SP t2 12oO faah$ffi,4

Transcription

1 ILE D SP t2 12oO faah$ffi,4 BEFORE THE CORPORATION COMMISSION OF THE STATE OF APPLICANT: RELIEF SOUGHT: EQUAL ENERGY US INC POOLING - DEER VALLEY #1-31H LEGAL DESCRIPTION: SECTION 31, TOWNSHIP 14 NORTH, RANGE 5 EAST, LINCOLN COUNTY, OKLAHOMA - COURT CLERK'S OFFICE OKC CORPORATION COMMISSION OF OKLAHOMA CAUSE CD NO REPORT OF THE ADMINISTRATIVE LAW JUDGE This Cause came on for hearing before Susan R. Osburn, Administrative Law Judge for the Corporation Commission of the State of Oklahoma, on the 14th day of August 2013, at 8:30 a.m. in the Commission's Courtroom, Jim Thorpe Building, Oklahoma City, Oklahoma, pursuant to notice given as required by law and the rules of the Commission for the purpose of taking testimony and reporting to the Commission. CASE SUMMARY: Equal Energy US Inc. ("Equal") is seeking to pool Section 31 for the Hunton common source of supply, which was spaced as a 640-acre horizontal unit by Order No Applicant has proposed to drill a well in this unit and Thistle Royalty Co. LLC ("Thistle") and Tower Royalty Co. LLC ("Tower") entered a protest to the action. Under the prehearing conference agreement, the issues specified were the bonus value and royalty, the sharing of force pooled acreage, a request for 30-day spud notice provisions, and operations. During the hearing, the bonus values, the issue as to sharing of force pooled acreage, and the 30-day spud notice were all addressed to the satisfaction of both parties. Additionally, neither of the protestants were seeking to be designated operator. The only issue to be addressed at this point is the issue of jurisdiction, which arose during the hearing itself. Equal had contacted a representative of the protestants and negotiated for a multi-unit agreement to develop a number of sections prior to filing their pooling action. Unable to reach a consummated agreement that included this unit, Equal sent a formal proposal for this unit and then later filed their pooling application April 17th, In August 2013, the landman dealing with the representative from the protesting companies sent notice that Equal was withdrawing all their previous attempts to negotiate agreements with the protestants, which would include both verbal and written offers. Attorney for the protestants argued that by withdrawing all written offers, that would include the formal proposal letter

2 and therefore, since that is a prerequisite to filing a pooling action, the Commission would then lose jurisdiction to pool these parties. Applicant took the position that at the time they filed their pooling application, their proposal letter, which was sent prior to the filing of the pooling application, was in force and by withdrawing in August any earlier written or verbal offers for development would not vitiate jurisdiction established for their pooling. RECOMMENDATIONS: 1. It is the recommendation of the ALJ that the application of Equal seeking to pool Section 31, Township 14 North, Range 5 East, Lincoln County, Oklahoma, for the Hunton common source of supply, as spaced on a 640-acre horizontal basis by Order No , be granted. Based on the testimony of Equal employees, costs to date for this well, which has already been drilled, should be set at $3,059,675 for parties electing to participate in this pooling action. That the per well allocation of costs, as explained by the Equal engineer, have been determined on a reasonable and fair basis. 2. That Equal established the prerequisite bona fide effort to come to an agreement prior to filing their application, by the efforts made by their land department with the protestants. That the Commission has jurisdiction to proceed in this case to final order. 3. That the timeframes, bonus amounts, deeming provisions, and subsequent well provisions as recommended by the Equal landman are not in dispute and should be included in the order to issue in this cause. 4. That the order should provide for sharing of force pooled acreage within the entire unit, whether it is under the order to issue in this cause or the order which issued in the previous pooling order for this unit. HEARING DATE: August 14th, 2013 APPEARANCES: Richard J. Gore, Attorney at Law, appeared on behalf of Applicant, Equal Energy US, Inc. ("Equal") Eric R. King, Attorney at Law, appeared on behalf of Thistle Royalty Co. LLC and Tower Royalty Co. LLC. ("Thistle" and "Tower") 2

3 FINDINGS AND SUMMARY OF EVIDENCE 1. That CD is the application of Equal seeking to pool the Hunton common source of supply underlying Section 31, Township 14 North, Range 5 East, Lincoln County, Oklahoma. 2. The Commission has jurisdiction over the subject matter and notice has been given in all respects as required by law and the rules of the Commission. 3. The following numbered exhibits were accepted into evidence: 1. Current charges for the already-drilled Deer Valley 1-31H well. 2. A nine-section plat centered on Section 31 reflecting current lease values. 3. A letter from Equal to Chad McDougal, dated August 2nd, An Equal AFE cost estimate of the Deer Valley 1-31H well, signed by Mark Rupert on April 2nd, That heretofore, by Order No , this Commission established 640-acre horizontal spacing for the Hunton common source of supply underlying Section 31, Township 14 North, Range 5 East, Lincoln County, Oklahoma. 5. A. That Bob Kendrick, a landman qualified in matters of this kind, appeared on behalf of Applicant and stated he was familiar with this section. That Applicant owned 98% of the unit, and Tower and Thistle together owned about 2% of the unit. This well had been drilled as a horizontal Hunton well and has a TD of about 4,800'. He testified to the current costs of the well based on Exhibit 1, noting that the well's first sales were June 17th, He said there could be additional charges, that not all invoices had been received. As to bona fide effort to reach agreement prior to filing their pooling application, he had contacted Chad McDougal, who was negotiating with him for the protestants. His first contact with Mr. McDougal was by e- mail, and then he spoke with him on the phone, and they came to agreement as to a multi-section deal which included this area; after this agreement was reached, he realized that he did not have current addresses for Tower and Thistle to put on the oil and gas leases, so he ed Mr. McDougal requesting those current addresses and received no response. He thereafter phoned him, and Mr. McDougal indicated that he would get that information to 3

4 him when he had a chance. Over time he ed and phoned Mr. McDougal again and never got him to give the proper addresses, so he went ahead and used the last addresses of record for these entities and sent the multi-section leases to Mr. McDougal with a letter advising that if he did not sign and return the leases by a certain date, they would have to file a pooling for this unit. He never received the leases back, so they then filed this pooling application. By letter in August, he withdrew all the previous unconsummated verbal and written offers to the protestants. Mr. McDougal never advised why he would not sign the multi-section lease. The witness sent a proposal letter dated March 19th, 2013, and thereafter they filed their pooling April 17th, so there was a month before they filed, during which Mr. McDougal never responded to the proposal. From their first contact on February 22nd, 2013, until he sent the leases for the multi-section deal, he had been dealing with Mr. McDougal; within that timeframe they had determined they would send a proposal letter and then file for pooling if they could not reach an agreement. He recommended fair market value, based on the highest values paid in the nine-section area in the last year, would be $150 an acre and 1/8th royalty, $125 an acre and 3/16th royalty, or no cash and 1/5th total royalty. He identified Exhibit 2, which reflected transactions and poolings in the last year in this nine-section area. He explained that the poolings reflected Equal poolings and those pooling values were based on actual transactions in the area, and he was familiar with those orders. Exhibit 2 reflects Section 36 has a pending state lease, which is a Commission of the Land Office bid lease, and other than that there are no transactions in Section 36; that in Section 1 the only transaction is a lease over a year old which was a multi-section deal. He identified values section by section, noting that some of these reflect leases that are over a year old and that all are multi-section deals. He recommended the order reflect respondents have 20 days from the date of the order within which to elect, 25 days from the date of the order within which to pay any participation monies due, and 35 days from the date of the order within which Applicant is to pay any bonus due, and this would be upon receipt of a W-9 form from the respondent. He recommended if a party fails to elect timely or elects to participate and then fails to pay their costs timely, then they be deemed to have elected option 1, 2, or 3 so that they would receive the highest bonus which their NRI would entitle them to have; that all elections be limited based on the NRI a party can deliver. He recommended Equal be designated operator, and that elections be made to the operator, and that the operator pay any bonuses. Equal is a bonded operator in the state of Oklahoma and they will comply with rules for escrowing any monies that cannot be paid. He recommended, as to subsequent operations, that any initial working interest owner can propose a subsequent well and that the same elections, timeframes, and deeming provisions would apply for the subsequent well with all timeframes running from receipt of the proposal; that the well would have to be commenced within 180 days or the proposal would lapse, and that any proposal would have to include the costs of the well, location, and any other

5 pertinent information regarding the proposed well. That if there are multiple proposals, the earliest proposal would be the controlling and valid proposal. That in order to be a valid proposal, a party must obtain any regulatory orders necessary prior to proposing their well. That once a party opts out or is deemed out of participation of a subsequent well he is out of all future participation. He believed that the issuing of an order pooling this unit under the terms he has recommended would prevent waste and protect correlative rights. Regarding the issue of sharing of force pooled acreage, he said there would be no problem with that. As to the request for a 30-day spud notice, he said that would not be necessary under the order since this well has already been drilled. That the order should provide that operator continue operations of the Deer Valley well in a diligent, workman-like manner. 5. B. On cross by Mr. King, the witness agreed that he had sent a proposal letter to the protestants dated March 19th, 2013, and at this time he read Exhibit 3, the letter to Mr. McDougal for Tower and Thistle, dated August 2nd, 2013, which indicates a withdrawal of any and all unconsummated written or verbal offers made by Equal or their predecessor Altex pertaining to Section 31. When it was noted to the witness that this letter withdraws the required proposal offer, which was made prior to filing to pooling action, he said in fact the proposal letter was available, valid, and good when the application was filed. He explained that it was his intent that the letter was addressing the earlier agreements he had discussed with Mr. McDougal, although he admitted that his letter did not say it was limited to the multi-section negotiations. As to Exhibit 1, which was exchanged with protestants at the exhibit exchange, he acknowledged that it did not reference the specific Deer Valley 1-31H well, although he did not know if Mr. Gore had indicated that this was reflective of costs for the well in question when exhibits were exchanged for the Section 31 hearing; from a letter referencing the exhibit exchange, he agreed that it references both Section 31 and Section 11 wells, and does not indicate which well these costs would cover. He acknowledged that he had not prepared or supervised preparation of Exhibit 1, and he did not know what the charge for IDC-ACCRUAL would cover, that to his knowledge there was a lady in the accounting department, whose first name is Shawna and whose last name he could not recall, who would prepare this type of exhibit; that she acquired the figures for this well from bills they received on the well. That if any of the figures are incorrect, she would be aware of that. When asked if he knew what the well produced, he said he thought it produced just gas, and he knew it produced water, but he did not know the quantity. There are no charges for hauling because the water is piped to a disposal well, which is owned by an Equal affiliate. He was unsure exactly where the saltwater disposal well ("SWD") was located, and he did not know the number of wells using that disposal well. He did not know the costs of the disposal well, but knew it was several years old and that there were a number of wells hooked up to it, but he did not know the details. On Exhibit 1, he was asked where were charges for 5

6 the costs of the disposal well and he guessed it might be on the IDC-ACCRUAL line, but he did not know for sure. When asked if his proposal letter indicated respondents were to pay their share of the costs of the disposal well, he said it was his recollection that it was referenced as an access fee; at this time he was shown a copy of the proposal letter, and he noted it would be under option 1, the second paragraph that references the one time cost for access to the system has been included in the AFE and he agreed that would be the charge on the AFE of $757,000; it was his understanding a disposal well would cost about $3 million to drill. He reiterated he did not know the number of producing wells using this disposal well. When asked whether having at least four wells on the system would mean the SWD was already paid for, he responded that access costs include more than just the disposal well, that it includes tubing, piping, and other things. He did not know where the SWD was located and could not state that only four wells would be using it, although he agreed the $757,000 for access to the infrastructure system is an estimate of what would be attributable to the Section 31 well. He could not show where that $757,000 would show up on Exhibit 1 and acknowledged it was possible they could be charged for that later; if the Equal affiliate charged Equal and other working interest owners, then if Tower and Thistle participated they would also be charged. On Exhibit, 1 there are no charges for legal fees; he did not know if division order title opinions would be charged as legal costs or a separate category. The AFE sent with the proposal letter showed total well costs of $3,477,000 and it appeared the well cost was less than the AFE originally set out for this well; that the costs for connecting up to the SWD were not on Exhibit 1. That there would be a charge for transportation of saltwater to the disposal well, which would be actual costs, and it was his understanding it would be about 50 cents a barrel. Their proposal letter indicated such charges would be actual costs, but the proposal letter did not indicate that access to the infrastructure would be actual costs, although he understood any charge made for a SWD would be at actual costs. By looking at Exhibit 1 current charges, one would not know if it reflected the total costs of the well, even though the well is currently two months into production. He did not know if the costs for logging included the electric logs or mud logs. He did not know if the separate charges for lines, pipe, and valves on Exhibit 1 would include the pipeline, which should be included under the $757,000 AFE costs. He did not know if the road and location work charges would include ingress and egress to the well, nor did he know if directional tools were used here. The well was not frac'd, but when asked what the $41,741 were for, he said he did not know, nor did he know if the engineering costs were staff or consultant. He could not explain the outside consulting charge, the charge for permits, and he could not state for certain what the IDC- ACCRUAL charge would be, nor could he say how long they used the completion rig. As to questions about the charges for drives/panels, etc., Lo

7 subsurface equipment, tubing, intermediate casing, wellhead charges, conductor casing, he said he did not know and could not answer those questions. He said he did not know what the well was currently producing. When he sent the letter to Tower and Thistle indicating Equal would have to file a pooling if they did not receive the signed lease by April 1 1th, that lease covered Sections 11, 31, and twenty other units and was Equal's standard lease; it had different terms than Altex, their predecessor, had sent. The multi-section deal offer was $100 an acre and 22% total royalty, but Equal's proposal letter with their AFE for Section 31 sent March 19th was for $150 an acre and 1/8th, $125 an acre and 3/16th, no cash and 1/5th total royalty, or participation. Asked when costs would be due under a standard order providing 25 days from the date of the order, he opined payment would be due by the 25th day, and it should be received by that day not just mailed by that date; that is what Equal would expect. If it were mailed by the 25th day from the date of the order, that would not be timely and a party would be deemed to receive a cash and royalty based on the NRI they could deliver. He was referenced to an sent to JMA on August 2nd, 2013, regarding the Omega 1-33H well, which indicated that due to problems they had had with JMA and affiliates, that JMA could not participate if Equal did not receive their cost payments by the 25th day. Tower and Thistle together own about acres out of the 640 acres here, and they have offered to sign a lease similar to an older lease that would include some stratigraphic equivalent language which Altex had requested several years ago. He was aware of their offer and had indicated that to protestants, that if they would pay Equal's legal fees for this case, Equal would be willing to sign that lease too, but Tower and Thistle declined. Since he did not believe his Exhibit 3 letter applied to the proposal letter, he was asked why the August 2nd letter did not indicate that, and he said it did not occur to him at the time to exempt the proposal letter. As to the sharing of force pooled acreage by Tower and Thistle, he agreed there had been a prior pooling for this unit covering a number of respondents and he could not answer whether the sharing of force pooled acreage would include those interests. At this time the ALJ instructed the witness to clarify that issue with someone at Equal authorized to make that type of decision. On further cross, the witness agreed if the sharing of force pooled acreage was limited to today's application, that Tower and Thistle would get nothing. He did not know how much forced pooled acreage Equal acquired in the prior pooling, but he could find out. 7

8 6. A. At this time, Mr. King moved to dismiss the application because the offer and the proposal letter, dated March 19th, 2013, were withdrawn by the letter on August 2nd, 2013, and with that withdrawal of the offer, he believed the Commission lost jurisdiction to proceed in the pooling. He moved to dismiss further because the witness could not explain what the charges on Exhibit 1 would cover, he could not address the costs of the disposal nor disposal infrastructure, nor could he explain the IDC-ACCRUAL costs. That the witness did not prepare or supervise preparation of Exhibit 1 and could not say if additional charges might still be outstanding for this well. As a third cause for dismissal, he said that case law addresses the fact that if there is a SWD, then one has to have actual costs, and here the witness did not know the number of wells using the disposal well nor the actual costs of the disposal well, and he believed that the testimony of the witness that the drilling of a disposal well would cost around $3 million seemed excessive. Further, they do not know the transportation costs, and, in fact, the witness acknowledged there might be additional charges even for the disposal. That Tower and Thistle do not know the costs of this well if they seek to participate, nor do they know if they would be entitled to share in all the force pooled acreage in this unit. 6. B. In response to the motion, Mr. Gore stated that the proposal letter was sent March 19th, 2013, and there is no indication that the respondents here did not receive it. That they were negotiating multi-section deals and, in fact, the witness sent a letter withdrawing offers as to those negotiations. That at the time of the proposal letter, Mr. McDougal had over four months to accept or reject the proposal, which is more time than is usual in pooling actions, and in fact it included a period of time when the land witness was making effort to contact Mr. McDougal regarding agreements to develop. He noted that Commission rules do not require that an Applicant maintain their offer after they file a pooling, that the rules say they will make a bona fide effort to reach an agreement before a pooling is filed, but it does not say that the Applicant will then maintain the offer throughout the pooling or protested pooling. That the pooling application is only filed after negotiations do not result in an agreement, so it seems that all offers would automatically be withdrawn upon filing of the pooling since the respondents have indicated they are not interested in making a private agreement. He believed the Commission still has jurisdiction, that the later letter in August withdrawing prior offers is after the pooling was filed, and the Commission would not lose jurisdiction. That additionally, on June 24th, when they signed and filed their prehearing conference agreement, Tower and Thistle listed various issues and it was clear at that time they were not interested in making a deal and were protesting the cause, so from March 19th to June 24th, the parties were still not agreeing to develop this unit and the force pooling should go forward. As to the AFE cost versus the Exhibit 1 costs, he said that most poolings have an AFE which is an estimate of the costs, but this case has been dragged out until the well has been drilled and they have most of the costs in on this well. He could

9 understand their argument better if the actual costs exceeded the estimated costs, but they do not, so he is not quite clear why they would object to the Exhibit 1 invoiced costs. He acknowledged that some more costs might come in, but that would be expected. Applicant does not have to provide all actual costs at this time, but if protestants had problems with the AFE costs, which had been sent with the proposal letter, they could have filed for discovery in the four months before the hearing on the merits today. He reiterated there was no reason to dismiss the cause. As to disposal costs, Equal will charge only the actual costs in this case. He noted none of the argued reasons presented by Mr. King were a basis for dismissal. 6. C. In response, Mr. King noted that the fact that there were over four months to make a decision, in this case, was irrelevant. That the proposal letter was withdrawn, the AFE which was attached to the proposal letter was also withdrawn, and they need to address actual costs here. Mr. Gore argues that usually they have only an AFE in these type of actions, but since that was withdrawn, he believed that they need to address the actual costs since no AFE was presented. That the saltwater disposal access charge of $757,000 was asked about and the witness did not know if it was included in the actual costs. They are not asking that the witness know all the actual costs, but here the witness could not explain any of the costs. He believed Tower and Thistle were still trying to settle this cause, that in fact they made an offer this morning to settle the case and it was rejected. 6. D. At this time the ALJ denied the motion to dismiss the cause, noting that the proposal letter was still in effect at the time the pooling was filed. That it appears the August 2nd withdrawal of unconsummated written or verbal offers previously made was explained by the witness to refer to the multi-section deal negotiations, and it was his intent that the withdrawal apply only to those and not to the proposal letter, although he acknowledges it was not clear in the letter. It is the opinion of the AU that even if the withdrawal applied to the proposal letter it would not make any difference since the proposal letter was still in effect at the time the pooling order was filed and jurisdiction attached. As to the AFE costs versus actual costs, the AU indicated there were still questions about that, and she wanted the witness to use the lunch hour to clarify certain issues regarding costs and the force pooled acreage to be shared from this unit's poolings. That everyone agrees disposal costs will not be more than actual costs. Further allocation of the costs of the disposal well need to be on the record so Tower and Thistle will have an idea of what their share of the costs would be for participation. The ALT noted in particular that the Exhibit 1 line item of IDC-ACCRUAL for $352,440 needs to be clarified. At this time, all parties broke for lunch and to gather information. 7. A. Bob Kendrick was recalled to the stand by Mr. Gore. He stated that the proposal letter offer was still good. He explained that Equal

10 does not charge any participant for the title opinion. He reiterated that they had never received an executed lease from the respondents for this unit, and his verbal offers to respondents were never consummated. As to sharing of force pooled acreage, Equal had pooled acres under their original pooling and he later explained that if respondents participated they could share in that force pooled acreage. As to mailed versus received elections or payment of costs, they had discussed it at the company and believed that such elections or payment of costs would be timely if they were postmarked and mailed within the timeframe provided under the order. That the Exhibit 4 AFE is a copy of the one sent to the respondents in Equal's proposal. 7. B. On cross, the witness reiterated that the proposal letter offer was still good; he agreed based on the Exhibit 3 letter, parties would probably not know that, but they still could elect under the pooling order for those terms. As to no charge to working interest owners for the title opinion, he explained that if a working interest owner wants a copy of said title opinion, they would need to pay their share of its costs. That Equal's position had changed regarding timely election and timely payment under orders, and they now believed if a payment or election made under the pooling order is postmarked and mailed within the timeframe offered under the pooling order it would be timely. As to the letter to JMA regarding when such payment or elections had to be received, he said he had been instructed to do that and the party who had instructed him regarding that position has now agreed that timeliness is whether or not such election or payment is mailed and postmarked timely within the order timeframe. 8. A. At this time, Mr. King agreed Equal's petroleum engineer responsible in this area could be called for clarification testimony even though he was not listed on the prehearing conference agreement. Mark Rupert, a petroleum engineer qualified to testify in this type of hearing, appeared and stated that he was Vice President of Operations for Equal and was very familiar with the well here. That he was ultimately responsible for overseeing the staking, construction, drilling, completion, and production of the well, and he was also familiar with the Exhibit 1 presented herein. As to the costs for Drives/Panels, he said that was the cost for the variable speed drive that transfers power to the downhole submersible pump used to produce the well; that Line, Pipe, Valves, & Fittings represent parts used to connect the production equipment at the surface, and he explained that it is mostly stainless steel with some polypipe which they bury; that steel has to be used in a dewatering project where they are carrying 4,500 to 5,000 barrels of saltwater daily along with the gas and some oil. As to the costs for Land Damages And Right Of Way, he said that number was about half of what they paid for the surface location, since this location is shared with the Section 29 Park City well. That the costs for Logging (Cased Hole) does not include the mud log, that it is the open hole log and the bond log, that the mud log costs are in the category Other Outside Consulting Services, which shows $52,413, of which 10

11 about $19,950 would be the costs for mud logging. The Engineering Services/ Supervision charges are mostly for Equal's personnel being out there, mainly the geologist and some charges for the engineer. The IDC-ACCRUAL of $352,440 is an accounting place holder used internally, but is never billed out to the joint account and is not on the AFE; that this number is a total of the costs that have come in plus the costs of what they expect might still come in; this number should be deducted from the total at the bottom of Exhibit 1, which would leave $2,302,675, and this would represent the costs that have come in to date and would be billable to the working interest owners. Regarding Road, Location, & Restoration, the witness explained that number was the costs incurred to build a tank battery facility and to provide rock for the location since it was built during the rainy season and they needed the rock for stabilizing the location. That Contract Labor & Special Services would be for labor to build the tank battery facility and for the completion operations; this would be different from the previous category of Road, Location, & Restoration which would involve the dirt work, while Contract Labor & Special Services would include the hook up and welding for the tank battery. Regarding the Exhibit 4 AFE, the $757,000 access to infrastructure is based on his review of the costs he receives from accounting for the existing system, and that would include the costs of the SWD; injection pumps on the disposal well; electric facilities, which includes about 8,000' of power line; and the cost of water handling, which includes about 8,000' of water line to take the water to a holding tank and from there it is taken to the disposal facility. All these costs are determined and then prorated among the fifteen wells which use the facility, fittings, and tanks. He explained that the Deer Valley 1-31H well and the Section 29 well share line costs, and he went to the board and drew lines representing the movement of water among the first six wells or so, which use the disposal well. He explained how he allocated the costs, that he tried to make an allocation to charge each well fairly for their disposal. He explained that when a well is added to the system, accounting adjusts the allocation to reduce the costs for the existing wells and to allocate a fair cost to the newly added wells. He did a cost allocation along distance to account for the water lines and electric lines per well; the electric costs per well are allocated based on the water production so that each well is charged for only the portion of the power used and the water lines attributable to them. Some costs are directly attributable to the wells, such as the lines and pipes for electricity and moving the water, and other charges are allocated costs shared and attributed based on the fifteen wells in the system. When asked what the costs for drilling and equipping a disposal well were, he said that they would AFE such a well and two pumps for about $3 million, currently. He noted that they try to charge each well fairly for their disposal costs and when a well is added to the system, accounting adjusts the allocation to reduce costs to wells along the system. He then went into some detail explaining how these additional wells can affect the allocation of costs within the system, accounting for distance, number of wells, tanks, and the disposal well itself. This is a 11

12 complicated system of allocation, and he went into some detail to explain it. He noted that the cost for electricity is allocated in a similar manner, that the electric costs are per well and the disposal well pump/ electricity is allocated based on the water production from each of the wells. An additional increase in cost for the electric facility is the fact that the surface owner would only agree to the lines if they were buried, and it is very costly to bury the lines; that actually, the water lines are more expensive than the electric lines. That for the total costs of this proposed well, one would need to add the $757,000 to the previously adjusted costs on Exhibit 1 of $2,302,675, so a good estimate for the well costs for participation election would be $3,059,675 and Exhibit 1 costs should be so amended for the cost provision under the order to issue in this cause. 8. B. On cross by Mr. King, the witness was asked why one could not multiply the $757,000 costs attributed for the disposal well by two for the total charges for the Deer Valley and the Park City wells, and the witness agreed that they would each incur that cost and that would total over $1.5 million; he agreed other earlier wells of the system had paid their share at the time they went online, but noted there were other wells that used to be online to the northwest. He agreed there were subsequent wells added to the system after the first two wells were drilled and that those two wells had initially paid 100% of the costs of the disposal well. Each new well paid for the extension of the system from the original two-well pad up to its pad at the new site; these two wells pay about a quarter of the original line costs and the wells that originally paid 100% of the costs would get a credit back; this accounting is to be done by the accounting department. When asked if the accounting department in fact did that, he explained that they do not work directly for him, but he assumes they do as they are told for accounting. Since he indicated the costs of a SWD plus two pumps would be about $3 million, he was asked if, since there were fifteen wells using the system, that would not calculate to a payment for the disposal well of over $11 million, he said that was not the case, that the cost is prorated based on the cost of each segment that is used for each well; that there are fifteen wells disposing here so the cost of drilling the well and putting the high pressure pumps on would be divided by fifteen. In addition, there would be a segment cost from the disposal well to the first two wells, and l/ 15th of that cost is allocated to the Section 29 and 31 wells, and then 1/ 13th of the cost on the segment to the other two wells to the north, 1/6th of the cost to the segment to the two wells that were put on just before the Deer Valley and the Park City wells, and half of the cost of the segment of the water and electric lines from the last two wells down to the Park City and Deer Valley wells. That this is a complex method of allocation, but he believes it is fair with the allocation done by segment as each well is added on. Mr. King said it appeared to him that the $757,000 charged to the Deer Valley well seemed high, and the witness noted that if the electric line segment cost $800,000, which he thought it might, and 12

13 if the Deer Valley well's charge on that would be $400,000, and if 1/ 15th of the cost of drilling the disposal well would represent about $200,000 based on Mr. King's calculation, that the charge was already up to $600,000 and that they had not included the disposal line for water yet, so he felt the figure of $757,000 was pretty close to the Deer Valley well actual costs for its share of the facility. When asked about the tank charges, he explained that there are two 210 barrel tanks for production and Exhibit 1 shows zero for that charge, so either they were charged under another item or the tanks were moved from one facility to this location and the material transfer has not hit the charges yet. (This charge was later found on the sixth line as $10,500 for Stock Tanks.) He noted they also have one 300 barrel fiberglass tank to hold the saltwater and also on location are three separators, and that charge is under Separation on Exhibit 1. That the Contract Labor & Special Services charge was mostly for the directional driller, the casing crew, and roustabouts. Although the prior witness testified that this was a gas well, in fact some oil is produced also. Exhibit 1 was prepared by the accounting department, probably by Shawna Bailey. When asked if there were any other significant bills that might show up later, he said there might be some for surface equipment, but he did not expect any for major items. He agreed that building the tank battery and pad would run about $187,000 and that Land Damages and Right of Way would run about another $50,000 if one were totaling up everything for those charges. IDC-ACCRUAL is just an accounting placeholder for the balance of the costs that might come in and it is never billed out. For this accounting placeholder number he said that he keeps a running daily cost on each well and those costs do not include repairs to rental equipment nor sales tax; he then gives accounting the cost that he gets from his field operatives plus 10% to cover any additional costs. Regarding the completion rig, he did not know the number of days it was on location, but he said it costs about $3,000 a day, so based on the costs here it looked like about 7 days. 8. C. On redirect he said Equal has about 75 wells in this field, and he has been involved in about 25 of them and has a good feel for the costs of drilling these wells. As to the $11 million Mr. King referenced in his multiplication of the $757,000 times the fifteen wells, he agreed that potentially they have spent that much on all the costs on fifteen wells and their lines and equipment, and he did not think the number was out of line. He did not know what the Water Tanks & Associated Costs charge of $7,500 represented, that there should not be anything on this cost sheet for the handling of water on this well, and he would have to check on what this charge represented, that it might be associated with the stock tanks. For the pooling order the well cost should be shown as $3,059,675. This is less than the amount of the original AFE, so the well was coming in under the estimate. 13

14 8. D. On recross, he agreed the AFE estimate was dated April 2nd, 2012, and that Exhibit 1 had no date for charges to the well, but he believed those charges were correct and current. 8. E. As to the Exhibit 4 AFE, he believed it was an accurate estimate of the cost at the time it was prepared. 9. At this time, the ALT noted to Mr. King that, based on the prehearing conference agreement and issues, there was no objection by protestants as to bonus and royalty, that they had gotten their request to share the entire amount of pooled acreage in the unit, that the 30-day spud notice provision was moot at this time, and that protestants were not seeking operations, therefore the ALJ wanted to know what issue Mr. King felt needed to be addressed. Mr. King asked to go off the record, at which time he indicated that, upon reflection, he believed the issue remaining was the withdrawal of offers and the fact that he believed there was no valid proposal so the question of jurisdiction would remain. The ALT noted that she had already addressed that issue to some extent by denying the motion to dismiss, but would address it more fully in a report. 10. The ALT took the cause under advisement and closed the record. RECOMMENDATIONS AND CONCLUSIONS After taking into consideration all the facts, circumstances, evidence, and arguments in this cause, it is the recommendation of the ALT that the application of Equal Energy US Inc. be granted with the bonus values, well cost, timeframes, and subsequent well operation provisions, as recommended by Applicants landman and engineer, to be included in the order. Additionally, the order should provide for respondents to have an opportunity to share in force pooled acreage, if they participate. The only issue remaining in this cause is as to jurisdiction of the Commission to proceed in this cause. The ALT previously addressed the issue when she declined to dismiss the cause on oral motion of protestants' attorney. Clearly, at the time Equal filed the pooling application, a formal proposal letter had been sent. This proposal letter was sent March 19th, 2013, and there is no indication that said proposal letter was not received by respondents. Applicant's application for pooling was filed thereafter on April 17th, The proposal letter, a prerequisite to the filing, was sent almost thirty days prior to the filing of the application; with that, and the timely publications of notice and the mailing of notice of the hearing, clearly the Commission has jurisdiction to proceed in the cause. 14

15 Protestant argues that since Applicant's landman later withdrew all unconsummated verbal or written offers, that would include the formal proposal letter with the attached AFE, and therefore the Commission lost jurisdiction to hear the case. In response, the Applicant's witness indicated that the withdrawal of the offers applied to only the multi-section negotiations and he did not intend for that to apply to the proposal letter; however, he did admit the letter withdrawing those offers did not state it did not apply to the proposal letter; he said it simply did not occur to him that anyone would think his withdrawal referenced the proposal letter. In any event, it is the opinion of the ALJ that the proposal letter was valid at the time of the filing of the application. Even if one accepted the fact that the withdrawal applied to the proposal letter, with proper notice to the parties and proper publication, the Commission's jurisdiction to hear this cause had already attached. While the issue of jurisdiction can be raised at any time during a proceeding, once the Commission's jurisdiction to hear a cause exists, a party's action by a letter or declaration after that jurisdiction has attached does not invalidate the existing jurisdiction. RESPECTFULLY submitted this 12th day of September SRO :js xc: Richard Gore Eric King Michael L. Decker, OAP Director Oil Law Records Commission Files &~~. 4 Susan R. Osburn Administrative Law Judge 15