APPENDIX A

DEPARTMENT OF NATURAL RESOURCES
OIL AND GAS CONSERVATION COMMISSION 
AMENDMENTS TO 100 SERIES - DEFINITIONS AND 300 SERIES - DRILLING, DEVELOPMENT, PRODUCTION AND ABANDONMENT
2 CCR 404-1
Proposed Statement of Basis, Specific Statutory Authority, and Purpose

Amendments to Current Rules of the Colorado Oil and Gas Conservation Commission, 2 CCR 404-1, Amending Rule 318A., and Defining Horizontal Well in the Rule 100 Series (Definitions).
This statement sets forth the basis, specific statutory authority, and purpose for the amendments to Rule 318A. and Rule 100 Series (Definitions) of the Rules and Regulations and Rules of Practice and Procedure (“Rules” ) promulgated by the Colorado Oil and Gas Conservation Commission (“Commission” or “COGCC” ) on November 15, 2012.

Statutory Authority

These amendments to Rule 318A. and Rule 100 Series (Definitions) are based on:  1) general Commission jurisdiction and rulemaking authority granted in section 34-60-105(1), C.R.S; and 2) specific statutory authority of section 34-60-106(2)(a), (c), and (d), C.R.S.  The Commission adopted the following statement of basis and purpose consistent with section 24-4-103(4), C.R.S., of the Administrative Procedure Act. This statement is hereby incorporated by reference in the rules adopted.

The rulemaking hearing for these amendments to Rule 318A. and Rule 100 Series (Definitions) was held by the Commission on November 15, 2012.  These amendments become effective twenty days after publication in the Colorado Register.

Basis and Purpose

Introduction

Since the initial Wattenberg Field discovery in 1970, oil and gas development has continued to increase, with significant ancillary economic benefits.  Rule 318A. was initially adopted in April 1998, and modified in 2005.  The rule, also referred to as The Greater Wattenberg Area (“GWA”) Rule, was initiated to facilitate location of wells, and operator access to all Cretaceous age formations, without need to routinely secure Commission approval.  Statewide setback rules of Rule 318.a. were becoming increasingly too restrictive, and an unnecessary impediment to reasonable development of the hydrocarbon resources of the GWA.  The Rule was driven by intense interest in hydrocarbon development in the GWA, the complex nature of the tight sands of the GWA, and the need to mitigate conflicts between mineral rights developers and surface owners with predictable and reasonably protective rules.  

The GWA Rule was most recently amended by the Commission on August 8, 2011 (“August 2011 Amendments”).  The August 2011 Amendments were intended to promote the use of horizontal drilling to maximize resource recovery, while taking appropriate safeguards to protect public health, safety, and welfare, including the environment and wildlife resources.  The August 2011 Amendments were also intended to reduce the number of applications filed by GWA operators seeking Commission approval for well location exceptions.  The August 2011 Amendments also implement additional environmental reporting requirements.  

The GWA Rule prior to the adoption of the August 2011 Amendments generally:  1) authorized comingling of hydrocarbon resources of Cretaceous age formations to the base of the Dakota Formation; 2) allowed defined drilling locations (“GWA Windows”) to be used to drill wells; 3) established procedures for adaptive (wellbore) spacing units; 4) provided for the location of interior infill and boundary wells; and 5) limited the number of producing completions to eight per 160-acre governmental section.  The purpose of the instant amendments are to extend the August 2011 amendments though the entire GWA, including the City and County of Broomfield.  

The following discussion identifies proposed amendments and explains the substance of and rationale behind the proposed amendments.  

Identification and Explanation of Amendments

1.	Definition of “Horizontal Well” (Rule 100 Series Definitions).	One of the drivers for recently requested well location exceptions is horizontal drilling in the Niobrara Formation.  The Niobrara Formation in the GWA has been drilled since the early 1980’s, and the GWA is an ideal location for horizontal drilling.  The proposed amendments require a definition of “Horizontal Well”.  The definition is self explanatory.  

2.	Repeal of 318A.(II).  The City and County of Broomfield (“Broomfield”) submitted written comments on the August 2011 Amendments objecting on numerous grounds.  Broomfield’s objection advocated, among other things, that the Commission should have provided a more lengthy comment period.  An interim compromise that was acceptable to Broomfield was proposed prior to the Commission’s August 8, 2011 hearing.  The August 2011 Amendments adopted by the Commission incorporate the compromise.  Namely, Broomfield was effectively excepted from the Amendments.  Rule 318A.(I) contained the amendments to GWA rules approved by the Commission on August 8, 2011 and applies to GWA lands within Larimer, Boulder, Adams and Weld counties.  Whereas Rule 318A.(II) applied only to GWA lands within Broomfield and contains the version of Rule 318A. as it existed immediately prior to the Commission’s August 8, 2011 hearing.  The purpose of the instant rulemaking is to remove Rule 318A.(II) from the August 2011 Amendments such that Rule 318A. would apply to all counties within GWA, including Broomfield.  

The Commission’s repeal of Paragraph 318A.(II) would extend the purview of the August 2011 Amendments to Broomfield and would result in the following changes: 

A.	Reduced Minimum Size Spacing Units  (318A.a.(4)C.).  This amendment allows wellbore spacing units to be smaller than 160 acres.  The wellbore spacing unit commonly referred to as a “roving 160”, has worked well, but there are occasions where it does not.  These situations occur in unspaced areas, where the spacing unit may be central to two quarter-quarter sections but not to four.  In these cases it makes sense to size the wellbore spacing unit at 80 acres and not 160 acres. This amendment would address this situation.

B.	Flexible Horizontal Wellbore Spacing Sizes (318A.a.(4)D.).  This amendment allows a horizontal wellbore spacing unit to include any quarter-quarter sections within 460 feet of the lateral wellbore in the producing formation.  This will result in irregular unit boundaries along the edges of the included quarter-quarter sections along the length of the wellbore, but would allow for a more equitable sharing of oil and gas revenues by mineral interest owners, when compared to requiring the unit to be an entire section.  Each horizontal well would have its own unique unit.

C.	Increased Area Allowed for Infill Wells (318A.e.).  This amendment removes the infill well area geographic restriction of 318A.e., and allows infill wells throughout the GWA.  New completion techniques have made hydrocarbon resources throughout the GWA attractive targets that were not considered economic six years ago.  Additionally, removing this geographic constraint allows the drilling of horizontal wells between GWA windows, without requiring Commission approved exceptions.  This amendment also makes the rules uniform over the entire GWA, providing for simpler administration and easier understanding by owners and operators.

D.	Water Well Sampling (318A.e.(4)).  By eliminating the special area of 318A.e. with amendment 4 above, the entire GWA is covered by the water well sampling requirement.  The intent with this amendment is to get a water well sample in every section within the GWA based on a requirement for the test with the next proposed well in the section, regardless of its drainage area.

E.	Notice and Hearing Procedures (318A.e.(6)).  This amendment covers notice and hearing procedures for wells utilizing the wellbore spacing unit concept.  Because this concept creates units across original traditional units established by early spacing orders, each well would have different mineral owners.  This amendment establishes the process to inform mineral owners of the intent of an operator to create the new unit and drill a new well.  The idea is to provide operators a simple method to create a wellbore spacing unit and only utilize the Commission adjudicatory process when the parties cannot agree on terms.  The notification consists of a letter sent to the mineral owners in the proposed unit describing the operation and the affected lands.  This notice requires the recipient to object to the proposal within 30 days or the assumption will be that there is no objection to the proposed operation.  This provision establishes a procedure and requirements of an objection, before parties proceed with a formal hearing before the Commission.  Finally, if the operator fails to file an Application for Permit to Drill, Form 2, within 90 days of the expiration of the 30-day notice period,  the notice will be considered withdrawn.  A notice provision is included in the current rule, but this amendment clarifies the process and provides an action deadline which does not currently exist.  

F.	Elimination of Outdated Effectiveness Review (318A.e.(7)).  This amendment eliminates an effectiveness review of the GWA infill provisions, from the previous Rule 318A. amendment, that was required to be completed by March 1, 2008.

G.	Elimination of Limitation of Eight Completions (318A.f.).  This proposed amendment eliminates the restriction on the number of wellbore completions per quarter section, and thus the requirement that any increase in the number of completions beyond eight requires Commission approval.  The current limitation of eight completions has driven a significant increase in the demand for Commission hearings in recent months.  With the increasing demand for horizontal wells in the GWA, this trend will continue in the absence of this amendment.  

The limitation of eight wellbores commonly causes an operator to seek a well number exception because the current rule is not conducive to operator utilization of optimum infill well locations for recovery of the resource.  Sometimes the drilling sequence of wells resulted in bypassed reserves, as the eight-well limit would be reached before reaching each otherwise authorized infill location. The amendment provides greater flexibility for the operator to match the number and location of wells to that necessary to fully develop the resource.  This amendment does not eliminate the surface use limitation imposed in the original GWA Rule.  Utilization of GWA drilling windows and twinning existing wells are still required.

H.	Waste Management Plans (318A.h.).  This amendment requires an operator filing an Oil and Gas Location Assessment, Form 2A, to file a waste management plan in accordance with Rule 907.a.  The waste management plan will require the operator to describe its basic exploration and production waste handling operations at the location, including:  1) storage; 2) transportation method; 3) transportation frequency; 4) disposal sites; and 5) any planned re-use and recycling.  It is not intended that the waste management plan be particularly detailed.  It is intended to demonstrate the operator’s  conceptual plan for dealing with: 1) drill cuttings, produced water, and tank bottoms; 2) what the operator will do with the waste when it is generated; 3)  how the operator will be transport the waste; and 4) how the waste will be disposed. 

I.  No Impact on Existing Orders (318A.k.).  The amended rules will not override any existing Commission order establishing the authorized number of horizontal wells per spacing unit. This provision was requested by industry to protect settled expectations of parties to existing orders.  Any increase in the number of horizontal wells beyond that established by existing Commission order, may be authorized by application to the Commission and approval of a new order to that effect, just as this opportunity existed before the amendments. 

J.  Minimum Interwell Distance (318A.m.).  Operators were concerned about the possibility of new horizontal wells encroaching upon existing or other permitted wells. The proposed amendments establish a minimum distance of 150 feet between any new horizontal well and any existing or permitted wellbore, unless waived by the operator of the encroached wellbore.

3.	Elimination of Unnecessary Language in Rule 318A.(I).  As a result of the August 2011 Amendments, Rule 318A.(I) states that it has no application to lands within the City and County of Broomfield, Colorado.  The proposed amendments to Rule 318A. will make the GWA uniform across the entire GWA, including Broomfield.  Accordingly, the limiting language contained in Rule 318A.(I) will be removed, and the rule will be re-labeled, 318A.   

4.	Clarification of Existing Rules Applicable to Horizontal Wellbore Spacing Units.  The Amendments eliminate an ambiguity present in the August 2011 Amendments by clarifying that, for purposes of establishing horizontal wellbore spacing units, the productive portion of a wellbore lateral, instead of the entire length of the wellbore lateral, is the relevant consideration.  

Conclusion

These proposed amendments to Rule 318A., and Rule 100 Series definition of “horizontal well” will make the GWA uniform across the entire GWA, including Broomfield.  In doing so, the rules are expected to allow further development of the GWA in a logical and cooperative manner, to the benefit of mineral owners, residents, and industry, while continuing to provide balanced, reasonable protections to surface owners and the environment.