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Oil could ignite San Juan revival

Copyright © 2012 Albuquerque Journal

The good times may soon return to the San Juan Basin in northwestern New Mexico, thanks to oil deposits buried in shale beds alongside the region’s abundant natural gas fields.

Two large companies, Canada’s Encana Corp. and Bill Barrett Corp. of Denver, have partnered with local producers in Farmington to dig wells in the Mancos Shale, a hard-rock layer rich in liquid fuels that rests between 5,000 feet and 12,000 feet below ground.

That layer is located amid dry natural gas reservoirs above and below it that have sustained the industry in the Four Corners area for decades. But with dry natural gas prices at 10-year lows, and a market glut likely to keep it that way for the foreseeable future, producers are turning to oil and other liquid fuels trapped in the Mancos as a potential ticket to economic recovery.

“The Mancos oil play is the real deal,” said T. Greg Merrion, president of Farmington-based Merrion Oil and Gas Corp., which partnered with Bill Barrett to explore for oil. “We could be on the cusp of another energy boom here in the San Juan Basin.”

30 billion barrels

Merrion and Bill Barrett estimate up to 30 billion barrels of oil are trapped in the New Mexico portion of the Mancos Shale bed, which stretches into Colorado, Utah and Wyoming. They believe at least 5 percent, or about 1.5 billion barrels, can be economically recovered.

But that may be conservative.

“Encana Corp. estimates like twice that amount of oil is in the play, and they say up to 8 percent can be recovered,” Merrion said. “The numbers are not set in stone. The jury is still out.”

Encana’s USA Division created a special team in Denver solely dedicated to oil exploration in the play, said spokesman Doug Hock.

“We believe it’s a very prospective area,” Hock said. “We tend to be conservative, taking one step at a time, but we’re encouraged by the initial results of exploration. The fact that we put together a dedicated development team is a significant step for us.”

Efforts to extract oil mark a significant shift in the basin, which was hit hard by the recession, and by vast new shale gas plays in the Northeast, Midwest and South that have flooded the market and driven prices down. The price per 1,000 cubic feet of natural gas fell from about $6 in early 2008 to below $3 after the economy tanked, and has yet to climb back.

Dry gas problem

Four Corners producers have particularly suffered because most natural gas there is dry. In contrast, gas in the oil-rich Permian Basin in southeastern New Mexico has high liquid content, allowing processors to extract fuels like propane to sell separately from dry natural gas, boosting income.

In addition, while the Oil Patch enjoys a boom in crude production thanks to today’s high oil prices, San Juan Basin operators almost exclusively produce natural gas, not crude.

Consequently, New Mexico’s natural gas output plummeted 18 percent from 2007 to 2011, reaching its lowest level in 20 years. About a dozen drilling rigs now operate in the San Juan area, down from about 40 before the recession.

“The basin just continues to suffer,” said Jason Sandel, executive vice president at Aztec Well Servicing in Farmington. “It’s really brutal up here.”

That could change if extraction of Mancos oil proves commercially viable.

The basin has produced crude in the past, starting early last century and gaining momentum in the 1950s. But it petered out because low oil prices made extraction less economical and drilling technology needed improvement to bust open hard-shale rock. Instead, companies focus on easier-to-crack sandstone beds to exploit natural gas.

But with oil prices now fluctuating from $80 to $100 a barrel, plus modern hydraulic fracturing and horizontal drilling technologies making it easier to permeate shale beds like the Mancos, oil extraction in the San Juan Basin appears more attractive.

Weighing the costs

The question is whether companies can extract enough crude and liquid gas from Mancos wells to make the high cost of drilling worth the investment, said Kurt Reinecke, Bill Barrett Corp.’s executive vice president for exploration.

The company will drill two exploratory wells this fall.

“We don’t know what the full cost of these wells will be yet,” Reinecke said. “It could be upwards of $6 million, so we’ll need more than that in oil to recover costs.”

Barrett partnered with Merrion to gain access to about 25,000 acres of mineral rights held by the latter. Merrion needed a company with deep pockets and experience.

“We bring acreage, they bring people, capital and expertise,” Merrion said.

Once Barrett begins drilling, it can reduce production costs by operating multiple wells on a single site with shared facilities. But the company will need total output of at least 250,000 or more barrels of oil and liquid gas equivalent from each well, or between 300 and 500 barrels of equivalent per day over the life of a well, to make it profitable, Reinecke said.

Initial results from Encana Corp. exploration indicate potentially good returns.

Encana drilled seven wells so far this year, and plans at least four more by December, Hock said. The first well produced an average of 438 barrels of oil equivalent per day in its first 30 days of operation.

Encana has partnered with Dugan Production Corp. in Farmington, which controls 174,000 net acres of mineral rights in the Mancos.

“Encana is starting to drill its eighth well now,” said Dugan owner Tom Dugan. “The first ones look fairly good.”

Encana’s initial success could encourage more companies to explore for oil.

“There’s lots of talk about other folks planning to drill test wells,” said Merrion Investment Manager George Sharpe. “I expect some bigger operators will start testing their positions and switch some of their active rigs from gas to oil.”