order No. 139 -32 (1998) 1 well per 20 acres Ø COGCC Order No. 139 - 38 (2003) 1 well per 10 acres

SPACING Williams Fork formation Garfield County

FORCE POOLING MULTI-WELL FORCE POOLING Ø Refusal to participate in first well prevented participating as consenting owner in any future wells. Ø No information on when and where future wells would be drilled. Ø Statute requires that owner be given “the opportunity to recover. . . his just and equitable share. ” C. R. S. § 34 -60116(6). Ø May prevent owner from developing his or her own property.

FORCE POOLING MULTI-WELL FORCE POOLING Ø Potential for not participating in any future wells. Ø Free look vs. changed circumstances. Ø Relative risk vs. 200% statutory penalty. Ø Royalty owners treated differently than working interest owners. Ø Industry standard Ø May prevent other owners from proposing a well in the spacing unit. 11

PRODUCING FORMATIONS IN THE GREATER WATTENBERG AREA “Cretaceous formations” are those that formed during the Cretaceous Geologic period which occurred between 145 million years ago and 66 million years ago. It includes all of the formations listed in the stratigraphic column on the left of this slide. Greater Wattenberg Area includes all lands in Townships 2 South through 7 North, and Ranges 61 West through 69 West.

SPACING Greater Wattenberg Area Weld, Adams and other counties Section 1: All Rule 318 A (1998) All Cretaceous fms. 5 wells per quarter section (160 acres) Utilizes original “drilling windows” (surface locations) for existing wells (vertical). Allocation of production varies based upon existing spacing orders, private agreements and location of wells

Greater Wattenberg Area Weld, Adams and other counties SPACING Rule 318 A (2006) All Cretaceous fms. 8 completions per quarter section in “J” Codell and Niobrara. Same surface locations. New spacing rules for boundary and infill wells (directional wells). Production allocated to every quarter-quarter section (40 acres) within 460 feet of wellbore or existing spacing unit (80, 160 or 320 acres) Section 2: E 2 NE Section 1: W 2 NW

Greater Wattenberg Area Weld, Adams and other counties SPACING Rule 318 A(I) (2011) All Cretaceous fms. No limit to number of wells. Horizontal wells Same surface locations Well bore spacing Production from well allocated to every quarter-quarter section (40 acres) within 460 feet of perforated section of wellbore Section 2: E 2 NE Section 1: W 2 NW

Greater Wattenberg Area Weld, Adams and other counties SPACING Section 2: E 2 Rule 318 A(I) (2011) all Cretaceous fms. Horizontal wells along section lines Well bore spacing Production from well allocated to every quarter-quarter section (40 acres) within 460 feet of perforated section of wellbore. Section 1: W 2

PRODUCING FORMATIONS IN PORTIONS OF THE DJ BASIN Ø Niobrara formation contains up to four producing zones, often with permeability barriers between them. Ø Some natural fracturing exists, creating extensive drainage in a few areas. Ø Hydraulic fracturing does not often create significant, longterm flow between the producing zones, or even for distances of greater than 100 or 200 feet within zones.

SPACING Individual Orders All formations Horizontal wells Drilling windows not located optimally. Horizontal wells: Production from all wells allocated to entire spaced area. (40 to 1280 acres) (640 acre example) Niobrara and Codell formations Weld, Adams and other counties Section 1: All

Greater Wattenberg Area Weld, Adams and other counties SPACING Section 2: E 2 Rule 318 A(I) (2011) all Cretaceous fms. Horizontal wells along section lines Well bore spacing Production from well allocated to every quarter-quarter section (40 acres) within 460 feet of perforated section of wellbore. Section 1: W 2

SPACING Greater Wattenberg Area Weld, Adams and other counties SEGMENT OF ONLINE GIS MAP FROM COLORADO OIL AND GAS CONSERVATION COMMISSION WEBSITE http: //cogcc. state. co. us/ Red dots = Well surface locations Purple, green and blue dots = Bottom hole locations Radiating lines (spokes) = Directional well bores Parallel lines = Horizontal well bores

SPACING ROLLING SPACING UNITS Ø HORIZONTAL WELLS MUST BE AT LEAST 600 FEET FROM BOUNDARIES OF 1280 -ACRE SPACING UNITS. Ø ADDITIONAL WELL COULD CROSS BOUNDARIES OF SPACING UNITS. Ø ALLOCATION OF PRODUCTION FROM PREEXISTING WELLS DRILLED WITHIN PRE-EXISTING 640 ACRE UNITS WAS NOT AFFECTED. COGCC Order No. 421 -4 (2011) 21

SPACING EXPLORATORY SPACING UNITS Ø USED AUTHORITY UNDER C. R. S. § 34 -60 -116(2) AND C. R. S. § 34 -60 -118. 80% WORKING INTEREST AND ROYALTY OWNERS MUST AGREE. Ø WELLS MUST BE AT LEAST 600 FEET FROM UNIT BOUNDARY AND 150 FEET FROM OTHER WELLS IN UNIT. Ø NUMBER OF WELLS NO GREATER THAN NECESSARY TO EFFECTIVELY DRAIN RESERVOIR. Ø ONE SURFACE LOCATION PER QUARTER-QUARTER SECTION. (40 ACRES) COGCC Order No. 535 -259 (2013) 22

SPACING UNCONVENTIONAL RESOURCE UNITS Ø USED AUTHORITY UNDER C. R. S. § 34 -60 -105 AND C. R. S. § 34 -60 -106(2) - AUTHORIZES COGCC “TO DO WHATEVER MAY REASONABLY BE NECESSARY” TO REGULATE SPACING. Ø 2, 600 -ACRE UNIT, BUT SIZE NOT LIMITED – WELLS COULD BE NOT LESS THAN 600 FEET FROM UNIT BOUNDARY. Ø AS MANY WELLS AS NEEDED TO EFFECTIVELY DRAIN THE RESERVOIR. Ø 8 SURFACE LOCATIONS PER SECTION. COGCC Order No. 540 -12 (2013) 23

UNLEASED FEDERAL TRACTS Effect of Federal Unleased Minerals All formations Horizontal wells Production from all wells allocated to entire spaced area, including federal acreage. (640 acre example) Section 1: All

UNLEASED FEDERAL TRACTS Effect of Federal Unleased Minerals All formations Horizontal wells Production from all wells allocated to entire spaced area, including federal acreage. (640 acre example) Section 1: All

SPACING AND POOLING OTHER PROBLEMS Ø Unleased interests. Ø Restrictive lease terms. Ø Control of development. Ø Pooling notice.

SPACING SETBACKS At the time of initial drilling operations 2009 2013 Building 150’ 500’ High Density areas 350’ 1000’ Schools, hospitals, etc. 350’ 1000’ Designated Outside Activity Area 350’+ 2014 BALLOT INITIATIVES

QUESTIONS? Steve Sullivan Welborn Sullivan Meck & Tooley PC 1125 17 th Street, Suite 2200 Denver, CO 80202 (303) 830 -2500 ssullivan@wsmtlaw. com www. wsmtlaw. com