BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA RELIEF SOUGHT: LOCATION EXCEPTION CAUSE CD NO

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: T.C. CRAIGHEAD & COMPANY RELIEF SOUGHT: LOCATION EXCEPTION CAUSE CD NO LEGAL DESCRIPTION: SECTION 9, TOWNSHIP 20 NORTH, RANGE 23 WEST, ELLIS COUNTY, OKLAHOMA F I L E D OCT COURT CLERK'S OFFICE - 0KG CORPORATION COMMISSION REPORT OF THE ADMINISTRATIVE LAW JUDGE OF OKLAHOMA This Cause came on for hearing before Michael Norris, Administrative Law Judge for the Corporation Commission of the State of Oklahoma, 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: 1. The applicant, T.C. Craighead and Company (Craighead) sought a location exception in the section based upon topography and geology. Craighead presented evidence of the unique geology in this section. They also believe this well is the only opportunity for the owners in the section to recover the reserves. 2. The protestant, Crawley Petroleum Corporation (Crawley) took issue with the location. Crawley believes that the geology is inaccurate and that the location exception may adversely affect their producing well in the adjoining section. RECOMMENDATIONS: 1. The application of Craighead should be approved. Sufficient evidence was presented to warrant the location exception.

2 HEARING DATE(S): June 3, 2015 APPEARANCES: Thomas J. Enis, Esq., attorney, appeared on behalf of applicant, T.C. Craighead & Company. Charles Helm, Esq., attorney, appeared on behalf of Crawley Petroleum Corporation. FINDINGS AND SUMMARY OF EVIDENCE 1. The following numbered exhibits were accepted into evidence: 1. Topographic Map 2. Mississippi- Meramec Structure Map 3. Hunton Structure Map 4. Comparison of the Hunton reserves underlying sections 8 and 9 5. Hunton Structure and Net Porosity Map 6. Production Map 7. Stahiman Area Hunton 8. Arnett Area Mississippi Structure Map 9. Calculation of Effective Drainage Area Section Calculation of Effective Drainage Area Section 8 2. The applicant called Mr. Gary Stevenson, geologist. His qualifications as an expert were accepted. He is familiar with this application and has worked on the applicant's position. Page 2

3 3. The location being sought is 660 feet from the west line and 1520 feet from the south line. The unit was established as a 640 acre unit by order number Mr. Stevenson identified the Mississippi-Meramec and Hunton wells in section 8. He indicated that the location that is being sought is indicated on the plat, Exhibit 1, in the Southwest quarter of section 9. The well to the North is the Crawley Vonalee well. This well penetrated the Hunton and was a dry hole. It is not now productive from any formation. The Vonalee well is located 700 feet from the west boundary line of section The Vonalee well location exception was requested to avoid the creek to the east and to gain structural position. This Creek also extends towards the applicants requested location and is a factor in the request. He stated that all wells that have been identified as producing from the Hunton also penetrated the Mississippi Meramec. The only production is the well mentioned in section Mr. Stevenson has been working this area for some time. He prepared the structure map for the Mississippi Meramec and the Hunton. These structures are very similar. He stated there are approximately 105 acres in the Southwest quarter underlain by the productive reservoir. 6. There are other reasons than the surface condition for the location exception. Craighead wants to gain a structural advantage at this location. It is not economic to drill the well without this location. The reserves underlying section 9 will not be recovered for the owners in section 9 otherwise. Eventually those reserves may be produced by the well in section 8. That well is a productive well that has been there since It has been producing for several years. 7. Mr. Stevenson testified that there are faults in section 9. One fault folds and cuts across the southeast corner and another across the northwest part of the section. These were determined from the logs of wells in the area. There is sufficient well control to identify these faults. They also had 3-D and 2-D seismic to assist in placing the faults. However, they consider seismic in this area to be unreliable. The fault cut has caused anomalies in the formations. The fault in the southeast quarter of section 9 is a sealing fault. This is the Hunton reservoir. This sealing fault boundary is just north of the well in section 8. Therefore, the well location in section 9 is separated by this sealing fault from the well in section 8. The same faulting is true for the Mississippi Meramec formation. The Mississippi Meramec well in section 9 at the requested location would have no effect on the well in section He testified that the plat offered by the protestant differs from his structure. One of the key differences is their plat does not show any faults in section 8 or 9. He stated there is a fault cut in the Argonaut State well in section 16 that is Page 3

4 not on the protestant' s map. He believes the fault goes farther and is more vague from a northeast to southwest direction than what the protestant shows. He believes the faults are present as he has testified and they are based on well data. 9. Upon cross-examination Mr. Stevenson testified that the bottom hole location of the well will be 1,520 feet from the west boundary line. He stated that the bottom hole will be surveyed to determine its location. The well location would be legal insofar as the current spacing as to the south line. It is not closer than 1,320 feet from the south line. The location would be encroaching upon the west boundary because they are requesting 660 feet from the west. That is the reason for the location exception application. This means that the proposed well would be encroaching on the Crawley unit to the west and the 2 wells that are currently producing in section He stated that the Crawley well is in the southeast quarter of section 8. It is the MacFarland 3-8. This well is approximately 2,000 feet from the east boundary of section 8. The proposed location exception would be 660 feet from that common boundary. The proposed well will be deep enough to penetrate the Hunton formation. The Crawley well is productive in the Hunton. The proposed well would be competing with the MacFarland 3-8 well for the remaining production. The MacFarland well would be competing 2,000 feet away while the proposed well would be competing 660 feet away. The Hunton is the primary target of the proposed well and they believe it to be predominately a gas reservoir. 11. Mr. Stevenson believes that the proposed location will be in the same structural feature as the MacFarland 3-8 and in the south of section 17. He believes that structure is important with regard to the Hunton. He believes that there is a structural trap in the Hunton. They would like to stay high above the gas water contact in the reservoir. Structurally, the highest well in the Hunton is the Stahlman well in section 17. The MacFarland 3-8 well is a little bit lower structurally. Mr. Stevenson testified that the structurally lower MacFarland well produced greater reserves in the Hunton formation than the structurally higher Stahlman well. He believes the highest well structurally, the Stahiman well, watered out and produced less than the MacFarland 3-8 well for two reasons. One, the reservoir quality rock in the Stahlman is not as good as in the MacFarland 3-8. Secondly, they had a casing leak in the Stahlman well and could never get production back without producing water when they tried to correct the casing leak. In his opinion it is not always just the structural depiction but sometimes reservoir quality comes into play with regard to the productivity of a well. 12. He believes the seismic may be unreliable in this area and relied more heavily on the subsurface geologic log analysis and well analysis as well as an Page 4

5 understanding of where the seismic fell down. He does not believe the missing sections of some formations can be attributed to erosion or a little bit thinner zone. It does depend on the circumstance. In this particular case, there is a well four hundred feet away that has the same fault and it's at a slightly higher location. In the 9 sections, 15,000 feet across, he did not see a variation of more than twelve feet. The two wells he compared were the MacFarland 3-8 and the Carbon Economy MacFarland 1-8. It is his opinion that this faults exist as he has depicted. Based upon his analysis he believes that there is faulting in the MacFarland 3-8. He believes there is faulting at shallower beds in the Carbon well. His opinion is that the Vonalee well actually found the fault. He does not believe there are erosional features in the Hunton instead of a fault. He did not prepare an isopach map for the Hunton in the 9 section area for the exhibit exchange. 13. Upon redirect examination Mr. Stevenson stated that he did not believe it was possible to find a legal location before you incurred the oil-water boundary. You would not have very much reservoir quality rock at that location. The witness reiterated that the surface location obstruction of the creek, the higher structural advantage and well protection from the section 8 drainage are the reasons for the location exception. 14. The applicant called Mr. Steven K Blair, petroleum engineer. His qualifications were accepted without objection. He has looked at the reserves under both sections and calculated those reserves. He determined that section 8 had 6.4 BCF recoverable Hunton reserves in place. 4.2 BCF have been recovered. Leaving 2.23 BCF to be recovered from the lands underneath section 8. In section 9 there are 2.97 BCF recoverable Hunton reserves in place. None have been recovered. 15. He believes the application should be granted without a penalty imposed on production. Section 9 has more remaining reserves than section 8. A penalty on section 9 would unfairly penalize production from that section. He also believes the well in section 9 is most likely going to drain predominately from the east, north and south. This is because the reservoir in those areas is going to be under higher pressure that it will be going back to the west toward the existing well. Initially until the pressures equalize across the whole area the production will be coming from other parts of section 9 and not section 8. He believes the well should be given a full allowable. 16. Mr. Blair stated that he used an isopach that Mr. Stevenson had done and the structure map that Mr. Stevenson prepared. He took into consideration the gas-water contact based on the structure map. The isopach map used by Mr. Blair was not in evidence in this cause. He calculated the surface acres based upon the structure map using the area above the gas-water contact. Based upon Mr. Stevenson's structure map he used a twenty-four feet thickness. He believes that everything above the gas-water contact will produce. The net feet Page 5

6 utilized for the calculations in each section is the structure shown minus the gas water contact. He did utilize an initial reservoir pressures and abandonment pressure in his volumetrics. 17. He agreed that his volumetric analysis of sections 8 and 9 are based on the mapping that was supplied. There is a greater amount of surface acres in section 8 because of the gas-water contact. As you move a foot higher you have 1 foot of pay. Because of this you expect twice as much reserves for the same amount of area. Even though the zones are the same thickness, half of it is below the water contact in section 9. In section 8 it all lies above the water contact. Mr. Blair stated that upon his analysis the net thickness in section 9 would be 37.5 feet and the average net thickness in section 8 would be 75 feet. 18. After extensive questioning concerning drainage Mr. Blair agreed that if his analysis is wrong then there could be potential draining from section 8. He stated that if the proposed well recovers 3 BCF of reserves it will be economic. If the well does that he would argue that none of that came from section Upon redirect examination Mr. Blair stated that the pressure was lower in section 8 than in section 9 because of the production that has occurred already from section 8. The reserves in section 9 then would drain towards section 8. It is possible that the reserves from section 9 could be recovered in the well in section 8. The volume at this point suggests that has not happened. Gas is always going to move from higher pressure to lower pressure. In this case it is going west towards the MacFarland well. If the proposed well is not drilled the reserves could in fact be recovered by the well in section 8. This means the mineral owners in section 9 would lose those reserves. He further stated that the volumetric analysis he used was a standard procedure. There was nothing unusual about how it was conducted. The applicant did rest. 20. The protestant called Mr. Allen Peacock, geologist. His qualifications were accepted without objection. 21. Mr. Peacock has been working in this area for some time on behalf of Crawley petroleum. He is familiar with the Crawley wells in section 8 and drilled the well in section 9 the Vonalee. He stated the Vonalee was not a success in the Hunton. He analyzed wells in the area and presented across section showing the Hunton wells and the production. 22. He indicated that the MacFarland 3-8 has produced 4.4 BCF to date. The Hunton is the primary zone of concern with regard to Crawley's position in this case. Crawley wants to protect the MacFarland 3-8 well as to the remaining reserves that might be produced. Crawley wants to see what impact the proposed location would have on the MacFarland well recovering the remaining reserves in section 9. Mr. Peacock prepared an 8% net porosity isopach map of Page 6

7 the area. His mapping indicates that the Hunton is a big thick reservoir throughout this area with pay developed at the top. That development at the top is where he thinks that the Hunton is primarily producing from. His crosssection indicates that this is a very thick reservoir with only thin amounts that meet the 8% porosity cut off. The net porosity varies from approximately 67 feet to 5 feet across this area. He believes this gives a reasonable estimate of the net thickness and potential pay that would exist in the Hunton common source of supply as underlies specifically sections 9 and 8. The net pay is limited by the water contact. His depiction indicates that section 9 has 50 feet of net pay above the water contact and section 8 has approximately 14 feet of wet Hunton. He believes that not all of the 14 feet would be pay. 23. He thinks it is important to look at the part of the Hunton that may produce as opposed looking at the entire thick gross interval. The pay develops that the top and that is why the net values are much thinner than the gross interval. He believes his isopach work is a reasonable interpretation of the porosity that may produce in sections 8, 9 and 17. He understands that the applicant did not submit an isopach map. 24. Mr. Peacock testified that there is a north/south trending fault that is depicted based on well control from the Guy well just to the west of section 17. It is a significant fault that is well recognized in this area. There is a 300 to 400 feet displacement between the Guy well and the Josephine well in the south half of section 17. He believes that to some extent the fault influences how much reservoir might underlie section 8 from a production standpoint. This helps the MacFarland 3-8 produce from the Hunton common source of supply. He believes it creates a trap along the west boundary of section 8. Also, it is his belief that this trap holds and stores the hydrocarbons being produced from the MacFarland well. It is his opinion that this major fault along the west boundary of sections 8 and 17 also allowed the Stahlman well to produce from the Hunton because of that trapping mechanism. The water contact definitely limits the extent of pay on a structure like this. That unconformity is what caused the lack of pay in the Vonalee well. 25. He cannot say that the Vonalee was faulted out in the Hunton as expressed by the previous geologic expert for the applicant. However, he thinks it is more likely that the formation was truncated on the east side of the trap as an unconformity. If it were truncated on the East half it would be an erosional feature rather than a fault. If this were a fault he would expect to see a decent amount of displacement on the applicants structure map. He did not see much of a fault there. He believes his interpretation is reasonable for section 8, section 9, section 17 and section 16. He thinks it is less likely that there is really a fault zone going through the MacFarland and cutting off section 8. He does agree that the water contact will put some limitations on the ability for a Page 7

8 well to produce in section 9. It will also tend to restrict the amount of reservoir that could underlie section Mr. Peacock believes that section 8 has a significantly higher amount of productive reservoir than section 9. From the calculations made by the Crawley engineer for section 9 there are 90 surface acres of reservoir. 27. Under cross-examination Mr. Peacock stated that he believed the loss of section in the Vonalee well was due to erosion. Such loss could be due to a number of things. It could be due to a fault. He stated that if the problem was due to erosion you could expect other wells in the immediate proximity to also show erosion. This is a highly faulted area. 28. Upon further cross-examination and redirect examination there was testimony concerning an exhibit submitted in a previous case. This exhibit showed different faulting. It was determined that it was for a different formation and prior to subsequent well information. The subsequent testimony resulted in justification of Mr. Peacock's interpretation of the area versus the applicant's interpretation. Notice was taken of Commission order number Mr. John Thomas, engineer, was the next witness for Crawley. His qualifications as an expert were accepted without objection. He stated that Crawley's concern with the proposed location exception is the impact that it might have on their existing producing MacFarland 3-8 well. They have no objection to the development of the Mississippian Meramec at the proposed location. They are objecting to the proposed development of the Hunton without some restrictions in the allowable. 30. Mr. Thomas was provided information that allowed him to complete a volumetric analysis of section 9. He also completed a volumetric analysis for section 8 where the MacFarland 3-8 well is producing. He used the acre-feet that might underlie sections 8 and 9 and illustrated the surface acres of sections 8 and He stated that where the Vonalee well is located in the northwest quarter of section 9 there is a good sized body of water in proximity to that well. He believes that the pond was taken into consideration for that location. He had Crawley personnel visit the Southwest quarter of section 9 to investigate the surface. He stated that at a legal location 1,320 feet from the east line the surface is dry and covered in trees and vegetation. There is no evidence of any Creek and no standing water. Based upon those observations he believes it is possible to drill at the legal location. The applicant would have to cut down some trees to do so. If you move a few hundred feet back to the west they can avoid the trees. Page 8

9 32. Mr. Thomas considers his calculations to be traditional volumetric analysis. The average thickness in section 9 over the area within the water contact is an average of 14.8 feet for the reservoir that might be productive in section 9 then would result in 90 surface acres. The acre-feet for Granger volume would be 1,335. This indicates original gas in place underlying section 9 of just over one BCF. That is a reasonable estimate of the reserves that are recoverable underlying section 9 in the Hunton formation. That is the amount underlying section 9 that hasn't been recovered. He believes that the applicant's conclusion that section 9 would have almost 3 BCF is unreasonable. 33. He testified that he did a similar analysis for section 8. The average thickness for section 8 is 35.7 feet over the entire area underlain by the productive reservoir above the water contact. That equates to 520 surface acres. That equates to 18,606 acre-feet. Based upon that information he equated the recoverable reserves in the Hunton above the water contact to be 14.8 BCF. He stated that the MacFarland 3-8 well has produced 4.4 BCF from section 8. That results in just over 10 BCF of unrecovered reserves. He does not expect that the MacFarland 3-8 will be able to recover all of that 10 BCF. He expects that the MacFarland well might ultimately recover 6 BCF. That is not much different than the applicants estimate of 6.44 BCF. Crawley is trying to protect the 1.6 BCF that they expect the MacFarland 3-8 to recover. 34. The MacFarland well has averaged about one million per day production over the last few months. It is about 2,000 feet away from the common boundary. Crawley attempted to develop the Hunton reservoir in the Vonalee well. He believes the Vonalee result helped determine the lack of reservoir that might exist in section 9 for future development. He believes the amount of reservoir that might underlie section 9 should be considered in trying to come up with an allowable for any well. He recommends that an allowable of 500 MCF per day should be given to any well at the proposed location. If they moved back to a legal location he recognizes they can't produce 100% of their normally assigned allowable. At a legal location they would still have an advantage being closer to the common boundary. He believes these wells will be in competition for the reserves. He also believes that the MacFarland well can be adversely impacted if the proposed location is allowed to produce at 100% of the normally assigned allowable. 35. Under cross-examination Mr. Thomas testified that he relied on the information provided to him by their geologist. If the geology is wrong then his calculations could be wrong. There is quite a disagreement as to the geology out there. He stated that the MacFarland well is draining part of section 8. The drainage pattern is most likely radial. Page 9

10 36. In his opinion the MacFarland well is not draining reserves from section 9 at this time. The drainage radius does not go that far. The MacFarland well is 2,000 feet from that boundary. At this time Crawley has not considered seeking increased density to recover some of the Hunton reserves. 37. He stated that the reserve study presented by the applicant appeared to follow the decline curve of the MacFarland well. It appears the study was made to fit. In other words the applicant tried to phony up the exhibit to match the production. 38. In his opinion he does not believe the well in section 9 could be economically drilled with a 500 MCF a day cap. As to the Hunton reserves, they would not be recovered by the section 9 owners if that kind of limit on production is imposed. 39. If the applicants' structure picture is correct, and Mr. Thomas used it his calculations would come out quite different. He stated there was nothing wrong with the approach utilized by the applicant concerning the gas water contact. However, he believes you still need a porosity cut off and an isopach map to do it. 40. Upon redirect examination Mr. Thomas understands that the applicant mentioned they were looking at two formations. Crawley is not opposed to the applicant producing the Mississippian Meramec at 100%. The objection comes if the applicant wants to drill deeper into the Hunton at this location and produce it at 100% of the normally assigned allowable. If there is no other formation that the applicant could produce from and they just had a Hunton producer it might be questionable economics as to how long it would take to recover those Hunton reserves. 41. Mr. Thomas stated that he does not believe he can do a traditional volumetric calculation based upon the applicants' geologic exhibits. He stated there is nothing to refute the thickness map utilized by Crawley in this case. 42. On recross examination Mr. Thomas stated that he used a combination of structure map and an isopach map to determine the formation above water. He stated that if you used a porosity cut off and imposed it on the structure map you would come up with a net pay isopach. He understood that Mr. Blair testified that he used a porosity cut off in calculating his reserves. He does not believe that the MacFarland well will ever drain reserves from section 9. The parties did rest. RECOMMENDATIONS AND CONCLUSIONS Page 10

11 1. After taking into consideration all the facts, circumstances, evidence and testimony presented in this cause, it is my recommendation that the application of T.C. Craighead and Company be approved. 2. The applicant presented evidence demonstrating that topography influenced the surface location which was strongly refuted by the protestant. However, evidence of a structural advantage and faulting in the area supported the request for the location exception. 3. The applicant also established that the prevention of waste and the protection of correlative rights were significant for this section. The evidence was convincing that without this well the reserves in section 9 quite possibly would not be recovered. 4. The protestant stated that the current offset well that they operate would probably not recover hydrocarbons from the Hunton formation in this adjoining section. S. There were differing opinions as to the geology in this area. The amount of recoverable reserves were also disputed. The applicant presented valid reasons for the need for this location exception in the section. Well locations for this distance are commonplace. I/ /#) 0a, RESPECTFULLY submitted this f day of MN:sm xc: Thomas J. Enis Charles Helm Michael L. Decker, OAP Director Oil Law Records Court Clerk - 1 Commission Files INorris Administrative Law Judge Page 11