Applications, Hearings and Orders. Oh my!1
Cynthia L. Bargell, Visani Bargell LLC2
I.
Introduction.
In 2012, the Colorado Oil and Gas Conservation Commission (COGCC)3 considered
approximately 147 Drilling Unit (spacing) Applications and 283 Involuntary (forced)
Pooling Applications.4 Many of the Applications involved over fifty, sometimes nearly 100,
different mineral interest owners. If you have not recently received an Application, I
would venture a guess that by our next meeting date you may have become acquainted
with the COGCC Application and hearing process.5
What should you do when one of these pieces of paper shows up in your mailbox?
Many mineral owners who have signed a lease figure it’s just a governmental regulatory
matter, and file it. Others who receive the Application initially note that the matter is to be
set for hearing, at some later as yet undermined date, and put the Application in the bottom
of the pile. Then, when the Notice of Hearing shows up the day before any protest or
A paraphrase from the 1939 movie release the “Wizard of Oz” spoken by Dorothy to her companions when
they “prepared to enter the dark, forbidding forest surrounding the Yellow Brick Road on the way to Oz.”
Deciphering COGCC hearing documents can evoke a similar emotion in Colorado mineral estate owners.
1
Cindy Bargell received her degree in Mineral Land Management from the University of Colorado in 1981 and
worked as a Landman for 10 years before obtaining her law degree with honors from the University of
Denver in 1994. Cindy is a member of Visani Bargell LLC, and practices oil and gas and real estate law. She
currently serves on the NARO Rockies Board of Directors. The information and views contained in this paper
are that of the author’s alone and are not intended to be representations or information made on behalf of the
NARO Board.
2
The Colorado Oil and Gas Conservation Commission (the “Commission”) is the appointed body of nine
individual Commissioners directed to “foster the responsible, balanced development, production, and
utilization of the natural resources of oil and gas in the state of Colorado in a manner consistent with
protection of public health, safety, and welfare, including protection of the environment and wildlife
resources” as set forth in § 34-60-102 (1), C.R.S. The Commission is the governing body of the agency housed
in the Department of Natural Resources, initially created upon adoption of the Colorado Oil and Gas
Conservation Act in 1951, § 34-60-101 to – 129, C.R.S. (the “Act”). The Director and agency staff are referred
to herein as the “COGCC” and the Commissioners appointed in accordance with § 34-60-104 C.R.S., are
referred to as the Commission.
3
COGCC dockets hearing Applications by year, hearing month and type of application. For example 1301 UP
13 would be the 13th involuntary pooling application received in 2013 for the January hearing. Orders are
then entered by field number and sequentially numbered. The November, 2012 COGCC docket (October
Applications for a November Hearing) identifies the final Spacing Application as 1211 SP 147 and the final
Involuntary Pooling application as 1211 UP 283. A few of the Applications likely were withdrawn along the
way, but the numbers above – while not an official count – provide a good feel of the volume of Applications
processed by the COGCC.
4
1
intervention is due (and sometimes after the COGCC response date) the timing is such that
action is all but impossible – so the Application and Notice are then filed, permanently.
There is of course a vague hope that the Commission is looking out for mineral owners and
operators alike, after all the Commission charge is to “Protect the public and private
interests against waste in the production and utilization of oil and gas”.6 Times are
changing, however, and understanding Commission paper work is increasingly important
because Commission Orders impact mineral interests for years to come. Long after the
Leases have been transferred, or have even expired (and the long ago landman presumably
has sold out and is enjoying a cocktail on a Bahaman beach), the mineral owner must sort
out the impact of a series of Commission Orders filed long ago.
II.
Changing Times
The current workload of the COGCC in processing statutory Applications7 impacting
spacing and pooling is staggering. Add to that the obligation to affirmatively process
several thousand APDs annually, and there’s little doubt the COGCC is one of the busiest
agencies in the State. Contrast the fourteen page June, 2013 COGCC docket, with over 80
matters for one hearing to the December, 2000 hearing docket with ten total matters
heard, including the last of the five total involuntary pooling Applications filed for that year
and the scope of current COGCC regulatory obligations take shape. Below is an unofficial
Application count related to spacing and involuntary pooling.
Figure 1
Year
Hearing
Application
Deadline
Hearing Date
Total (Annual)
Spacing
Applications
Total (Annual)
Involuntary
Pooling
Applications
2000 October
December
6
5
2001 October
December
5
7
2002 October
December
14
7
6§
34-60-101 (1) (a) (II), C.R.S. During the 2012 legislative session, several legislative proposals were
advanced that would change the Commission’s mission, and all but eliminate oil and gas conservation from
the statutory edict of the Commission, more information on these issues to be provided during the Legislative
session.
7Applications
herein refer to adjudicatory Applications filed pursuant to Rule 507 of the COGCC Rules and
Regulations. This is to distinguish the land based Applications from Applications for Permit to Drill (“APD”)
the volume of which also has increased exponentially from 90-145 per month in 2000, to as many as the 481
APDs received in May, 2012.
2
Year
Hearing
Application
Deadline
Hearing Date
Total (Annual)
Spacing
Applications
Total (Annual)
Involuntary
Pooling
Applications
2005 October
December
17
7
2006 October
December
49
18
2007 October
December
34
24
2008 October
December
26
37
2009 October
December
24
28
2010 October
December
42
62
2011 October
December
164
171
2012 September
December
147
283
2013 Though April
June
113
131
There is little doubt a correlation exists between this workload and recently
released data that Colorado oil and gas production is at a 56 year high.8 This generally is
good news to both the oil and gas operator and the mineral owner alike.
The increase in Applications also can be attributed to other factors including (i) the
desire by operators to downsize from the traditional 40 acre drilling unit designations to
allow for increased well density for tight sands on a ten acre basis (Piceance Basin) (ii) the
advent of technically advanced, targeted horizontal drilling that often requires larger
drilling units to ensure the lands drained by the productive lateral are attributed
production from the well (iii) the COGCC processes that allow the operator to create
exploratory drilling units to tie up larger blocks of land to justify exploratory operations
and (iv) the often baffling splintering of mineral interests in different basins that makes
locating and leasing small interests costly, and sometimes nearly impossible, increasing the
appeal of involuntary pooling. The impact of these factors, and the changing regulatory
environment on mineral interest owners in our State, are touched on briefly below.
COGCC Update April 2013 stating “Colorado oil production has reached its highest level since 1957 as the
COGCC’s initial calculation of total oil produced in 2012 exceeds 49 million barrels. This represents a 25
percent increase over 2011 which itself saw a 20 percent increase over oil produced in 2010.”
8
3
III.
Conservation Act Basics
A.
The Drilling Unit. Despite the overwhelming change in the Commission work load,
the statutes and rules related to spacing and involuntary pooling have remained relatively
constant, with the exception of (i) the addition in 1977 of risk penalties imposed on nonconsenting parties;9 (ii) the addition of obligation to offer a lease to objecting unleased
mineral interest owners in a proposed pooled area10 and (iii) and the addition of
exploratory drilling units added in 1991 (and discussed in Section IV. below). All
involuntary pooling (and most voluntary pooling) starts with order entered by the
Commission to establish the drilling unit for a proposed well, and more recently for several
wells.11 The drilling unit order is commonly referred to in the industry as the “spacing
order.”12 The math is simple - the bigger the unit the more diluted each owner’s share is in
the pooled area. Historically, this has been viewed with disfavor by most mineral owners,
and standard leases often attempt to contractually limit the size of a pooled area.13
Unleased mineral interest owners, and operators, receive copies of the Spacing Unit
Application, and Notices when a Hearing is set on the Application.14 Leased mineral
owners typically are unaware their lands are being spaced.15 The Commission has taken
9
S.B. 77-113, approved June 1, 1977, establishing the recovery of 200% of the bulk of exploration costs.
S.B. 88-65, approved April 4, 1984. This legislation passed primarily based on an outcry from wellorganized Weld County mineral owners who increasingly experienced operators using the threat of force
pooling as a way to convince the mineral interest owner they had to lease under the terms provided.
Significant changes requiring an operator to offer a lease “under terms no less favorable than those prevailing
in the area” were adopted by the General Assembly. § 34-60-116(7)(d), C.R.S.
10
The Act, § 36-60-116( 3 ), C.R.S. states “(3) 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 . . . “ More and more frequently Spacing Orders provide for additional optional
wells in the unit, often deferring to the Operator regarding the appropriate drilling operations.
11
The Act, § 36-60-116 (6), C.R.S. states “When two or more separately owned tracts are embraced within a
drilling unit, or when there are separately owned interests in all or a part of the drilling unit, then persons
owning such interests may pool their interests for the development and operation of the drilling unit. In the
absence of voluntary pooling, the commission, upon the application of any interested person, may enter an
order pooling all interests in the drilling unit for the development and operation thereof.“ (emphasis
supplied).
12
The efficacy of a pooling limitation contained in a Lease is currently under fire, and the sanctioning of larger
spacing units by the Commission is considered by some as creating in the operator the right to establish a
“statutorily pooled” area, with the spacing unit – involuntary pooling potentially overriding the negotiated
lease terms, as discussed in Section III.B.3.
13
Notice is provided to all “owners” with the right to drill into and produce minerals. COGCC Rule 507 (b)(1).
This definition does not include mineral interest owners who have leased their minerals.
14
The Commission has identified by Rule who may file an Application related to spacing and who is entitled
to receive Notice of Hearings on spacing. This does not include any leased mineral owner, although a leased
15
4
the position that mineral interest owners, once leased, have no interest in how their lands
are spaced even though spacing provides the geologic basis for further development of the
mineral owners’ lands.
When the Commission receives an Application it is assigned a docket number and
typically is set for the next Commission hearing. Information on all docketed matters are
available on the Commission website as depicted in Figure 2 below.
Figure 2 – from http://cogcc.state.co.us/
As the drilling unit establishes the basis for all later statutory pooling it is incumbent upon
all mineral owners, leased and unleased alike, to monitor and understand the impact of
spacing on their mineral ownership.
Mineral Owner Tip No. 1: When you receive a copy of any Application
immediately go on-line to the COGCC website to determine the Hearing Date
and the Protest Date associated with the Application. Do not wait for the
Notice of Hearing to consider the impact the Application may have on your
mineral interest.
B.
Involuntary Pooling.16 In 2010, the NARO - Rockies Conference Agenda included a
presentation on Involuntary Pooling that explained the involuntary pooling process.17 The
mineral owner may request this information contractually as part of a Lease contract. The Commission’s
authority to limit the parties that appear before it was recently affirmed by the District Court.
The process by which a party is included in a pooled area through the regulatory process is often referred
to a Forced Pooling, or in some states Compulsory Pooling.
16
Michael Elliott, Forced Pooling of Oil and Gas right in Colorado: What is and how it works, a Mineral
Royalty Owner’s View, NARO Rockies conference, September 2010.
17
5
substance of the paper is not reiterated here, although the process is summarized briefly
below:

Spacing does not pool, a separate involuntary pooling Application must be filed with
the Commission and approved (the COGCC consent agenda process typically is
used).

Pooling Applications must be provided to all mineral interest owners in the
proposed pooled area, including leased mineral interests.18

A Pooling Order may not be entered “over protest of such [unleased] owner until the
commission shall have received evidence that such unleased mineral owner shall
have been tendered a reasonable offer to lease upon terms no less favorable than
those currently prevailing in the area.”19

Pooling is discretionary and any Order must be entered “upon terms and conditions
that are just and reasonable, and that afford to the owner of each tract or interest in
the drilling unit the opportunity to recover or receive, without unnecessary expense,
his just and equitable share [of production.]”20
The BIG Pooling Questions:
1.
Won’t I be better off if I decide not to Lease?
Any unleased mineral owner or non-participating operator can elect to go “nonconsent” or
be deemed a nonconsenting if the party fails to respond to a Authority for Expenditure
(AFE) or Lease offer within thirty (30) days as required by Commission Rule 530. The
Operator is entitled to recover from the nonconsenting party’s share of production risk
based costs including:
100% of the nonconsenting owner's share of the cost of surface equipment beyond
the wellhead connections, plus
100% of the nonconsenting owner's share of the cost of operation of the well
commencing with first production and continuing until the consenting owners have
recovered such costs, plus
18
COGCC Rule 507 (b) (2) ; See Act, § 34-60-116 (6), C.R.S.
19
Act, § 34-60-116(7)(d), C.R.S.
20
Act, § 34-60-116 (6), C.R.S.
6
200% of the costs and expenses of staking, well site preparation, obtaining rightsof-way, rigging up, drilling, reworking, deepening or plugging back, testing, and completing
the well, plus
200% of the equipment costs, including the wellhead connections.21
When only one well is allowed in the spacing unit the risk of going nonconsent may
be easier to assess, although the decision for a mineral owner is never simple.22 When
multiple wells in horizontal formations are factored in, the decision becomes exponentially
more complex. While the Act provides expressly that a drilling unit may designated only
one well (with the right to apply for future densities), the COGCC, especially in the context
of horizontal drilling, commonly enters orders as a matter of course that allow for more
than one well in a horizontal drilling unit.23 The question then arises as to the number of
wells within a drilling unit that are considered “nonconsent” wells, where the cost recovery
penalties apply. In the case of the Axia Exploratory Units, considered by the Commission
at the March, 2013 Hearing, the COGCC staff, in collaboration with the Applicant,
determined the nonconsent penalty would apply to the first eight (8) wells in the drilling
unit, creating a considerable change in the economic analysis of any nonconsenting entity.24
[Remainder of page intentionally blank.]
21
Act, § 34-60-116(7)(b) (I) & (II), C.R.S.
See n. 11 regarding the number of permissible wells per Spacing Unit. If the nonconsent penalty applies
only to the first well in the Unit will the Owner then be prepared to pay its proportionate share of costs in the
next wells drilled. There always is a risk that even a development well will be a dry hole, something the
Owner must factor into any decision. There also is the upside of receiving the full mineral interest if costs are
recovered quickly. The reality is most parties enter into a Joint Operating Agreement (“JOA”) to better
handle the cost and risk.
22
See, e.g., Order 407-662, entered as of July 11, 2012, that provides for the following “four approximate
640-acre drilling and spacing units, for the below-described lands, and up to four horizontal wells within each
unit, are hereby approved, for the production of oil, gas and associated hydrocarbons from the Codell
Formation, with the treated interval of the wellbore to be located no closer than 460 feet from the boundaries
of the units, without exception being granted by the Director in [location].” (Emphasis supplied).
23
Axia Order 540-20 entered April 5, 2013, effective March 25, 2013 in which the Commission states, “IT IS
FURTHER ORDERED, that the approved pooling order will pool all interests in the unit, pursuant to §34-60116(6) C.R.S., and acknowledges that the nonconsenting parties’ interests in the first eight wells drilled and
completed in the unit will be subject to the nonconsent penalties set forth in §34-60-116(7) C.R.S. If Applicant
elects to drill more than eight wells, Applicant will notify nonconsenting parties and give them an opportunity
to participate pursuant to Rule 530.” (Emphasis supplied).
24
7
Figure 5- Horizontal Drilling in Weld County (example – T7N, R63W and surrounding
area) http://dnrwebmapgdev.state.co.us/mg2012app/
2.
Who decides on lease terms that are “reasonable” and “no less favorable than
those prevailing in the area”?
COGCC Rule 530.c. provides that:
An unleased owner shall be deemed a nonconsenting owner if, after at least thirty
(30) days’ written notice, the unleased owner has failed or refused a reasonable
offer to lease. In determining whether a reasonable offer to lease has been tendered
under §34-60-116(7)(d), C.R.S., the Commission shall consider the lease terms
listed below for the drilling and spacing unit in the application and for all cornering
and contiguous units that are under the proposed lease:
(1) Date of lease and primary term or offer with acreage in lease;
(2) Annual rental per acre;
(3) Bonus payment or evidence of its non-availability;
(4) Mineral interest royalty; and
(5) Such other lease terms as may be relevant.25
Accordingly, the Commission retains jurisdiction to determine lease terms that are
just and reasonable, provided each party impacted by an involuntary pooling order must
respond within the statutory time-frame to either participate or lease, and the party will be
25
COGCC Rule 530.c.
8
considered a non-consenting party.26 There are however few Commission Orders that deal
with the lease terms offered when a tract is involuntarily pooled.27
More commonly, the Involuntary Pooling applicant will certify that “at least thirty
(30) days prior to the hearing on [the] matter each such interest owner not already leased
or voluntarily pooled will be offered the opportunity to lease, or to participate in the
drilling of the authorized wells, and will be provided the information required by Rule
530”.28 Any mineral owner that receives an offer to Lease or AFE needs to be aware that a
response is required within the thirty (30) day period prior to the hearing, a fact not
always clear from the offer letters.
Mineral Owner Tip No. 2: Keep close track of the time frames within which a
Lease Offer or Offer to participate is received. If a pooled party does not
respond within thirty (30) days the statutory presumption is an election to go
non-consent.29
3.
My interest is leased and contains a pooling limitation, the Commission can’t
change my Lease, can they?
Historically, the Commission has avoided injecting itself into any private party
contractual disputes. 30 As a legal matter the Commission has only regulatory jurisdiction
over the items specifically enumerated by statute, and accordingly is not typically in a
position to adjudicate specific lease terms.31
26
Act, § 24-60-116(7), C.R.S.
Order No. 256-10 entered August 22, 2000, outlined lease terms offered by Chesapeake to an unleased
mineral owner for the Commission’s consideration, including a 3 to 5 year lease term and $40/acre bonus.
More recent orders only acknowledge the obligation to make a lease offer, but do not set forth specific lease
terms.
27
28
See, e.g., Application Docketed at 1301 UP 10, Carrizo Oil and Gas Applicant at ¶ 8.
See Order 381-16, entered April 4, 2011, in which the Commission determined Noble’s failure to timely
respond to an involuntary pooling proposal resulting in Noble being ordered a nonconsenting party despite
Noble’s later attempts to participate in the proposed well.
29
See Order No. 346-6, In the Matter of the Promulgation and Establishment of Field Rules to Govern
Operations in the Spear Field, Washington County, Colorado, rescinding a prior pooling order, stating
“Settlement of these matters between private parties is encouraged.” Order No. 342-6, ¶11, Aug. 11, 1994.
30
See Order No. 1-73, ¶ 40, Oct. 21, 1997, explaining § 118.5 of the Act is “intended to ensure timely payment
of proceeds due to payees who are legally entitled to payment, and does not create in the Commission
authority to adjudicate private disputes related to the legality of specific deductions.” The one exception
being the consideration of lease terms offered to an unleased mineral owner pursuant to Rule 530; see supra
n. 25.
31
9
Unlike a Spacing Application, the notice of an Application for involuntary pooling
goes to every mineral interest owner.32 Applications are routinely filed asking the
Commission for an Order “pooling all interests, including but not limited to, any
nonconsenting lease interests, in the Application Lands for the development of the
Niobrara Formation by six authorized wells.”33 The Commission Orders entered for
Involuntary Pooling Applications typically echo the Application language.34 The question
then arises whether a Commission Order entered on an Involuntary Pooling Application
impacts or alters existing Lease terms that contain a pooling limitation that differs from the
approved Involuntary Pooling Order. Inquiries directed at operators’ counsel thus far have
been answered with the statement that the operator will consider the leased interest
“statutorily pooled” for the purposes of the drilling unit, information that does not directly
address the question above.
Accordingly, it is important to recognize that Involuntary Pooling is a discretionary
function of the Commission, and every involuntary pooling order “shall be made after
notice and hearing and shall be upon terms and conditions that are just and reasonable,
and that afford to the owner of each tract or interest in the drilling unit the opportunity to
recover or receive, without unnecessary expense, his just and equitable share.”35
Traditionally, what is considered just and reasonable for resource allocation among the
owners in a pooled area is based on a calculation, taking the amount of acreage in each of
the pooled tracts and dividing it by the total acreage in the pooled area (proportionately
reduced in accordance with the undivided ownership in the pooled tracts). However, if a
pooling limitation is considered an inducement to execute a lease, and the lessor is relying
upon the lessee’s compliance with the Lease terms, a mineral lessor can argue that it is not
just or reasonable to use the statutory process to invoke a lease change that could not be
effected directly.
When the impact on a leased owner is not clear, operators may argue that the lack of
any objection by the leased mineral owner to the entry of the Involuntary Pooling Order is
evidence that the owner has acquiesced to statutory pooling of its interest, despite any
32
Supra, at n. 18.
See, e.g., Application 1302 UP 40 filed on behalf of Carrizo Oil Company to pool all interests within a six
hundred forty acre drilling Unit.
33
See, e.g., Order No. 407-778 and 525-286 in which the Order states “Pursuant to the provisions of §34-60116, C.R.S., as amended, of the Oil and Gas Conservation Act, all interests in an approximate 640-acre drilling
and 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
any of the costs specified in C.R.S. §34-60-116(7)(b)(II) are first incurred for the drilling . . . .” (Emphasis
supplied.)
34
35
Act, § 34-60-116 (6), C.R.S. (Emphasis supplied).
10
negotiated lease terms. Mineral Owners should be aware of the risk an operator may argue
pooling based on the size of a unit, regardless of lease terms, if the Commission has (i)
approved a drilling unit of that size and (ii) approved the Involuntary Pooling Order –
regardless of the Lease terms.
One relatively simple, albeit potentially costly option, to ensure lands are not
statutorily pooled contrary to existing Lease terms is to request that the Commission, in the
entry of an Involuntary Pooling Order, recognize that the Order does not modify the lease
in question. This will require careful review and a possible response to the Application
through an intervention or protest to ensure the Application does not violate the Lease
terms, or that any larger pooled area is in the mineral owners’ best interest.
Mineral Owner Tip No. 3. When an Involuntary Pooling Application is
received read your existing Lease terms to ensure the Application is
consistent with the Lease language.
C.
Change in Hearing Processes – and Impact on Mineral Owners
To the layman the statutory provisions related to involuntary pooling may seem
bewildering. While the statute has not undergone significant change in the last few years
(except as identified above), the COGCC procedures for considering spacing and
involuntary pooling Applications has changed dramatically. As part of the 2007 legislation
that altered the focus of the Commission, the General Assembly also required the
Commission to promulgate rules to establish a “timely and efficient procedure for the
review of applications for a permit to drill, and applications for an order establishing or
amending a drilling and spacing unit.” 36 The Commission adopted the rules as required
December 11, 2008 to take effect on April 1, 2009. 37 The new Rules shift the burden of
considering the statutory and geologic bases for spacing and involuntary pooling from the
Commission primarily to the Commission staff. Applications that receive no protests or
interventions are considered administratively by a hearing officer before the Commission
36
37
H.B. 07-1341, Ch. 320 at 1357 (Colo. 2007).
COGCC Rule 511 provides in part: UNCONTESTED HEARING APPLICATIONS
a. If the matter is uncontested, the applicant may request, and the Director may recommend,
approval without a hearing based on review of the merits of the verified application and the
supporting exhibits. If the Director does not recommend approval of the application without hearing,
the applicant may request an administrative hearing on the application. For purposes of this rule an
uncontested matter shall mean any application that is not subject to a protest or an intervention
objecting to the relief requested in the application and shall include matters in which all interested
parties have consented in writing to the granting of an application without a hearing.
b. Uncontested matters may be reviewed or heard administratively by a Hearing Officer and
recommended for approval on the Commission’s consent agenda.
11
hearing date, and then placed upon the Commission consent agenda. The vast majority of
Applications therefore are never heard by the Commission. Instead, the Commissioners
typically see the Applications presented on the Hearing Docket as shown on Figure 3.
Figure 3
The right to full participation in a COGCC hearing is afforded only to Commission
defined “interested parties” or to a party that successfully intervenes in the proceeding. If
a mineral owner wants to voice an opinion or present testimony, whether in support or
adverse to an Application, filing appropriate Commission documentation by the
Protest/Intervention deadline remains an important first step.38 In addition, any
The Commission typically sets the protest/intervention deadline at least 10 days in advance of the
scheduled hearing. Rule 509 (a)(1). By statute parties have a right to protest or intervene up to three (3)
days in advance of the hearing. § 34-60-108 (7), C.R.S. (“Any interested party desiring to protest the granting
of the petition shall, at least three days prior to the date of the hearing, file a written protest with the
commission, which shall briefly state the basis of the protest.”) This statutory provision may be useful when
38
12
individual may provide input to the Commission in the form of a Rule 510 statement. The
COGCC website outlines the process for filing a 510 statement under oath, in writing, to
receive proper consideration.39
Mineral Owner Tip No. 4: Do not expect to attend a Commission Hearing with
the expectation to offer testimony on any matter that is on the Consent Agenda
and be able to either influence, or appeal, an adverse decision.
IV.
The Unconventional Resource Unit (a/k/a Exploratory Drilling Unit) - A
Horizontal Panacea or Poltergeist?
In 1991 the General Assembly passed legislation to address the difficulties that
might arise when a drilling unit cannot be appropriately defined in an exploratory setting.
At the time, drilling costs had been on the rise while operators watched oil prices hover at
about $20 per barrel, before continuing on a down-ward slide to all-time lows.40 The
General Assembly was sympathetic to operator issues, and enacted legislation to give the
COGCC authority to encourage wildcat drilling by adding the following additional language
[IN ALL CAPS] to the Conservation Act:
34-60-116. Drilling units and pooling interests. In establishing a drilling unit, the
acreage to be embraced within each unit and the shape thereof shall be determined
by the commission from the evidence introduced at the hearing, except that when
found to be necessary for any of the purposes mentioned in subsection (1) of this
the Notice of Hearing is received after the protest deadline.
39
Instructions to submit a written statement under Rule 510 from http://cogcc.state.co.us/:
Submit a Rule 510 statement to the Commission by writing/typing a maximum of two (2) pages. You must
include the following information and you must identify the document as a “510 Statement” and verify your
submission by dating, printing your name and signing the statement:
Docket Number:
Full Name:
Mailing Address:
Phone Number:
E-Mail:
Submit an original Statement and thirteen (13) copies preferably no later than 10 business days before the
hearing on which this statement is being submitted. . . . In order to meet the deadline you may email a PDF to
COGCC at COGCC.Hearings_Unit@state.co.us and in the subject line, type: Rule 510 Statement Docket Number
____(locate number on Notice). Check with Commission on currently required number of copies.
See Historical Crude Oil prices, 1861 to Present, available on-line at http://chartsbin.com/view/oau.
Prices hovered in the $20 range for several years and reached a (thus far) all-time low of $12.72/ barrel in
1997. As of Monday, June 10, 2013 the NYMEX West Texas Intermediate Crude Oil Price for July delivery was
at $95.77 per barrel.
40
13
section, the commission is authorized to divide any pool into zones and establish
drilling units for each zone, which units may differ in size and shape from those
established in any other zone, so that the pool as a whole will be efficiently and
economically developed, but no drilling unit shall be smaller than the maximum
area that can be efficiently and economically drained by one well. [A> IF THE
COMMISSION IS UNABLE TO DETERMINE, BASED ON THE EVIDENCE INTRODUCED
AT THE HEARING, THE EXISTENCE OF A POOL AND THE APPROPRIATE ACREAGE
TO BE EMBRACED WITHIN A DRILLING UNIT AND THE SHAPE THEREOF, THE
COMMISSION IS AUTHORIZED TO ESTABLISH EXPLORATORY DRILLING UNITS FOR
THE PURPOSE OF OBTAINING EVIDENCE AS TO THE EXISTENCE OF A POOL AND
THE APPROPRIATE SIZE AND SHAPE OF THE DRILLING UNIT TO BE APPLIED
THERETO. IN ESTABLISHING THE SIZE AND SHAPE OF THE EXPLORATORY
DRILLING UNIT, THE COMMISSION MAY CONSIDER, BUT IS NOT LIMITED TO, THE
SIZE AND SHAPE OF DRILLING UNITS PREVIOUSLY ESTABLISHED BY THE
COMMISSION FOR THE SAME FORMATION IN OTHER AREAS OF THE SAME
GEOLOGIC BASIN. <A] Any spacing regulation made by the commission shall apply
to each individual pool separately and not to all units on a statewide basis.
(Emphasis supplied)
In recent months several operators have gone before the Commission to see just
how far a drilling unit will stretch, identifying larger drilling units, and adding a new term
to the COGCC vocabulary, “Unconventional Resource Units.”41 Relying primarily upon the
first few sentences of this section establishing COGCC sanctioned exploratory units
Operators and staff have recommended the Commission think “outside of the box” and
establish “Unconventional Resource Units” for horizontal wells in Moffat County, Colorado.
While there is no doubt that the advent of horizontal drilling and establishing a framework
for drilling units and cost recovery presents issues was not contemplated by the General
Assembly in 1951, thinking creatively about what was intended poses its own risks.42
While the exploratory drilling unit section may provide a feasible solution to the horizontal
dilemma, it is not without restrictions. The statutory language does not stop at establishing
the unit, but instead states the unit is to be established “to obtain evidence”, and thereafter
to consider the “appropriate size and shape of the drilling unit to be applied thereto.”
If only portions of the statute are relied upon to create an “Unconventional Resource
Unit” the risk arises that the concept may be used as a Commission sanctioned mechanism
to continue leases in effect based solely on speculation, as a single vertical well could hold
41
Axia Exploration Applications 1303-SP-40-44, heard at Commission on March, 2013 hearing docket.
H. Philip Whitworth And D. Davin McGinnis, Square Pegs, Round Holes: The Application and Evolution of
Traditional Legal and Regulatory Concepts For Horizontal Wells, June 21, 2012, available online at
http://tjogel.org/wp-content/uploads/2012/07/Whitworth_McGinnis_Final_June13.pdf.
42
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the entire larger unit. At the March, COGCC hearing the Commission heard testimony from
NARO regarding these concerns and added to the Axia Exploration Company Orders
language to provide for Commission review of the Unconventional Resource Units after a
one year period, presumably to confirm the operator is indeed proceeding as intended.43
Mineral interest owners hope that the best intentions of the operator prove to be true, but
think it appropriate that the Commission step in if the intentions are stalled. Simply put, if
an Operator wants to invoke Commission jurisdiction to create an Unconventional Unit,
then continued Commission oversight of the Unit operation should not be perceived as an
unwelcome intrusion.44 The continued establishment of exploratory units where the
development is left to the discretion of the operator will require vigilance by the mineral
interest community.
Mineral Owner Tip No. 5: When a Spacing or Pooling Application is filed to
include your minerals in an Exploratory Unit or an Unconventional Resource
Unit that gives the Operator complete discretion regarding development, ask
the Commission take appropriate action to ensure the Units are developed
according to their intended purpose, and are not used as a tool merely to bank
acreage positions for future development.
V.
Special Surface Owner Concerns. When a mineral owner owns the surface, and only
a portion of the minerals in a pooled tract, issues can arise related to surface use by
different operators. Although surface owner concerns are not NARO’s primary focus,
surface owners should be cognizant of the potential for conflict among operators in pooled
areas, and at a minimum include in any surface use agreement provisions to insulate the
surface owner from claims from different operators to the maximum extent possible.
VI.
Developing Your Knowledge and Listening to Your Inner Intuition.
There seems to be a certain expectation among operators, and sometimes
regulators, that mineral interest owners should quietly accept the decisions regarding
mineral development that are handed down by the experts. It is accurate that mineral
owners and operators often coexist often in a symbiotic state, and many benefits can flow
from developing positive, cooperative relationships with other players in the oil and gas
Axia Orders 540-12 through 540-17, entered April 5, 2013 as of March 23, 2013. The Orders issued on the
Axia Unconventional Resource Units include the sentence, “The Commission requested that this matter be set
for review by the Commission in one year.” These matters should be calendared for NARO review also in
March, 2014.
43
44For
all approved BLM Units that extend BLM mineral leases there is continued oversight and confirmation
that the Unit lands are developed in an orderly manner. While the Unconventional Resource Units are just
that, unconventional, in that they involve fee leases, the fact remains their creation should be consistent with
Commission authority, not to achieve the economic certainty desired by an individual operator.
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sandbox. But make no mistake in thinking that an operator is obligated to look out for your
interest. No fiduciary relationship exists between operators and their lessors.45 So, when
a letter, or the Application or the Notice arrives that’s not exactly clear, or the explanation
offered doesn’t quite hold water, keep asking the questions. The minerals will be yours
long after the inevitable change in operator, latest technologic development or shift in
regulatory policy, and if you want them protected it’s your responsibility to remain
informed, and to voice your concerns.
See generally Atlantic Richfield Co v. Farm Credit Bank Wichita, 226 F.3d 1138 (10th Cir. 2000); see, e.g.,
Howell v. Texaco Inc., 112 P.3d 1154 (Okla. 2004)citing Finley v. Marathon Oil Co., 75 F.3d 1225, 1229-30 (7th
Cir.1996).
45
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