News Column

Oil, Gas Production Still Sliding in San Juan Basin

June 20, 2013

Chuck Slothower

J Natural gas production in northwest New Mexico decreased 15.8 percent during the first three months of 2013, continuing a years-long decline that has rippled across the San Juan Basin.

Perhaps most discouraging for the basin's sprawling oil and gas industry, oil production -- a source of some hope -- was also down by 12.3 percent, according to the New Mexico Oil Conservation Division.

Natural gas production fell to 168.4 billion cubic feet from 200 billion cubic feet during the same period in 2012. This year is on track to mark the seventh consecutive year of declining gas production in northwest New Mexico.

Oil production also fell to 227,553 barrels, down from 259,548 barrels during the first quarter of 2012. That's a reversal after two years of climbing oil production.

Industry officials said the two are linked because most oil production in the San Juan Basin is a byproduct of natural gas drilling.

"Most of the oil would be natural gas liquids that are taken off in association with natural gas production," said Steve Henke, president of the New Mexico Oil and Gas Association. "If natural gas drops, the liquids would drop an equivalent percentage."

Encana Corp. and others are drilling for oil in the Mancos Shale, a geologic layer of the San Juan Basin. Encana has drilled 23 wells in the basin as of last week, said spokesman Doug Hock.

In April, Encana said the Mancos play had "reached commerciality."

Encana, a Canada-based firm, is forging ahead with its drilling program despite costs of $5 to 6 million per well, Hock said.

"It's sustainable," he said. "We're going to continue to get those costs even lower. The other important factor is that we had determined we had reached commerciality, meaning the economics were favorable to go ahead and produce at that cost."

Jason Sandel, executive vice president of Aztec Well Servicing, said drilling costs need to go down before the Mancos Shale play can take off.

"Wells need to be more affordable in order for a boom to happen," he said.

Industry officials said they expect a gradual increase in Mancos Shale activity throughout the rest of 2013 and in 2014.

"There's a real opportunity, but I think it will be a measured uptick in activity throughout 2014," said Sandel.

John Byrom, president and CEO of Farmington oil and gas producer D.J. Simmons Inc., agreed.

"I wouldn't say it's taking off to the standpoint of going crazy, but it's increasing incrementally," he said. "The doubt on the play is slowly but surely fading away."

Mancos Shale activity hasn't been enough to counter the overall trend of falling production, but that could change, Byrom said.

"I don't think we've seen enough drilling on the Mancos yet to really reverse that," he said. "With the activity we've got, it could pick up this year or next."

A lasting turnaround in drilling won't happen until natural gas prices show sustained improvement, officials said.

Henke said drillers need to see about $5.50 per million British thermal units. The commodity was trading at $3.96 on the New York Mercantile Exchange on Wednesday.

San Juan Basin well operators are increasingly shutting in old gas wells until prices improve.

"I hear more and more that operating companies are waiting for gas prices to fully recover before they bring their wells back online," said Sandel. "Operating companies are waiting to do that work until gas prices recover. What that means is the overall volume of gas that is being produced by the basin is collectively less because they're shutting in wells, in effect."

Chuck Slothower covers business for The Daily Times. He can be reached at 505-564-4638 and cslothower@daily-times.com. Follow him @DTChuck on Twitter.

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Source: Copyright Daily Times (Farmington, NM) 2013


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