BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA CHESAPEAKE OPERATING, INC. AND CHESAPEAKE EXPLORATION, L.L.C. WELL LOCATION EXCEPTION

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: CHESAPEAKE OPERATING, INC. AND CHESAPEAKE EXPLORATION, L.L.C. RELIEF SOUGHT: WELL LOCATION EXCEPTION LEGAL DESCRIPTION: SECTION 4, TOWNSHIP 28 NORTH, RANGE 14 WEST OF THE IM, WOODS COUNTY, OKLAHOMA CAUSE CD NO FILE FEB APPLICANT: RELIEF SOUGHT: CHESAPEAKE OPERATING, INC. AND CHESAPEAKE EXPLORATION, L.L.C. WELL LOCATION EXCEPTION LEGAL DESCRIPTION: SECTION 4, TOWNSHIP 28 NORTH, RANGE 14 WEST OF THE IM, WOODS COUNTY, OKLAHOMA COURT CLERKS OFFICE - OI OPPORATION COMMISSIOi OF OKLAHOMA CAUSE CD NO APPLICANT: CHESAPEAKE OPERATING, INC. AND CHESAPEAKE EXPLORATION, L.L.C. RELIEF SOUGHT: WELL LOCATION EXCEPTION LEGAL DESCRIPTION: SECTION 4, TOWNSHIP 28 NORTH, RANGE 14 WEST OF THE IM, WOODS COUNTY, OKLAHOMA CAUSE CD NO. REPORT OF THE ADMINISTRATIVE LAW JUDGE This cause came on for hearing before David D. Leavitt, Administrative Law Judge for the Corporation Commission of the State of Oklahoma, on the 16th day of January, 2013, at 8:30 a.m. in the Commission's Courtroom, Jim Thorpe Building, Oklahoma City, Oklahoma, pursuant to notice given required by law and the rules of the Commission for the purpose of taking testimony and reporting to the Commission. The Administrative Law Judge ("AU" proceeded to hear this cause and reports the following findings. CAUSE SUMMARY On February 2, 2012, Chesapeake Operating, Inc. and Chesapeake Exploration, L.L.C. ("Chesapeake" filed two location exception applications, CD and CD ,

2 and on March 21, 2012, Chesapeake filed a third location exception application, CD , to drill three horizontal wells in the Mississippi common source of supply located in Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. The three applications requested authorization to locate the end-points for the completion interval of the horizontal lateral wellbore in the Mississippian common source of supply no closer than 165 feet from the north and south lines of Section 41 All three applications were subsequently protested by Xanadu Exploration Company ("Xanadu", questioning the need for such applications and alleging that any lateral Mississippi welibore closer than 660 feet from the northern boundary line of Section 4, Township 28 North, Range 14 West of the TM could damage their Rhodes 1-33 Well located in the SE/4 of Section 33, Township 28 North, Range 14 West of the IM that is currently producing from the Mississippi common source of supply. The hearing was then held on January 16, After hearing the evidence and testimony, the ALJ took the matter under advisement upon receiving the transcript on January 28, RECOMMENDATION After taking into consideration all of the facts, circumstances, evidence and testimony presented in this cause, the ALJ recommends that Chesapeake' location exception applications in CD and CD be granted. The ALJ further recommends that Chesapeake's application in CD be granted subject to a requirement that the wellbore perforation and hydraulic fracturing activities of the proposed Cordray-Ritter 4-28N-14 1H Well located in Section 4 be monitored to determine if said activities substantially and adversely affected the operation of and production from Xanadu's Rhodes 1-33 Well located in Section 33. The AU recommends that this cause be reopened thirty days after completion of the Cordray-Ritter Well to report on the status of the Rhodes 1-33 Well. APPEARANCES At the time of the hearing, Mr. Richard Books, attorney, appeared on behalf of Chesapeake; Mr. Michael Stack, attorney, appeared on behalf of Xanadu; Mr. Rick Taber, Vice President of Richland Resources Corporation, appeared on behalf of Richland Resources Corporation; and Ms. Sally Shipley, Deputy General Counsel, appeared on behalf of the Oil and Gas Division of the Commission. JURISDICTION 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 EXHIBITS 'CD proposed the Cordray-Ritter IH Well; CD proposed the Eleanor lh Well; CD proposed the Noble H Well. 2

3 Exhibit 1 - Well location and nine-section production map centered on Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. Exhibit 2 - Mississippi subsea structure map centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Exhibit 3 - Mississippi net porosity isopach centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Exhibit 4 - Letter agreement, dated September 24, 2009, between Chesapeake and Xanadu related to a location exception application in CD Exhibit 5 - Monthly oil and gas production report for the Sundance 14H Well located in Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. Exhibit 6 - A calculation of the recoverable oil in place for the Mississippi common source of supply underlying a portion of Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. Exhibit 7 - Monthly oil and gas production report for the Rhodes 1-33 Well located in Section 33, Township 29 North, Range 14 West of the TM, Woods County, Oklahoma. Exhibit 8 - Monthly oil and gas production report for the T-Rex 1-5 Well located in Section 5, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Exhibit 9 - Well location and nine-section production map centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma showing the locations of some of the perforations in the weilbores. Exhibit 10 A table prepared by Flow Measurement Company showing production and well information for the T-Rex 1-5 Well located in Section 5, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Exhibit 11 - A daily drilling progress report for the T-Rex 2H-5 Well located in Section 5, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Exhibit 12 - a daily production chart taken from the T-Rex 1-5 Well located in Section 5, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. SUMMARY OF THE EVIDENCE 1. On September 25, 1975, the Commission issued Order No that formed a 640 acre drilling and spacing unit for the Toronto, Douglas, Tonkawa, Cherokee and Mississippian separate common sources of supply located in Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Under the above-named order and the general rules of the 3

4 Commission, the permitted well location in the said 640-acre drilling and spacing unit was to be located not less than 1,320 feet from any exterior boundary of such unit, unless the Commission granted an exception to the permitted well location tolerances. 2. On July 29, 2009, the Commission issued Order No that formed a 640-acre drilling and spacing unit for the Lansing-Kansas City and Oswego separate common sources of supply located in Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Under the above-named order and the general rules of the Commission, the permitted well location in the said 640-acre drilling and spacing unit was to be located not less than 1,320 feet from any exterior boundary of such unit, unless the Commission grants an exception to the permitted well location tolerances. 3. On February 2, 2012, Chesapeake filed an application in Cause No. CD for authorization to drill an off-pattern horizontal well in the Mississippi common source of supply in Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. The surface location of the proposed well was to be no closer than 200 feet from the south line and no closer than 1,980 feet from the west line of the unit. The proposed location of the end points for the completion interval for the Mississippian common source of supply was to be no closer than 165 feet from the north line and no closer than 1,590 feet from the west line and no closer than 165 feet from the south line and no closer than 1,590 feet from the west line of the unit. The proposed location of the end points of the completion interval for the Toronto, Douglas, Tonkawa, Cherokee, Lansing-Kansas City and Oswego separate common sources of supply was to be no closer than 330 feet from the north line and no closer than 1,590 feet from the west line and no closer than 330 feet from the south line and no closer than 1,590 feet from the west line of the unit comprising said Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma, with a tolerance of 100 feet from the proposed completion interval. 4. On February 2, 2012, Chesapeake filed an application in Cause No. CD for authorization to drill an off-pattern horizontal well in the Mississippi common source of supply in Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. The surface location of the proposed well was to be no closer than 200 feet from the south line and no closer than 1,980 feet from the east line of the unit. The proposed location of the end points for the completion interval for the Mississippian common source of supply was to be no closer than 165 feet from the north line and no closer than 1,320 feet from the east line and no closer than 165 feet from the south line and no closer than 1,320 feet from the east line of the unit. The proposed location of the end points of the completion interval for the Toronto, Douglas, Tonkawa, Cherokee, Lansing-Kansas City and Oswego separate common sources of supply was to be no closer than 330 feet from the north line and no closer than 1,320 feet from the east line and no closer than 330 feet from the south line and no closer than 1,320 feet from the east line of the unit comprising said Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma, with a tolerance of 100 feet from the proposed completion interval. 5. On March 21, 2012, Chesapeake filed an application in Cause No. CD for authorization to drill an off-pattern horizontal well in the Mississippi common source of supply in Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma. The surface location of the proposed well was to be no closer than 200 feet from the south line and no 4

5 closer than 2,490 feet from the west line of the unit. The proposed location of the end points for the completion interval for the Mississippian common source of supply was to be no closer than 165 feet from the north line and no closer than 1,320 feet from the west line and no closer than 165 feet from the south line and no closer than 1,320 feet from the west line of the unit. The proposed location of the end points of the completion interval for the Toronto, Douglas, Tonkawa, Cherokee, Lansing-Kansas City and Oswego separate common sources of supply was to be no closer than 330 feet from the north line and no closer than 1,320 feet from the west line and no closer than 330 feet from the south line and no closer than 1,320 feet from the west line of the unit comprising said Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma, with a tolerance of 100 feet from the proposed completion interval. 6. Sometime thereafter, Xanadu objected to all three of the location exception applications requested by Chesapeake, questioning the need for such applications and alleging that any lateral Mississippi wellbore closer than 660 feet from the northern boundary line of Section 4, Township 28 North, Range 14 West of the IM could damage their Rhodes 1-33 Well located in the SE/4 of Section 33, Township 28 North, Range 14 West of the TM that is currently producing from the Mississippi common source of supply. 7. Direct Examination of Mr. Matthew Fleischer. Mr. Books called Mr. Matthew Fleischer as his first witness. He said that he is landman currently working for Chesapeake and is familiar with the ownership interests in the proposed unit and the surrounding land. His qualifications were accepted by the ALJ without objection. 8. He testified that Chesapeake owns interests in the common sources of supply subject to these causes, including the Mississippi, and has the right to drill in Section 4, Township 28 North, Range 14 West of the IM. He said that he notified all of the offset operators and working interest owners of the applications and the hearing in these causes in accordance with the rules of the Commission. He said that Chesapeake operates the Sundance 14H Well in the W/2 of Section 4 and proposes to drill the three location exception wells east of the Sundance 14H Well in and around the center of the section and that the proposed Cordray-Ritter H Well that is the subject of CD is the closest location exception well to the Sundance 1-4H Well. 9. He also said that focus of the dispute in this cause is the location of the proposed Cordray-Ritter H Well which is the closest of the three proposed location exception wells to the Rhodes 1-33 Well, a vertical well owned by Xanadu in the SE/4 of Section 33, Township 28 North, Range 14 West of the IM in Woods County, Oklahoma. The Rhodes 1-33 Well is currently producing oil from the Mississippi. Xanadu has a 15% interest in Section 4 and a 100% interest in the Rhodes 1-33 Well. He said that Xanadu alleged that their Rhodes 1-33 Well would be damaged if the perforated intervals in the lateral of the proposed Cordray-Ritter Well were closer than 660 feet from the north line of Section He opined that even if the proposed Cordray-Ritter Well was 165 feet from the north line of Section 4 it would not adversely affect the Rhodes 1-33 Well. He noted that several other horizontal wells in the nine-section area centered on Section 4 were permitted by the Commission to be as close as 165 feet from adjacent wellbores. He noted that 14 location 5

6 exception wells were authorized by the Commission in which: one well was 175 feet from its unit boundary; three wells had at least one lateral 165 to 175 feet from the unit boundary; seven wells had laterals up to 200 feet from the unit boundary; and four wells had at least one lateral within 330 feet of the unit boundary. He also noted that two of the location exceptions granted were in Section 33 where Xanadu operates the Rhodes 1-33 Well and that Xanadu had no objection to these wells at the time they were authorized by the Commission Cross Examination of Mr. Matthew Fleischer. Upon inquiry of counsel, Mr. Fleischer testified that Chesapeake currently operates the Sundance 4-1H well in Section 4, and that the well was drilled in accordance to a letter agreement dated September 24, 2009 between Chesapeake and Xanadu. He identified Exhibit 4 as the letter agreement and noted that the agreement specified that the welibore 's exit from the Mississippi formation should be no closer than 660 feet from the north line of Section 4 with Xanadu allowed to drill a mirror location well in Section 33. He said that the Rhodes 1-33 Well is located 660 feet from the south line of Section 33. He said that Stephens Co. drilled the well and that Sundance Co. proposed the location exception before the Commission. He didn't know if Stephens Co. and Chesapeake had entered into any kind of agreement with respect to the well. 12. He said that although the Commission approved several horizontal wells in the ninesection area centered on Section 4 with terminal locations ranging from 165 feet to 660 feet from their respective unit boundaries, the key factor for the Commission to consider in this cause is the location of the perforated zones in the wells. He then noted the following: the bottom hole location for the Sundance 14H Well was 716 feet from the north line of Section 4; the last perforation for the Sundance Stephens Well (the Rhodes 1H-33 Well was 750 feet from the south line of Section 33; and the last perforation of the Achenbach 1-33H Well was 878 feet from the south line of Section Re-direct Examination of Mr. Matthew Fleischer. Upon inquiry of counsel. Mr. Fleischer testified that Xanadu could have protested the location of the wells that were permitted by the Commission to be located 330 feet from their Rhodes 1-33 Well in Section 33 but didn't do so. He opined that Xanadu wasn't concerned about these wells because drilling the wells benefited them. He noted that wells are often not drilled as close as allowed by the Commission. 14. Direct Examination of Mr. Adam Kruse. Mr. Books called Mr. Adam Kruse as his next witness. He said that he is a geologist and is currently working for Chesapeake. He has drilled 40 horizontal wells in the Mississippi formation and is Chesapeake's Mississippi expert. His qualifications were accepted by the ALJ without objection. 15. He said that the Mississippi is a variable, low porosity, low permeability reservoir made up of limestone chat rock. He noted that the Mississippi is tight rock that is compartmentalized between productive areas ("good parts that come and go" and non-productive areas. He said that some areas of the rock are more porous and more permeable than other areas. Because the rock is compartmentalized, the Mississippi is best drilled horizontally so that the long lateral welibore can connect all the good productive zones together in order to maximize production and prevent waste. on

7 16. He identified Exhibit 1 as a nine-section production map centered on Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma that showed all of the wells in the area. He said that the Commission should focus on the Cordray-Ritter Well located in Section 4 because the location of this well was the apex of the dispute between Chesapeake and Xanadu. He said that the lateral weilbore of this well will be oriented north-to-south to encounter the natural fractures that are oriented east to-west in the Mississippi formation, and that a long lateral is necessary to allow the wellbore to encounter more of these fractures and connect them together to maximize production. He also noted that the best communication between the lateral wellbore and the natural fractures occurs along the weilbore and not at the ends of the wellbore, implying that the welibore primarily drains hydrocarbons from the reservoir along its lateral length and not from the ends. 17. He identified Exhibit 2 as a Mississippi subsea structure map centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. He said that the Mississippi formation is up-dip towards the north of the map and down-dip towards the south. He said that there wasn't anything unusual about the structure of the Mississippi formation in the area that would be related to the issue of locating the lateral welibore of the Cordray-Ritter Well closer than 660 feet from the north line of Section He identified Exhibit 3 as Mississippi net porosity isopach centered on Section 4, Township 28 North, Range 14 West of the TM, Woods County, Oklahoma, that was prepared using a 5% net porosity cutoff. He said that one of the thickest areas of the Mississippi lies over Section 4 and that the map shown in Exhibit 3 depicts the thickness of the top 100 feet of the Mississippi formation. He said that the Mississippi wells permitted to be within 200 feet of their unit boundaries do not significantly communicate with the reservoir at the ends of their lateral weilbores. 19. Cross Examination of Mr. Adam Kruse. Upon inquiry of counsel, Mr. Kruse said that the Chesapeake location exception applications would allow them to perforate the Mississippi as close as 165 feet from the north line in Section 4. He said that the Sundance 14H well is the best and most productive Mississippi well in the nine-section area, and it is located more than 660 feet from the north line of the section. He said that he proposed Cordray-Ritter Well will be located more than 1,100 feet from the Sundance 14H Well. 20. He opined that well-communication with the reservoir in a north or south direction from the lateral weilbore is usually limited. When asked about the T-Rex 1-5 Well (vertical well located in the SE/4 of Section 5, he said that he didn't know if this well was affected by the T- Rex 2H-5 well also located in Section 5. The vertical welibore of the T-Rex 1-5 Well is located approximately 1,700 from the terminal end of the lateral welibore of the T-Rex Well. The last perforation in the T-Rex 2H-5 Well is located approximately 1,700 to 1,800 feet directly north of the T-Rex 1-5 Well. He testified that the last completion interval point of 165 feet from the north line and 1,590 feet from the west line of Section 4 proposed for the Cordray-Ritter Well would be 834 feet from the welibore of Xanadu's Rhodes 1-33 Well or around 50% closer to this Xanadu well than the T-Rex 2H-5 Well is closer to the T-Rex 1-5 Well. He also noted that the common sources of supply that underlie Section 4 and Section 33 are very similar. 7

8 21. Direct Examination of Mr. Aaron Jones. Mr. Books called Mr. Aaron Jones as his next witness. He said that he works as a well completion engineer for Chesapeake and has completed around 150 wells for the company of which 25 wells were horizontal wells in the Mississippi formation. His qualifications were accepted by the ALJ without objection. 22. He said that the proposed Chesapeake wells in Section 4 will be cased and cemented and that perforation of the lateral wellbore would occur in several stages. He said that perforation clusters would occur in each stage of the fracturing process with each stage representing a length of the lateral welibore sealed off from the other stages during the perforation process. He described the perforation process whereby the perforations within each stage are spaced out in 90 foot intervals and the last perforation within one stage is around 90 feet from the first perforation in a subsequent stage. He said that the midpoint between each perforation was thus 45 feet, and that this distance between perforations was determined to be the optimum distance to maximize production and keep drilling cost from becoming excessive. 23. He said that if each perforation was a separate wellbore, the 45 foot distance between the midpoint of the weilbores would be sufficient to prevent one wellbore from influencing another, thus indicating to him that welibores separated by more than 45 feet would not be in significant communication with each other and would not adversely affect the drainage from the zone of influence of each separate weilbore. 24. He said that Chesapeake learned to optimize the distance between perforations by trial and error. Weilbores or perforations that are too close together cause a pressure anomaly analogous to an increase in the back-pressure of each wellbore. He said that he has never seen a pressure anomaly in over 1,350 stages completed by him where the perforations were separated by 90 feet, and opined from this experience that Mississippi wells separated by more that 45 feet would not adversely affect each other, and that a separation of 90 feet would facilitate effective drainage of the reservoir. 25. He agreed with Mr. Kruse that the Mississippi is a tight, compartmentalized formation that lends itself to horizontal drilling and fracturing. He also noted that the Cordray-Ritter Well was located more than 844 feet from Xanadu's Rhodes 1-33 Well while the Rhodes 1H-33 Well was located more than 930 feet from the Xanadu Well. He said that the Rhodes 1H-33 Well poses a greater risk of adverse interference with the Xanadu well than the Cordray-Ritter Well because the welibores of the Xanadu Well and the Rhodes 1 H-3 3 Well are parallel to each other and encounter the east-to-west oriented fractures in the Mississippi while the terminal point of the lateral welibore of the proposed Cordray-Ritter Well is located hundreds of feet south of the Xanadu wellbore. 26. Cross Examination of Mr. Aaron Jones. Upon inquiry of counsel, Mr. Jones testified that the Sundance Well is a good well even though its horizontal lateral stopped at around 770 feet from the north line in Section 4. He said that Chesapeake's position is that a well drilled 165 feet from the north line of Section 4 will not damage Xanadu's Rhodes 1-33 Well. He said that the proposed well could be up to 90 feet from the section line and not affect the Xanadu Well. He noted that the Sundance 14H Well had a shorter lateral than what was proposed for the Cordray-Ritter Well and still was a good well, and he opined that it would have been an even 8

9 better well had it been extended closer to the north line of the section. He noted that it was Chesapeake's experience that the most productive horizontal wells had the longest laterals. 27. Re-direct Examination of Mr. Aaron Jones. Upon inquiry of counsel, Mr. Jones said that Chesapeake wouldn't go to the expense of drilling longer horizontal lateral wellbores than allowed at a legal location unless such wells produced more oil and gas. He said that longer laterals prevented waste in compartmentalized reservoirs because communication between the most productive compartments is increased and more gas and oil is produced from contacting more areas of high porosity and accessing more natural factures. 28. Second Cross Examination of Mr. Aaron Jones. Upon inquiry of counsel, Mr. Jones said that the Sundance 14H Well was a good well primarily because of the thickness of the Mississippi reservoir in which the well was drilled. He noted that the well was drilled early on in the section and that well drilling and fracturing practices were different back then. He said that over 200 horizontal wells have been drilled by Chesapeake since the Sundance well was drilled, and the company has learned from the experience and developed its current drilling practices based upon its experiences. 29. Direct Examination of Mr. Lauren Heath. Mr. Books presented Mr. Heath as his next witness. He testified that he was a petroleum consultant holding a BS degree in engineering physics and a MS degree in petroleum engineering and currently working for Chesapeake. His qualifications were accepted by the ALJ without objection. 30. He said that the Mississippi formation was a tight, compartmentalized, variable reservoir consisting of productive portions of rock alternating between non-productive rock. He said that it is necessary to drill a long horizontal wellbore through such formations in order to encounter the maximum quantity of productive portions of the rock in order to prevent waste. Drilling close to the unit boundary would prevent waste by capturing hydrocarbons that would remain in the reservoir if the lateral didn't extend beyond the legal location towards the unit boundaries. 31. He said that encountering more of the natural fractures in the Mississippi improves drainage in the east-to-west direction. He agreed with Mr. Kruse that the proposed Cordray- Ritter Well would only drain around 45 feet north of the terminus of the lateral in Section 4 and that Chesapeake has learned a lot about how to optimally drill horizontal wells in the Mississippi since they drilled the Sundance 14H Well. He noted that the Sundance Well is a good well and is expected to produce around 429,000 barrel of oil and around 0.8 BCF of gas. 32. He identified Exhibit 7 as a monthly oil and gas production report for the Rhodes 1-33 Well located in Section 33, Township 29 North, Range 14 West of the IM, Woods County, Oklahoma. He said that this well produced 31 MMCF of gas and 5,640 barrels of oil since 2003 and is projected to produce a total of around 9,700 barrels of oil. He noted that the well didn't sell much oil in 2010 and only sold around 290 barrels of oil in He implied that this well was no longer a good producer and had limited production capability, and that the well didn't represent a resource that could be significantly harmed by proximity to another wellbore.

10 33. He said that waste will occur if the horizontal lateral of the Cordray-Ritter Well is limited to a location less than 660 feet from the north line of Section 4. He noted that short laterals yield less reserves and that the Sundance 14H Well would have produced more oil and gas if it had a longer lateral He calculated that the Sundance 14H well produced around 104 barrels of oil per linear foot of lateral wellbore. Based upon an assumption that the proposed Cordray-Ritter Well might produce similar to the Sundance 14H Well, limiting the lateral wellbore to 660 feet from the north line of Section 4 instead of allowing the well to extend to 165 feet could leave around 51,300 barrels of oil in the reservoir. He said that leaving the oil in the ground would constitute waste of the resource. 34. He identified Exhibit 6 as a calculation of the recoverable oil in place for the Mississippi common source of supply underlying a portion of Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Based upon this calculation, he estimated that around 77.2 acres in the Mississippi reservoir in Section 4 would not be drained in the lateral welibore for the Cordray-Ritter Well was limited to a location 660 feet from the north line. He said that the exclusion of this acreage from production would result in around 174,555 barrels of oil being left in the formation and that doing so would waste the resource. 35. He opined that the Rhodes 1H-33 Well posed a greater risk of adverse interference with the Xanadu Rhodes 1-33 Well than the Cordray-Ritter Well, and noted that the T-Rex 2H-5 Horizontal Well shouldn't have any adverse impact upon the productivity of the T-Rex 1-5 Vertical Well in Section 5. He said that these two wells were more than 1,000 feet from each other. 36. Referring to an argument made by Xanadu that perforation and hydraulic fracturing operations completed in the T-Rex 2H-5 Well interfered with production from the T-Rex 1-5 Well, he opined that it would not be possible for a pressure wave created by fracturing in one well to pass through the reservoir rock in 60 minutes and affect operations in another well separated by 1,000 feet of rock as implied by Xanadu. He said that perforating and fracturing one welibore could not cause well pressure and production to plummet to zero in another weilbore that produces in the same reservoir when separated by 1,000 feet of reservoir rock. He further noted that the T-Rex 1-5 Well has never been very prolific producer, plodding along at a production rate of 100 to 400 MCF gas per month and that production improved after the completion of the T-Rex 2H-5 Well to around 14.2 MCF per day. 37. He identified Exhibit 9 as a well location and nine-section production map centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma showing the locations of some of the perforations in the welibores. He noted that many of the wells were authorized to locate the terminus of their lateral weilbores as close as 165 feet from a unit boundary but actually stopped perforations farther away from the unit boundaries than allowed by the Commission. 38. Cross Examination of Mr. Lauren Heath. Upon inquiry of counsel, Mr. Heath testified that the surface location of the T-Rex 2H-5 Well was no closer than 250 feet from the south line, 5,030 feet from the north line and 1,050 feet from the east line of Section 33; and that the first perforation was 750 feet from the south line and 1,041 feet from the east line of the section. 10

11 39. Re-direct Examination of Mr. Lauren Heath. Upon inquiry of counsel, Mr. Heath said that it would have prevented waste to drill a longer lateral wellbore in the Sundance 14H Well. 40. Direct Examination of Mr. Larry Sweet. Mr. Stack presented Mr. Larry Sweet as his first witness. He testified that he is a petroleum engineer and one of the owners of Xanadu. His qualifications were accepted by the ALJ without objection. 41. He said that it was possible for a perforation and hydraulic fracturing operation completed in one well to adversely affect the productivity and operation of another well that produces from the same formation. He called the Commission's attention to an incident that occurred related to the T-Rex 1-5 Well and the T-Rex 2H-5 Well whereby the T-Rex 1-5 Well lost pressure and quit producing gas just after the T-Rex 2H-5 Well was perforated and fractured. He noted that the horizontal well was perforated and fractured in the Mississippi formation and that the vertical well was producing from the same formation and from the same reservoir. 42. He opined that these wells affected each other even though they were separated by over 1,000 feet of reservoir rock. He said that this was possible because the Mississippi formation isn't homogenous but is comprised of many natural fractures that can extend many feet after being fracture-stimulated, and that such extended fractures allowed the vertical weilbore to be influenced by the operations completed in the horizontal weilbore. He said that the fracturestimulation of the T-Rex 2H-5 Well flooded out the T-Rex 1-5 Well, causing gas pressure to go to zero and production to cease until the area around the well regained enough pressure from the reservoir to cause oil to flow again through the wellbore. 43. He identified Exhibit 9 as a monthly oil and gas production report for the T-Rex 1-5 Well and Exhibit 10 as a table prepared by Flow Measurement Company showing that well's production and well information. He noted that the data taken from these tables showed a decline in production occurring around November 11, He said that before the T-Rex 2H-5 Well was fracture-stimulated on November 11, 2011, the T-Rex 1-5 Well produced around 10 to 15 barrels of oil per day. Around 60 minutes after the horizontal well was fracture-stimulated, the T- Rex 1-5 Well quit producing for around 10 days and then resumed production at a reduced rate of only 7 to 8 barrels of oil per day. 44. In support of his argument, he referred to Exhibit 11 that depicted the daily drilling progress report for the T-Rex 2H-5 Well. He noted from the report the approximate date and time when the well was fractured-stimulated and said that this date corresponded to the time that the T-Rex 1-5 Well lost pressure and production. He also identified Exhibit 12 as a daily production chart taken from the T-Rex 1-5 Well that showed a time that the well lost pressure and production and opined from all of the well records that the T-Rex 1-5 Well lost pressure and production around 60 minutes after the T-Rex 2H-5 Well was fracture-stimulated. He further opined that the proximity in time between the loss of pressure and production in the T-Rex 1-5 Well and the fracture-stimulation of the T-Rex 2H-5 Well was evidence that one event influenced or caused the other event. 11

12 45. Cross Examination of Mr. Larry Sweet. Upon inquiry of counsel, Mr. Sweet testified that the perforation in the T-Rex Well that is closest to the welibore of the T-Rex 1-5 Well was around 1,777 feet from the well. He admitted that Xanadu hasn't drilled any horizontal wells but opined that fracture-stimulation can promote factures in the Mississippi that can extend long distances in all directions, including fractures that are oriented north and south from a horizontal wellbore. 46. Re-direct Examination of Mr. Larry Sweet. Upon inquiry of counsel, he said that Xanadu has been concerned about fractures extending long distances from fracture-stimulated horizontal wells for some time and this was why they entered into the letter agreement with Chesapeake shown in Exhibit 4 related to the location exception application in CD After hearing the evidence and testimony, the ALJ took the matter under advisement upon receiving the transcript on January 28, CONCLUSIONS OF LAW 48. The primary issue in these three causes is a dispute over the prevention of waste between Chesapeake and Xanadu. Chesapeake applied to drill three horizontal wells in the Mississippi formation in Section 4 having lateral wellbores extending up to 165 feet from the north line of the section instead of being limited to 660 feet from the section line. Chesapeake argued that the longer lateral wellbores were necessary to prevent the waste of hydrocarbons that would be left in the ground if its lateral wellbores were limited to 660 feet. Xanadu alleged that Chesapeake's proposed lateral wellbores would be too close to a vertical Mississippi well that it operates in the S12 of the SE/4 of Section 33, which is adjacent to Section 4, and that the Chesapeake's proposed wells would damage the well and reduce it's productivity. 49. Chesapeake's experts presented substantial evidence in support of their respective applications that the proposed location exceptions are necessary to prevent waste and maximize the production of hydrocarbons in Section 4. Chesapeake showed that their proposed wells would penetrate the thickest rock in the Mississippi formation while maximizing the length of the horizontal lateral wellbores and optimizing access to the natural fracture systems having an east-to-west orientation in the formation. 50. Chesapeake presented a Mississippi subsea structure map and net porosity isopach based upon a 5% net porosity value centered on Section 4, Township 28 North, Range 14 West of the IM, Woods County, Oklahoma. Chesapeake showed the thickest net rock to run in a broad band throughout the section and that several horizontal location exception wells would be necessary to maximize production from the thickest region of the Mississippi. 51. Chesapeake's experts testified that the natural fracture system in the Mississippi runs east-to-west and that lateral wellbores oriented north-to-south are necessary for the welibores to be perpendicular to the natural fractures in the system. Chesapeake's experts maintained that being perpendicular to the natural fractures is important so that the horizontal weilbores can access and interconnect the many productive pockets that are found within the Mississippi in 12

13 this area. Chesapeake's claim that the natural fractures in the area run east-to-west is supported by other horizontal wells drilled in the area that have lateral wellbores oriented north-to-south. 52. Chesapeake's expert also said that the Mississippi is a variable, low porosity, low permeability reservoir made up of limestone chat rock. He noted that the Mississippi is tight rock that is compartmentalized between productive areas and non-productive areas. He said that some areas of the rock are more porous and more permeable than other areas. Because the rock is compartmentalized, he opined that the Mississippi is best drilled horizontally so that the long lateral weilbore can connect all the good productive zones together in order to maximize production and prevent waste. 53. He opined that well-communication with the reservoir in a north or south direction from the lateral welibore is usually limited. He noted that the best communication between the lateral weilbore and the natural fractures occurs along the welibore and not at the ends of the weilbore, implying that the wellbore primarily drains hydrocarbons from the reservoir along its lateral length and not from the ends. He said that the Mississippi wells permitted to be within 200 feet of their unit boundaries do not significantly communicate with the reservoir at the ends of their lateral wellbores. 54. Chesapeake's drilling engineering expert testified that wellbores could be as close as 90 feet from each other without adversely affecting their respective performance. He based his opinion upon Chesapeake's experience whereby perforations within a lateral weilbore were optimally located 90 to 100 feet away from each other. He said that if each perforation was a separate welibore, the 45 foot distance between the midpoint of the weilbores would be sufficient to prevent one wellbore from influencing another, thus indicating to him that wellbores separated by more than 45 feet would not be in significant communication with each other and would not adversely affect the drainage from the zone of influence of each separate wellbore. 55. Chesapeake's experts also presented a map in Exhibit 9 that showed the lengths of the lateral wellbores for horizontal wells drilled in the nine-section area centered on Section 4 as support for their argument that their proposed location exception wells should be drilled to 165 feet from the north line of the section. Chesapeake showed that it was a common practice allowed by the Commission for such wells to have lateral weilbores located closer than 660 feet from a unit boundary. Chesapeake's experts also presented data in Exhibit 6 that showed 407,285 barrels of oil and 790,298 MCF of gas remained to be recovered in Section Chesapeake's reservoir engineering expert testified that waste would occur if the horizontal lateral of the Cordray-Ritter Well is limited to a location less than 660 feet from the north line of Section 4. He estimated that around 77.2 acres in the Mississippi reservoir in Section 4 would not be drained in the lateral welibore for the Cordray-Ritter Well was so limited. He said that the exclusion of this acreage from production would result in around 174,555 barrels of oil being left in the formation and that doing so would waste the resource. 57. Xanadu didn't object to Chesapeake's argument that the Mississippi is best developed by horizontal drilling using welibores oriented in a north-to-south direction. The crux of Xanadu's argument was that fracture-stimulation of the Mississippi during horizontal drilling would induce I-, 1.

14 fracturing that could extend long distances in all directions. In support of the argument, Xanadu's owner and expert described an incident whereby the T-Rex 1-5 Well in Section 33 lost pressure and quit producing gas just after the T-Rex 2H-5 Well was perforated and fractured. He noted that the horizontal well was perforated and fractured in the Mississippi formation and that the vertical well was producing from the same formation and from the same reservoir. 58. He said that the fracture-stimulation of the T-Rex Well flooded out the T-Rex 1-5 Well, causing gas pressure to go to zero and production to cease until the area around the well regained enough pressure from the reservoir to cause oil to flow again through the weilbore. He opined that these wells affected each other even though they were separated by over 1,000 feet of reservoir rock because the Mississippi formation is comprised of many natural fractures that can extend many feet after being fracture-stimulated, and that such extended fractures allowed the vertical wellbore to be influenced by the operations completed in the horizontal weilbore. 59. He noted that the T-Rex 1-5 Well produced around 10 to 15 barrels of oil per day before the T-Rex 2H-5 Well was fracture-stimulated and quit producing for around 10 days and then resumed production at a reduced rate of only 7 to 8 barrels of oil per day after the horizontal well was fracture-stimulated. He also noted that the approximate date and time when the well was fractured-stimulated corresponded to the time that the T-Rex 1-5 Well lost pressure and production. He opined that the proximity in time between the loss of pressure and production in the T-Rex 1-5 Well and the fracture-stimulation of the T-Rex Well was evidence that one event influenced or caused the other event. 60. He opined that a similar event could occur with respect to the Rhodes 1-33 Well. He said that the proposed Cordray-Ritter Well would be 834 feet from the welibore of Xanadu's Rhodes 1-33 Well or around 50% closer to this Xanadu well than the T-Rex 2H-5 Well is closer to the T-Rex 1-5 Well. Chesapeake's experts responded that it would not be possible for a pressure wave created by fracturing in one well to pass quickly through the reservoir rock and affect operations in another well separated by 1,000 feet of rock as implied by Xanadu. 61. After taking into consideration all of the facts, circumstances, evidence and testimony presented in this cause, the AU recommends that Chesapeake' location exception applications in CD and CD be granted. Chesapeake presented significant evidence that waste would occur if the Commission doesn't permit the lateral wellbores to extend within 165 feet of the unit boundary. These lateral terminus of these wells in Section 4 are located at least 1,500 feet away from the wellbore of Xanadu's Rhodes 1-33 Well and thus do not appear to pose a threat to the operation of that well in Section The AU further recommends that Chesapeake's application in CD be granted subject to a requirement that the weilbore perforation and hydraulic fracturing activities of the proposed Cordray-Ritter 4-28N-14 1H Well be monitored to determine if said activities substantially and adversely affected the operation of and production from Xanadu's Rhodes 1-33 Well. Xanadu presented circumstantial evidence that fracturing from the proposed Cordray- Ritter Well might have an affect upon Xanadu' s Well, indicating that the process of fracturestimulation of that well should be monitored. Because the extent of fracturing in the Mississippi formation caused by fracture-stimulation isn't definitively known and expert opinion on the issue 14

15 conflicts, it is in the public interest for data on this process and the possible effect, if any, upon other wells drilled in the same formation, be gathered and evaluated. The ALJ recommends that this cause be reopened thirty days after completion of the Cordray-Ritter Well to report on the status of the Rhodes 1-33 Well. RESPECTFULLY SUBMITTED the 19th day of February, 2013 DAVID LEAVITT ADMINISTRATIVE LAW JUDGE DL xc: Richard Books Michael Stack Rick Taber Sally Shipley Michael Decker Oil Law Records Commission Files 15