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Tuesday, June 21, 2011

Another Boom?

Since the San Juan Basin first boomed after World War II, natural gas has formed the backbone of the local energy industry.

Reliable natural gas production brought jobs, pumped tax revenues into government coffers and, in many ways, built Farmington. Oil production, meanwhile, was at best an afterthought.

That may be about to change. New technology, coupled with high oil prices, is spurring renewed interest in oil buried deep within San Juan Basin shales.

"We've always known that there's hydrocarbons in the shales. We haven't been able to get it out in economic quantities," said Steve Dunn, drilling and production manager at Merrion Oil & Gas in Farmington. "That's changing."

Though it's far from certain, oil and gas industry insiders say there's also a realistic possibility that San Juan County could be on the verge of an oil boom.

Several major producers are exploring the potential for drilling San Juan Basin oil, industry officials said. Companies recently have approached local independent oil and gas firms to discuss buying rights in the Mancos Shale, the oil-rich geologic layer of the basin.

"We're on the cusp of a lot of interest," Dunn said.

One major North American company in discussions with Merrion Oil & Gas flew geologists to Farmington to evaluate the basin, said Dunn, who declined to identify the company, citing ongoing discussions.

The geologists estimated the Mancos Shale holds 59 billion barrels of oil, of which perhaps

3 billion is recoverable -- 10 times more than the basin has produced in the past 90 years.

"That would make this a big, big prize, and that's why these companies are coming in," Dunn said. "If they see success, there will be a boom overnight, assuming the price of oil holds."

Elliott Riggs, a Farmington-based independent petroleum geologist, has studied the San Juan Basin for more than 50 years. He sees potential for significant oil production in the Mancos Shale.

"It's real," he said. "Every 10 years, something happens here unanticipated and unexpected in the basin that changes the economics of the basin. The last big change was coal-bed methane 10 or 15 years ago. I predict the Mancos will be the next big change."

Forbidden shale

The Mancos Shale stretches across the San Juan Basin from Durango, Colo., at its northern extreme nearly to Gallup southward, and from Shiprock to the Chromo, Colo., area.

At 3,600 square miles, the basin is the largest natural gas-producing region in the Rockies.

Natural gas dominates the basin to the north, while oil is thought to be more prevalent in the south. Oil and gas officials say the Mancos Shale is geologically similar to the Niobrara Shale in Northeast Colorado, where production has boomed.

San Juan Basin oil is difficult to drill. The shale is a tight and nonporous layer of rock, and only in recent years have drillers perfected two techniques that could set the oil free: horizontal drilling through thousands of feet of rock, and multiple-stage hydraulic fracturing that can shatter shale rock, allowing oil to flow.

The techniques were pioneered in the Barnett Shale near Fort Worth, Texas, where they revolutionized oil and gas production.

The process is expensive and raises numerous environmental concerns. But drillers say it's the only way to bring oil to the surface in significant quantities.

Black Hills Exploration and Production, a Denver-based firm, is among the first companies to pursue Mancos Shale oil. The company in April drilled a test well for Mancos Shale oil. Results are expected by the end of the year.

"It's our first horizontal well drilled in the Mancos Shale in the San Juan Basin," said Amy Estes, a Black Hills spokeswoman. "Certainly, depending on when the results come in, we may develop further."

ConocoPhillips, which has major operations in the San Juan Basin, also is taking a look.

"We are aware of the potential in the Mancos, and we're in an early evaluation stage," said Jim Lowry, a Houston-based ConocoPhillips spokesman. "But right now we don't have any Mancos development under way."

Likewise, BP said it is evaluating the shale play.

"BP has acreage in a number of shale basins in the U.S., including access to acres in the Mancos play," spokesman Daren Beaudo said. "At this time we are evaluating the potential opportunity there but are not able to speculate further about its potential or our plans going forward."

Sources caution it's not clear that large-scale oil production can be done profitably in the San Juan Basin.

"The jury is still out," said John Byrom, president and CEO of DJ Simmons Inc. in Farmington. "It's a legitimate possibility. The rocks have the potential."

Tucker Bayless of Bayless Drilling Co. said he has heard rumblings about Mancos Shale oil. But, he said, "I also hear it's just as likely to be gas as oil."

Companies look for land

Out-of-state companies looking at drilling for San Juan Basin oil face a major challenge: The land is taken.

For decades as natural gas production surged in the San Juan Basin, companies snapped up leases on nearly every conceivable productive corner of land.

"There is no open acreage here in the San Juan Basin," Riggs said. "In the producing area, you probably couldn't find 40 acres that isn't leased."

That leaves the out-of-state companies interested in the Mancos Shale seeking to make deals with small, local firms such as Merrion Oil & Gas on the assumption that international firms such as ConocoPhillips and BP won't deal away their rights.

Merrion is listening.

"It's too expensive for us to experiment with," Dunn said. "It takes somebody with size to come in and do the science part."

Companies are working to cobble together significant acreage to undertake the work, industry officials said.

Oil prices are driving interest in San Juan Basin oil. While natural gas prices have stagnated, oil remains highly valuable, trading for $93 per barrel on the New York Mercantile Exchange on Friday.

Natural gas, meanwhile, has been trading for less than $5 per million British thermal units, far below levels seen a few years ago. Natural gas production in Northwest New Mexico has declined steadily since 2006.

Oil drilling has helped compensate. Production has increased for three consecutive years, according to state Oil Conservation Division data.

In the San Juan Basin and across the nation, oil and gas firms are retooling their operations to focus on oil.

High oil prices may make expensive operations worth undertaking for large firms. Drilling for oil in the Mancos Shale would require a huge investment, making it necessary for a large firm to take the first plunge into the shale.

"It's a big deal to do one of these wells, and a lot of capital up front," said John Thompson, president of the Independent Petroleum Association of New Mexico. "Somebody's got to go first."

A boom town again?

If drillers find significant oil in the Mancos Shale, it could transform Farmington once again into a boom town.

Communities across the nation from Utah to New York have seen dramatic transformations when shale plays exploded, marked by a rush of jobs coupled with growing environmental concerns.

The Bakken Shale in North Dakota and Montana has been one of the busiest drilling areas in recent years. It boomed after an accidental discovery.

"The Bakken, nobody knew about it until one guy had to drill horizontally under a lake," Thompson said.

An economic boost would be welcome in San Juan County. The steep decline in natural gas production, coupled with low prices, has been felt in a widespread economic slowdown marked by lost jobs, slow retail sales and closed businesses. The county's unemployment rate surged past 9 percent in 2010 before declining to 7.2 percent in April.

While sales tax data suggest retail sales are improving, the recovery is expected to be a slow one. The Mancos Shale may be Farmington's best shot at a dramatic recovery.

"I hope it works," Byrom said. "It would provide a lot more economic development here when our activity is on the decline. If it is successful, it could reverse all that."

Knight Ridder/Tribune Business News
Monday, June 20, 2011

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