BEFORE THE CORPORATION COMMISSIO I L E OF THE STATE OF OKLAHOMA SEP 162011 SANDRIDGE EXPLORATION AND PRODUCTION, L.L.C. COURT CLERKS OFFICE - OKC CORPORATION COMMISSION OF OKLAHOMA RELIEF SOUGHT: HORIZONTAL DRILLING AND SPACING UNITS CAUSE CD NO. 201100264 LEGAL DESCRIPTION: S/2 OF SECTION 7 AND N/2 OF SECTION 18, TOWNSHIP 28 NORTH, RANGE 5 WEST GRANT COUNTY, OKLAHOMA APPLICANT RELIEF SOUGHT ELIZABETH ANN KOCH IRREGULAR HORIZONTAL DRILLING AND SPACING CAUSE CD NO. UNITS 201101608 LEGAL DESCRIPTION S/2 OF SECTION 7 AND N/2 ) OF SECTION 18, TOWNSHIP ) 28 NORTH, RANGE 5 WEST ) GRANT COUNTY, ) OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE This cause came on for hearing before Michael Porter, Administrative Law Judge for the Corporation Commission for the State of Oklahoma, on the 22'' and 23rd days of June, 2011, at 8:30 a.m. 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: Sandridge Exploration and Production L.L.C. ("Sandridge") filed a horizontal spacing unit application on January 19, 2011, for the above-mentioned lands. This was done to create a 640 acre horizontal spacing unit for three formations. Ms. Koch filled an irregular horizontal spacing unit application April 4, 2011. Ms. Koch ("Ms. Koch") is seeking to create 320 acre standup horizontal spacing units. Sandridge takes the position that it will take a 640 acre unit to
Page 2 minimize the number of horizontal wells needed to fully develop the unit and prevent waste. Koch's position is that she will have to share with other mineral owners until such a time as other wells are drilled in another part of the unit. Ms. Koch also has the position that one well will not drain the entire 640 acres and that 320 acres is a more appropriate size given a well's ability to drain the unit. RECOMMENDATIONS: 1) That the application of Sandridge Exploration and Production, L.L.C. in CD 201000264 be granted. 2) That the application of Elizabeth Ann Koch in CD 201001608 be denied. HEARING DATES: June 22, and 23, 2011 APPEARANCES: Roger Grove and Richard Grimes, Attorneys at Law, appeared for Sandridge Exploration and Production, L.L.C. Gregory Mahaffey, Attorney at Law, appeared for Elizabeth Ann Koch SUMMARY OF EVIDENCE 1. Causes CD 201100264 and CD 201101608 are applications of Sandridge and Ms. Koch JMA respectfully in Grant County, Oklahoma as shown above.. 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. 3. The following numbered exhibits were accepted into evidence on the 15th of April, 2010: 4) Diagram showing a single transverse fracture propagated from a single set of perforations (or cluster of perforations) in the Kilian well. 5) Nine section plat centered on Section 7 showing the requested unit outlined in red. 6) Three well cross section hung on the top of the Woodford. 7) Series of decline curve graphs for offset wells productive in the Mississippian formation. 8) Production history and decline curve graph for Kilian 7-1H well.
Page 3 9) Summary of volumetric, petro physical information and volumetric calculation of drainage area of Kilian 1-H well. 10) Series of web pages from Sandridge's web site 11) Daily production report for Kilian 1-7H. 12) Location Plat using quarter section, centered on subject area. 13) Three well cross section hung on the top of the Mississippian. 14) Reservoir Data sheet based on Sladek #1 and Kilian #1-7H. 15) NOT ADMITTED 16) Packet of Mississippian horizontal spacing orders. 4. Summary of Testimony Jon Goss Mr. Goss testified on behalf of Sandridge. He testified Sandridge had the right to drill. He further testified all parties, entitled to notice of the date of filing, had been notified of the proceedings. He agreed Greenleaf was claiming an ownership interest in the section. Upon cross examination it was established there is slightly more acreage in the north half of Section 18 than in the south half of Section 7. He also admitted there was no spacing order in effect on February 10, 2011 that spaced the north half of Section 18. He stated there was an emergency spacing order that was in place at that time. He also admitted on February 10, 2011, Sandridge was not physically doing any activity on the north half of Section 18. He agreed the effective date of the spacing order should be the date of first production from the Kilian 1-71-1 in early April 2011. Ross Giblet Mr. Giblet testified as the operation engineer on behalf of Sandridge. He testified as operations engineer he was primarily responsible for the completion of horizontal Mississippi wells including perforation design, fracture design and fracture modeling. He stated he used a software program named GOHFER. He then explained what Exhibit #4 represented. He said it showed a single wing of a single transverse fracture propagated from a single set of perforations, which is also known as a cluster. He agreed it was intended to reflect the results of the fractures put on the Kilian well. He said the exhibit also had a representation of the electric log run from a nearby vertical well. He said this was used to model the Kilian 1-71-1 well. He said he used this vertical well because it was the nearest well with a sonic log. He said a sonic log is used to determine the stress profile of the rock and this is the main factor in determining the dimensions of the height and length of the frac. He agreed the purpose of fracture modeling
Page 4 was to determine the height and length of the frac in the rock. He testified he thought the use of a sonic log for a well several miles from the Kilian well was valid to use for the computer simulation for the Kilian well. He said it was compared to a well drilled within a half mile of the Kilian well. He said he verified that it was a good representation of the Mississippi for the immediate area, matching the tops and porosity along the log. During cross examination he stated a sonic log was needed to calculate a Young's modulus and a Poisson's ratio, measures used to calculate stress in the rock. He said stress was measured in PSI [sic]. He testified that you couldn't use the overburden stress as it would be the horizontal stress that dictates fracture growth. He admitted there were variations in porosity in the formation; however he did not believe it would affect the fracture geometry. He explained the different colors represented the proppant concentration that was injected or in place after fracture treatment. He said when they are pumping the proppant; they used lower concentration at the beginning of the job so that when it reaches the end of the frac it would have a lower concentration of proppant. He also said the proppant tends to settle as it is pumped, so it was harder to get more proppant towards the end of the fracture. He testified that gravity pulls the proppant towards the bottom of the frac as it is being pumped. He then testified as to the process employed by Sandridge to frac its Mississippi wells. He stated that slick water, which carries the proppant, is pumped at high pressures into the perforations. He said this creates a fracture and the proppant is carried into the formation. When the operation is completed the proppant stays in the formation and keeps the fracture open. In addition, he stated Exhibit #4 was a representation of a single set or cluster of perforations. He said there were three clusters per stage and that Sandridge does 11 stages. He said a cluster was two feet of perforations and six shots per foot for a total of twelve perforations. He agreed Exhibit #4 showed one side of the frac and that on the other side of the well bore would be another similar frac wing. He said to determine the height of the frac he used the average volumes, of all eleven stages pumped into the Kilian well and the average volumes of water and proppant. He stated the height of the frac was 110 feet and the projected length of the frac would be 1800 feet. He admitted that the frac wing would not extend into the east halves of Sections 7 or 18. He admitted on cross examination that this was an attempt to model what he thought was going on in the reservoir. He agreed it was not an exact measure. He also admitted there was micro seismic technology available that has been used in horizontal Woodford plays in the area, but Sandridge had not used it for this well. Michael Glenn Davis Mr. Davis testified as a consulting petroleum engineer for Sandridge. He explained Exhibit #5, the production plat. He then testified about Exhibit #6. He said it was a three well cross section that runs from the Romona Kilian to the north of the proposed unit, to the Sladek well in Section 8, finally to the Carol well in Section 17. He agreed a small snippet of Mr. Giblet's exhibit #4 was also on the Exhibit 46. He testified the cross section was hung on the top
Page 5 of the Woodford. He said the logs showed the gamma ray, dual induction and porosity logs. He testified the cross sections illustrated the Mississippian was a uniform formation with similar gross thicknesses and almost identical log signatures at the top of the Woodford. He testified the porosity in the productive interval was 3.9%. He said he digitized the gamma ray, induction, and porosity logs and performed a foot by foot analysis of the area where the frac would grow. He further indicated he set certain parameters. He used a 2% porosity cutoff, a 90% water cutoff and an 80 % shale cutoff so as to include as much of the reservoir as he could find. He said his calculations gave him and 3.9% porosity overall. He indicated not all of the yellow shaded area on Exhibit 46 is pay. He said some portions of the pay are 100% wet and some had porosity less than 2%. He did not include those in his calculations. Mr. Davis then discussed the decline curves in Exhibit #7. He testified the Romona Kilian well experienced a harmonic decline curve. He said a harmonic decline was a way to categorize the decline curve production history over time. He described two other types of declines. He said the exponential decline is a straight line and the hyperbolic decline tends to bend over a period of time. He described a harmonic curve as one that declines quickly and then flattens out over a period of time. He then discussed Exhibit #8 which he said was created from information gathered from production and drilling reports supplied by Sandridge for the Kilian 7-1 H well. He also said he created a rate/cumulative decline curve from that information. He testified the decline curve was a variant of the harmonic decline curve. He indicated it showed an ultimate recovery of 145,000 barrels of oil. He testified the data showed the overall volumes of water was between 65 and 75 percent. He agreed this would affect the variables for calculating the volumetrics and drainage area. He testified the gas/oil ratio was low for a well producing this much fluid. He said in spite of a gas break out, this well was an oil well. He admitted during cross examination that if the same decline curve parameters used on the Boger #2-1 well are applied to the Kilian well, the ultimate recovery would be 256,000 barrels. He also said it would drain 362 acres. Mr. Davis then described the data he used to create Exhibit #9. He discussed in detail the factors he chooses and how he came to agree the drainage area was 205 acres. He also compared and contrasted the factors he used and the factors used by Mr. Stromburg (witness for Ms. Koch). He then testified he calculated how far the well would penetrate the reservoir. He said it would have a drainage width of 1,691 feet or 845 feet either side of the lateral. He agreed it was consistent with Mr. Giblet's modeling showing 1,800 feet of overall frac wing. He testified that the model showed about 850 feet of effective fractures. Mr. Davis testified that the spacing should be 640 acres because it would be possible to obtain the maximum recovery with a minimum of wells. He further testified with a drainage area of 200 acres, it would take three wells to fully develop the unit. He said one well would need to be drilled on each end of the unit and one in the middle and those should produce all the hydrocarbons in the unit. He continued that a 320 acre unit would result in either leaving reserves on one quarter section or over drilling the unit. He admitted that the well drilled would not drain 640 acres. He also admitted that the well would not drain any hydrocarbons from what would be the east half of the unit. He also admitted if an order for 640 acre spacing is granted it
Page 6 would provide for one well. He further admitted he could give no guaranty of when an increased density well would be drilled. Mr. Davis said if you had 320 acre spacing you couldn't put a well down the middle between the two 320 acre units. He testified that because the wells were so expensive to drill, that you would want to drill as few wells as possible to recover the oil. He said it was possible as development occurs, it might there is a need for more than three wells. He said this was because the nature of the reservoir was unknown. He also testified that if 320 acre units was in place, then the reserves in the eastern half of the western unit would left in the ground. He said if a well were placed in the eastern side of the western unit, then it would drain hydrocarbons from the western portion of the eastern unit. He said two wells could be drilled in the east unit, but that the owners in the west half would be drained unless they were to drill another well in the west unit. He continued with so now you have four wells with two wells competing for the same reserves because they are near the center portion between the two 320 acre units. He testified those wells near the dividing line have to be drilled for the parties to protect their correlative rights. He agreed that with the information currently available that a 640 acre unit would give the operator the ability to locate the wells to maximize recovery without violating correlative rights. Mr. Davis further testified that if Mr. Stromberg's estimates of 112 to 159 acres of drainage were correct, then 640 acre units would still be the proper spacing. He said you would need maybe five wells. He said you might have two in the west 320 and three in the east 320 or two in the east 320 and three in the west 320 and somebody being drained. He agrees that with a 640 acre unit, you could spread the five wells equidistantly apart in the unit. He testified the fact that two engineers disagree as to drainage is further proof of the need to have the flexibility to space out the wells across a unit. He also testified not a lot is known about the Mississippi, in this area, but what is known is it is of poor quality and a low drainage reservoir thus flexibility is needed to fully develop the reservoir. During cross examination and after a thorough review of the parameters used to create the drainage study, he admitted that if the porosity figure was changed, then the drainage area would be 185 acres. He admitted in that case, four wells would be needed to drain a 640 acre unit. Likewise if the recovery factor were to be four percent, he admitted the drainage area would be closer to 300 acres. During cross-examination Mr. Davis was asked several hypothetical questions concerning changes in the petro physical characteristics he used to determine drainage area for the Kilian well. Some of the factors were the "B" factor, porosity, and water saturation. As to the B factor, he was stated it would not be higher than one. He admitted he had heard of Netherland Sewell, a reservoir engineering company. He also admitted he had seen on the website [sic] that Netherland Sewell had looked at hundreds of wells in the Mississippi play. He admitted Exhibit #10 illustrated a B factor of 2.5. He then testified at length as to how Netherland Sewell might have come up with the B factor it used. The net result of the exchange between counsel and Mr. Davis was Mr. Davis explained his reasons for using the numbers he used and could not explain the numbers used by Netherland Sewell, who was not represented or present at this hearing. Upon additional cross examination, he admitted if 640 acre spacing was approved by the Commission, then it would dilute the mineral interest of the mineral owners in the west half of
Page 7 the proposed unit. He also admitted he did not know when Sandridge would drill a well in the east half of the proposed unit. Elizabeth Ann Koch Ms. Koch testified as a mineral owner and also as the applicant in one of the causes. She said she owned the northeast and northwest quarters of Section 18. She said she also owned the surface rights as well. She testified the interests had been in her family for over 30 years. She said she had no objection to stand up 160 acre units if the Commission ordered that spacing. She indicated she understood that if the Commission ordered 320 acre units that she and Mr. Kilian would share 100% of the royalties. She said she did not think it was fair that the owners in the southeast quarter of Section 7 to participate in royalties from the well located on Mr. Kilian's and her property. She also did not think it was fair for them to participate in the well if their minerals were not going to contribute to the well. MS. Koch indicated she lived in California but was raised in Wichita [sic] with family in Oklahoma, El Reno and Enid. On cross-examination, she admitted Sandridge was the first party to come out here to drill a well on her interests. She said others had come out to lease her interests but Sandridge was the only one to drill a well. Richard D. Veal Mr. Veal testified as president of Greenleaf Energy. Mr. Veal testified he had taken two oil and gas leases from Ms. Koch for the north half of Section 18. He said this was for about 300.5 acres. He said he was supporting Ms. Koch's application. After some discussion regarding ownership issues in District Court, he testified he had paid off the bonuses and believes he has valid leases covering the north half of Section 18. Upon re-direct examination, he identified Exhibit #10. He said he had taken the information from Sandridge's website and believed it to be a true and correct copy a potion of the webpages on that site. Upon cross examination, he said he didn't know what was on pages one through page forty nine. He testified he was trying to understand what the Mississippi play was about from Kay County to Woods County. He also said he wanted to know what Chesapeake, Panther and Sandridge were doing in making this play function. He did admit he did not review the entire website, and did not know the factual or scientific basis for Exhibit #10. Jon Stromsburg Mr. Stromburg testified as a consulting petroleum engineer for Ms. Koch. He testified he had examined logs from wells in the vicinity, production from wells in the vicinity, scout tickets and 1002As. He also reviewed Exhibit #10 and drilling and completion reports. He agreed that based on his review of the data and his experience as a petroleum engineer, it was his opinion 320 acre spacing was appropriate. He agreed the 320 acre spacing would be in the best interest of
Page 8 protection of the correlative rights of the mineral owners. He also agreed it would help insure the orderly development of the Mississippian in this acreage. He then discussed the exhibits he had prepared for this hearing. His plat was based on 40 acre quarter sections showing wells and delineating the 320 acre units and showing a representation of the drainage area of the Kilian 1-7 well. He also testified regarding the cross section noting he and Mr. Davis had selected the same three wells for the cross section. He said he saw no disagreements with Mr. Davis' cross section and his cross section. He testified he had looked at logs for the Susie Q #1-7 and it was likely Mr. Davis had not seen the log for that well. He said he had used those logs in his evaluation process for his testimony. He then discussed the differences in certain petro physical properties shown on his Reservoir Data Sheet (Exhibit #14) and the petro physical properties shown on Mr. Davis' Exhibit #9. His water saturation was about the same as Mr. Davis', but his porosity figure was slightly lower. He testified he believed this was because Mr. Davis had a 3% cutoff and his was a 2% cutoff. He also said his water cutoff was 50% and Mr. Davis' cutoff was 90%. He also said a lot of the interval was real low porosity and he did not include it in his, so his porosity figure was slightly higher. He testified he did the same on the other wells he evaluated. He also testified he had a different thickness because he went above the frac zone. He said he thought all these things are the reason the porosity averages are different. In addition he did not use the Carol well as a third well but instead used the Susie Q, which had higher porosity, even though it was a thin well. He testified that his higher porosity and lower water saturation would result in slightly higher oil in place calculation in a volumetric calculation. Mr. Stromburg then discussed why he thought his recovery factor of 15% was more appropriate than Mr. Davis' 6% recovery factor. He said he had a different perception of the recovery factor. He testified he agreed it was a tight reservoir with low permeability, so he believed it will drain close to the weilbore effectively and efficiently. He testified as you go further from the lateral, the less it will drain. He said he was not showing drainage as far from the welibore as Mr. Davis was. He said this would result in recovering a higher volume and this is based on his perception of low permeability reservoirs. He agrees that the reservoir does not have any drive, which he believes means it has little gas and high water content which is going to make it hard to move oil through it. He did not think the drainage would be effective at long distances, like 205 acres from the wellbore. He said he thought there would be high recovery near the weilbore and it would not reach out very far. He agreed that with a tight reservoir and lots of water in reservoir in his experience the drainage area is limited to that which is close to the weilbore. He also agreed it was consistent to have a higher recovery factor and smaller area than having a lower recovery factor and larger drainage area. He then discussed the issues he and Mr. Davis had with production from the Sladek well. He testified he had the same problems with evaluating the [decline] curve because of the way it dropped. He said he decided not to curve it and gave it five years at the current rate. He said that gave it another 5,000. He said based on his data, that the well would drain 18 acres. He said that would be a drainage radius of 500 feet. When asked if a well that makes 50,000 barrels only drains 18 acres, was it practical or reasonable that a well that makes 145,000 barrels would drain
Page 9 200 acres. He replied "I don't make that calculation. No sir". In discussing the reservoir volume, he testified the bottomhole temperature differences would not have a significant impact on an oil well. He said Mr. Davis' reservoir volume factor of 1.31 was lower than his of 1.40 for two reasons. First, his gas was 590. Mr. Stromburg said he did not use an actual gas number. He said he thought there was enough gas to saturate the oil so he assumed a bottomhole of about 2,200 pounds and calculated the bubble point gas in place and the formation volume factor at that bubble point. He said it gave a result between 1.35 and 1.4, so instead of using the precise number, he rounded up and used the 1.40 number. He said the effect was it would give his oil in place number lower than Mr. Davis' oil in place number. Mr. Stromburg then discussed two alternative drainage areas for the Kilian 1-71-1 well. He said he used the decline curve for a well in Woods County and applied it to the Kilian well and came up with 400,000 barrels. He said he then got new data for the Kilian well and said it was a steeper decline and when he used that, he got close to Mr. Davis' number. Mr. Stromburg said he got a result of 138,000. He said he was all over the place, so he used Exhibit #10 where Sandridge said an average well makes 200,000-211,000 barrels. He said he used that number to avoid controversy. He said if the average was 211,000 barrels then when back calculated, it would give a result of 112 acres. He testified that if applied to the Sladek well [as a horizontal well] with a 5,000 foot lateral and a drainage radius of 500 feet then it would drain 115 and 200,000 was a reasonable number, based on the Sladek as a horizontal well. He said if you used 300,000 barrels the back calculation would give a drainage area of 159 acres. There was some discussion regarding the "Bo" factor. He said he was aware that Netherland Sewell did use curves ranging from.25 to 2.8. He agreed technically, the number should not exceed 1.0. He indicated he had seen curves to fit production above 1 to fit production. Mr. Stromburg then testified he thought that four wells were going to be needed to drain 640 acres. He said based on that and the problems of ownership, he believed that 320 acre spacing would be the proper spacing. He said he could see no circumstance where the wells would drain more than 160 acres. He said the option of 160 acre stand up units would not be a bad option. He testified the depth of the Mississippian would be at about 4,750 feet and the point entry and lateral for a conventional reservoir can be no closer than 660 feet from the unit boundary. He also testified he had seen orders issued to allow for 320 acre Mississippian horizontal spacing. Upon cross examination, Mr. Stromburg admitted the primary reason he thought 320 acre units were proper is that it would best allocate the production and revenues from production to the owners of the tracts that contribute the oil and gas. He also admitted he thought it would take two wells in each 320 acre unit to develop each unit. He also said he thought it would take four wells to develop a 640 acre unit. He admitted that neither would resolve the statutory requirement of one well per unit. He again stated he thought a 160 acre standup unit would be more appropriate. He testified he thought the purpose of the creation of drilling and spacing units was to allow pooling. He admitted he had heard of the principle that the purpose of drilling and spacing units was to avoid drilling unnecessary wells. He admitted that the sharing of revenues was not mentions in this principle. He also admitted one of his primary concerns was how to attribute the hydrocarbons from the well and to whom they are paid. He further testified another
Page 10 primary concern was not only the distribution of proceeds, but the timing of the proceeds. He also admitted he had not recommended 320 acre Mississippi spacing in 65 cases where the Woodford was involved. Continuing on cross examination he admitted there were differences on an exhibit for another case involving the Sladek well. The porosity, water saturation and thickness were different from the numbers in Exhibit #14 in this cause. He admitted in this cause the porosity was 5.2, not 4.6 as in this cause. The water saturation was 39 and not 4 land the thickness was 84 feet and not 122 and in this cause. He admitted that if 84 feet of thickness had been used in this case, it would expand the drainage area calculated on Exhibit #14 by 30%. He admitted the AU would not have known this if it had not come up on cross examination. He testified he undertook two forms of analyses of curves for the Kilian well. He agreed one analysis resulted in a figure of 400,000 barrels and other was similar to Mr. Davis's number. He said he decided not to use either of those analyses and to use analyses of unknown engineers. He followed up with he said there was not enough data to make a calculation of what the Kilian well is going to drain. FINDINGS AND CONCLUSIONS OF LAW The ALJ finds the following: the Mississippian is a low porosity, shaley, high water saturation reservoir; the Kilian 1-7H will not recover hydrocarbons from the east half of either Section 7 or 18; the Mississippi Chat will be found at a depth of 4,775 feet, the Mississippi Lime will be found at 4,780 feet and the Mississippi Solid will be found at 5,000 feet; and the Mississippi is an oil reservoir. Testimony was given of two types of waste that could be prevented if the proposed unit were to be established as an irregular 640 acre unit. Evidence was conflicting as to how many acres would be drained by the existing well, the Kilian 1-7H. The testimony ranged from 112 acres to 359 acres. Using the testimony from the expert who testified for Koch, at least two wells would be needed in the west 320 acres. The testimony indicated the east 320 acre unit had similar geological characteristics and would likely need at least two wells to drain its hydrocarbons. This gives a total of 4 wells for the entire 640 acre area. The evidence indicated that even with the four wells, hydrocarbons would likely be left in the ground in the area of the center dividing line between the two standup units because of set-backs. Using the testimony from the expert who testified for Sandridge, three wells would be needed to drain the unit and their placement could be more flexible in a 640 acre unit. Waste would be avoided by not drilling excessive wells and not leaving hydrocarbons in the ground, if a 640 unit is established. The AU found the evidence submitted by Mr. Davis regarding the drainage area of 205 acres to be more convincing than that of Mr. Stromberg's for 159 acres. Mr. Davis used actual data from the Kilian 1-7H to develop his opinion of the drainage area and Mr. Strornburg did not. Both Ms. Koch and the Kilians presented testimony of how their correlative rights would be affected if a 640 acre unit were formed. It is well established in Oklahoma that between the prevention of waste and the protection of correlative rights, prevention of waste is the superior interest of the Commission. This is not a matter of stripping anything from any party; it is more a
Page 11 concern of when a party would get their royalties. One concern of Ms. Koch was that if the 640 acre unit was formed, a well might never be drilled in the east half. Thus she would have to share her minerals with the parties in the east half. This would be true until a well is drilled in the east half, when she would share in minerals in that area. There was no evidence presented to show when a well would be drilled in the east half of a 640 acre unit. It was brought out that Sandridge had over 1200 units to develop and had done some increased density applications for a second wells on a unit. Whether she is in a 320 acre unit or a 640 acre unit, she has a fifty percent royalty ownership position and would ultimately receive proceeds from the minerals in the both halves. It is simply a matter of timing. The Kilians showed they would experience a fifty percent reduction in royalty because they own nothing in the east half of the proposed unit. If a 320 acre unit is formed, they would own the entire north half of that unit. They would share the total royalties with Ms. Koch who owns the south half of a 320 acre unit. The evidence presented was based on assumed values of $95 a barrel for oil and recovery of 145,000 barrels. The Kilian's have a 3/16 royalty so would gross approximately $1,290,000 from a 320 acre unit. They claim they would be losing approximately $680,000 if a 640 acre unit were formed. This is based on the assumption that a well would not be drilled in the east half of a 640 acre unit. Ultimately the Kilians would receive proceeds from minerals in the east half of a 640 acre unit. Again, it is a matter of timing. RECOMMENDATIONS This cause pits conflicting duties of the Commission against each other. The Commission is charged to prevent waste under Title 52 0. S. 86.2. The statute states the term waste shall include economic waste and underground waste. The Commission is also seeks to prevent adverse affects to correlative rights. The law is well established which is the superior interest. After taking into consideration all the facts, circumstances, testimony and evidence presented in this cause, it is the recommendation of the Administrative Law Judge ("AU") that cause CD 2011000264 be approved with an effective of the date of the date of First Production as it will best prevent economic waste by minimizing the number of wells needed to develop the unit to recover the hydrocarbons in the unit. Cause CD 201101608 is not recommended for approval because it will contribute to waste by causing unnecessary wells to be drilled and leaving hydrocarbons unrecovered. RESPECTFULLY SUBMITTED this 16th day of September, 2011. ICHAEL PORTER" Administrative Law Judge
Page 12 cc: Roger Grove Richard Grimes Gregory Mahaffey Michael D. Decker Oil-Law Records Commission File Office of General Counsel