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Beach W1, Dzybon 1, Eolin 1, Gillis 1, Little 1, Lucas 1, Messing 1-B, Pietilla 1

June 19, 2007

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION

NOTICE OF PUBLIC LEGISLATIVE HEARING, ISSUES CONFERENCE, AND ADJUDICATORY HEARING

The Department of Environmental Conservation (the "Department") hereby gives notice, pursuant to Environmental Conservation Law ("ECL") § 23-0901(3)(d), that a public hearing will be held at the time and place stated below to address compulsory integration of interests in the following wells:

Well Name Town County API Number
Beach W1 Spencer Tioga 31-107-23927-00-00
Dzybon 1 Corning Steuben 31-101-23867-00-00
Eolin 1 Corning Steuben 31-101-23105-00-00
Gillis 1 Caton Steuben 31-101-23110-00-00
Little 1 Veteran Chemung 31-015-23228-00-00
Lucas 1 Van Etten Chemung 31-015-23928-00-00
Messing 1-B Southport Chemung 31-015-23186-02-00
Pietilla 1 Van Etten Chemung 31-015-23925-00-00

Well Operator: Fortuna Energy Inc., 203 Colonial Drive, Suite 101, Horseheads, New York 14845 (Contact: Ms. Janice Hart).

Project Description and Departmental Action Proposed: The Department proposes to issue compulsory integration orders pursuant to ECL 23-0901 integrating mineral interests within the spacing unit for each well listed above. Objections to the draft orders for each well listed were raised at a compulsory integration hearing, which resulted in the referral to the Department's Office of Hearings and Mediation Services for adjudicatory proceedings.

Among the potential issues for adjudication are access to well data and site access (Beach, Dzybon, Eolin, Gillis, Lucas, Messing and Pietilla); whether the operator must assess all costs listed in the definition of well costs at ECL 23-0901(3)(a)(5) or whether the operator has the discretion to assess costs (Dzybon); costs included in the authorization for expenditures ("AFE") and the impacts to the uncontrolled owners when costs are excluded from an AFE (Gillis, and Messing); service of recently identified heirs (Dzybon); risk penalty (Eolin, Little); adequacy of service (Beach and Dzybon); and length and cost of gathering lines (Gillis). Additional issues may be identified at the issues conference described below. Hearings for the above listed wells will be conducted on a joint record.

Department Staff Position: Staff's position on the various issues is summarized as follows:

Well data and site access - ECL 23-0901(3)(f) establishes that all operations on a spacing unit covered by an order of integration are deemed to occur upon each separately owned tract by the owner or several owners thereof. The statute further provides that all production allocated to a tract of land in the spacing unit is presumed to be produced from that tract of land as if a well had been drilled. In Department staff's view, integrated participating and non-participating owners have the same rights of ownership to the data as the operator of the well. Therefore, integrated participating and non-participating owners cannot be denied access to the data collected on the unit. Department staff also take the position that the integrated participating and non-participating owners are entitled to operator-supervised well site access during the collection of data. Although site access must not unreasonably interfere with the conduct of operations nor conflict with the well operator's established safety protocols, participating and non-participating owners are nevertheless entitled to observe operations that are deemed to be conducted on their land.

Data collection as a well cost - ECL 23-0901(3)(c) requires uncontrolled owners to be notified of their share of well costs. All well costs stated in ECL 23-0901(3)(a)(5) should be included in this notification. Costs include drilling, stimulation, testing and logging, which all result in collection of data; therefore owners who pay such costs either as participating or non-participating owners are entitled to the data because they are assessed the costs of collecting it. However, even if the well operator chooses not to assess the costs, the data is nevertheless deemed to be collected from each separately owned tract. Therefore the data must be provided, upon request, to the owners of such tracts who are deemed by law to be collecting the data themselves.

Costs included in the AFE - For the Gillis well, Department staff's position is that although the well operator complied with the Department's requirements for the level of detail provided regarding costs which had already been incurred, the parties should confer and the well operator should share additional information and detail. For the Messing 1-B well, integrated non-participating owners should not be assessed costs associated with portions of the wellbore that were plugged and abandoned before the spacing unit was established. It is appropriate to assess costs for portions of the wellbore which will be used for production.

Service of recently identified heirs - At the time of the hearing, considerable uncertainty existed regarding ownership of numerous parcels in the Dzybon unit affected by a minerals reservation. While the Department cannot resolve title issues, adequacy of notice should be determined before an integration order is issued.

Risk penalty - Department staff's position is that assessment of a risk penalty against costs incurred prior to an election to participate in a well permitted before the effective date of the current statute is just and reasonable and conforms to the intent of the legislation that risk be addressed. ECL 23-0901(3)(a)(4) provides the opportunity to buy out of the risk penalty prior to recoupment and become a participating owner by paying "the full amount subject to recoupment," which includes the risk penalty incurred up to that point in time. Absent agreement on this point regarding the Little well, the Hearing Officer correctly accepted an alternative non-participating owner election offered by the uncontrolled owner.

Adequacy of service - Owners identified less than 30 days prior to the compulsory integration hearing must be provided notice of the hearing and compulsory integration election options prior to leasing their mineral rights.

Length and cost of gathering lines - The only gathering line costs that should be assessed against integrated non-participating owners in the Gillis unit are those described by ECL 23-0901(3)(c)(ii)(E), i.e., to the first point of interconnection with other facilities that commingled production from a group of wells at the time the Gillis well was connected. Department staff concludes that no adjustment to the authorization for expenditure is required as the result of later interconnections to subsequent wells tied in after the Gillis gathering line was constructed.

SEQRA Status: On September 1, 1992, after publishing a Final Generic Environmental Impact Statement on the Oil, Gas and Solution Mining Regulatory Program, the Department concluded that the action of holding a compulsory integration hearing is non-significant. No further action is required to comply with SEQRA.

Public Hearing: A legislative hearing to receive unsworn comments about the proposed integration orders will be held at 1:00 PM on July 18, 2007 at the Hilton Garden Inn, 35 Arnot Road, Horseheads, New York 14845 (For directions to the Hilton call: 607-795-1111). Written comments may also be submitted to the Office of Hearings and Mediation Services, at the address below, in advance of the legislative hearing. All persons, organizations, corporations, or government agencies that may be affected by the outcome are invited to attend the hearing and to submit oral or written comments. Interpreter services will be made available to deaf persons, at no charge, upon written request to the administrative law judge ("ALJ") at least five business days prior to the date of the hearing. The hearing location is reasonably accessible to persons with a mobility impairment.

Issues Conference: A pre-adjudicatory hearing issues conference will be held at the Hilton Garden Inn, 35 Arnot Road, Horseheads, New York 14845 (For directions to the Hilton call: 607-795-1111) immediately following the legislative hearing and will continue on July 19, if necessary. The purpose of the issues conference is to define, narrow, and resolve, if possible, the proposed issues for adjudication. Any persons requesting party status must appear or be represented at the issues conference in order that all proposed issues may be fully discussed.

Party Status: Pursuant to a ruling of the ALJ (see Matter of Dzybon 1, et al., ALJ Ruling on Procedural Issues, June 6, 2007 [available online at www.dec.ny.gov/hearings/34993.html]), the well operator and all uncontrolled mineral rights owners in the spacing unit for each well listed above are automatic full parties to the adjudicatory hearing with the status of an applicant (see 6 NYCRR 624.5[a]). Uncontrolled owners are mineral interest owners in a spacing unit who have not entered into a voluntary lease or participation agreement with the well operator, including potential participating owners, non-participating owners, and royalty owners (see ECL 23-0901[3][a]).

All automatic full parties wishing to participate in the adjudicatory hearing must file a written notice of appearance. The notice of appearance must fully identify the party together with the name(s) of the person(s) who will act as the party's representative(s), the issues the party seeks to address (whether in support of or in opposition to the proposed integration orders), the scope of the issue raised, and the nature of the factual proof, if any, the party intends to present. Please see 6 NYCRR 624.4(c)(1)(i) and (ii) and 624.5(a) for further information on automatic full party status and identification of issues.

All other persons wishing to participate in the adjudicatory hearing must file a written petition requesting party status, pursuant to 6 NYCRR 624.5(b) (also see 6 NYCRR 624.4[c]). The petition must fully identify the proposed party together with the name(s) of the person(s) who will act as the proposed party's representative(s), the proposed party's interest in the proceeding, any interest relating to the statutes administered by the Department relevant to the proposed action, whether the request is for full party status or amicus status, and the precise grounds for opposing or supporting the proposed integration orders. Mere opposition to the proposed integration orders is not a sufficient basis to be granted party status. Please see 6 NYCRR 624.4 and 624.5 for further information on party status and identification of issues.

Petitions for full party status must demonstrate that substantive and significant issues exist concerning the proposed integration orders. Please see 6 NYCRR 624.4 and 624.5 for further information about requesting full party status and identifying issues for adjudication.

All notices of appearance and all petitions requesting full party or amicus status to participate in the adjudicatory hearing must be received at the Office of Hearings and Mediation Services at the following address no later than 4:00 PM on July 11, 2007. Telefaxed or emailed copies will be accepted, provided a hard copy is sent by first class mail and postmarked no later than July 11, 2007. Petitions must be submitted to: James T. McClymonds, Chief Administrative Law Judge, New York State Department of Environmental Conservation, Office of Hearings and Mediation Services, 625 Broadway, Albany, New York 12233-1550 (Telephone: 518-402-9003).

All persons filing notices of appearance or petitions for party status must also send a copy of their notice or petition at the same time and in the same manner to: Jennifer Hairie, Esq., Associate Attorney, New York State Department of Environmental Conservation, Division of Legal Affairs, 625 Broadway, 14th Floor, Albany, New York 12233-1500 (Telephone: 518-402-9188). A copy of the notice of appearance or petition must also be sent to all persons on the service list for the well at issue. A copy of the service lists are available from the ALJ or Department staff, or at the location listed under "Document Availability" below.

Adjudicatory Hearing: The adjudicatory hearing may commence immediately after the issues conference on July 18, 2007, and continue if necessary on July 19, 2007. Subject to review of the notices of appearance and party status petitions, the parties will be advised in advance of the issues conference whether the adjudicatory hearing will begin on July 18, 2007, and which issues will be adjudicated. All parties participating in the adjudicatory hearing must be prepared to go forward with their respective witnesses on the issues so identified on July 18, 2007.

Document Availability: All filed documents, including the draft integration order for the spacing units for each well listed above, are available for inspection during normal business hours at New York State Department of Environmental Conservation, Horseheads Suboffice, 276 Sing Sing Road, Suite 1, Horseheads, New York 14845 (Telephone: 607-739-0809, Attn: Joy Brewer [appointment recommended]), and at the Office of Hearings and Mediation Services at the Albany address above. A copy of 6 NYCRR part 624 may be obtained from the Office of Hearings and Mediation Services at the address above, or online at www.dec.ny.gov/permits/6234.html.

Statutory and Regulatory Provisions: ECL article 1 (General Provisions); article 3, title 3 (General Functions); article 8 (State Environmental Quality Review); article 23 (Mineral Resources); and 6 NYCRR part 550 (Mineral Resources); part 617 (State Environmental Quality Review); and part 624 (Permit Hearing Procedures).

Albany, New York
James T. McClymonds
June 19, 2007
Chief Administrative Law Judge

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