BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA MEWBOURNE OIL COMPANY DRILLING AND SPACING UNITS (HORIZONTAL UNIT)

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: MEWBOURNE OIL COMPANY RELIEF SOUG DRILLING AND SPACING UNITS (HORIZONTAL UNIT) LEGAL DESCRIPTION: SECTION 28, TOWNSHIP 15 NORTH, RANGE 16 WEST, CUSTER COUNTY, OKLAHOMA CAUSE CD NO FILE 1 JUL APPLICANT: RELIEF REQUESTED: LEGAL DESCRIPTION: SANGUINE GAS EXPLORATION, L.L.C. HORIZONTAL DRILLING AND SPACING UNITS W/2 OF SECTION 21 AND W/2 OF SECTION 28, BOTH IN TOWNSHIP 15 NORTH, RANGE 16 WEST, CUSTER COUNTY, OKLAHOMA; AND E/2 OF SECTION 21 AND E/2 OF SECTION 28, BOTH IN TOWNSHIP 15 NORTH, RANGE 16 WEST, CUSTER COUNTY, OKLAHOMA COURT CLERK'S OFFICE - OKC CORPORATION COMMISSION OF OKLAHOMA CAUSE CD NO REPORT OF THE ADMINISTRATIVE LAW JUDGE These Causes came on for hearing before Susan R. Osburn, Administrative Law Judge for the Corporation Commission of the State of Oklahoma, on the 9th and 10th day of May, and the 5 th day of July, 2012, at 8:30 a.m. in the Commissions 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:

2 These are competing horizontal spacing applications with Mewbourne seeking a 640 acre horizontal unit for the Cottage Grove covering Section 28, T15N, R16W, Custer County, Oklahoma and Sanguine seeking irregular 640 acre horizontal units for the Cottage Grove, Douglas (Upper Tonkawa) and the Tonkawa (Lower Tonkawa) in Sections 21 and 28, T15N, R16W, Custer County, Oklahoma, consisting of two units with Unit #1 being a stacked irregular 640 acre unit comprised of the W/2 of 28 and the W/2 of 21 and Unit #2 comprised of the E/2 of 28 and the E/2 of 21. Mewbourne plans to drill a horizontal Cottage Grove well at an off pattern location with a lateral around 4100' which is what they have done in Oklahoma in a number of wells in the past. Sanguine wants to have their spacing in the hopes of drilling a very extended lateral; they have horizontal drilling experience in a few wells in Oklahoma and a number of wells in Wheeler County, Texas with laterals ranging from an average of about 3500' up to a maximum of around 4800'. Both sides agree the Cottage Grove underlies both Sections 28 and 21, but they dispute how development should occur. RECOMMENDATIONS: That the application in CD of Mewbourne Oil Company seeking an order creating a 640 acre horizontal drilling and spacing unit for the Cottage Grove common source of supply underlying Section 28, T15N, R16W, Custer County, Oklahoma, with said unit to be formed by a governmental section with permitted well location at a point no closer than 660' to the unit boundary be granted. 2. That the application in CD of Sanguine Gas Exploration, L.L.C. requesting an irregular 640 acre horizontal units be established for the Cottage Grove, Douglas (Upper Tonkawa) and Tonkawa (Lower Tonkawa) common sources of supply underlying Sections 21 and 28 with said units comprised of irregular 640 acre units one in the W/2 of Section 21 and W/2 of Section 28 and another unit in the E/2 of Section 21 and E/2 of Section 28 all in T15N, R16W, Custer County, Oklahoma, be denied. Page 2

3 3. That the depth of the top of the Cottage Grove common source of supply be shown as 8515' as provided by the Mewbourne engineer's testimony using the base of the Avant as reflective of the top of the Cottage Grove. 4. That the legal location of the horizontal unit comprised of Section 28 be established as no closer than 660' from any unit boundary. HEARING DATE(S): May 9 & 10 and July 5,, 2012 APPEARANCES: Richard A. Grimes, attorney, appeared on behalf of applicant, Mewbourne Oil Company Eric King, attorney, appeared on behalf of Sanguine Gas Exploration LLC Nancy Lambert, appeared by phone and entered a Pro Se appearance on behalf of Mack M. Braly FINDINGS AND SUMMARY OF EVIDENCE 1. A. CD is the application of Mewbourne Oil Company seeking an order creating a 640 acre horizontal drilling and spacing unit for the Cottage Grove common sources of supply underlying Section 28, T15N, R16W, Custer County, Oklahoma, said unit to be formed by the governmental section with permitted well location to be at a point not closer than 660' to the unit boundary. Page 3

4 B. CD is the application of Sanguine Gas Exploration, L.L.C. requesting that irregular 640 acre horizontal units be established for the Cottage Grove, Douglas (Upper Tonkawa) and Tonkawa (Lower Tonkawa) common sources of supply underlying Sections 21 and 28. That the units be comprised of an irregular 640 acre unit in the W/2 of Section 21 and the W/2 of Section 28 and another unit in the E/2 of Section 21 and the E/2 of Section 28, all in T15N, R16W, Custer County, Oklahoma. That the legal location for each unit is to be no closer than 660' to the unit boundary. 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. evidence: 3. The following numbered exhibits were accepted into 1. A production plat centered on Section 28 reflecting the wells throughout that nine section area. 2. An isopach map of the gross Cottage Grove Sand centered on Section A structure map of the Basal Cottage Grove Sand centered n Section Sanguine's Exhibit "A-i" modifying their Exhibit "A" to their application for Section Sanguine's Exhibit "A-2" modifying their Exhibit "A" to their application for Section Sanguine's Cottage Grove Gross Sand isopach with structure top superimposed. 7. Sanguine's Tonkawa Gross Sand isopach. Page 4

5 8. A copy of a wellbore drawing made during the hearing for demonstration purposes. 4. A. That Chuck Falkenstein, a landman qualified to testify in matters of this kind, appeared on behalf of applicant. He stated that Mewbourne had the right to drill owning acres in Section 28 and that Sanguine also had the right to drill owning 375 acres in Section 28. The Exhibit "A" attached to the application reflected all the owners entitled to share in any Cottage Grove production from Section 28 other than Mewbourne; that all parties had proper notice for this hearing. He explained that they had found a new address for respondent #7 and had given them timely notice and that they were unable to locate a current address for respondent #5 explaining that when he had checked the records in Texas it showed a last address in Texas as the unclaimed money fund for the State of Texas (that this interest used to belong to Nelson Hunt who had gone through bankruptcy and he was unable to find anything further). B. On cross regarding respondent #5 he said that he did not check the bankruptcy records although he was aware that Mr. Hunt had gone through bankruptcy and he agreed that possibly that would be a logical place to check further but he didn't do that. Mewbourne's acres were obtained through three year leases which they acquired starting around the end of 2011 up to March of He agreed a delay here, even as late as January of 2013, would not cause them to lose any of their acreage nor would Sanguine, since their leases don't begin to expire until June of Mewbourne will later be seeking a pooling order designating Mewbourne as operator. He denied that Mewbourne had a stated policy to not participate in wells drilled by other operators and he denied that this was contrary to what he had told Vaughn Martin. He believed Section 21 to the north had existing Cottage Grove nonhorizontal 640 acre spacing; they have filed to pool that unit and believe the Cottage Grove is prospective there. C. On redirect he confirmed the application to pool Section 21 included the Cottage Grove and other zones; it was filed April 16, 2012 and set May 7th, but was protested by Sanguine. He reiterated that Mewbourne does not have a policy to not participate in wells drilled by other Page 5

6 operators, although in his nine years at Mewbourne they had not participated during that timeframe in wells drilled by other operators. 5. A. Gerrard Medina, a consulting petroleum geologist qualified to testify in matters of this kind stated he had been hired by Mewbourne to do a study of this area and to appear at their Cottage Grove hearings; he had worked as a consultant for them for the last 5 or 6 years. He identified Exhibit 1 as his production plat with each of the wells color coded for production; the blue numbers under each well reflected the numbers on page 2 of the exhibit which contained a line of information with the operator's name, well number, the zone producing and oil and gas cume information; this separate information page avoids cluttering the production plat. The Section 28 Coit well is coded to show three zones that produce and since it had 3 different zones there were three different lines applicable on page 2. Section 28 also shows the north to south track of the proposed horizontal Cottage Grove well. Exhibit 2 is his isopach map of the gross Cottage Grove Sand based on log review. From his experience in areas of horizontal drilling of shaly sands it was better to have a gross interval map which is a better reflector of the geometry of the underlying formation and better for picking well locations at the start of horizontal development. The Coit well shows 38' of gross Cottage Grove and red numbers by each of the wells reflect the gross Cottage Grove found in the log. To the west is the newly drilled Dotson #29 1-H horizontal Cottage Grove well which is currently being tested and the engineer will have further information on it later. Exhibit 3 is his structure on the base of the Cottage Grove based on publicly available logs. The Cottage Grove structure becomes a little higher to the east in Section 28 and that is one of the factors in their request for 640-acre horizontal spacing; that they anticipate the Cottage Grove to have a lot of oil content and oil is heavier than gas so for production of oil the engineering is different and structure helps in its production. He did not pick the proposed location but believed the petroleum engineer helped. The Dotson well in Section 29 has not been completed and he has been advised there was a strong indication of crude oil with water, but he didn't know if that was formation water or load water. He believed the Cottage Grove would be susceptible to oil production even before the Dotson well based on development in the general area. The Section 22 well is up dip to Section 28 and was oil productive. When vertical units are established and they believe it Page 6

7 will be oil productive there are limits on the unit size based on depth; Section 22 Cottage Grove is spaced on vertical 640-acre gas spacing; in Section 28 currently there is no 640 acre spacing for the Cottage Grove at all. For vertical Cottage Grove oil spacing the maximum size unit they could establish in Section 28 would be 80 acres based on the top of the Cottage Grove at 8,650'; that would allow a very short lateral of about 2,640'; they have proposed to develop Section 28 with a 4,000' or greater lateral length. The Section 21 Cottage Grove is spaced 640 acres and they can drill a horizontal well there and Mewbourne has a location exception for Section 21; they are seeking horizontal spacing for the Cottage Grove in Section 28 since they believe it will produce oil. This horizontal spacing in Section 28 would allow a legal location of no closer than 660' to any unit boundary for a conventional reservoir and for a nonconventional reservoir they can drill even closer to the unit boundary the Cottage Grove is a sandstone with a lot of shale and carboneous material and Mewbourne is not claiming it is a nonconventional reservoir. Mewbourne has a pending location exception request for their proposed well in Section 28 which will encroach both the north and south unit boundaries He has worked this region since 1980 and has reviewed the Cottage Grove. During that time he worked for Woods Petroleum and they did not like drilling for the Cottage Grove because it was a tight fine grain sand with some shale interspersed and not good for vertical development. He had not seen evidence of natural fracturing in the Cottage Grove but based on his studies of the Cleveland he would not be surprised if there were some small natural fracturing. The Cottage Grove is better for horizontal development due to the nature of the rock; while it might make a certain amount of production over a 100 years through a vertical well, there would be more efficient development and better profitability to develop horizontally. His Exhibit 2 shows the Cottage Grove underlies all of Section 28. That Sections 29 and 21 are already spaced on a 640-acre basis for the Cottage Grove and they have drilled the Dotson #29-1H off pattern well in Section 29 and they have an order for an off pattern well in Section 21. The Dotson well is the only horizontal Cottage Grove well in this nine section area and is currently being completed so there's not a lot of production data and he hasn't done a drainage study of the Cottage Grove. Mewbourne wants to drill both Section Page 7

8 21 and 28 for the Cottage Grove. Their requested spacing for Section 28 will prevent waste and protect correlative rights. B. On cross when asked whose correlative rights this requested spacing would protect he said it would protect mineral owners in Section 28. When asked about mineral owner correlative rights in Section 21 he said interest owners in Section 21 would not be entitled to share in production from Section 28. He was aware Sanguine had filed to establish irregular horizontal spacing consisting of the W/2 of Section 21 and the W/2 of Section 28 as one 640-acre unit and the E/2 of 21 and the E/2 of 28 as a second 640 acre irregular unit. He did not know when the Section 21 Mewbourne location exception was filed, nor whether it was prior to the drilling of the Section 29 well. The proposed Section 28 horizontal lateral would be about 4000' and approximately located as shown on his exhibits. When asked if Sanguine's proposed irregular unit in the E/2 of 21 and E/2 of 28 could have a much longer lateral, he said Sanguine could attempt that. As to laterals of over 4000', he was aware in western Oklahoma there had been one well drilled in another zone that exceeded that; in eastern Oklahoma, which is a different type reservoir development, there were some but they were all to zones other than the Cottage Grove. He had earlier indicated horizontal spacing was better here than vertical spacing because the horizontal rules would apply so the well can be closer to the unit boundary than in vertical units and its lateral longer.. He believed the top of the Cottage Grove Sand was around 8640' or 8650' based on the Coit #1-28 well. That there was Cottage Grove formation found at 8608', but the reservoir quality begins at about 8640' or 8650'. For his Exhibit 2 gross map he did not use porosity logs. The 38' in the Coit well shown on Exhibit 2 did not represent the entire gross sand package, since his isopach did not include all the Cottage Grove. When asked what that 38' represented, he said based on his experience in shaly sand horizontal plays he has had to change the way he maps these sands; that he could not map those type sands within a traditional net porosity cutoff. That he uses a combination of the resistivity log and the Sp deflection to the left and from those he derives his thicknesses shown by each of the wells on Exhibit 2. To explain further he checks the Sp on the one inch presentation for an area of no deflection to determine his zero base line both above and below the interval and that would represent the Cottage Grove; then he identified a kick to the left in the Sp Page 8

9 curve; when the resistivity curve reaches 8608' on the Coit there's a resistivity increase on the log and the decrease on the resistivity curve and that area within the Cottage Grove zone represents the footage he picked for his Exhibit 2. For Cottage Grove resistivity reading he used a standard of 15 to 20 ohms. That the 38' on his Exhibit 2 would therefore represent their target zone. He disagreed if one looked at just the Sp curve on the Coit well that it would show 80'. When he saw a significantly greater differential when looking at the two curves he would count that, but not just a slight increase. He agreed normally when one sees a gross isopach without a net porosity cutoff that one expects it would include all the sand from the top to the bottom; that for shaly sands he would include some shale in his picks but he did not do that here. That he had compared his evaluation with the porosity logs and they didn't strictly agree. If he had used a porosity cutoff for a vertical case he would have used an 8% porosity cutoff, that for a horizontal case he does not use porosity cutoffs. In the Coit well the 38' of Cottage Grove would be found from 8642' to 8680'. The 30' of Cottage Grove in the Section 21 Floyd H Jones well was from 8618' to 8648'; in the Section 21 #1-Jones Floyd Unit the 30' was found from 8650' to 8680'; the 32-1 Hutton D 30' of Cottage Grove was found from 8780' to 8810'; that the Christensen 32-1 had 35' from 8781' to 8816'; the 35' in the Hutton B well was from 8795' to 8830' and in the SE/4 the #1 Hutton C 25' of it was from 8779' to 8804'. His Cottage Grove picks in these various wells were in block areas and no sands above or below those areas met his parameters based on the Sp and resistivity curves. In the Section 33 Triad RF Custer well he found the 20' of Cottage Grove from 8720' to 8740' and for the #1-33 McElmurry well he found 35' of gross sand from 8659' to 8694'. His Cottage Grove study did not include this particular area. He doubted his testimony about his Cottage Grove well study in western Oklahoma estimated a cume average of 4,000 barrels because he had not done averaging of Cottage Grove cumes; however he would estimate that such vertical wells would probably cume about 10,000 BO. Page 2 of Exhibit 1 line for the Ward Petroleum Hutton well in Section 32 showed a cume of 17,045 BO and for the 32-1 Hutton D a cume of 34,698 BO and he agreed in the area there are some large cumes; he had spoken about averages over a larger area and the Section 22 Boyd Miller showed a cume of 3,538 BO while the May Petroleum Coit showed 2,556 BO cume and the Christensen #32-1 a cume of Page 9

10 Mewboume & Sanguine 5,430 BO and the #32-1 Hutton B a cume of 977 BO; so there were also low producers in the area. Regarding the Ward Petroleum 1 Hutton B in Section 32 he was asked if that 1.9 BCFG was from deeper zones and he said IHS reported it from the Cottage Grove. He was then given a scout card on that well and it had been originally drilled to the Hunton and completed in the Cottage Grove for 172 BOPD and then it appeared that Ward did a work over on this and produced gas from the Springer with initial potential of 1 MMCFGPD so it appeared the gas was not from the Cottage Grove. He could not say when production stopped for the 977 BO cume, that he would have to do further study to determine that. That structure went up a little to the east in this area and structure was a factor in determining their proposed location. For drills here they preferred to be up dip; he admitted their Section 29 well was down dip to the proposed Section 28 well by about 50'. He reiterated that he did not help pick this location, that Mewbourne independently chose it. He noted in the nine section area their location was only relatively down dip. That the Section 28 proposed location would be up dip to the wells in Section 32. He was not aware of laterals over 4000' in western Oklahoma, that most of the ones that he is familiar with in sandstone plays are horizontals only in a 4000' range. When asked if he was aware that in Woods and Alfalfa Counties Continental is drilling laterals over 4000' in the Cottage Grove he said he couldn't speak to that. There have been strong indication of oil production in the Dotson 29 #1 H well; they are fracing it with water and currently getting their load water back. As to Sanguine's request for the two irregular 640 units he was asked if there was any geological impediment to that spacing and he said there are riskier geological conditions in the W/2 of 21 and W/2 of 28 compared to the E/2 of 21 and E/2 of 28. Early in these plays it is important to drill wells near control; that in the NE/4 of Section 29 the Dotson well is drilled near the 1-29 Davis control and in Section 28 the well control is the Coit 1-28 and to the north in Section 21 there are two control points. He did not see any geological objection to a well in Sanguine's E/2 of 21 and 28 proposed Unit #2. He had seen Sanguine's isopach maps and believed they had probably used sound geological principles for their maps. For his structural map he used structural subsea data; for example in the NE/4 of Section 28 he showed -6852' while Sanguine's showed -6766'; his was based on the base of the Page 10

11 Cottage Grove; that Sanguine's exhibit referenced structure on top of the formation and he said if he assumed that he would have no argument with that interpretation. He agreed Sanguine's request could represent another way to develop the Cottage Grove under Sections 21 and 28. C. On redirect he reiterated average vertical Cottage Grove production might be around 6 MBO or higher; the average production of the five Cottage Grove wells in the nine section area was 12,653 BO but that average did not change his opinion that vertical well production was not very good. That horizontal development of the Cottage Grove is better and both Sanguine and Mewbourne were seeking to develop it horizontally here. He hadn't thought the Cottage Grove was a structural play, although structure was a factor in development of these wells. The Coit well is their control for locating their first well in Section 28; they still plan to develop the W/2 of Section 28 if necessary and structure has not condemned any part of Section 21 nor the W/2 of Section 28 for Cottage Grove development. That his net Cottage Grove is not as thick based on his method as Sanguine's maps; that all of Section 28 is underlain on their map and on his, so both maps reflect potential for Sections 21 and A. Cody Owens, a Mewbourne petroleum engineer qualified to testify in matters of this kind appeared and explained that Mewbourne drilled their first horizontal Cleveland well in 2007 and since then they have drilled 375 horizontal wells, about 275 in the Anadarko Basin and Panhandle of Texas and about 65 in western Oklahoma; their first Cottage Grove horizontal well is the Dotson #1-29H well. He helps plans these horizontal wells and also helps in the drilling and he is in almost daily contact with the field people on these wells and is involved in the completion. He helped pick the Dotson location and had consulted with Mr. Medina and with in-house Mewbourne geologist Marvin Woody and with Tyler Hill. The location was picked to maximize lateral length and to be near known control; to land the horizontal well as they wanted they drill vertically to their kickoff point and then build their curve so they need to know the structural top of the control and with that they can land their wellbore in sand. The Cottage Grove here is a sand; however it might have some shale, so they want to put the curved section behind casing because of that shale and other rock types and once they're in sand they want to stay in the sand for the entire lateral length. Their target is Page 11

12 in the basal portion of the Cottage Grove; as the geologist had indicated the Sp curve exhibits permeability and that also helps to place the lateral in the best sand. He had seen Sanguine's map but when they determined to drill here Mr. Medina's mapping gave an area of thick that they like to target. He agreed Mewbourne did not drill for the Woodford very often, that it is different from the Cottage Grove; that the Woodford is a shale but the shale is a siltstone, also the Woodford is about 200 to 300' thick so it is very different from the thinner Cottage Grove. In the Coit well Mr. Medina found 38' of their target sand with his method. That Mewbourne is not interested in the gross sand above the Sp deflection because if there's a lot of shale there and they would have problems with fracing in the shale laminations; they need to be in the sandstone and Mr. Medina's map is most helpful in targeting that. Currently the Dotson #1-29H well is flowing back frac fluid; it was not flowing back very well on its own so they pumped in nitrogen between the tubing and casing to help in lifting the fluids out; as of this morning they had recovered 49% of their load water from the Dotson well and it is cutting about 14 BO per hour which would be about 300 BOPD and 55 BW per hour which would translate to about 1200 to 1400 BWPD; this water could be a mix of load water and formation water. Cottage Grove production from vertical wells is oil production and the horizontal Dotson well is predominantly oil, as expected. They also expect oil production in their proposed well in Section 28. The Dotson is off to a good start with 49% recovery of their load water, and as they get more water off the formation they get an increase in the rate of oil and gas production. Their method of completion for these wells is open hole multiple packer system. It is a liner system using 4.5 inch liner with packers and between the packers there are ports with sliding sleeves for pumping the frac water and creating the conduit between the wellbore and reservoir. They have done open hole completion for horizontal wells since the first drill in The other method for horizontal completion is plug and perf, where the operator runs a 4.5 inch liner in the 7" and cements it in place in the lateral portion of the hole and then in the first stage the operator runs in a wire line and a perforating gun and a plug, sets a plug, comes off the plug and perforates, and then fracs and then repeats that process along the lateral. With this process they have the cement against the formation and they have to perforate through it versus the open hole with no cement against the formation where they frac through the ports. He explained when the term point of entry is used that Page 12

13 would be the heel in a lateral and the lateral termination would be the toe; to complete a well they begin at the toe and work back to the heel and that is true for either completion method. The Dotson lateral length is 4025' which is comparable with other laterals Mewbourne has drilled; Mewbourne's horizontal wells average about 4,000 to 4200' in lateral length. Exhibit 1 is generally correct as to the Dotson well track and the proposed lateral in Section 28. He was familiar with the Sanguine proposed irregular 640s Units #1 and #2. That Section 21 is already spaced on a 640 acre nonhorizontal basis and Mewbourne has obtained an interim order for a location exception to be drilled in the E/2 of 21 no closer than 1400' from the east, running a north-south lateral and located just to the west of the two existing wells in the E/2 of Section 21. He helped pick that location to horizontally develop the Cottage Grove Sand. Their Section 21 location was based on known control from the #1 Jones Floyd Unit well in the NE/4 and was to be drilled north to south to land near the Floyd H. Jones well with a terminus no closer than 330' from the south boundary. Their Section 28 location is based on the Coit well and is drilled north to south entering the Cottage Grove no closer that 600' FNL which is only 60' off pattern to the north. Although they had chosen to develop in Sections 21 and 28 using location exceptions in the E/2 of each of those sections, that did not indicate they believed there were no recoverable hydrocarbons in the W/2; their interpretation indicates possible Cottage Grove reserves in the W/2 of each section. The one other horizontal Cottage Grove well in the area is in 16N- 17W, where Chaparral reentered a well to the Cottage Grove and drilled a short lateral to the southwest and it was not a very good well and other than it, the Dotson is the first well in Custer County horizontally drilled to the Cottage Grove. He can't determine with great confidence how much horizontal wells drain on an east-west basis until there's more information from the Dotson well, so they don't know if they will need more wells in Section 28 or 29 but they have set up these proposed locations to leave flexibility to move west, especially in Section 28, if further development is necessary. Sanguine's spacing application does not indicate where they plan to drill their well other than a legal location under the order of no closer than 660' from the unit boundary; nor was there any indication about the length of their proposed lateral other than a statement in arguments on previously heard motions that their lateral would be between 6000 and 7000'. Mewbourne's two proposed Page 13

14 wells in Section 21 and Section 28 together would penetrate about 8000' total. They preferred to drill in a direction of the least principle stress so when they fracture the well the fractures would be perpendicular to the welibore, therefore they prefer to drill north-south and have fractures generate east and west. In determining the direction of least principle stress for the Cottage Grove they rely on experience in other formations in the Basin, so most of the wells they drill are on a north-south basis. If Sanguine drilled a 6000 to 7000' lateral in either of their proposed irregular units, whose length would be about 10500' from the north to south, that lateral would leave 3500' to 4500' unpenetrated; that Mewbourne's two 4000' proposed laterals would leave about 2000' unpenetrated so their drill would be the least wasteful since it would penetrate a greater amount of sand and develop longer total lengths than Sanguine's would. Additionally he is concerned about a lateral length of 6000' to 7000' because as one drills farther horizontally it is harder to control or steer the bit; the bit will travel up and down and with distance the more tortuous the path can become and the harder the drilling is to control. He acknowledged in Oklahoma there have been wells with lateral lengths of 5000 to 8000' and additionally in the Bakkin shale in North Dakota there have been wells drilled with 5000' laterals, but that was in a different formation; that they want to be in the best Cottage Grove sand and sand that will fracture; in the Bakkin and Woodford they can stay in the interval more easily and there's less difficulty in cracking the rock. The shale in the Cottage Grove is less brittle and more ductile and flexible, that is why they need to be in the good sand and out of those type shales. By doing this they can avoid the sloughing, getting stuck, or losing the well and having to sidetrack, all of which can be costly and risky in longer laterals. With experience they know more about how to handle this type situation, but here they have less experience in the Cottage Grove, that there are only 18 Cottage Grove horizontal completions in Roger Mills, Ellis and Dewey Counties and those have average lateral lengths of about 3000' and he doesn't know of any that are in the 5000' range. Mewbourne does open hole completions because for the reservoirs they develop they believe this is ideal to have rock exposed to and open to the welibore. In comparing the results of their wells in the same formation with other operators using plug and perf they find their wells do just as well and their completions are cheaper than plug and perf; with plug and perf they have the cost of the cement and have their perforation on wire line with trips in and out of the hole and that takes time and costs more compared to open hole completions. There would be problems Page 14

15 in completing open hole with a 6000 to 7000' lateral because it would be difficult to get their completion assembly to TD, that they have a 4.5 inch liner for their open hole drills with packers that are larger than that, so if they did a 6000 to 7000' lateral they would probably have to do a plug and perf. Based on limited information about Sanguine's irregular unit and plans for development for their longer lateral he had tried to do a cost analysis comparing Mewbourne's costs with what Sanguine's costs would be based on their type drill and the length of the drill. Mewbourne's AFE costs would be $3,955,200 for a completed lateral of about 4000' using an open hole completion. For Sanguine he had assumed an 8500' lateral drilled north to south in their 10560' length unit which would leave about 1000' in each onehalf section not drilled; he also assumed that they would use the plug and perf method since he doubted one could use open hole for an 8500' lateral length; with those assumptions the costs would be about $7,851,000 for a completed well. That this is almost double Mewbourne's costs and would be about the cost of two laterals, one in Section 21 and one in Section 28 as Mewbourne is proposing. The long lateral cost compared to the two proposed Mewbourne laterals are about a wash, however the concern he has is that the plug and perf method, which would really be necessary for the longer lateral, is more risky and more costly as he previously explained. He reiterated that Mewbourne had drilled a total of 375 horizontal wells in the Permian Basin and Anadarko Basin; 275 of those wells were drilled in the Anadarko Basin, which is where Section 28 is located, and 65 were in western Oklahoma and of those 65 all but one were drilled as open hole completions. That the one well of those 65 drilled in western Oklahoma was a slick drill where they ran in 4.5 inch liner pipe and cemented it rather than running in 4.5 inch liner with packer so in essence the slick drill is a plug and perf. He agreed that the Cottage Grove from his experience has specific issues for drilling since it is a sandstone; of the 65 wells drilled in western Oklahoma all but one were sandstone wells so Mewbourne wants to identify the Cottage Grove sand which is more susceptible for development and with better permeability so it is a narrower interval which is targeted. If the entire Cottage Grove had good production through-out they would be less concerned about targeting only a part of it; but here they need to target a limited 40' interval and they can do that with a 4000' lateral and have done so at least 64 times in western Oklahoma as open hole completions; one can efficiently and safely do that with limited risk. However if they add another Page 15

16 3500 to 4000' lateral length it becomes riskier; additionally here the Cottage Grove sandstone has abrasive rock which causes friction and the more lateral added to a well the more friction one deals with, which creates excessive drag and torque making it harder to stay within the 40' interval with better porosity and permeability. If one drills outside that target there's more shale which creates greater torque and drag and increases the problem. In the Cottage Grove the shale is ductile which means it's gummy, so it's harder to drill through with a longer lateral and there would be problems in completion. If the Commission spaces this area as Sanguine has requested the spacing will communitize rights to share in production and with the issues that he has described in the Cottage Grove the well cannot take equally from each one-half section. From experience Mewbourne knows they can drill a 4000' lateral and complete it open hole with less cost and less risk and therefore he would recommend Mewbourne's application be granted based on their experience with open hole completions. IHS records show Sanguine has drilled 25 horizontal wells, 17 of which were completed; he recognized public records are sometimes delayed so current numbers may be off somewhat. Most of these wells are located in Wheeler County, Texas, and four are located in Roger Mills County and Beckham County. These wells were drilled mostly to the Des Moinesian Granite Wash and there was one Marmaton well and one Missourian Granite Wash, but none were Cottage Grove, Cleveland Sand, nor Tonkawa Sand wells. They were completed as plug and perfs, so he checked from first perforation to last and lateral lengths ranged from 1164' to 4851', with an average of 3456'. None of these wells were in the range of 6000' to 8000' and none were in the Cottage Grove type sandstone. He recommended denial of the Sanguine application and the granting of the Mewbourne application. B. On cross he said that in reviewing IHS for the Sanguine wells he checked the production decline on those wells and that two were producing over a 1000 barrels a day. When asked if it were possible that some of these wells were reported as Lower Granite Wash or Des Moinesian but could be Cottage Grove wells, he said only if there were erroneous reports, that the Des Moinesian is lower age so any report like that would be an error. When asked if the Cottage Grove Sand thickness averaged about 80' he said their target Cottage Grove for the Dotson well was not that thick, that there they set casing well below the top of the Cottage Grove which on Sanguine's map would Page 16

17 be at 6912? and at that point there was still 45% sand and 55% shale. Asked again how thick the Cottage Grove would be, he responded that the Cottage Grove interval is defined at the top by the Avant, that he did not have those depths with him and noted again that the 40' thickness the geologist had testified about was their target. He explained that the questions on direct regarding an 80' thickness did not reference the target, that the target 40' was within that 80' referenced earlier, and he did not have depths for the interval top, the target top, nor the age top of the Cottage Grove. He explained that a common source of supply was a reservoir of a certain age that is hydrocarbon bearing and separated from other common sources of supply; he agreed shale could be what is separating the reservoirs and that within the entire Cottage Grove the targeted 40' is separated from the rest of the Cottage Grove by an impermeable and thick shale, although he could not recall how thick that shale would be above and below the 40' target. Completions by packers plus or by plug and perf both include fracture treatments; that Mewbourne uses a number of different type fluids for fracing and the fracture lengths depend on the size of the stage, the amount of frac fluid pumped into the formation, the size of the formation and the rock properties. When asked if fracture treatments in sandstones usually reach out 250' to 300' he said one could not say that as a fact, that there are a lot of variables that affect the frac half length, that it all depends on the design of the frac job. That his estimate of $3,955,200 for Mewbourne's 4000' lateral completion costs included 17 to 20 frac stages. When asked about the number of stages for the estimate he made on Sanguine's 8500' lateral length he said that is an entirely different design that it technically has 10 stages but each has perforation clusters so the total number of fractures depends on the design since each stage can have one to five frac perf clusters. When he checked for Sanguine horizontal completions through IHS he said they mainly did plug and perf, that it was really hard to tell the number of stages from public information. When asked the number of perforations Sanguine used in their completions he said public information only gave the first (toe) perf and the last (heel) perf. When asked what the distinction was when he was talking about Mewbourne horizontal wells drilled in the Anadarko Basin and in western Oklahoma, he said western Oklahoma is part of the Anadarko Basin and development in Custer, Roger Mills, Ellis, Dewey and Harper Counties represents Mewbourne's development in western Oklahoma. He reiterated that Page 17

18 63 of the 64 horizontal completions there were open hole and the Dotson #1-29H was their only Cottage Grove horizontal completion. Of those 64 horizontal completions 63 were sandstone drills all with logs similar to the Coit well. The Exhibit 1 isopach represented a continuous package of Mewbourne's targeted Cottage Grove; he agreed Cottage Grove above or below that might contribute to production, although it would be a lesser contribution than the targeted interval. The Dotson well had 19 ports and 19 fracs and Mewbourne ran a tool to measure gamma ray when they started building their curve. He helped in determining this prospect and was in constant communication with the geologist who is steering that well and once it reached TD he was responsible for working with the geologist to determine where to place the ports for fracing; from Dotson well information they determined the target interval under Section 29 was about 30' thick. When asked how far out the fracs on the Dotson 29-1H would go and he said he did not "know" but thought they would not extend over 600' on either side of the wellbore. While he agreed the area of least resistance would be more prone to opening up under fracing, he noted there were other factors involved; that control of the direction of the frac is not an exact science and it was possible the frac could go up or down and outside their 30' target, rather than going out just laterally. While Mewbourne is looking for a specific target within the Cottage Grove he said the reference to 40' was based on a reference to a drawing on the board which had been presented to him, that in fact the thickness of the target could vary. That the Section 28 location was based on control from the Coit well in the NE/4; he was part of a discussion in choosing the lateral location in Section 28 and was in agreement with the location chosen. That geology was part of the discussion about the location selected; when reminded he had previously testified that Mr. Medina had input for locating this well, the witness said that if he did say that he would apologize because in fact Mr. Medina worked the area and had discussed the Cottage Grove with him, however locating the lateral was an internal decision and in fact the location had been set when Mr. Medina was hired for this Commission work in Section 29 and 28. He reiterated that structure was very important, not in picking a location but in the drilling of the well so they can place their lateral in the target interval. When Mewbourne reaches kickoff and begins to build the curve, it is Page 18

19 important to them to land the kickoff near control so that they can know the subsea depth of the target interval; that as they move away from control the subsea depth is more of an interpretation so to land near well control reduces their risk. In Section 33 the #1 Miller "W" was a permitted location, but was never drilled. The Section 27 JF Davis well and the Section 33 Triad Custer well are control points for their proposed bottom hole and are also subsea points of control for structure. He acknowledged as they drill their location to the south it is going down dip. When reminded Mr. Medina had said they needed to be up dip, the witness said he did not recall that testimony but it was not of concern to him in picking a location, though it is important in drilling the well and staying within the target interval. The thickness of the basal portion of the Cottage Grove is important and in Section 28 it is about 30 thick based on the Coit well. Regarding his concern about shale laminations he was asked what empirical evidence he had regarding shale laminations in Section 28 and he said he had no empirical evidence. His concern was based mainly on the Coit 1-28 well log with the shale laminations seen at 8618' to 8620' which is above their target from 8643' to 8672'. That Mr. Medina had said the target was from 8642' to 8680' and he was asked why he would exclude some of that and he said he had been asked to show his target interval, not Mr. Medina's target. He was asked to identify the top and base of the Cottage Grove and he explained that the Avant marker is the top of the Cottage Grove interval at 8515' and the Cottage Grove base is at about 8750'. Regarding his previous testimony that he had concerns regarding shale laminations below the target zone he identified that on the Coit log at approximately 8690' and it is about 40' thick so it is not just a lamination. He agreed shale laminations above the target would be about 2' thick at 8618' to 8620' and from 8620' down to shale found below the target would represent about 70'; that the resolution on the log did not provide enough information to see all shale laminations, so there could be laminations in that 70' interval. Yesterday the Dotson had a 49% return of frac water and as of today it had a 52% return with production of 315 BO, 1200 BW and 85 MCFD; he believed the well was still cleaning up. That today's 315 BO was less than the previous day, but he doubted it would be lower on a 24 hour basis. Regarding the ductile shale as being less brittle, he was asked if it was the Page 19

20 same in Section 28 based on the Coit log and he said he couldn't make that statement based on the Coit log but he had noted those conditions in the Tonkawa and Cleveland Sands. That they have penetrated the Cottage Grove numerous times in drilling the Cleveland and found the shales to be problematic and that was why they ran casing and placed those shales behind casing. Earlier he had run costs for an 8500' lateral using a plug and perf completion; he had not run costs on a 8000' to 8500' lateral with packers plus completion but said it would be less costs than the plug and perf method. He had done economics on horizontal Cottage Grove wells but he did not know offhand how many barrels of production would be necessary to reach payout. He had prepared an AFE of $7,851,000 for an 8500' lateral completed with plug and perf method and that cost assumed 10 stages with four perforation clusters per stage. When asked if those 40 perf clusters were more than double the perforations under his packers plus AFE for $3,955,200 on a 4000' lateral open hole completion and he said actually they do not perforate in packers plus completions. Since they need flexibility they never know the number of ports that they are going to need but usually there are 17 to 20; that there is a cost associated with each port. Dotson well costs as of this date are at $4 million and the well is completed and selling down line. When he identified the target interval depths he used similar methods to Mr. Medina, that he picked the interval with the highest Sp and low Rt, where they expected the best permeability. He acknowledged that he got about 8' more using this method than Mr. Medina did. In drilling their well, to determine where they are within the target zone, he said they relied on the gamma ray in combination with the structural mapping and the mud loggers sample of the sands. He was asked to use an 8% cutoff in the Cottage Grove from 8515' to 8750' to determine the number of net feet of sand using the Coit log and he said he couldn't do that since that log does not have the caliper measurement. He had found 17 Sanguine horizontal completions and to his knowledge Mewbourne had not participated in any of those wells. To clarify earlier testimony he said they were looking for a 30' to 40' target interval in the Cottage Grove because outside that targeted area were more shale problems, that the shale was gummy and there were sloughing problems. He didn't think Mewbourne drilled the Dotson well outside the target area after they set their 7 Page 20

21 inch casing. Their target was based on Sp deflection which indicated permeability but if there was 8% porosity Cottage Grove outside that, it could possibly contribute to production. As to inequality of sharing based on inequality of lateral length in the irregular 640 acres proposed by Sanguine he agreed such inequality could be leveled out if a second well were drilled in the irregular 640 acre unit. When reminded that type of irregular spacing and development occurred at the Commission he said this was his first experience with stacked 320 acre units requested for an irregular 640 in Oklahoma. C. On redirect he explained the difference between an open hole completion and a plug and perf completion, noting in either case the well is drilled through the vertical portion in a similar manner. As the curve is beginning for open hole they set their 7 inch intermediate through the curve until they land in the sand and then they drill the well on out to TD without casing; they then run a 4.5 inch liner inside the hole from the end of the 7 inch to TD and that liner has packers against the formation and between the packers there are ports with sliding sleeves; for completion they open the first sleeve in the toe and frac that stage, close it off and move back to the next port and sleeve and repeat that process. That for the perf and plug they have the same type of vertical drill, the curve, and the horizontal; but they set a 7 inch casing against the formation all along the lateral, they run a 4.5 inch which is cemented; to provide a conduit from the wellbore to the formation they perf and frac, starting at the toe for the first perforation stage, seal it off, they then come off that plug up to the next perforation interval where they perf and frac again and repeat the process of plugging and perfing up the hole. The primary difference is that there is no cementing and no casing along the lateral in the open hole completion, whereas there is perforation and fracing and running in and out of the hole with tools for plug and perf. Regarding the Coit log and identifying the shales above and below the target zone he noted there were other horizontal wells for other zones that penetrated the Cottage Grove and those also furnished control information to identify the shale laminations; additionally they had mud loggers information for the Cottage Grove in the vertical section of those horizontal wells and also in vertical wells. Mud loggers analyze samples and determine how much shale content, grain size, fluorescence and other information used to identify shale laminations in the Cottage Grove; even in the Dotson well there were areas Page 21