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San Juan output dwindles

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Natural-gas production in northwestern New Mexico’s San Juan Basin is still in frank decline because of stubbornly low prices for dry gas.

But with drilling growing in the Mancos Shale – an oil- and liquid-rich zone that San Juan producers largely had ignored until recently – producers are more optimistic about a slow recovery in the near future.

“We’ve faced pretty much the same situation here every year since the recession,” said T. Greg Merrion, president of Farmington-based Merrion Oil and Gas Corp. “The price for dry natural gas remains so low that it just doesn’t make a lot of sense to drill. But the Mancos Shale is the one real caveat in the story.”

Dry-gas prices have remained chronically low since 2008, thanks to depressed consumer demand from the sluggish economy and some warmer-than-normal winters. That plus a market glut generated by an unprecedented surge in natural-gas production from shale-gas plays in other parts of the country.

Producers currently receive only about $3.60 per 1,000 cubic feet of dry natural gas, down from more than $6 before the recession.

That has slashed output in the San Juan Basin to 20-year lows. Production plummeted by 9 percent last year alone, followed by another 4.5 percent decline in the first six months of 2013, according to the state Oil Conservation Division.

“We’re still very much trapped in the doldrums of recession,” said Jason Sandel, executive vice president of Aztec Well Servicing in Farmington.

Merrion said dry natural-gas production won’t recover until prices climb back to at least $5 or $6 per 1,000 cubic feet.

The one bright spot, however, is the Mancos Shale. Two companies, Encana Corp. and WPX Energy Inc., are aggressively exploring for oil and liquid fuels there, such as propane and butane, which add substantial premiums to producer prices once separated from dry gas.

Until now, companies had concentrated on the San Juan’s dry-gas sandstone beds because they’re easier to permeate and exploit than hard-rock shale.

But modern drilling techniques are helping to crack the Mancos open, including three-dimensional imaging to pinpoint pools of hydrocarbons, hydraulic fracturing to bust up the shale, and horizontal drilling to pull trapped oil and gas sideways out of the rock.

To date, Encana has spent about $200 million to explore the Mancos, with 23 horizontal wells now operating there. And it plans a huge increase next year, with between $350 million and $450 million budgeted to drill up to 100 wells, according to a company report to investors in early November.

This year, WPX will have drilled 15 wells in the Mancos. And next year, it’s budgeted $200 million to drill 37 more wells, according to its third-quarter earnings report.

Both companies say they’re pursuing the Mancos because wells there have generated good, commercial-scale output of between 400 and 600 barrels of oil per day. In addition, drilling costs are declining substantially as they gain more experience cutting into the shale rock.

“We expect to see more companies begin operating in the Mancos as a result of WPX and Encana’s activities, because their experiences will encourage other producers,” Merrion said. “A lot of money is being spent in the Mancos, and activity is beginning to pick up. That will end up having a significant impact on the San Juan economy.”

Sandel said he’s “cautiously optimistic.”

“There’s a glimmer of hope on the horizon,” he said. “Thanks to the Mancos, I think some recovery could begin in the San Juan at the end of 2014 or in early 2015.”

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