MEWBOURNE OIL COMPANY LOCATION EXCEPTION. SECTION z, TOWNSHIP 17 NORTH, RANGE 19 WEST, DEWEY COUNTY, OKLAHOMA MEWBOURNE OIL COMPANY

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: MEWBOURNE OIL COMPANY F ILED AUG COURT CLERKS OFFICE - OKC CORPORATION COMMISSION OF OKLAHOMA RELIEF SOUGHT: LEGAL DESCRIPTION: LOCATION EXCEPTION SECTION z, TOWNSHIP 17 NORTH, RANGE 19 WEST, DEWEY COUNTY, OKLAHOMA CAUSE CD NO APPLICANT: MEWBOURNE OIL COMPANY RELIEF SOUGHT: LEGAL DESCRIPTION: INCREASED WELL DENSITY SECTION z, TOWNSHIP i7 NORTH, RANGE i9 WEST, DEWEY COUNTY, OKLAHOMA CAUSE CD NO A. Case Summary Mewbourne wants an increased density well to capture reserves otherwise unobtainable in Section z Cleveland Sand. Mewbourne also wants a location exception to drill a mirror well. JMA stands in opposition because they fear damage to one of their wells.

2 Page 2 of 11 B. Recommendations One well will not drain the Section z Cleveland Sand. Because the geologic conditions are sitnilar and because this is Mewbourne's request for a mirror well so they can fairly compete for Cleveland Sand reserves, both applications should be granted without penalty. C. Hearing Date June 7, 2017 D. Appearances Richard Grimes, Attorney at Law, appeared on behalf of the Applicant, Mewbourne Oil Company. Charles Helm, Attorney at Law, appeared on behalf of the Protestant, JMA Energy Co, Inc. E. Exhibits i. Transfer of Operator Form 1073 z. Completion Report for Camargo Ranch 3. Production Plat (05/31/2017) 4. Volumetric Reserve Evaluation 5. Mewbourne/JMA Hrz Cleveland Sections Map 6. JMA 4GH i-3h Survey Plat and Report (Ranger Directional Services) 6A. JMA 4GH i-3h Survey Plat 7. Recent JMA Operated Cleveland HRZ Completions 8. Sonny 6 #3HC Graph 9. 4GH i-3h Graph 10. Permit to Drill (JMA) II. Completion Report for 4GH i-3h iz. Interim Order # Isopach Map (Cleveland Sand)

3 Report of the Adrninistrative Law Judge Page 3 of Interim Order # Gross Isopach Map (Cleveland Pay Zone) i6. Cleveland Gross Sand Isopach Map 17. Isopach Map (Cleveland Sand, revised 12/03/2014) i8. Completion Report for Sonny 63HC 19. Econornics Summary Graph for Sonny 6-3HC 2o. Completion Report for Toni 6 BO IFIC 21. Toni 6-iHC Report 22. Economics Sumrnary Graph for Toni 6i BO ihc 23. Completion Report for Florene 5MD 2HC z4. Economics Summary Graph for Florene 5MD zhc 25. Florene 5MD 2HC Report z6. Completion Report for Barracuda i-z7hc 27. Economics Summary Graph for Barracuda i-z7hc z8. Cornpletion Report for P&M Clem z8 PA II-IC 29. Economics Summary Graph for P&M Clem z8 PA IFIC 3o. Clem z8 PA IFIC Report 31. Mewbourne Letter to Mayhawk Energy (June 9, 2017) F. Evidence Summary Chuck Falkenstein, Land Witness Mewbourne first presented Chuck Falkenstein as its land witness and he represented Mewbourne owned about 43% of the 64o acres spaced Cleveland in Section z. In the location exception matter there were all good addresses and in the increased density matter there were three returns. The first was Respondent #69 for which Mewbourne mailed to a better address and that mailing has not returned. The second is Respondent #129, whose notice was returned and they are probably a deceased and curative party. The third Respondent with a returned mailing was #I38 and Mewbourne found a better address which was not returned. For the rernaining Respondent #129, the

4 Page 4 of 11 unknown party, Mewbourne exhausted in house records, county records, state records, Corporation Commission records, and consulted Accurint (a global website checking many other websites.) Publications appear proper and notice is found to meet the minimum standards of state and federal due process. Mr. Faulkenstein recommended October i6, 2017 as a suggested interim order reopening date and also proposed Mewbourne to operate the well. On JMA cross examination, Mr. Faulkenstein admitted Mewbourne had acquired the Carmargo Ranch well in Section z, with rights to the well bore and Cleveland rights outside the well bore. This was done by an August 31, zoi6 assignment from Chesapeake to Mewbourne. Terry Medina, Geologist Jerry Medina, a geologist, was Mewbourne's next witness and he has worked this area for years. He stated the Carmargo Ranch well was in the Oswego producing oil. It is co-mingled with the Cleveland, the Tonkawa, and the Skinner common sources of supply. He believed JMA had a Cleveland horizontal well in Section 3. Mr. Medina used a mapping method employing resistivity. He developed this methodology to identify about a 3o foot pay zone in the Cleveland sand in Section z. The Cleveland total vertical depth is about 9,00o feet and it is an oil producing formation. It is a tight sand with low porosity and vertical wells show about ten acres of drainage. The Section 3 JMA well is a horizontal Cleveland well producing oil. He testified Mewbourne needed to drill a mirror well to the JMA Section 3 well. He said the Mewbourne proposed well could be drilled from Section ii to the south. Mewbourne's proposed well would be 33o feet from the north and south lines and no closer than 800 feet from the west line of Section z.

5 Page 5 of 11 On JMA cross examination, Mr. Medina admitted there was no geological reason to move toward Section z's west line. During cross examination it was pointed out that a 2014 location exception case used a map showing the same Cleveland area as having about a zo foot thick, not this newer map showing about a 3o foot thick. On that 2014 map, the Section 3 Cleveland thick appeared the same as it does on the present map. This scenario was the same in Sections 10 and ii. There had been no additional vertical drilling or logs since the 2014 map. JMA emphasized that no changes had occurred since the 2014 map and they found no explanation for the different interpretations. Later testimony showed the maps had different footages for contour lines. Contour lines will change volumetrics. Mr. Medina stated that Charles Vace, an inhouse geologist from Mewbourne, may have done some of the geologic work. Mr. Medina admitted his methodology is not in a textbook and he was unsure if other geologists used his methodology. On re-direct examination, he noted Section z was completely underlain by the Cleveland Sand and added the 2014 contour interval was zo feet and the current map has a contour interval of io feet allowing for more detail. He said the placement of wells was not entirely based on the location of a formation thick. Using either map, Mewbourne would still ask for the location exception. Nick Stowers, Engineering Mewbourne next presented Nick Stowers as its engineering witness. Mr. Stowers said using standard parameters and well accepted engineering formulas, he found original recoverable oil in place in Section 2 at 489,000 barrels of oil. Attributing all existing production to the Cleveland, about z6,000 barrels of oil will be recovered leaving the remaining reserves of 463,000 barrels of oil. He noted an independent log evaluation supported Mr. Medina's geologic methodology. He said increased density was needed to prevent waste

6 Page 6 of II because even at half the projected Cleveland pay thickness there still remained about zzo,000 barrels of oil to be recovered. Mr. Stowers said the JMA Section 3 mirror well (not closer than 800 feet from the east line of Section 3) has lessened its choke restriction within the last two weeks. Barrels of oil produced per day rose to 800 from 65o. He did not know if a final order had issued for the JMA well but he was aware the JMA Section 3 well was producing. He noted there were several Commission orders showing JMA had done exactly what Mewbourne is requesting in this application. None of those had penalties and all were in the same general area. He testified that even if using an exchanged JMA isopach map and using the same parameters it would still leave 318,000 barrels of oil not recoverable without an additional well, plenty of reserves for an additional well. Mr. Stowers stated the engineering reason for the 800 foot from the west line location exception was the need for a mirror well for a chance to fairly compete for reserves and to prevent drainage from Section z. He believed without the exception that Section z would be disadvantaged by a 1,32o foot from the west line location. Mr. Stowers stated his analysis showed, without the Mewbourne opportunity to compete, a JMA recovery of 146,000 barrels would take oil 85 feet into Section z. If recovery was zoo,000 barrels it would be a 43o foot intrusion in Section 2 and at 278,000 barrels of recovery it would be a 928 foot intrusion into Section z. The 800 foot location exception for a mirror well would allow a no-flow zone to be created and protect Section z from drainage. This will comply with an implied lease covenant. He recommended no penalty, just like the Section 3 JMA well. On cross examination, he admitted using Mr. Medina's mapping and, using a pyramid formula, resulted in 331,000 barrels of oil undeveloped in Section 2.

7 Page 7 of 11 This was less than his prior testified 463,000 barrels of oil. He said there was an agreement to drill from a Section II surface location of 27o feet from the north line and 70o feet from the west line for Mewbourne's Section z well. He admitted that for JMA to produce z78,000 barrels of oil and impact 928 feet of drainage into Section 2 it would take about 52 years. He also admitted lessening the choke in a well about 45 days after initial production could be standard operating procedure. He also admitted it was possible that other Mewbourne wells have impacted offset wells. Mewbourne Oil rested its case. Carroll Kinney, Geologist JMA presented as its first witness geologist Carroll Kinney, and she said the zone under consideration is the Upper Cleveland and she has studied it for years. She believes Section 2 was not fully underlain by a foot thick in the Cleveland. She noted, using Mr. Medina's map, there was a thin part of the Cleveland formation in the west half of Section 2 and using Mr. Medina's 2016 map, there was a thick zone in the Cleveland in the west half of Section z. She noted there had been no new data available to consider since the 2,014 mapping. The mapping done by Ms. Kinney was much like Mr. Medina's 2014 map. She did not believe Mr. Medina's testimony about the contour intervals being the reason for the change as it did not make sense. Ms. Kinney drew io and 3o foot contour lines and that did not change testimony about the trend in Section z. She noted that Mr. Medina's mapping had shown the Section 34 Barnes well was zero gross pay and now his mapping showed z8 feet of pay in the Barnes well. She thought such changes were made to support Mr. Medina's mapping. When Ms. Kinney was asked why JMA did not put their well in the thickest part of the Cleveland reservoir, she stated JMA wanted its wells aligned in a north/south fashion for optimal well spacing. The idea is so JMA will not

8 Page 8 of I 1 have wells that are too close to each other in an east/west axis. She was unaware of any adverse drainage with an 800 foot to the section line location and believes no penalties necessary. She noted she sees thickening in the Cleveland Sand in Section z moving toward the east and stated Mr. Medina agrees with this belief. Michael Davis, Engineer JMA next presented its engineering witness, Michael Davis, and he recommended the increased density be granted and the location exception not be granted. Mr. Davis believes the location should be in the east half of Section z. Mr. Davis found there was lateral alignment in a north/south orientation in the general multi-section area and this should lead to similar well spacing to avoid damage to wells. He testified fracturing can affect nearby wells and the large size of fracturing being used could affect wells 2,50o to 4,00o feet away. He noted with a Mewbourne well i,600 to 1,700 feet away from a JMA well, a frac intrusion will affect the JMA well. He stated JMA wants the Mewbourne well in the east half to avoid frac damage to the JMA Section 3 well. He also stated the JMA well in Section 3 will never produce all the producible oil in Section 3. He recommended no closer than 1,32o feet from the east line of Section 3 and, again, did not oppose the increased density. He did state the Commission should limit injected water to 3,00o barrels of water per frac stage. On cross examination, Mr. Davis was asked how to drill under his north/south picket fence theory with different owners and, also, how to align all wells vertically when you have different geologic circumstances. Mr. Davis did not offer definitive responses. When asked if the Commission should be in the business of designing completions for oil wells, Mr. Davis responded there should be a frac plan with every location exception.

9 Page 9 of I I David Graham, Land JMA presented David Graham as its land witness and he stated there were respondents not on the Mewbourne list as shown by a title opinion. One of these was Caritas Energy and a second was Mayhawk Energy. Both cases were reopened on June 13th, where Mewbourne land witness, Chuck Falkenstein, testified Mewbourne had acquired the Caritas interest in the Cleveland and a waiver for the Mayhawk interest was admitted as Exhibit 31. G. Findings of Fact i. Mr. Medina and Ms. Kinney agree the west half of Section 2 is underlain by producible Cleveland Sand. They also agree there is no geologic reason to move towards Section z's west line. 2. Vertical wells drain about ten acres. 3. Whether there is a zo foot thick or a 3o foot thick in the Cleveland Sand in the west half of Section z, Mewbourne would still ask for this location exception for its mirror well. Mewbourne requests a mirror well to establish a no-flow zone and requests no penalty for its location exception. 4. Ms. Kinney stated she was unaware of any adverse drainage with an 800 foot setback and believes there should be no penalties necessary. 5. Ms. Kinney and Mr. Medina both agree there is a thickening of the Cleveland Sand moving toward the east in Section z. 6. Notice of this proceeding is governed by OAC 165:5-7-9(a) 7. Proper Notice of this proceeding was given pursuant to law and rules of the Commission.

10 Page 10 of 11 H. Conclusions of Law i. Mewbourne requests increased density to drill an additional well in Section z and Mewbourne requests a location exception to drill a mirror well and have the opportunity to fairly compete for oil. JMA opposes this because they believe Mewbourne should place a well further east in Section 2 where the Cleveland Sand is thicker and where the possibility of fracture damage to the JMA Section 3 well would be reduced. 2. Both geologists agree there is zo feet or more Cleveland Sand pay zone in the west half of Section z. JMA has a well about 800 feet from the shared section line between Section 3 and Section z. 3. Both geologists agree there is no geologic reason to move closer to Section z's west line. There was considerable disagreement concerning volumetrics. Mewbourne desires to drill the mirror well to establish a noflow zone and have an opportunity to compete for reserves before, they believe, those reserves will be drained from Section z by the JMA Section 3 well. 4. Mr. Davis proposed a north/south picket fence theory which is of questionable workability. There is different ownership in the general area and there is different geology in the area, so to place all wells in a consistent north/south position in differing sections could create significant inequity. Mr. Davis also testified the large size of modern frac'ing operations could affect wells 2,500 to 4,000 feet away. The Commission is unable to award future damages or to determine the applicability of a location exception based merely on speculative testimony. Mr. Davis also believed the Commission should limit injected water to 3,00o barrels of water per frac stage, should the location exception be granted. He also believed a fracturing plan should be included with every

11 Page 11 of 11 location exception granted by the Oklahoma Corporation Commission. The Commission is not positioned to design frac plans for private businesses. The Commission is simply not in the business of designing frac plans for private industry. 5. The proposed Mewbourne well and the existing JMA well rest in similar geologic positions and show similar drilling patterns. The idea that JMA believes Mewbourne should drill in a different place for better economics or design a different fracturing plan to protect speculative future damage are concerns for the operator, Mewbourne. It is a most difficult burden to show, by volumetrics, that drainage is occurring. However, it is not as difficult to find mirror wells not draining each other. Mirror wells having potential to drain offsets should establish a no flow zone. 6. The Mewbourne application for increased density drilling should be granted because additional wells are needed to fully drain Section z Cleveland Sand and the Mewbourne location exception should be granted because they should have a mirror well and the opportunity to fairly compete for Cleveland Sand reserves. There should be no penalty or limits on a fracturing program for the location exception. Respectfully submitted this 9th day of August, PEP: tt Paul E. Porter Administrative Law Judge Cc: Richard Grimes Charles Helm Maribeth Snapp Oil-Law Records Commission File Office of General Counsel