STATE OF ALASKA

OIL AND GAS CONSERVATION COMMISSION

3001 Porcupine Drive

Anchorage, Alaska 99501-3192
Re:The Application of Lapp Resources  Inc.           )  Conservation Order No.358
requesting pool rules for the development of a       )
sequence of coalbeds in the vicinity of Houston,     )  Houston Gas Field
Alaska as a commercial methane reservoir.            )  Houston Coalbed Gas Pool
                                                     )
                                                        July 6, 1995
IT APPEARING THAT

1. By letter dated April 25, 1995 Lapp Resources, Inc. requested a public hearing to establish pool rules for a new coalbed gas pool located in the area of Houston, Alaska.

2. A notice of opportunity for public hearing was published May 2, 1995.

3. A public hearing was held at the Oil & Gas Conservation Commission office on June 2, 1995.

4. The hearing record was held open until June 9 to allow for the submission of additional information from Lapp Resources, Inc.

FINDINGS:

1. The project area is confined to one State of Alaska oil and gas lease, ADL 374135. Lapp Resources is 100% working interest owner in ADL 374135.

2. Previous exploratory drilling activity in the general vicinity of the proposed project area includes five petroleum exploratory wells and three coal coreholes. The five exploratory wells are the Rosetta No. 1, 2, 3, 4, and 4A. Drilling occurred in the middle to late fifties. None of the exploratory wells encountered other than trace amounts of oil.

3. The prospective section for which development is proposed by Lapp Resources is best represented in the Rosetta 3 well between the surface and 2200 feet measured depth.

4. The distribution and quality of aquifers in the project area has not been established.

5. Lapp Resources' proposal is the first coalbed methane project planned for development in Alaska. Coalbed reservoirs have been commercially exploited as gas reservoirs worldwide for several decades.

6. Spacing requirements for coalbed reservoirs are generally less than conventional sandstone gas reservoirs due to the low permeabilities of coal.

7. Lapp Resources requests 40 acre spacing units and a 330' location offset from the spacing unit boundary.

8. Coalbed spacing requirements vary in the lower 48 states. At least three states, Alabama, Utah, and Wyoming, have established 40-acre spacing per well. Alabama prohibits opening the well bore to production within 330 feet of a spacing unit boundary.

9. Commercial coalbed methane production may require dewatering coal seams using a downhole pump until gas begins to flow at an economic rate. It may be necessary to vent or flare some gas during the dewatering phase.

10. Water produced from the coal seams will require disposal. Lapp Resources has yet not finalized disposal plans, but may propose injecting produced water into receiving formations.

11. Previous drilling in the project area vicinity encountered gas bearing sandstone at depths proposed for development by Lapp Resources.

12. AOGCC statewide oil and gas regulations are applicable to conventional oil and gas reservoirs in the absence of specific pool rules.

13. Lapp resources proposes to drill it's typical coalbed methane well as follows:

a. drill eight inch surface hole to approximately 300 feet.

b. set six inch surface casing to 300 feet and cement to surface, install blowout preventer equipment.

c. deepen hole to approximately 2100' with a coiled tubing unit using gelled water with bentonite for fluid control.

d. set 3.5 or 4 inch production casing to T.D. and cement to surface.

e. log production hole using standard oil field logging tools.

f. complete each well with a downhole pump, either a progressive cavity or jet pump, suspended from tubing.

14. Lapp Resources identified six locations for possible development, and plans to drill three wells during the first year of development and evaluation.

15. Lapp Resources submitted separate estimates from Schlumbeger and Haliburton, ranging from $8,400 to $10,000, for plugging and abandoning each well.

16. Lapp Resources estimates rates of approximately 200,000 cubic feet of gas per day from the project area.

17. Lapp Resources estimates reserves at approximately 2 billion cubic feet per 40 acre spacing unit assuming 300 cubic feet of methane per ton of coal. The estimated recovery factor is 50% of the gas in place.

CONCLUSIONS

1. Pool rules for the initial evaluation and development of the Houston Coalbed Gas Pool are appropriate at this time.

2. Previous drilling in the immediate vicinity of the proposed project area has substantively delineated the potential resource and local drilling hazards. The project wells are not anticipated to encounter liquid hydrocarbons.

3. Forty acre spacing units with a 330 foot standoff from drilling unit boundaries are appropriate for initial drilling and evaluation of the coalbed gas seams expected to be productive in this pool.

4. Statewide spacing requirements are appropriate for any sandstone reservoirs that may be encountered.

5. Ultimate field development plans will be predicated on evaluation of initial wells.

6. Flaring or venting gas during coal seam dewatering and gas flow rate evaluation may be appropriate and necessary.

7. Underground disposal of produced water must comply with statewide regulations, 20 AAC 25.

8. Bond requirements may be reduced to cover the lower costs of plugging shallow coalbed gas wells.

9. The operator's plans for well construction should adequately protect any freshwater aquifers from possible contamination.

NOW, THEREFORE, IT IS ORDERED THAT the rules hereinafter set forth, in addition to state-wide requirements under 20AAC 25 (unless revised by this order), apply to the following described area referred to in this order as the affected area:

SE1/4 NE1/4, N1/2 SE1/4, SW1/4 SE1/4, E1/2 SW1/4, Section 21; T18N, R3W, SEWARD MERIDIAN

Rule 1. Field and Pool Name

The field is the Houston Gas Field. The hydrocarbons contained within coal seams within 2200 feet of the surface in the affected area constitute a single coalbed gas reservoir called the Houston Coalbed Gas Pool.

Rule 2. Pool Definition

The Houston Coalbed Gas Pool is defined as the accumulation of coalbed methane found in coal seams common to and correlative with the surface to 2200' MD interval in the Rosetta 3 well.

Rule 3. Well Spacing

A coalbed methane drilling unit will consist of 40 acres. No coalbed methane wellbore may be opened to production within 330 feet of a spacing unit or property ownership boundary.

Rule 4. Bond Requirement

A bond in the amount of $10,000 for each well drilled will be required to cover the cost of plugging and abandoning the well. The bond must be filed in accordance with 20 AAC 25.025.

Rule 5. Diverter Requirement

A diverter is not required while drilling surface casing hole.

Rule 6. Gas Flaring

Gas may be temporarily flared or vented during periods of dewatering coal seams and while evaluating a coalbed gas well commercial rate, or for no more than 6 months, whichever is less, without specific authorization from the Commission. Gas disposition must be reported according to 20 AAC 25.235 on a monthly basis.

Rule 7. Development and Depletion Plan

Within one year after the start of test production, the operator shall present to the Commission a more definitive development and depletion plan for this pool. Thereafter an annual reservoir surveillance report will be required.

Rule 8. Administrative Action

Upon request by the operator or upon its own motion, the Commission may administratively amend this order if the revision does not promote waste, jeopardize correlative rights, and is based on sound engineering principles.

DONE at Anchorage, Alaska and dated July 6, 1995.

David W. Johnston, Chairman

Russell A. Douglass, Commissioner

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