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New Mexico’s gusher of good news

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Copyright © 2013 Albuquerque Journal

The good times just keep getting better in the oil patch in southeastern New Mexico.

Oil production jumped by another 15 percent in the first six months of 2013, according to the latest statistics from the state Oil Conservation Division. That puts New Mexico on track for its sixth consecutive year of growth, marking the longest period of expansion in at least four decades.

State production is now at its highest levels since the late 1970s. And producers project a lot more growth for the foreseeable future, thanks to robust oil prices and modern drilling technologies that keep cracking open new pools of hydrocarbons in the Permian Basin.

This oil rig is operating in southeastern New Mexico as the Permian Basin's output grows. (Courtesy of Nmoga)

This oil rig is operating in southeastern New Mexico as the Permian Basin’s output grows. (Courtesy of Nmoga)

“Everything is in excellent shape here,” said Raye Miller, a veteran oil man who now heads Regeneration Energy Corp. in Artesia. “Most companies are busy and getting busier, and many are planning strong capital budgets and drilling programs for next year.”

The boom in the southeast is helping to offset a continuing decline in natural-gas production in the San Juan Basin in northwestern New Mexico, which remains mired in recession because of stubbornly low gas prices that discourage producers from initiating new drilling activity.

Natural-gas production there is at 20-year lows, and producers see little prospect for improvement in the short term.

“Things are still very depressed up here,” said Jason Sandel, executive vice president at Aztec Well Servicing in Farmington. “Times are difficult, no question about it. A number of companies have had to move out to survive, and the ones who remain are just running basic infrastructure with skeleton crews.”

San Juan producers are pinning their hopes for the future on exploration in the Mancos Shale, a hard-rock layer rich in liquid fuels that’s sandwiched in between dry gas beds above and below it.

Companies now drilling in that zone have reported good, commercial-scale output of oil and other liquid fuels, which could encourage more firms to launch exploratory activities there in the next few years.

Oil production boom

But for now, it’s the boom in the Permian Basin that’s keeping New Mexico’s oil and gas industry alive.

Last year, oil production in the southeast leaped by a record 19 percent, from 71.3 million barrels in 2011 to 85.1 million. That’s New Mexico’s highest output since 1978.

Rigs that use a closed-loop system, such as this one in the southeastern part of the state, use a lot less water in the extraction process. (Courtesy of Nmoga)

Rigs that use a closed-loop system, such as this one in the southeastern part of the state, use a lot less water in the extraction process. (Courtesy of Nmoga)

And from January through June of this year, production climbed to 46.4 million barrels, up from 40.2 million in the same period in 2012. That puts the state on track to surpass 90 million barrels this year for the first time since 1976.

The boom is fueled by robust prices for crude, which remained above $100 per barrel during most of this year, receding to about $96 per barrel in late October.

Those high prices have made modern, but expensive, drilling techniques economical, allowing producers to capture oil and natural gas trapped in Permian Basin shale beds that companies previously passed over. Those techniques include hydraulic fracturing to crack open tough shale layers, followed by horizontal drilling to suck out hard-to-reach pools of hydrocarbons in the rock.

In addition, apart from oil, producers in the Permian have benefited from the high liquid content of natural gas in the basin, which includes fuels such as propane and butane. That provides more incentives to drill there, because companies can earn a $1 to $1.50 premium for those liquids on top of what they receive for dry gas, which currently sells for about $3.60 per 1,000 cubic feet.

Processing bottleneck

A consequent increase in demand for processing services to separate dry gas from liquids has created a production bottleneck in the basin, said Miller of Regeneration Energy.

“All the processing plants here are running at full capacity with no room left in them,” Miller told the Journal . “We have a lot of infrastructure in place in the Permian Basin, but at this point, we’re producing more gas than what the local processing plants can actually handle.”

New Mexico's Permian Basin continues to be a hotbed of oil and gas production this year. Here, students are learning about the industry during a tour of a drilling-rig site in southeastern New Mexico. (Courtesy of Nmoga)

New Mexico’s Permian Basin continues to be a hotbed of oil and gas production this year. Here, students are learning about the industry during a tour of a drilling-rig site in southeastern New Mexico. (Courtesy of Nmoga)

Thanks to production growth in the basin and robust oil prices, the state’s revenue outlook this year has improved significantly. In its latest forecast for fiscal year 2014, released in August, the Legislative Finance Committee projected $995 million in general-fund revenue from oil and gas, up $46 million from the $949 million the state captured in FY 2013.

And oil companies are now planning more drilling.

Concho Resources Inc., for example, aims to double its oil and gas output by 2016, according to the company’s earnings report for third-quarter 2013. Concho expects to invest $2.3 billion in the Permian next year, up from $1.8 billion this year.

Devon Energy Corp. of Oklahoma also plans more drilling in New Mexico’s Bone Spring play to take advantage of hefty output from wells there, said spokesman Tim Hartley. The company has drilled about 100 wells in that area this year, and it expects to drill at least as many, if not more, in 2014.

“We’re getting about 20 percent better returns from our Bone Spring wells than what we expected, so we’re very pleased,” Hartley told the Journal . “Now, we’re escalating our activity there to go into a full-scale development program … We’ve identified about 1,400 locations for drilling in the Bone Spring, and we expect that number to increase as we go forward.”

Miller said production will reach new heights next year.

“At this point, 2014 looks to be a great year for local industry,” Miller said. “I don’t see anything on the horizon to change that in the next 12 months.”

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