AMERICAN ASSOCIATION OF PETROLEUM LANDMEN

SEPTEMBER 17, 2012 OIL CONSERVATION COMMISSION RECENT RULEMAKING PROCEEDINGS CURRENT OPERATOR ISSUES OIL CONSERVATION DIVISION INTERPRETATION OF THE NEW RULES

William F. Carr, Esq. Holland & Hart, LLP Gabrielle Gerholt, Esq.

NM Oil Conservation Division

William F. Carr is certified as a specialist in natural resources law, oil and gas, by the Board of Legal Specialization of the New Mexico State Bar. He has practiced oil and gas law in Santa Fe since 1972. He has been attorney to the Legislative Finance Committee of the New Mexico Legislature, General Counsel to the New Mexico Oil Conservation Commission and since 1978 has been in private practice. His practice has concentrated on regulatory matters, lobbying and litigation, with a focus on issues before the New Mexico Oil Conservation Division/Commission. Since 2000, he has served as Co-Chairman, Regulatory Practices Committee of the New Mexico Oil and Gas Association, and is an Adjunct Professor, teaching oil and gas law at University of New Mexico School of Law. Mr. Carr has represented industry clients in recent Oil Conservation Commission hearings where new rules have been adopted governing compliance, surface waste management, pits, hydraulic fracturing and horizontal drilling. He currently is Of Counsel with the Santa Fe Office of Holland & Hart, LLP. Gabrielle Gerholt, Assistant General Counsel for the New Mexico Oil Conservation Division, currently represents the Division in all rulemaking proceedings. Gabrielle is an acting advisor to the Division in matters related to Acid Gas Injection, Reclamation Fund work and Compliance matters. Before joining the Division, she was Assistant General Counsel at the New Mexico State Land Office and was charged with representation for Oil, Gas and Minerals focusing on leasing and royalty issues. Gabrielle started her career as an Assistant District Attorney, prosecuting drug traffickers under a federal grant. She holds a Juris Doctorate from Temple University in 2005 and a Master of Science in Cell and Molecular Biology from Tulane University in 2002.

Mr. Carr and Ms. Gerholt have participated in the development and adoption of all recent New Mexico Oil Conservation Commission rule changes. Their presentations will focus on recently adopted rules governing hydraulic fracturing, horizontal drilling and the on-going proceedings where amendments to the pit rule and new rules governing the injection of acid gas are under consideration. They will review current issues that impact the work of land professionals practicing in New Mexico and make suggestions on how to avoid regulatory pit falls that face those working in this state.

OCD RULES- PART 2 ADJUDICATION

Adjudications not listed above. The applicant shall give notice as the division requires.

19.15.4.9 (4)(9) NMAC

OCD HORIZONTAL DRILLING RULES

DEFINITION OF A HORIZONTAL WELL:

“Horizontal well” means a directional well bore with one or more laterals that extend a minimum of 100 feet horizontally in the target zone. A well with multiple laterals from a common well bore in the same or different target zones or formations shall be considered one well.

DEFINITION OF PROJECT AREA:

L.

“Project area” means an area the operator designates on Form C-102, well location and acreage dedication plat that comprises: (1) (2) one or more complete, contiguous spacing units (in one section or in more than one section) that are developed by the horizontal well; or an entire voluntary or statutory unit for an approved enhanced recovery or pressure maintenance project, an approved state exploratory unit, or a participating area in a federal unit.

DEFINITION OF “PRODUCING AREA:

“Producing area” means the portion of the project area that lies within a window formed by plotting the measured distance from the project area’s outer boundaries, inside of which a well bore can be drilled and produced in conformity with the setback requirements from the outer boundary of a standard spacing unit for the applicable pool.

DEFINITION OF “COMPLETED INTERVAL”

“Completed interval” means that portion of the well bore or lateral that is: (1) cased, cemented and perforated; (2) an open hole; or (3) isolated by a packer or other non permeable means and open to the formation.

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NOTICE TO AFFECTED PARTIES:

Unorthodox well locations.

(a) Affected persons are the following persons owning interests in the adjoining spacing units: (i) the division-designated operator; (ii) in the absence of an operator, a lessee whose interest is (iii) evidenced by a written conveyance document either of record of known to the applicant as of the date he files the application; and in the absence of an operator or lessee, a mineral interest owner whose interest is evidenced by a written conveyance document either of record or known to the applicant as of the date the applicant filed the application.

19.15.4.9 (2) NMAC

19.15.16.15

SPECIAL RULES FOR HORIZONTAL WELLS: A.

Directional and horizontal well consent requirements. An operator shall not file an application for permit to drill nor commence drilling of a horizontal or directional well until the operator has either: (1) received consent of at least one lessee or owner of an unleased mineral interest in each tract 9 in the target pool or formation) in which any part of the well’s completed interval will be located: or (2) obtain a compulsory pooling order from the division.

19.15.16.15.B.(4) NMAC: A horizontal well’s surface location may be outside the setbacks or outside the project area provided that the completed interval is entirely within the project area and complies with the applicable set back requirements.

PRODUCING THE WELL:

MUST FIRST CONSOLIDATE ALL INTERESTS IN THE PROJECT AREA 19.15.16.15.F NMAC: Consolidation of the project area. If a horizontal well is dedicated to a project area in which there is more than one owner of any interest in the mineral estate, the operator of the horizontal well shall cause the project area to be consolidated by voluntary agreement or, if applicable, compulsory pooling before the division may approve a request for form C-104 for the horizontal well. [Request for Allowable and Authorization to Transport]

COMPULSORY POOLING FOR HORIZONTAL WELLS: ADDITIONAL INFORMATION BEFORE YOU CAN START:

TYPE OF WELL OIL/GAS

VERTICAL / HORIZONTAL

LOCATION –

SURFACE LOCATION LOCATION OF HORIZONTAL WELL BORE AND TERMINUS

TARGET FORMATION AND POOLS SPACING RULES [STATEWIDE OR SPECIAL POOL RULES]

ACREAGE DEDICATION [SPACING UNIT / PROJECT AREA]

70-2-17. EQUITABLE ALLOCATION OF ALLOWABLE PRODUCTION; POOLING; SPACING.

C.

When two or more separately owned tracts of land are embraced within a spacing or proration unit, or where there are owners of royalty interests or undivided interests in oil and gas minerals which are separately owned or any combination thereof, embraced within such spacing or proration unit, the owner or owners thereof may validly pool their interests and develop their lands as a unit. Where, however, such owner or owners have not agreed to pool their interests, and where one such separate owner, or owners, who has the right to drill has drilled or proposes to drill a well on said unit to a common source of supply, the division, to avoid the drilling of unnecessary wells or to protect correlative rights, or to prevent waste, shall pool all or any part of such lands or interests or both in the spacing or proration unit as a unit.

C. …For the purpose of determining the

portions of production owned by the persons owning interests in the pooled oil or gas, or both, such production shall be allocated to the respective tracts within the unit in the proportion that the number of surface acres included within each tract bears to the number of surface acres included in the entire unit.

CONTRACTION OF PROJECT AREA:

“…if the proposed well is not completed in all of the spacing units combined to form the project area within 120 days after commencement of drilling, then the operator shall apply to the Division for an amendment to this Order to contract the Unit so that it includes only those spacing units in which the well is completed.”

ORDER NO. R-13580

70-2-18. SPACING OR PRORATION UNIT WITH DIVIDED MINERAL OWNERSHIP.

Any operator failing to obtain voluntary pooling agreements, or failing to apply for an order of the division pooling the lands dedicated to the spacing or proration unit as required by this section, shall nevertheless be liable to account and pay each owner of minerals or leasehold interest, including owners of overriding royalty interests and other payments out of production, either the amount

to which each interest owner would be entitled if pooling had occurred or the amount to which each interest is entitled in the

absence of pooling, whichever is greater.

PIT RULE: A. Siting B. Closure C. BGT’s D. Multi-Well Fluid Management Pits E. Procedural Streamlining E. Operational requirements G. Notice H. Variances and Exceptions I. Rules that require actions w/in set time frames

OCD HYDRAULIC FRACTURING RULE