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NM gas production up significantly

Pictured is Lucid Energy’s Red Hills natural gas processing plant near Jal. (Roberto E. Rosales/Albuquerque Journal)

Copyright © 2020 Albuquerque Journal

New Mexico’s natural gas production is ramping up to record heights, with 2019 output on track to surpass the peak levels the state reached nearly 20 years ago.

The surge comes courtesy of southeastern New Mexico, where the oil boom is extracting billions of cubic feet of “associated” natural gas, which comes up alongside the crude that operators are pulling out of the Permian Basin’s lucrative shale-rock reservoirs. That oil-associated output has reversed a decadelong decline in state gas production that bottomed out in 2013, when natural gas extraction plummeted to its lowest level since the early 1990s.

But the rebound is doing very little to revive the industry in the northwestern San Juan Basin, the state’s traditional gas-producing region, where most operators are still struggling to stay afloat. That’s because gas prices remain stuck at recession-era lows, providing little incentive for companies there to invest beyond the minimum needed to keep current wells running, much less drill new ones.

Permian, not San Juan

“We’re producing so much gas in the Permian Basin, but it’s a much tighter environment in the northwestern part of the state,” said New Mexico Oil and Gas Association Executive Director Ryan Flynn. “Unfortunately, we don’t really see that situation changing in the near future.”

From January to November of last year, the Permian boom pushed state output up to 1.65 trillion cubic feet. That’s up from 1.3 trillion cubic feet in all of 2017, and 1.5 trillion in 2018, according to the latest statistics from the state Oil Conservation Division.

When December tallies are in, total natural gas production for 2019 will set a record, surpassing the state’s historic peak of 1.68 trillion cubic feet in 2001.

At the turn of the century, the Four Corners Region was one of the nation’s biggest natural gas hot spots, riding a wave of new drilling activity that began in the 1990s.

A pipeline is installed across the Permian Basin southeast of Carlsbad in November. (Eddie Moore/Albuquerque Journal)

But soon after, the shale-gas revolution – fueled by the modern techniques of hydraulic fracturing and horizontal drilling – opened up vast new natural gas deposits in other states, creating a prolonged market glut that continues today. That, combined with the 2008 recession, gutted wholesale prices to a range of about $2 to $3.50 per 1,000 cubic feet, or Mcf, over the last decade, down from $9 or more per Mcf in 2001.

As a result, a steady decline in New Mexico production that began in 2002 accelerated following the recession, falling a total of 27% by 2013, when it bottomed out at 1.23 trillion cubic feet.

Production bounces back

State-level production began climbing again in 2014 as shale-oil activity in the Permian began to rapidly rise, sucking out associated gas alongside the oil gushers.

But in the San Juan Basin, chronically depressed prices have kept output flat, at best. In fact, in late January, the wholesale price fell below $1.90 per Mcf, its lowest level since March 2016, thanks to a moderately warm winter, plus national gas storage levels that are 20% higher than this time last year, according to the U.S. Energy Information Administration.

“Gas prices have gone from bad to worse,” said George Sharpe, investment manager with Merrion Oil and Gas Corp. in Farmington. “It’s hard to justify drilling anywhere at these prices.”

There are about 25,000 wells still operating on New Mexico’s side of the San Juan, but about 80% are considered marginal wells that produce less than 90 Mcf per day, Sharpe said.

There was a spurt of drilling activity from about 2012 to 2014 in the San Juan’s Mancos shale formation, an oil-rich zone sandwiched in between the basin’s dry natural gas reservoirs. For a short time, that raised hopes for a San Juan revival based mostly on oil rather than the basin’s traditional gas production. But when oil prices crashed in late 2014, Mancos activity ground to a near halt.

Still slow in San Juan

“There’s just one drilling rig running in the oil zone now,” Sharpe said.

In addition, there’s substantial opposition by Native Americans, environmentalists, and state and federal officials against Mancos-focused drilling around Chaco Culture National Historical Park.

Still, some large operators have dug in for the long term, maintaining current production and waiting for better prices, Flynn said. Hilcorp San Juan LP, for example, paid $3 billion in 2018 to acquire roughly 12,000 exiting wells from ConocoPhillips. It’s since been reworking those assets to pump up production.

“Hilcorp and others are taking the long view on their investments,” Flynn said. “Prices can’t stay low forever.”

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