BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA TARKA ENERGY, LLC DRILLING & SPACING UNITS TARKA ENERGY, LLC

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1 BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA APPLICANT: RELIEF SOUGHT: TARKA ENERGY, LLC DRILLING & SPACING UNITS FILED JUL FOURT CLERKS OFFICE - OKC )CORPORATION COMMISSION OF OKLAHOMA CAUSE CD NO LEGAL DESCRIPTION: SECTION 14, TOWNSHIP 21 NORTH, RANGE 5 EAST, PAWNEE COUNTY, OKLAHOMA APPLICANT: TARKA ENERGY, LLC RELIEF SOUGHT: WELL LOCATION EXCEPTION CAUSE CD NO. ROBERSON # LEGAL DESCRIPTION: SECTION 14, TOWNSHIP 21 NORTH, RANGE 5 EAST, PAWNEE COUNTY, OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE 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. This is the application of Tarka Energy, LLC (Tarka) for drilling and spacing application and location exception. Tarka sought 640 acre spacing for the

2 caption section based upon their different method of trying to recover stranded hydrocarbons. 2. The protestant, Weaver Investments, opposed the spacing and believes that 40 acre spacing is appropriate. This is the spacing for the unit in the northeast quarter of the northeast quarter operated by the protestant. RECOMMENDATIONS: 1. The application of Tarka for the spacing and location exception should be granted HEARING DATE(S): March 11, 2015 andmarch 12, 2015 APPEARANCES: Richard J. Gore, attorney, appeared on behalf of applicant, Tarka Energy, LLC William H. Huffman, attorney, appeared on behalf of respondent, Weaver Investments Michael Erickson, appeared on behalf of the Respondent, Michael Erickson FINDINGS AND SUMMARY OF EVIDENCE 1. The following numbered exhibits were accepted into evidence: 1. Exhibit A in cause CD Posted well data 3. Cumulative exhibit of qualifying calculations for dewatering qualifications for each formation 4. Depths for each zone Page 2

3 S. Protestants cumulative exhibit of logs and structures 2. The applicant called Mr. Maurice Whittenburg, Petroleum Landman, as the first witness. His qualifications were accepted without objection. He testified that in the spacing, the applicant has the right to drill in this section and their interest totals 337 acres of the acre unit. He also testified that the notice in the spacing and location exception was appropriate and due diligence was exercised. As to the location exception he verified that the well has been drilled. 3. This well is located 660 feet from the north line and 2,310 feet from the east line. Tarka is the operator. The protestant, Weaver, owns 10 acres in the northeast quarter of the northeast quarter of the northeast quarter. There is an existing well on this tract and it is producing from the Bartlesville. They do not own any interest outside the 10 acres. 4. The Erikson revocable trust has a one half interest in acreage in the southwest quarter. It is located in the south half of the southwest quarter and the west half of the northwest quarter of the southwest quarter. 5. Tarka operates a well in the offsetting section 15. This is the Spears well. The existing well in section 14 is the Roberson well. There are no wells in any offsets producing from any of the formations that are being spaced. So, there are no respondents in the location exception as far as offset wells towards which this well is moving. Tarka gave notice to everybody in the location exception that was named in the spacing application. This was just to give everybody notice of what's happening. 6. Upon cross-examination the witness agreed to verify that notice was mailed to Gladys Carter and Rex Carter at a new address. He stated that it was mailed by Mr. Gore's office. 7. Upon cross-examination by Mr. Erikson the witness corrected the interests held by the Erikson trust. Mr. Erikson agreed with the corrected amount of acres. 8. Mr. Daniel B. Honeyman, III, petroleum geologist was the next witness. He is familiar with this section. His qualifications were accepted without objection. Page 3

4 9. Mr. Honeyman stated that the applicant was seeking to delete spacing in order and to delete 40 acre spacing in certain areas under order They are also asking to establish 640 acre dewatering spacing for the Layton, Cleveland, Prue, Skinner, Red Fork, Mississippian, Woodford, Simpson Dolomite and the Wilcox. The spacing order will provide for a location no closer than 1,320 feet from the unit boundary. The witness stated the Roberson well has been drilled and is located 660 feet from the north and 2,310 feet from the east. The witness testified concerning the structure of the formations in the section. He further testified to the production in the section and well log information that shows the water saturation. He stated the water saturation for each formation and indicated they are all above 50%. He then testified to the depths from the top of each formation. All of the formations underlie all of section He testified that these formations are going to make water and they are going after the stranded hydrocarbons in these reservoirs with high water cut. They have technology they are utilizing that the witness described as the kind of thing that horizontal drilling is to vertical drilling. They are attempting to recover hydrocarbons that are in a heterogeneous compartmentalized reservoir that hasn't been migrated into a structural trap or some other type of stratigraphic trap. They are going after hydrocarbons that will not be found unless they do it this way. The Mississippian and the Red Fork have historically been done the same way. Hydrocarbons have been found in all of the formations that are requested in the spacing. 11. Mr. Honeyman stated that these are very heterogeneous reservoirs. There are vertical permeability barriers and horizontal permeability barriers. There are migratory paths and also secondary fracturing in these reservoirs. He stated that in a standard archiequation calculation open hole well logs will not register or observe secondary fracturing processes. Therefore, the volume in the reservoir is actually larger than matrix porosity that an open hole well log will measure. There is secondary fracturing porosity in these reservoirs which means there is more volume there. He testified that they know they are going to produce large volumes of fluids and a lot is going to be water. They are going to strip the hydrocarbons out and are going to produce a revenue stream. These hydrocarbons will not be produced in any other fashion. They would not drill a well here for any one of these formations. The only way to be economic is to combine them. Page 4

5 12. According to Mr. Honeyman the predecessor to Tarka was Mount Dora. They have been doing this type of dewatering in this area for some time. The primary hydrocarbon is oil. Section 14 is the unit and they are requesting 1,320 feet locations. By excluding the northeast quarter of the northeast quarter of the northeast quarter there are no producing wells in the unit. 13. The reason for the location exception is that Tarka is trying to create a pressure sink in this water. Historically they try to drill several wells close together so that they can start a pressure sink down toward these wells and build the infra structure. It's the economic way to do it. They want to produce as much water as possible and within reason, the more wells you have the more water you produce. 14. He believes the location exception would have no adverse impact on the offsetting tracts or units by being 660 feet from the boundary. He would recommend the location exception be granted without penalty. 15. This witness testified that the only economic way to produce these stranded hydrocarbons would be in the manner he has described. From the geological standpoint the deletion of the 40 acre units and establishment of the 640 acre dewatering units will prevent waste, protect correlative rights and promote development in the area. This is true for both applications. 16. Upon cross-examination by Mr. Huffman, Mr. Honeyman stated that a technician prepared the map for the Pink Lime structure. He reviewed the well logs that are shown and reviewed the top for the Pink Lime. He has looked at the map and has adopted it. 17. He further testified that they can comingle these particular zones in order to have been economically viable well as long as you have consistent spacing to all the zones. As long as all zones are consistently spaced you can comingle these particular wells whether it is 40 acres or 320 acres. 18. He stated that the predecessor, Mount Dora, has drilled a bunch of wells in the area. They have not calculated the drainage area for those particular wells in these various formations. He has looked at the well logs and looked at the cumulative production from those wells. In his opinion he would say they are not draining 640 acres. If the commission established a drilling and Page 5

6 spacing unit that would be consistent in size from the top to the bottom of these formations listed it would satisfy the company's ability to comingle these zones and produce the hydrocarbons. However, it would not be economical unless it is 640 acre spacing because you have to build an infrastructure to get rid of the water. One well cannot handle the costs of drilling a disposal well and building infrastructure. 19. Upon cross-examination by Mr. Erikson, Mr. Honeyman stated that the applicant is proposing to pay a fair market lease bonus to the mineral owners in the spacing unit. He stated he is not a land man but that's the way it would occur. He then explained the increased density process and the applicant's need for 640 acre spacing instead of 40 acre. The stranded hydrocarbons cannot be produced economically with 40 acre spacing. It will not be economical for the company or the mineral owners. 20. Right now you would not drill a well in the section conventionally. There is no structural reason to do it. Their method is really a technology that is as new as a horizontal drilling was to vertical drilling. It is incremental hydrocarbons that are not going to be produced by any other well. It is different from the 40 acre spacing because they can economically produce a well by drilling additional wells. You built an infrastructure and you need to add volume, then drill another well if you are not draining the reservoir. Economically this proposal is more efficient than wells drilled on each 40 acres. 21. Mr. Honeyman testified that if 4 or 5 different operators drilled a well on 40 acre spacing in this section they would have to drill a saltwater disposal well and build an infrastructure to get rid of the water that is going to be produced to actually bring the hydrocarbons to surface. Economically you cannot do that. 22. The applicant has utilized this method in multiple areas of Oklahoma and it has worked in this fashion. They have also done it where they drilled on 40 acre spacing and it hasn't worked. He stated that the bottom line is when you have really really high salt water saturation you can't afford to produce the well. That's the reason this technology works because they go in expecting to produce large volumes of water and take the hydrocarbons that they get and build an infrastructure to allow them to do that. To do that they have to have something sizable enough to be able to put the dollars into that infrastructure. Page 6

7 They will drill as many wells as the data indicates it takes to drain the reservoirs. 23. During redirect examination Mr. Honeyman testified that in preparation he built cross-sections, dip cross-sections and strike cross-sections across this land to show that the reservoir or remnants of the reservoir exist. He stated you have to take off the conventional production hat because you are going after stranded hydrocarbons. You know you have secondary porosity that is fractured. The saltwater calculations are going to be using grain matrix porosities which are the best they have. They know that the volume is actually no more than what they are calculating. So there are also probably more hydrocarbons setting in there than what they are calculating. 24. What the applicant is asking to do is go in there and economically produce the stuff. They will produce hydrocarbons with large volumes of water. They will calculate the drainage rights and will drill what it takes to drain the thing. He believes the spacing they are seeking is fair and equitable to all involved. It has to be something that is economic to drill. In his opinion, that's the way you do it in this scenario. 25. Mr. Honeyman stated that he reviewed the Pink Lime structure map and conducted his own independent study. He did cross-sections of various wells surrounding section 14 and correlated every formation that Tarka is requesting. All of the formations underlie section 14. He believes the methods they utilize is more efficient than a horizontal drilling in this particular type of reservoir if it is drilled vertically and perforated and open up the whole thing. He believes you open up a whole lot more of the reservoir and make it more transmissible to the well bore and to the surface. The process is similar to horizontal drilling and they are generally spaced 640 acres to allow the flexibility to drill them where they are needed. When you drill a horizontal well you do not know what you're going to drain which is the same as this method. They do not want to over drill. If you drilled too many wells it is uneconomic and you lose money. He testified that part of this development also includes the possibility of horizontal wells in the Woodford and Mississippi. 26. If this development is allowed as 640 acre spacing everybody in the section will share in the wells. You never know if you're going to get a good well or a bad well. However, in 640 acre spacing all hydrocarbons in the section are going to everybody. There was further recross examination concerning spacing Page 7

8 size and fairness to mineral owners. The applicant stated that they believe it is fair because that's the only way you're going to drill this type of well and make money at it. In his experience you can't drill one well in a dewatering play and have it economic. He believes there is a definite change of conditions that justify the spacing because they are trying to produce these reservoirs in a totally different manner. They are not trying to produce this in a conventional manner. They are actually going to move large volumes of water and you can't do that economically in a conventional sense. 27. The witness testified that their development plan has identified that the reservoir is there. They have identified that there is a large percentage of saltwater and these calculations are done on grain matrix porosities and that's what the open hole well log is going to read. There is a good probability that there is secondary fracturing in this area and that adds additional volume. When you increase that you not only increase the water but also hydrocarbons. The whole methodology is to be able to provide an infrastructure to get rid of this water in an economic manner. They must identify the drainage pattern so they can place wells in a manner that is far enough away from the original well to drain efficiently. He stated they are creating a pressure sink and trying to pull the water and hydrocarbons towards that pressure sink. They have used the same method in the surrounding areas and it has been successful. 28. The next witness was Mr. Gary Mayfield, petroleum engineer and CEO of Tarka. There were no objections to his qualification as an expert witness. He testified that they have drilled 50 to 60 wells in Pawnee County. They are currently drilling basically one well per week in the county. 29. Tarka has over 40,000 acres in Pawnee County and they intend to continue to drill vertical wells for the dewatering plan. They also intend to drill horizontal Mississippi and Woodford wells in this acreage block. They have a total acreage investment of millions of dollars. 30. Mr. Mayfield testified that this dewatering of multiple formations is a relatively new concept. They are dealing with a transition reservoir which means they are in an environment that is over 50% water saturation. Some calculations go up close to 100%. These wells were drilled from the 1940s through the 1980s. Historically the wells were drilled and plugged or drilled and attempted to be produced but because they cut so much water they were quickly plugged out. That's the conventional historical method. The definite Page 8

9 change of condition or knowledge of change of condition is the new concept that occurred subsequent to the early dates mentioned. He does not believe that you can economically develop this area on 40 acre spacing. This is because the cost to dispose of the saltwater is too overbearing unless you have a plan, set up infrastructure and spend a lot of money up front to develop these wells in the method they are utilizing. It cost approximately $1.2 million to $1.5 million to drill a saltwater disposal well and completely outfit it with surface equipment and infrastructure. 31. They can generally put as many as 10 wells in one saltwater disposal well. They usually permit the disposal wells to around 20,000 barrels per day. 32. Tarka also develops electrical structure. It requires a lot of electricity to run the injection pumps and for producing the wells. They have big pumps that produced the water and big pumps that push it back down. To develop this electrical infrastructure costs anywhere from tens of thousands to hundreds of thousands of dollars. This is a very capital intensive operation. The cost of producing a well when you are co-mingling zones, which Tarka believes is a requirement to make these wells economical, start at around $600,000. For each zone you add it is an additional $100,000 per zone for completion costs. To justify a multimillion dollar investment Tarka believes they need to be able to hold some significant amount of acreage. These are the reasons they are seeking 640 acre spacing for this project. 33. They have an anchor formation that they sort of count on in this area. The Red Fork is in the area and their knowledge indicates they will encounter it in each of the wells. It is the primary target. They also know that the Mississippi and Woodford are present. These 3 formations, by their maps, are present. 34. Mr. Mayfield testified that he is familiar with the phrase stranded hydrocarbons. He tends to call it a transition reservoir. They can go in with this method and high-powered electrical equipment to dispose of the water and have large blocks of acreage available to drain from. 35. They intend to test all those zones and if they have any hydrocarbons at all they will produce it. They typically start at the bottom and work their way up because it's more efficient operation wise. And as they play out they will continue up the hole and co-mingle those zones. These are the hydrocarbons that are so small that no one would produce them any other way than how Page 9

10 they do it. Creating the pressure sinks helps recover the hydrocarbons quicker which is important in helping recover their investment. 36. Mr. Mayfield discussed other features of these formations and method of production. He stated they need flexibility in light of the water saturation. If they discover they are draining 320 acres they would drill two wells in a section. If they are draining 160 acres they would drill four wells. They let the reservoir tell them how many wells they need to drill. They will drill as many wells as they need to drain the area. He stated that is why the dewatering statute was put in place with 640 acre spacing for dewatering. As long as it is economic you drill the number of wells it takes to drain the reservoir. They have drilled 50+ wells and have found a wide variation. They have had good wells and they have bad wells. 37. Mr. Mayfield believes that the location exception should be granted without a penalty. He believes the granting of these applications would be in the interest of the prevention of waste and the protection of correlative rights. 38. Upon cross-examination by Mr. Huffman Mr. Mayfield stated that Tarka could come back and space this unit by establishing horizontal spacing to do a horizontal development. He agreed that there are approximately 100 acres or so that are out there available for somebody else to obtain and potentially try to develop. 39. He testified that the water from the Roberson well that they have already drilled is probably going to their Warren disposal well in section 33, Township 22 N. Range 5 E. That disposal well is available for this well right now. If they drill additional wells down there they may need to drill another disposal well. He stated what it comes down to developing this and not putting in the infrastructure and disposal wells that they have a disposal well they think they can utilize for the Roberson well. He also stated that they have several disposal wells across the area but they have plans when they develop this area to have a disposal well available for producing these wells. That is a necessity. 40. Mr. Mayfield agreed that they drilled the Roberson well July 7, They drilled a well on a lease basis. This was before the date they filed for the 640 acre spacing. Page 10

11 41. Tarka has been developing this particular type or prospect since He stated he did not testify that Tarka has been able to calculate the drainage area of the wells in the past 7 years. In some areas where there is a greater density of wells and they are on an up dip pinch out they may have been able to calculate reserves from those wells. Where they are stepping out like here and don't have wells around it becomes more difficult to determine those numbers. It is an unknown factor and what ever number is determined will not be the ultimate recovery from that well. It is highly unlikely you would get that exact number of barrels you would produce. It is an educated guess using whatever science and knowledge they have. It's a difficult number to back into. When they are out in the middle of a basin they are in an area that they don't know if there is any structure. All the data they have indicates that there is not a structure and they don't know what the recovery is going to be. That is based upon his experience and knowledge. 42. Mr. Mayfield was asked numerous questions about wells in the area that were producing. He testified that he did not have drainage calculations. He believed the wells were completely different because they were on a structure or completed in a different manner. He stated it is a completely different situation and those wells have nothing to do with section 14. He stated these wells were not draining 640 acres but they were were geologically different than what they believe they are drilling in section 14. This testimony reiterated the fact that the areas and wells discussed were probably not draining 640 acres. However, Tarka believes that 640 acre spacing is necessary to develop the area by the overall program that they are doing. 43. When asked why Tarka didn't place a well in the center of a section if they weren't too sure if the well could drain 640 acres, Mr. Mayfield testified that they tried to put these wells close to the section line and a well across the section line in the next section to create a pressure sink to recover hydrocarbons more quickly. As they create a pressure sink they change the relative permeability in a localized area. When they have the opportunity to do that they will. 44. Tarka believes this spacing is fair because they are going to drill a well in the section. The operator in the northeast quarter has one well. That operator has had the opportunity to drill wells and has not done it. Because a well is on a structure doesn't always mean that it will have better production. Tarka has wells that have been mentioned that her owner structure in section 33 and 34 Page 11

12 and they have not been their better wells. He further stated that the map presented by their geologist doesn't indicate any faults. Mr. Mayfield stated that they have wells where they didn't know there were faults until the wells were drilled. There is a vast area that's not drilled in this section. When that area is drilled he believes the map may look different based upon what they find. 45. Upon cross-examination by Mr. Erikson, Mr. Mayfield explained why the 640 acre spacing is fair to all the mineral owners based upon their plan of development. He explained all the mineral owners would receive their pro rata share of production from any wells developed by Tarka. With 640 acre spacing all of the mineral ownership shares in all of the wells. They also believe that each well they drill in this development will give them valuable data which they believe will increase the chances of producing a successful horizontal well later. If Tarka does not drill and nobody else is going to drill then there is no economic benefit. 46. Upon redirect examination Mr. Mayfield testified that there is not necessarily any relationship between the size of the drainage area versus the return on investment. If they drilled a well and the oil cut in that well is one percent and never gets any better they could drain 640 acres and the well might never pay out. On the other hand, a well could have a 10% oil cut and draining 160 acres and pay out more than it made two or three times. The deciding factor is return on investment. He stated he had testified about all the money it takes to develop these areas. They have to be able to hold a decent amount of acreage to have the possibility of getting their money back. Tarka believes they need 640 acres to have a good chance of getting their money back. He stated that is why the State of Oklahoma enacted the dewatering statute. Tarka is more likely to drill more wells if they have the acreage held by production. That is why they have a plan for most of the county. Tarka has some 40,000 acres. For the most part that plan was based on 640 acre spacing. Also they need 640 acre spacing to facilitate their plan for drilling horizontal wells. 47. Mr. Mayfield testified, upon cross-examination by Mr. Huffman, that he had stated that it was possible this well could drain 320 acres. He reiterated that he does not know the exact drainage capability. Page 12

13 48. He testified that Tarka believes that all mineral owners would get their fair share because that's what the spacing unit is and it is a dewatering project. He understands that the statute provides that the unit shall be of such size and configuration as to allow all the owners to receive their fair share of the oil and gas. 49. During redirect examination Mr. Mayfield testified if they drill a well and they determine it is an economical well, they can seek an increased density well. If the well is not economical, they can release the leases in the part that's not been drained. They will drill more wells and the owners get their benefit from the additional wells or they release them and it reverts back to them. The law contains remedies for the situation where they are not draining the full amount that is spaced. Applicant did rest 50. Protestant called Mr. Claus Axelsen, geologist as their witness. His qualifications were accepted without objection. Mr. Axelsen stated he has mapped the entire Pawnee County. He has worked with various clients on drilling, completion of wells and consulting on well locations. This includes all the geology in the surrounding area where they are talking about doing a project. 51. He has reviewed the map of Tarka energy that is the Pink Lime structure map. He agrees with the structure that is shown in the northeast quarter of section 14. He does have problems with the entire map and the Pink Lime as it is depicted. He believes there is a misinterpretation of the Skinner and the Red Fork association. He sees a Northwest to Southeast trend where the Pink Lime is absent. He has a map that shows his interpretation of the Pink Lime and maps with the Skinner showing the channel that he is talking about. In his opinion, the well in the northeast northeast northeast is a Red Fork well. He stated as you trend to the Northeast there are more Red Fork wells on that structure. The wells that appear down dip from the north east quarter had Red Fork Sand but those wells didn't have any production. He stated in section 14 the Third Skinner is present most likely diagonally across section 14. It's a very narrow channel. Both north and south of this channel there are essentially bar sands not channel sands. He further stated that when he maps the Skinner formation because there are separate reservoirs and he feels compelled to show each of them. There is first, second and third Skinner in various areas of Pawnee County. His cut off for net producible reservoir is 8%. Page 13

14 He has used that in his exploration process for 40 years or more. He stated he would not complete an 8% porosity well. 52. In Mr. Axelsen's opinion there is a minor amount of Prue Sand underlying section 14. It is on the edge of a distributory channel. He has mapped these channels through the entire county. He believes there is a strong nosing of Oswego. In Pawnee County he stated there are 2 distinctive reservoirs in the Cleveland interval. Namely the upper and lower. He believes there are no shows of oil and gas in either the upper or lower Cleveland. 53. He believes that the Layton is approximately 127 to 150 feet thick in this area. He stated there was nothing to correlate as far as looking for oil or gas. The significant thing to him is that it is essentially devoid of shows. He stated there is porosity and permeability. He essentially testified that he disagrees with the opinions of Tarka concerning all of the formations they intend to produce. 54. His testimony was that he did not believe the application should be granted for 640 acre spacing. He does not see why it couldn't be developed on 40 acre spacing. He testified that based upon his geological analysis of these formations he believes that 40 acre spacing would be an appropriate size unit to allow owners to get their fair share of the production. 55. Upon cross-examination Mr. Axelsen stated that the Nettie Dallas well produces from the Red Fork. He understood that the 10 acres in the northeast quarter of the Northeast quarter of the northeast quarter is excluded from this spacing. He agreed that the well is spaced in the Red Fork on 40 acres. He stated that if the ownership of the well is the same as the ownership of the 40 acres then the royalties have been paid on a 40 acre basis. 56. He stated he believed his client was protesting the spacing because he thinks 640 acre spacing is inappropriate to produce any Cherokee Sands. Mr. Axelsen believes that on 640 acre spacing you're not really protecting correlative rights of people to the north or people to the south. He believes the 40 acres is just fine. 57. The witness testified that he does not agree with 640 acre spacing for anything to do with the Cherokee Sands or the Ordovician Sands. He stated that all that he testified to relates to conventional exploration. He uses 8% Page 14

15 porosity for his cut off for exploration activities. He does all conventional work except that he has a large interest in a horizontal Hunton in Grant and Garfield counties. He stated he would not drill a well for a single zone on 8% porosity. The Tarka wells were co-mingled in the Red Fork, Wilcox and Mississippian which means they are probably around 14 to 16% porosity in this area. 58. He stated that the Roberson well did bust his map. Based upon that well he would remap with more Red Fork Sand and stretch it down through section 14. That was a change of condition from his map. 59. Mr. Axelsen testified that he did not know what his client's plan was for developing this area. He has never talked to him about. He has owned his well since 2010 and has not drilled any wells. 60. He agreed that heterogeneous reservoirs that display less than 6 to 8% porosity contain hydrocarbons. These are the kinds of the formations that Tarka is targeting. Mr. Axelsen agreed that there are reservoirs that produced water before producing hydrocarbons. He agreed that the type of dewatering that Tarka is doing could be successful. He stated that you do have the probability of encountering these different formations through this dewatering. He stated that geology is not an exact science or else they would never make any new maps. He believes it would be improbable to find stranded hydrocarbons in the Southwest quarter of section 14 unless they were encountered in the Mississippi. He could not exclude the Mississippi. 61. Mr. Axelsen agreed that the Nettie Dallas well is a Red Fork well and it is spaced on 40 acres. Therefore, the applicant amended its application to exclude the northeast quarter of the northeast quarter. That would reduce the spacing application to include acres. 62. There was further extensive testimony concerning what formations did underlie section 14. The witness agreed that the Skinner, Red Fork, Mississippi, Woodford, Simpson Dolomite and Wilcox all underlie section 14. He stated the only formation that is absent is the Pink Lime. The rest of the testimony established that the witness disagrees with the applicant about what is the appropriate spacing. Mr. Axelsen believes that 40 acres could adequately test the limits of this field for the new technology in the field. Page 15

16 63. Upon redirect examination Mr. Axelsen stated he agreed that these formations exist under pretty much all of Pawnee County. He does not agree that completing a well with less than 8% porosity would be a success. He believes that the northeast quarter has the best chance of porosity greater than 8%. He believes the northeast quarter has the highest probability of any success in the drilling activity. He reiterated his disagreement with the spacing and the character and existence of the formations. He believes this unit is mostly devoid of any significant shows of oil and gas in any individual sandstone. He also stated that acreage could be held pursuant to a lease if an initial well was drilled on the leased acreage. 64. During recross examination Mr. Axelsen agreed that he didn't believe that anyone would have any success producing hydrocarbons in this area unless they had at least 8% porosity. He stated he would be very hesitant to do so. He stated he understands this project and what Tarka is doing. However, he is not comfortable with it and would not do it but it is somebody else's idea. There was further cross-examination concerning Mr. Axelsen's opposition to the application and the differences of opinion concerning the various formations. 65. The applicant recalled Mr. Maurice Whittenburg as a rebuttal witness. He testified that initially in this project the applicant would frac, complete, test and isolate these zones. They would produce a single zone during that initial time. When they started co-mingling all the zones and completing them at the same time they got better results. 66. He agrees that the Nettie Dallas well is a 40 acre Red Fork unit and the application should be amended to exclude that 40 acres. He believes that Tarka would have difficulty holding acreage if section 14 was spaced on 40 acres. They have had some difficulty with leases even on 640 acres. They have had to re-lease acreage because not all landowners will give a lease with an option. He heard the testimony that you can obtain a 320 acre lease and hold with a 40 acre unit. In Pawnee County the minerals are cut up in relatively small tracts. You have difficulty holding leases on 40 acre spacing 67. Upon cross-examination Mr. Whittenburg stated that wells in section 17 and section 20 were some of the earlier wells. Those sections did not appear to be capable of draining 640 acres. The wells in section 20 had disappointing results. That is an isolated area apart from the bigger block of their acreage Page 16

17 according to Mr. Whittenburg. In sections 33, 17 and 20 they have not drilled a well that's capable of draining 640 acres. 68. Upon redirect examination Mr. Whittenburg testified that those 3 sections referred to were the ones that were fractured. They were also in the learning curve of what they are doing during that period of time. The parties did rest. RECOMMENDATIONS AND CONCLUSIONS 1. After taking into consideration all the facts, circumstances, evidence and testimony presented in this cause, it is my recommendation that the applications of Tarka be granted. 2. Tarka established evidence of the conditions necessary for the requested spacing and drilling unit. This is the spacing established throughout the area by Tarka for the formations listed. Tarka presented evidence they are utilizing a different method to recover stranded hydrocarbons. This method involves large amounts of water and requires greater spacing to be economic. They established that each of the formations involved in this project have water saturation in excess of 50%. They also plan to develop the other formations listed in the application on a horizontal basis. The spacing requested facilitates the plans they have in this area. Tarka indicated this gives more flexibility and allows a greater probability of preventing waste. Tarka has substantial acreage in Pawnee County and has drilled at least 70 wells in the area. It was established that the protestant has not drilled any wells in the unit. Tarka demonstrated that 640 acre spacing was not detrimental to the mineral owners. 3. Tarka established the prerequisites for the requested location exception. Their evidence showed that this well would have no adverse affect on any offset wells. 4. Protestant disagreed with the spacing request and wanted to keep 40 acre spacing. They disagreed with the geology promoted by Tarka and relied upon the fact that they do not agree with the larger spacing. Page 17

18 5. Tarka established that 640 acre spacing was the appropriate size unit for the project they are conducting. Spacing is not created based on land issues or ownership. RESPECTFULLY submitted this 15th day of July, PLE MIT xc: Richard J. Gore William H. Huffman Michael Erickson Michael L. Decker, OAP Director Oil Law Records Court Clerk - 1 Commission Files ae Administrative Law Judge Page 18