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Tectonic shift rumbling across southeast NM’s oil patch

Copyright © 2018 Albuquerque Journal

Hundreds of small, independent producers might soon be swallowed up by today’s unprecedented oil and gas boom in southeastern New Mexico.

As industry titans like ExxonMobil and Concho Resources pump billions of dollars into previously untapped sections of New Mexico’s century-old oil patch, the state’s small- and medium-sized producers are struggling on the margins to keep running aging wells based on outdated technology. Those companies, which have flourished for decades in New Mexico’s side of the Permian Basin, don’t have the resources to invest in the modern drilling technology needed to dig into the oil-rich, hard shale-rock formations where the majors are now concentrated.

And with oil prices still well below the $100 per barrel level that kept low-volume “stripper wells” profitable in years past, many independent operators are now choosing to invest in only their most-productive ones and abandon others, said Gregg Fulfer of the Fulfer Oil and Cattle Co. in Jal, which operates about 150 marginal wells.

Gregg Fulfer stands by his water holding pond, part of the water services operation he’s building to diversify his business beyond stripper well production. (Roberto E. Rosales/Albuquerque Journal)

“I think the little guys will be history pretty soon,” Fulfer said. “The low-volume wells run by stripper operators like me supplied about 20 percent of the market until recently, but it’s fading away now. We’ll see a lot of stripper operators disappear as they plug up the small, marginal wells.”

Local government officials and economic development professionals say the flood of investment pouring in from the major players will easily make up for economic losses from the decline in traditional, or legacy operations that fueled past booms. Indeed, many independent operators are shifting focus to provide services to the modern titans now operating in the Delaware Basin, an oval-shaped, shale-rock formation within the Permian that protrudes from southwestern Texas northward into Lea and Eddy counties.

And with the new oil boom gaining momentum, unemployment from the last four years of industry downturn is rapidly declining as workers find jobs in the Delaware. In addition, a new industry layer of “mid-stream” services to gather and process oil and gas after its pumped to the surface is cropping up for the first time on New Mexico’s side of the Permian after remaining glued to the Texas side for decades.

Companies are laying thousands of miles of new pipeline for oil, natural gas and water transport in the Delaware Basin near Jal.

All those changes reflect a tectonic shift in the state’s oil patch, as the old technology of drilling vertically into soft sandstone formations gives way to the modern techniques of hydraulic fracturing and horizontal drilling that’s opened up vast pools of hydrocarbons trapped in hard shale-rock.

“It’s kind of the end of an era,” said Larry Scott, owner of Lynx Petroleum in Hobbs and a Republican state representative. “On the one hand, technology-driven horizontal development yields high-enough values to make projects profitable even at $60 per barrel. But on the other hand, the economics for thousands of low-volume wells, many of them decades old, aren’t enough to keep them going.”

The state Oil Conservation Division reports about 59,000 completed wells in New Mexico. At least half of them are old, vertically drilled marginal wells, many of which produce maybe 10 or 15 barrels a day, Fulfer said.

During the downturn, Fulfer and other operators often chose not to invest in workovers needed to keep low-producing wells running.

“We had a lot of stripper wells down, because if one went off we just left it that way,” Fulfer said. “It’s just too expensive to bring them back on.”

With prices having climbed from about $45 a barrel in the last couple of years to above $60, Fulfer is now investing in the most productive wells to bring them back online. But even that’s becoming difficult with the boom in demand from Delaware operations driving up prices for supplies and services.

“All the trucking companies and rigs are out there hauling and servicing things for the big industry players, and companies are raising their prices all over,” Fulfer said. “It’s squeezing the marginal guys out really fast.”

Traditional service companies that focus on vertically-drilled wells are also under pressure, Scott said.

“Well-servicing units directed at lower-volume wells are now stacked up all over the county,” he said. “Businesses that can adapt with new equipment or expertise for horizontal wells will thrive, but those who can’t will struggle and maybe close.”

Still, many are adapting to the new reality, including operators like Fulfer, who is pushing heavily into water services for Delaware operations. He’s building a recycling plant to clean up dirty “produced” water from oil and gas operations for re-use by drilling companies, including a 21-mile pipeline system to supply operators.

“About one-fourth of my revenue comes from water operations now rather than oil and gas,” Fulfer said.

In addition, as big industry movers and shakers expand drilling operations here, they’re luring hydrocarbon gathering and processing companies to New Mexico to lower costs for shipping their product to processing facilities in Texas.

Service companies are laying thousands of miles of pipelines in the Delaware. And many are either expanding processing operations or building new plants that separate liquid butane, ethane and propane from dry natural gas, and, in some cases, employ cryogenic processors to condense dry gas into liquids. Until recently, only three such plants were in New Mexico, but since 2015, processing companies have either built or begun construction on five new ones in Eddy County. One, Lucid Energy, tripled its processing capacity at its existing Red Hills plant in Lea County.

Another three midstream projects are also in the works, although details are confidential, said Lea County Economic Development Corp. President and CEO Steve Vierek.

“Each project represents about a $250 million investment, and we project enough demand for about 20 to 30 more processing facilities in southeast New Mexico,” Vierek said.

Local officials are working to attract more such operations.

“Now that we’re producing a lot more crude, the next goal is to add value here and not just let the raw material leave the area,” said Hobbs Mayor Sam Cobb. “Those midstream companies can become another major source of capital flow that brings good-paying, long-lasting jobs even after drilling and exploration ceases. That creates more stability for our employment base and increased revenue for local governments.”

As independent oil and gas production declines, those new activities are picking up the slack in the local economy, Cobb added.

“We are seeing a shift away from independent producers,” Cobb said. “It’s like the industrialization process in so many industries where modern technologies push out the mom and pop operators. But it’s also creating many new opportunities in the process.”

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