Like their Texas neighbors, oil and gas producers in New Mexico feel the inevitable pressures that accompany a boom economy. Things are “still a gamble,” as one NM source says. But the state’s Permian region is producing more crude than ever.
Mike Miller said he was in Hobbs, N.M., recently when he saw a sign that spoke volumes about the economic impact of the booming oil and gas industry.
“There was a sign on the marquee at the Pizza Hut in Hobbs advertising for drivers to deliver pizza for $25 an hour,” recalled Miller, a lobbyist whose firm Professional Directions works with the Permian Basin Petroleum Association in Santa Fe. “It is amazing.”
The oil and gas industry is the engine that is fueling all facets of the economy, including pizza delivery drivers, a fact that is readily evident all across the Permian Basin, where unemployment ranks among the lowest in the country. The Permian Basin includes four counties in the southeastern New Mexico, and the story is the same across the state line as it is in Midland/Odessa and the rest of West Texas.
“I have been with David for 30 years,” said Bill Owen, exploration manager for David Petroleum Corporation in Roswell, “and southeastern New Mexico is probably as busy as I have ever seen it.”
The four counties in southeastern New Mexico (Lea, Eddy, Chavez, and Roosevelt) that are included in the Permian Basin have averaged between 70 and 80 rigs actively working in the region for the past year.
Greg Fulfer, owner of Fulfer Oil and Cattle in Jal, said the “doodlebuggers,” his description of seismograph trucks, showed up about four years ago, working from the state line toward the Guadalupe Mountains and turning up toward Artesia as they were surveying the possibilities of the Avalon Shale.
“We knew something was up,” he said. “I was told then that it takes about three years for them to analyze the data and sell it to prospective operators before drilling would start. And, boy, did it start!”
So what is the state of the oil and gas industry in New Mexico? Permian Basin Oil and Gas magazine asked Fulfer, Owen, Miller, and others to weigh in on everything from drilling activities in the Land of Enchantment to challenges facing the industry, as well as the outlooks to be derived from the recently concluded New Mexico legislative session.
Perhaps no one has a more unique, or diverse, perspective of the oil and gas industry in southeastern New Mexico than Fulfer, who not only owns Fulfer Oil and Cattle, which includes subsidiary Lea Energy, a service company that has pulling units doing work for both his company and others, but also serves as chairman of the county commissioners in Lea County.
“Everyone is tremendously busy,” Fulfer observed. “We originally purchased pulling units for our own company, but we had companies coming to us, begging us to do work for them. Everyone is so busy that sometimes smaller companies get left out and can’t find equipment. You need pulling units to finish completion of the wells. Of course, you have to do maintenance on the wells, too. With trucks moving water in and out and frac crews staying busy, the service industry is booming.”
Fulfer said his company is primarily involved in workovers, taking stripper wells, going in and frac’ing them, and converting them to producers, mostly in Lea County in the Jal and Eunice area.
“We have been fairly successful,” he stated.
As chairman of the Lea County commissioners, Fulfer has first-hand knowledge of both the good and bad associated with the booming oil and gas industry.
“From a county government point of view, there is a lot of traffic, so it is hard to keep our roads in good shape,” he commented. “But the increased revenue is good. We are one of only three counties in New Mexico that are actually providing jobs and growth. We are trying to diversify that growth. In the last census, Lea County had a 20 percent growth in population.”
The county judge chairman from Bradford County, which is in the middle of the Marcellus Shale play in Pennsylvania, came to visit Fulfer to see how Lea County handles its traffic issues and increased income.
“He was shocked by the money and benefits the oil and gas industry produced,” Fulfer claimed. “The oil and gas industry produces a lot of economic jobs and infrastructure.”
From that initial meeting, Fulfer and the county judge chairman from Bradford County, Pa., started a national association of oil and gas producing counties. The American Counties for Energy Independence now has about a dozen counties from at least seven states out of 123 counties in 33 states, stretching from New Mexico to Louisiana to Pennsylvania, who have joined in this grassroots conty level startup as members of the association. “We have just started to take members and the association is growing daily,” Fulfer said.
He added: “The counties can talk among ourselves. Counties can share information on the benefits and how to use them in beneficial ways to maintain and grow each county throughout the United States.”
One goal Fulfer has is to diversify the region’s economy to build more infrastructure to support the oil and gas industry.
“I would like to see more gas liquification plants here locally,” he emphasized. “It would be nice to have plants to process gas and catch that midstream business. We don’t have enough pipeline capacity.”
Fulfer noted that the Bone Spring/Avalon Shale play is rich in liquids, producing a “lot of good, wet gas.”
“We are producing our natural resources and shipping them out of the region when we could be diversifying our economy,” he added. “We have to create an end market for plastics, rubber, or pharmaceuticals for the methane that is stripped off. We have contacted several companies that might have interest if we could capture the processing here. But we have to get fractionation plants right here. There are a lot of things that could be significant long term if we can capture the processed gas here. It is an ongoing thing, but I feel we have 40 to 50 years of production available.”
Finding people to work is the biggest challenge to the continued growth of the region, according to Fulfer.
“There are an abundance of jobs, but to get people to relocate and live here is a challenge,” he emphasized.
While vertical drilling in the Yeso and other formations on the New Mexico Shelf continues to flourish, horizontal drilling, primarily in the 2nd Bone Spring zone, has certainly sparked the dramatic increase in drilling activity in southeastern New Mexico.
David Petroleum Corporation is involved in both vertical and horizontal drilling in the region, although Owen called David Petroleum a small “non-operating exploration company.”
“We come up with prospects and then go to a company, show them our idea and try to structure a deal where they are the operator and we keep a percentage of it,” he explained.
Owen said David Petroleum has worked with other southeastern New Mexico operating companies such as Yates, Manzano LLC, and Armstrong Energy. He noted that much of his company’s activity has been in southern Eddy and Lea counties, but it is also looking at prospects across the state line in Terry and Dawson counties in Texas as well as Roosevelt County in New Mexico, where Owen said there has been no “substantial horizontal drilling” to date.
“But we think there are zones that have potential,” he added.
Owen said some companies have targeted the Wolfcamp formation in the region, but it has “not necessarily been as prolific as they would like.”
“You still have to be in a good sand,” he continued, noting that the 2nd Bone Spring remains the key horizon for horizontal drilling activity. “If you are going to drill a well that costs $5 million to $7 million, you have to make sure you have a good well that won’t decline too quickly in order to make your money back. Some wells have made 400 barrels a day consistently, but other wells start at 400 barrels and in a matter of weeks are down to 50 or 60 barrels a day. If it costs $7 million a well, that is not what you are looking for. With the cost of these wells, you better make sure you are in a good quality zone.”
Ed David, the executive vice president and land man for David Petroleum, said commodity prices are also a critical component in horizontal drilling.
“If prices drop to much more than $75 or $80 a barrel, horizontal drilling will go down,” he explained. “You can justify the cost of horizontal drilling with prices like they are now. In general, drilling in southeastern New Mexico has been as prolific as it has been because of good oil prices.”
David also pointed out that technology, in addition to good commodity prices, has been critical to the growth in the oil and gas industry in southeastern New Mexico.
“The advent of horizontal drilling and completion techniques has made zones that were not prospective to now be prospective,” he stated.
“The more efficient way to fracture wells has changed our business,” Owen agreed. “But it has changed the price of poker, too. Costs are extremely high, and the price of leases has gone up. It all adds up to making the bottom line. Technology is great, but there is still a lot of risk. The oil and gas industry is still a gamble. With that said, there is more oil being produced in southeastern New Mexico than ever before.”
Most of the wells in the Bone Spring intervals that are being targeted today are crude oil wells but have associated natural gas and natural gas liquids, which is a Catch-22, according to David.
“Just as in previous weak natural gas price cycles, operators have started drilling more oil wells,” he said. “The majority of the newly targeted oil zones have been shale formations, which make significant associated natural gas, thus extending the duration of the current weak natural gas prices.”
By operating on both sides of the state line, Owen said that operators in the region know the additional cost involved with New Mexico’s pit rule and other environmental regulations compared to drilling in Texas.
“One company we have worked with drilled two identical wells on either side of the state line,” he explained. “The pit rule alone cost them $100,000 more in New Mexico. They said the ultimate cost will be $300,000 more for the well drilled in New Mexico. Most of the operators in our area drill in both New Mexico and West Texas. (Regulations in New Mexico) has gotten better, but it is not there yet. At least there is a better attitude out of the governor’s office toward our industry, but southeastern New Mexico and northwestern New Mexico (the two areas of the state that have oil and gas production) are not heavily populated, so there is a dramatic effort by legislators from other parts of the state to add more and more regulations to our industry. ‘Mora’ County recently banned all drilling for oil and gas.”
“No harm, no foul,” is Miller’s description of New Mexico’s 60-day legislative session that ended in mid-March.
“For the first time since I’ve been working with Ben (Shepperd, PBPA president), we actually had a few bills get out of the energy committee,” he said “They were not good bills, and fortunately they were stopped on the house floor.”
One of the challenges in the most recent legislative session, according to Miller, was the fact that there were 35 new legislators in the House and Senate. He called Gov. Susana Martinez a “great backstop,” but the work by Miller, Shepperd, and the PBPA, as well as other industry groups, helped defeat a myriad of bills that were introduced and would have been detrimental to the oil and gas industry.
“One [legislator] made changes to the Oil and Gas Acts that would have required additional financial assurances,” he stated. “It was carried by the chairman of the House judiciary committee, but it failed 36-32 on a House vote. Another bill dealt with the private right of litigations, which would have meant anyone could sue directly without going through the normal environmental regulatory process. It failed on a 36-30 vote.”
Miller said several bills that targeted hydraulic fracturing also failed to survive the committee process.
While most the industry’s work was “playing defense” during the legislative session, he said a House memorial was passed that requested the governor and the state’s Congressional delegation support efforts to not list the Lesser Prairie Chicken on the endangered species list.
David said putting the Lesser Prairie Chicken on the endangered species list would be devastating to the oil and gas industry in southeastern New Mexico.
“New Mexico is doing well financially, and the biggest reason is the oil and gas industry, and the jobs it has created both directly and indirectly.” Miller emphasized. “As a result, New Mexico is not in a position to have to cut things like other states. We have a severance tax that is divvied up for state and local projects to make capital improvements. There are those in the legislature and local governments that would like to totally ban our industry. But they are talking out of both sides of the mouths because they have their hands out to get the money from the industry’s severance tax for projects in their districts and counties.”
Miller also noted Gov. Martinez threatened to veto the budget, so the legislature at the last minute agreed to lower the state’s corporate tax rate. It will be phased in over a five-year period, going from 7.3 percent in 2014 to 5.9 percent in 2018.
“That will be very helpful to the oil and gas industry,” he added. “It was a successful session, but we need to continue to work to educate our new legislators and other decision makers that the industry is doing a good job.”
While most of the drilling activity in New Mexico is in the Permian Basin in the southeastern part of the state, there is excitement building about a new shale play in northwestern New Mexico. The Four Corners region in the San Juan Basin has historically been a natural gas province, so drilling had nearly ground to a halt in the last couple of years because of the depressed natural gas prices.
But the new horizontal drilling techniques that have opened up numerous shale and tight oil plays around the country, including the Bone Spring and Avalon Shale in southeastern New Mexico, has now allowed the possibility of accessing the deposits in the rock-hard Mancos Shale, which is sandwiched between soft sandstone layers in the New Mexico San Juan Basin.
Industry executives attended a conference in Farmington in March to discuss production potential in the Mancos Shale play. According to Gene Powell, as published in his Powell Shale Report, eight companies have received permits to drill 45 wells in northwestern New Mexico. Canada’s Encana Corp. has reportedly invested $100 million in the Mancos play.
Powell reported that some of the 22 exploratory wells drilled to date “have shown solid commercial potential for oil and gas production.”
Daniel Fine, senior analyst with the Center for Energy Policy of the New Mexico Institute for Mining and Technology in Socorro, told the Farmington conference that industry estimates place the Mancos oil reservoirs as high as 60 billion barrels, with eight percent or more of that commercially recoverable.
The Mancos Shale oil fairway is believed to be 3,400 square miles overlapping San Juan, Rio Arriba, McKinley, and Sandoval counties.
With the Bone Spring production ramping up into high gear in the southeastern part of the state and now the Mancos Shale play emerging in northwestern New Mexico, the Land of Enchantment appears poised to take advantage of the unconventional shale resource plays that are revolutionizing the nation’s oil and gas industry.