OIL & GAS DOCKET NOS. 01-0262018, 01-0262019, AND 01-0262020

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APPLICATIONS OF THE CHICKEN COOP, INC., TO CONSIDER EXCEPTIONS TO STATEWIDE RULE 21 TO PRODUCE BY SWABBING VARIOUS WELLS ON THE WIMBERLY DEV. CORP. -A- (06677) LEASE, THE ADKINS (12302) LEASE, AND THE MCWILLIAMS, GLENN (06690) LEASE, TAYLOR-INA FIELD, MEDINA COUNTY, TEXAS

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APPEARANCES:

FOR APPLICANT:	APPLICANT:

Linda Halbardier	The Chicken Coop, Inc.

Glenn McWilliams

PROPOSAL FOR DECISION

PROCEDURAL HISTORY

DATE APPLICATIONS FILED:	May 21, 2009

DATE OF NOTICES OF HEARING:	June 30, 2009

DATE OF HEARING:	July 31, 2009

HEARD BY:	James M. Doherty, Hearings Examiner

DATE PFD CIRCULATED:	September 9, 2009

STATEMENT OF THE CASE

This hearing concerns three separate dockets wherein The Chicken Coop, Inc. ("TCC") has made applications for exceptions to Statewide Rule 21 to produce by swabbing a total of 73 oil wells on the Wimberly Dev. Corp. -A- (06677) Lease, the Adkins (12302) Lease, and the McWilliams, Glenn (06690) Lease, Taylor-Ina Field, Medina County, Texas.1 The three dockets were heard jointly on July 31, 2009, and TCC appeared and presented evidence. There is no opposition to the applications.

APPLICABLE LAW

Statewide Rule 21(k) provides that swabbing, bailing, or air jetting of wells is prohibited as a production method for wells unless the Commission has, after notice and hearing, granted an exception to this subsection.

Pursuant to Rule 21(k)(1)(B), an operator seeking an exception must present evidence at the hearing establishing: (1) the method of production proposed; (2) that any production is properly accounted for pursuant to Statewide Rule 26 (relating to Separating Devices, Tanks, and Surface Commingling of Oil); (3) that the proposed exception is necessary to prevent waste or protect correlative rights; (4) that wellhead control is sufficient to prevent releases from the well; (5) that no pollution of usable quality water or safety hazard will result from either the proposed production method or the condition of the well; and (6) that the operator possesses a continuing good faith claim of right to operate the well.

Pursuant to Rule 21(k)(2), in determining a request for an exception, the Commission may also consider: (1) whether the well has passed a mechanical integrity test within the preceding 12 months; (2) the estimated monthly and cumulative production from the well if the requested exception is granted; (3) whether production will be into an on-lease tank battery or a mobile tank; (4) the adequacy of the financial assurance provided by the operator to assure that the well will be timely and properly plugged; (5) whether production volume, fine sands in the reservoir, or other factors render pumping of the well impracticable; (6) whether the reservoir from which the well produces contains hydrogen sulfide; and (7) the operator's history of compliance with Commission rules.

DISCUSSION OF THE EVIDENCE

Matters Officially Noticed

The examiner has officially noticed the Commission's P-5 Master Inquiry, P-5/Financial Assurance Inquiry, On-Schedule Leases, Wells, Wellbores By Operator, and P-4 Current Fields/Leases by Current Operator Name databases for TCC, and the P-4 Inquiry, Oil Proration Schedule, Oil Lease Ledger Status Inquiry, Production Data Query, 14(b)(2) Inquiry, and W-2/G-1 Record databases for the subject leases and wells.

TCC has an active Form P-5 organization report and has on file approved financial assurance in the amount of $50,000. At the time of the hearing, it was the operator of 73 wellbores having total depth of 23,996 feet. The leases that are the subject of this hearing are the only leases operated by TCC.

All of the wells proposed to be produced by swabbing are currently classified as producing oil wells. None of these wells are classified as "inactive" and none are subject to the 14(b)(2) System. The Production Data Query database shows that for the year 2008, the following production was reported for the subject leases: Wimberly Dev. Corp. -A- (06677) Lease - 24 BO; Adkins (12302) Lease - 221 BO; and McWilliams, Glenn (06690) Lease - 180 BO.

The examiner has also officially noticed Field Operations memoranda in the hearing files for the three dockets involved in this hearing. These memoranda state that Field Operations has reviewed the applications in each docket and has no objection to consideration of the applications for exceptions to Statewide Rule 21. These memoranda also state that based on inspections of the subject leases in June 2009, the subject wells have no wellhead control. Field Operations requests that any orders approving the applications include a requirement that wellhead control be installed on each well.

The Chicken Coop, Inc.

Wells on the Wimberly Dev. Corp. -A- (06677) Lease and the McWilliams, Glenn (06690) Lease were drilled by another operator in 1981. The P-4 Inquiry database shows that TCC became the operator these wells for the Commission's regulatory purposes effective October 1, 1985, in the case of the McWilliams, Glenn Lease and effective January 1, 1986, in the case of the Wimberly Dev. Corp. -A- Lease. Wells on the Adkins (12302) Lease were drilled by an affiliate of TCC in 1989. The P-4 Inquiry database shows that TCC became the operator of these wells effective June 1, 2003. The owners and principals of TCC own 87.5% of the mineral fee of the Adkins (12302) Lease and 80% of the mineral fee of the Wimberly Dev. Corp. -A- (06677) and McWilliams, Glenn (06690) Leases.

The subject wells on all three of the involved leases were at first produced primarily by air jetting, although a few of the wells initially were produced by pump jack powered by portable compressors. Starting in about 1988 or 1989, all wells on the subject leases were produced by swabbing. Swabbing has been the only method of production used between 1988 or 1989 and the current date. TCC claims that it received administrative approval from the Commission to commence swabbing the subject wells in 1988 or 1989, and no question was raised about TCC's right to continue this method of production until the Fall of 2008 when TCC received a letter notice from the Commission that it would need to apply for exceptions to Statewide Rule 21 to continue swabbing the wells.2

TCC operates one mobile swabbing truck that is used to swab wells on the subject leases. It is the practice of TCC to swab the subject wells once each week, and the wells produce about one-
third barrel of oil per well each time the wells are swabbed. According to TCC, even when the wells formerly were produced by air jetting or pump jack, they produced no more oil than is currently produced by swabbing. Production of the wells by swabbing has resulted in about the same amount of production since swabbing commenced in 1988 or 1989. The oil is produced into a tank on TCC's mobile swabbing unit and then transported to storage tanks. Oil produced on the Adkins (12302) Lease is transported to a 400 barrel tank on the Adkins Lease. Two 400 barrel tanks are maintained on the McWilliams, Glenn (06690) Lease, one marked for storage of oil produced from this lease and the other marked for storage of oil produced from the Wimberly Dev. Corp. -A- (06677) Lease. TCC obtained administrative approval for off-lease storage of oil produced from the Wimberly Dev. Corp. -A- Lease to make it more practical for oil transporters to pick up the oil. There is no commingling of oil produced from the subject leases.

All of the subject wells have gravity flow. TCC is aware that on the occasion of District Office inspections of the wells in June 2009, the wells were found not to have wellhead control, and TCC has starting equipping each well with a removable cap that will permit swabbing and maintain suitable wellhead control. All the wells are cased and cemented in a manner to protect usable quality water strata. There is no hydrogen sulfide component of the oil produced from the subject leases.

Currently, swabbing is the only practical means of producing oil from the subject leases and wells. Swabbing as a means of production is much more economical than any alternative production method. The operating cost of producing the subject wells by air jetting or pump jack is four or five times the operating cost associated with swabbing the wells. It is not practical to produce the subject wells by pump jack because the wells are not equipped to permit this method of production, and the cost of so equipping them would exceed the value of the oil that the wells produce. Old electrical lines and flow lines that once existed at some of the wells are no longer functional, and many wells have never been equipped with electricity necessary to operate pump jacks. If the subject wells cannot continue to be produced by swabbing, the oil that the wells now produce will be left in the ground. It would not be practical to drill new wells to produce the small amount of oil that wells on the subject leases will yield.

EXAMINER'S OPINION

The examiner is of the opinion that based on the proof made by TCC, and evidence officially noticed from Commission records, the requirements of Statewide Rule 21 have been satisfied, and the requested exceptions should be granted, subject to certain standard conditions and a special condition requiring that wellhead control be maintained with respect to the subject wells.

Mandatory Statewide Rule 21 Criteria

Method of Production and Accounting: The proposed method of production is by swabbing. Production will be properly accounted for pursuant to Statewide Rule 26 because such production will be stored in tanks assigned for each of the separate leases and there will be no commingling of oil produced from different leases. This will allow for accurate measurement of the oil produced from each of the separate leases.

Waste Prevention/Correlative Rights Protection: The requested exceptions are necessary to prevent the waste of oil and to protect the correlative rights of mineral owners of the subject leases who are entitled to a reasonable opportunity to produce their fair share of oil under the said leases. Currently, swabbing is the only practical method of producing oil from the subject wells. The wells are not equipped to be produced by pump jack, and so equipping them would not be feasible economically given the small amount of oil that the wells will yield. If the requested exceptions are not granted, the oil which is now produced by swabbing ultimately will be lost.

Wellhead Control: Wellhead control was disclosed to be lacking at the time of inspections of the subject wells in June 2009. However, TCC has been advised of this violation and has taken steps to provide wellhead control in the form of removable caps that will permit swabbing as a method of production and maintain adequate wellhead control. As requested by Field Operations, the examiner recommends that the orders approving the requested exceptions be made subject to a special condition requiring TCC to maintain wellhead control on each well as mandated by Statewide Rule 13.

Protection of Fresh Water: It is not likely that pollution of usable quality water or safety hazard will result from either the proposed method of production or the condition of the wells. The subject wells are cased and cemented in a manner to protect fresh water strata. The subject leases and wells were most recently inspected by the District Office in June 2009, and no pollution violations of Statewide Rule 8 were noted on the inspection reports.

Good Faith Claim: No issue arises regarding the good faith claim of TCC to a continuing right to operate the subject leases and wells because the owners and principals of TCC are also owners of the mineral fee in each of the subject leases.

Conclusion: The evidence satisfies the mandatory criteria of Statewide Rule 21.

Discretionary Statewide Rule 21 Considerations

MIT Testing: As far as the evidence shows, the wells proposed to be swabbed by TCC have not had mechanical integrity tests during the last 12 months, but neither does it appear that any such testing has been required.

Monthly/Cumulative Production: The amount of oil that will be produced by swabbing appears to be the same amount produced since 1988 or 1989 when swabbing of the wells commenced. In 2008, the total amount of oil produced by swabbing the subject wells was 425 BO. There is not a huge amount of oil at stake, but even this volume of oil doubtless is of importance to TCC and its royalty owners. Waste of even this small amount of oil will serve no conservation or water protection interest.

Oil Storage: Oil produced by swabbing will be stored in separate storage tanks assigned to each of the involved leases. No commingling of oil produced from separate leases will occur.

Adequacy of Financial Assurance: TCC has approved financial assurance on file in the amount of $50,000, which is the amount required of TCC by law. At the time of the hearing, TCC was the operator of 73 wellbores having total depth of 23,996 feet. This comes to $684.93 per well and $2.08 per foot. There is doubt, therefore, that $50,000 of financial assurance would be sufficient to plug all of TCC's wells, and TCC has not proposed to establish any nature of internal reserve account for well plugging. On the other hand, denying the requested exceptions would not address this issue. Because swabbing is the only practical means to produce the subject wells, denial of exceptions likely would cause the wells to become inactive. TCC would remain the operator of the wells even if inactive, and after 12 continuous months of inactivity, the wells likely would qualify for Statewide Rule 14(b)(2) plugging extensions. No greater amount of financial assurance would be required. Causing the wells to become inactive and unplugged is not an attractive alternative to permitting the wells to be swabbed.

Practicality of Pumping/Hydrogen Sulfide Issue: Producing the subject wells by pump jack is not practical for all of the reasons previously stated herein. There is no hydrogen sulfide associated with oil produced from the Taylor-Ina Field.

History of Compliance: TCC has swabbed the subject wells without appropriate authorization ever since the amendments to Statewide Rule 21 which took effect October 2, 2002. However, TCC obtained the necessary administrative approval to commence swabbing the wells in 1988 or 1989, and apparently has continued this operation without knowledge, until recently, that commencing October 2, 2002, TCC was required to obtain exceptions to Statewide Rule 21 to conduct swabbing operations. Inspections of the subject leases in June 2009 disclosed that the wells were not equipped with wellhead control, which is a violation of Statewide Rule 13. TCC has now taken steps to equip the wells with wellhead control, and the examiner recommends that the orders granting the requested exceptions be conditioned to require that this wellhead control be maintained. TCC has no history of formal enforcement orders entered against it for violations of Commission rules.

Conclusion: Denial of the requested exceptions is not required or warranted by any of the discretionary considerations prescribed by Statewide Rule 21.

Based on the record in this case, the examiner recommends adoption of the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1.	At least ten days notice of the hearing in Oil & Gas Docket Nos. 01-0262018, 01-0262019, and 01-0262020 was sent to all parties entitled to notice.

2.	In Oil & Gas Docket No. 01-0262018, The Chicken Coop, Inc. ("TCC"), requests that the Commission grant exceptions to Statewide Rule 21 to permit TCC to produce by swabbing the Wimberly Dev. Corp. -A- (06677) Lease, Well Nos. 1, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 and 22, Taylor-Ina Field, Medina County, Texas.

3.	In Oil & Gas Docket No. 01-0262019, TCC requests that the Commission grant exceptions to Statewide Rule 21 to permit TCC to produce by swabbing the Adkins (12302) Lease, Well Nos. 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 68, 69, 70, 71, 72, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 109, 110, 130, 131, 151, and 152, Taylor-Ina Field, Medina County, Texas.

4.	In Oil & Gas Docket No. 01-0262020, TCC requests that the Commission grant exceptions to Statewide Rule 21 to permit TCC to produce by swabbing the McWilliams, Glenn (06690) Lease, Well Nos. 6, 7, 8, 9, 10, 11, 12, 18, 19, 20, 21, 22, 23, 24, 25, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101A, and 102, Taylor-Ina Field, Medina County, Texas.

5.	As of the date of the hearing, TCC was the operator of 73 wellbores having total depth of 23,996 feet. TCC had an active Form P-5 organization report and approved financial assurance on file in the amount of $50,000.

6.	Wells on the Wimberly Dev. Corp. -A- (06677) Lease and the McWilliams, Glenn (06690) Lease were drilled by another operator in 1981. TCC became the operator these wells for the Commission's regulatory purposes effective October 1, 1985, in the case of the McWilliams, Glenn Lease and effective January 1, 1986, in the case of the Wimberly Dev. Corp. -A- Lease. Wells on the Adkins (12302) Lease were drilled by an affiliate of TCC in 1989. TCC became the operator of these wells effective June 1, 2003.

7.	TCC received administrative approval from the Commission to commence swabbing the subject wells in 1988 or 1989, and no question was raised about TCC's right to continue this method of production until the Fall of 2008 when TCC received a letter notice from the Commission that it would need to apply for exceptions to Statewide Rule 21 to continue swabbing the wells. Swabbing has been the exclusive means by which the wells have been produced since 1988 or 1989.

8.	TCC operates one mobile swabbing truck that is used to swab wells on the subject leases. It is the practice of TCC to swab the subject wells once each week, and the wells produce about one-third barrel of oil per well each time the wells are swabbed.

9.	For the year 2008, the following production was reported to the Commission for the subject leases: Wimberly Dev. Corp. -A- (06677) Lease - 24 BO; Adkins (12302) Lease - 221 BO; and McWilliams, Glenn (06690) Lease - 180 BO.

10.	Oil produced by swabbing is stored in tanks assigned for each separate lease and there is no commingling of oil produced from different leases. This allows for accurate measurement of the oil produced from each of the separate leases.

11.	It is not likely that pollution of usable quality water or safety hazard will result from either the proposed method of production or the condition of the wells. The subject wells are cased and cemented in a manner to protect fresh water strata. The subject leases and wells were most recently inspected by the District Office in June 2009, and no pollution violations of Statewide Rule 8 were noted on the inspection reports.

12.	Wellhead control was disclosed to be lacking at the time of inspections of the subject wells in June 2009. However, TCC has been advised of this violation and has taken steps to provide wellhead control in the form of removable caps that will permit swabbing as a method of production and maintain adequate wellhead control.

13.	There is no hydrogen sulfide associated with oil produced from the Taylor-Ina Field.

14.	Currently, swabbing is the only practical means of producing oil from the subject leases and wells.

a.	Swabbing as a means of production is much more economical than any alternative production method. The operating cost of producing the subject wells by air jetting or pump jack is four or five times the operating cost associated with swabbing the wells.

b.	It is not practical to produce the subject wells by pump jack because the wells are not equipped to permit this method of production, and the cost of so equipping them would exceed the value of the oil that the wells produce.

c.	Old electrical lines and flow lines that once existed at some of the wells are no longer functional, and many wells have never been equipped with electricity necessary to operate pump jacks.

15.	If the subject wells cannot continue to be produced by swabbing, the oil that the wells now produce would be left in the ground. It would not be practical to drill new wells to produce the small amount of oil that wells on the subject leases will yield.

16.	TCC has a good faith claim to a continuing right to operate the subject wells. The owners and principals of TCC own 87.5% of the mineral fee of the Adkins (12302) Lease and 80% of the mineral fee of the Wimberly Dev. Corp. -A- (06677) and McWilliams, Glenn (06690) Leases.

17.	TCC has no history of formal enforcement orders entered against it for violations of Commission rules.

18.	Field Operations has reviewed the applications in each docket and has no objection to consideration of the applications for exceptions to Statewide Rule 21. Field Operations has requested, however, in the event orders are issued granting exceptions, that the orders be conditioned to require TCC to maintain wellhead control for each of the subject wells.

CONCLUSIONS OF LAW

1.	Proper notice of hearing was timely issued by the Railroad Commission to appropriate persons legally entitled to notice.

2.	All things necessary to the Commission attaining jurisdiction over the subject matter and the parties in this hearing have been performed.

3.	The Chicken Coop, Inc., has submitted proof sufficient to meet the mandatory standards in Statewide Rule 21 [16 Tex. Admin. Code §3.21] for approval of exceptions to permit the swabbing of the wells, subject to conditions, in Oil & Gas Docket Nos. 01-0262018, 01- 0262019, and 01-0262020.

4.	Approval of the exceptions to Statewide Rule 21 requested by The Chicken Coop, Inc., in Oil & Gas Docket Nos. 01-0262018, 01-0262019, and 01-0262020 is necessary to prevent the waste of oil.

RECOMMENDATION

The examiner recommends that the Commission adopt the attached final orders granting exceptions to Statewide Rule 21, subject to conditions.

Respectfully submitted,

James M. Doherty

Hearings Examiner