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Terry Hill South Field

November 6, 2002

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
NOTICE OF PUBLIC HEARING AND
NOTICE OF NEGATIVE DECLARATION
PROPOSED WELL SPACING AND INTEGRATION OF INTERESTS

DEC Project No. DMN-02-3

PROPOSED PROJECT: The New York State Department of Environmental Conservation ("DEC") proposes to establish field wide spacing and integration rules for portions of acreage located in the Towns of Catlin and Veteran, Chemung County, and the Towns of Dix and Montour, Schuyler County, New York, identified as the Terry Hill South Field (the "Field"). The Terry Hill South Field produces natural gas from the Ordovician Trenton-Black River formations. Please consult the maps of this Field for a more precise description (see "Document Availability," below).

BACKGROUND AND PURPOSE: Fairman Drilling Company ("Fairman"), R.D. #1, Helvetia Road, P.O. Box 288, DuBois, Pennsylvania 15801-0288, has conducted an exploration and drilling program and has successfully drilled six wells in the Field. Fairman began development of the Ordovician Trenton-Black River formations in the Field in March of 2000. Fairman continued to drill, complete and produce wells to develop the existing Field and to identify similar producing reservoirs in adjacent areas, and, as of October 30, 2002, has conveyed its interests to Fortuna Energy Inc. ("Fortuna"), 1519 Olean-Portville Road, Olean, New York 14760.

In order to ensure that all affected interest owners receive fair and equitable compensation upon issuance of a final spacing order, the DEC has required that Fairman escrow royalties generated as a result of this production, which Fortuna has agreed to continue and maintain. Fairman has proposed eight production units in the Field. The production units contains a small number of unleased parcels where the right to develop the oil and/or natural gas has not been conveyed to Fairman or to Fortuna. Compulsory integration is necessary to incorporate the unleased parcels into the proposed spacing unit for the purpose of distributing escrowed and future royalties.

The DEC seeks a public hearing to allow all interested parties the opportunity to discuss the issues and facilitate a decision addressing the establishment of field wide spacing and integration rules for the Terry Hill South Field. According to DEC Staff, the primary issues to be addressed at the hearing are the establishment of fair and equitable production units for existing wells, development of a well spacing plan governing future well drilling in the field, integration of interests within all spacing units, including the designation of the unit operator, and allocation of well production to integrated owners.

The DEC has entered into a Stipulation, dated October 9, 2002, with Fairman Drilling Company, which is binding upon Fortuna as successor to Fairman. It is DEC Staff's position that this Stipulation, a copy of which is available as indicated below under "Document Availability," resolves issues pertaining to field wide spacing rules and establishes procedures for future wells. According to DEC Staff, the Stipulation's provisions are based upon an analysis of available geologic, engineering and seismic data from wells within the Terry Hill South Field and from similar reservoirs in the vicinity.

SEQRA STATUS: The Department, as lead agency, has reviewed the establishment of field wide spacing rules and the integration of interests within units for the Terry Hill South Field in accordance with the criteria set forth in Section 617.7 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York ("6 NYCRR"). A Notice of Determination of Non-Significance Negative Declaration was prepared on July 23, 2002, after determining that the establishment of field wide spacing and integration rules within the units will have no significant adverse impact on the environment.

PUBLIC HEARINGS: All persons, organizations, corporations or government agencies which may be affected by the proposed project are invited to comment. A legislative hearing will be held on Tuesday, December 3, 2002 at 7:00 p.m. at the Holiday Inn, 304 South Hamilton Street, Painted Post, New York 14870, telephone number (607) 962-5021 to receive unsworn statements from the public. All persons, organizations, corporations or government agencies who may be affected by the proposed project are invited to attend the legislative hearing and to submit oral comments on the proposed project. No prior filing is required to participate at the legislative hearing. Lengthy comments should be submitted in writing at the hearing. Written comments may also be filed with the Office of Hearings and Mediation Services, at the address indicated below, either before or during the legislative hearing. Equal weight will be given to oral and written statements.

ISSUES CONFERENCE: A pre-adjudicatory hearing issues conference will be held on Wednesday, December 4, 2002, at 9:00 a.m. at the Holiday Inn, 304 South Hamilton Street, Painted Post, New York, 14870, telephone number (607) 962-5021. The purpose of the issues conference is to define, narrow, and, if possible, resolve proposed adjudicable issues concerning the action which is being proposed by the DEC. Any person seeking to participate at the issues conference must appear or be represented at the issues conference in order that all proposed issues may be fully discussed.

PARTICIPATION AT THE ISSUES CONFERENCE: Those seeking to participate at this issues conference and at any subsequent adjudicatory hearing to challenge the DEC proposed field wide spacing and integration rules must file a written petition requesting party status, pursuant to 6 NYCRR 624.5 and 624.4(c). Status as a full party or amicus will be accorded ONLY to those persons who provide a clear demonstration of their challenge to the field wide spacing and integration rules proposed by the DEC for the Terry Hill South Field, and substantiate that challenge with sufficient scientific support and/or statutory authority that is related to the project. Acceptable scientific support would include, but is not limited to: seismic and/or geologic data, reservoir engineering analysis and well testing results specific to the Terry Hill South Field. Section 624.4(c)(4) of 6 NYCRR places the burden of persuasion that an issue is adjudicable on the participant presenting the issue, and a demonstration must be made that the issue is substantive and significant. An issue is substantive and significant if there is sufficient doubt about an applicant's ability to meet the applicable statutory or regulatory criteria such that a reasonable person would inquire further. To be substantive, the issue cannot be based merely on speculation, but on facts that can be subjected to adjudication.

All petitions for party status must be in writing and must identify: the petitioner's official representative at the hearing; the petitioner's environmental interests and the statutory considerations relevant to the project; whether the petitioner's request is for full party status or amicus status; and the precise grounds for opposition or support regarding the project. Mere opposition to the project is not a sufficient basis to participate in an adjudicatory hearing.

All submissions by those person(s) requesting party status to participate at the issues conference and adjudicatory hearing (if an adjudicatory hearing is deemed to be necessary) must be received at the Office of Hearings and Mediation Services no later than the close of business on Wednesday, November 27, 2002. Such filings should be submitted to Maria E. Villa, Administrative Law Judge, New York State Department of Environmental Conservation, 625 Broadway, Albany, New York 12233-1550; telephone number (518) 402-9003. Filings by telecopier transmission will not be accepted. At the same time, all persons must also send a copy of their complete filing to John H. Heyer, Esq., 604 Exchange Bank Building, P.O. Box 588, Olean, New York 14760; Fortuna Energy Inc., 1519 Olean-Portville Road, Olean, New York 14760, attn: Harv Rasmussen, Senior Landman; and to John K. Dahl, Director, Bureau of Oil and Gas Regulation, NYS Department of Environmental Conservation, 625 Broadway, Third Floor, Albany, New York 12233-6500, telephone (518) 402-8056.

DOCUMENT AVAILABILITY: The permit application, Stipulation of October 9, 2002 with attached exhibits, and other relevant documents are available for public review at the following locations:

1. NYSDEC Office of Hearings and Mediation Services, 625 Broadway, First Floor, Albany, New York 12233-1550, contact Maria E. Villa, (518) 402-9003.

2. NYSDEC Division of Mineral Resources, 625 Broadway, Third Floor, Albany, New York 12233-6500, contact Thomas E. Noll, (518) 402-8056.

3. NYSDEC Region 8 Headquarters, 6274 East Avon-Lima Road Avon, New York 14414-9519, contact Randall Nemecek, (585) 226-2466.

4. NYSDEC Region 8 Sub-Office, 276 Sing Sing Road, Suite 1, Horseheads, New York 14845, contact Joseph Yarosz, (607) 739-0809.

5. Town of Veteran Supervisor, Town Hall, 4049 Watkins Road, Millport, New York 14864, contact Frank Rusby, (607) 739-1476.

6. Town of Catlin Supervisor, Town Hall, 1448 Chambers Road, Beaver Dams, New York 14812, contact Joachim Varga, (607) 962-7930.

7. Town of Montour Supervisor, 408 West Main Street, Montour Falls, New York 14865, contact Kenneth Dillon, (607) 535-9476.

8. Town of Dix Supervisor, Town Office, 304 7th Street, Watkins Glen, New York 14891, contact Frank Ganung, (607) 535-7973.

APPLICABLE STATUTORY AND REGULATORY PROVISIONS: Environmental Conservation Law Article 1 (General provisions); Article 3, Title 3, (General Functions); Article 8 (Environmental Quality Review); Article 23, Titles 3, 5 and 9 (Mineral Resources); Title 6 of the New York Compilation of Codes, Rules and Regulations (6 NYCRR) Parts 550 (Promulgation and Enforcement of Rules and Regulations), 552 (Permits to Drill, Deepen, Plug Back or Convert Wells), 553 (Well Spacing) and 624 (Permit Hearing Procedures).

ALL PERSONS HAVING AN INTEREST IN THE PROPOSED PROJECT ARE URGED TO ATTEND THE HEARING OR BE REPRESENTED EITHER INDIVIDUALLY OR COLLECTIVELY.

Jo Anne W. Di Stefano
Assistant Commissioner for Hearings
and Acting Chief Administrative Law Judge

Albany, New York
November 6, 2002

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