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Bust a double whammy in San Juan

ALBUQUERQUE, N.M. — Until oil prices collapsed last fall, oil exploration in the Mancos shale in the San Juan Basin was the one bright spot in an otherwise dismal situation in the Four Corners region.

San Juan County, where New Mexico’s natural gas production is concentrated, has never really emerged from the Great Recession because natural gas producers are still earning a fraction of what they received prior to the financial collapse in 2008. Prices remain stuck below $3 per 1,000 cubic feet, compared to $6 or more before the recession.

As a result, New Mexico’s natural gas production has fallen nearly 20 percent since 2007 to its lowest level in more than 20 years.

But, with modern hydraulic fracturing and horizontal drilling, some oil companies had begun exploring in the Mancos shale formation – an oil-rich zone sandwiched between the San Juan Basin’s dry natural gas reservoirs. Nearly 200 wells were drilled in the Mancos by Encana Corp. of Canada and WPX Energy of Oklahoma, with half a dozen rigs operating there throughout 2014.

Following the oil price crunch, however, Encana ceased exploration, at least temporarily.

“There’s no question, we’ve had a setback,” said T. Gregg Merrion, president of Farmington-based Merrion Oil and Gas Corp. “The Mancos play has slowed down tremendously. As soon as oil prices plummeted, Enacana released all its drilling rigs and completely refocused on other basins in the U.S. and Canada.”

WPX is still drilling with three rigs because that company managed to lock in contracts for $95 per barrel for its Mancos production through next fall. But oil prices, which have fluctuated between about $45 and $55 per barrel since January, would have to regain some traction by the end of the year for WPX to earn an acceptable return on its investments, said WPX President and CEO Rick Muncrief during the annual San Juan Basin Energy Conference in Farmington in March.

“For the Mancos, you need to be in the $55 to $60 range to make a return,” Muncrief said.

BP America did announce that it will do some exploratory drilling in the Mancos later this year. That’s good news for New Mexico, since it reverses a previous BP decision last summer to sell off its San Juan assets.

But natural gas and oil prices must rebound significantly to reignite more aggressive activity – something that’s unlikely for now.

“We still expect these prices for a significant amount of time,” said Dave Lawler, CEO of BP America’s Lower 48 States onshore business. “There’s nothing we see to move the needle in the near term.”

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