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San Juan Production Still Gaining Ground

San Juan Production Still Gaining Ground

The longevity of the San Juan Basin never ceases to amaze most industry observers. Like the Denver Broncos' John Elway, the western producing basin in New Mexico and Colorado just seems to keep coming back each year to produce even more despite its age and the endless predictions of its degeneration by its critics.

Will the San Juan do it again in 1999? Probably so, say several experts eyeing developments there. But producers cannot prevent the inevitable from happening much longer, they warn.

George Lippman, who heads his own consulting firm based in El Paso and has studied the basin for 30 years, estimates slightly more than 4 Bcf/d of gas came out of the San Juan in 1998, up from 3.9 Bcf/d the year prior, 3.8 Bcf/d in 1996 and about 1.1 Bcf/d in 1988 just before coal-seam gas kicked in in a big way.

"I think we're getting close to the top, but I think currently production is still climbing," he said. "Coal-seam gas has started to decline in the fairway, but that is being offset by increased production from conventional wells in response to El Paso's Global Compression Project, in which they lowered line pressures on the conventional side last year. It was completed late last summer, but I think we're only just seeing the full impact of it. The conventional production has been [increasing] the last few months."

El Paso's Global Compression Project consisted of adding about 40,000 horsepower of compression, new gas dehydration facilities and 54 miles of pipeline looping placed strategically throughout the basin. It represented a $50 million capital investment designed to extend the productive life of the San Juan basin by lowering pressures on 70% of the wells. And it is partly responsible for somewhat of an exploration revival.

"Everybody keeps saying next year, next year, next year it's going to go down, but every year we've seen it continue to creep up," said Bob Cavnar, senior vice president and COO of El Paso Field Services. "With the Global Compression in the fall we've seen a marked increase in throughput." Cavnar said there has been a 125,000 MMBtu/d increase on El Paso's gathering system in the basin since the start of the Global Compression Project last September and he expects production to continue rising. "All the producers, especially the major producers, are continuing very strong drilling programs in that area because we're able to move more gas. And I expect to see some more improvement as we debottleneck more of the system. We still have a few pressure issues we're working on now."

A big question now, however, is whether the producers can continue to weather the storm in the commodity markets. In addition to decline rates in the basin, a major factor influencing production right now is the amount of capital available for E&ampP expenditures. Oil prices have hit 20-year lows, but gas prices also have declined significantly, down 46 cents/MMBtu on average last year in the San Juan from 1997 levels and still falling.

"Overall, funds are down right now, but I think there's still confidence in the basin," Lippman said.

Burlington Resources spokesman John Carrara said his company, which is one of the top three producers in the San Juan, has not cut back spending in the San Juan because of low commodity prices. "The cost structure is slightly lower out there than it is in many other producing basins in the United States. It's a very important piece of our business. It's half of our production."

Carrara said Burlington plans to drill about 400 wells over the next five years in the San Juan and expects to maintain its production levels of about 850 MMcf/d. "We think we're good for another five years."

One promising recent event is an order by the New Mexico Oil and Gas Conservation Commission approving another round of in-fill drilling in the Mesa Verde formation, the most productive formation on the conventional side in the San Juan. The order allows four wells rather than two to be drilled on 320-acre parcels of land. "They will go to 80 acre [well] spacing. In 1974, they approved in-filling going down to 160 acres and now here they are 25 years later going down even more. We're talking another 7,000 future drilling locations that would be opened up," said Lippman.

"In terms of drilling activity we're going great guns right now," said Ernie Bush of the New Mexico Oil &amp Gas Conservation Commission. "Things are really looking up for us as far as the number of rigs operating.

"But I think the jury is still out [on the potential impact] of this [well spacing] order because this is going to be a burden on the Bureau of Land Management to manage locations. I know the operators are very excited about getting after it and increasing the well count. But it's still going to be on a case-by-case basis."

Kevin Smith, a scout for HIS Energy Group, which keeps a close watch on drilling activity throughout the Rockies, said the word on the street is 1999 is going to be another good year for the San Juan. "Drilling remains steady [on the New Mexico side of the San Juan], which is a rarity in this day and age because of the dropping oil prices and the dropping gas prices," Smith noted. "Permits for January were up. There were 114 new drilling locations and workovers (up from only 97 at the same time last year), which was the second highest in the Rocky Mountain region behind Wyoming, which is riding the Powder River Basin.

"On the Colorado side, it's kind of precarious with the Southern Ute situation. A lot of people are sitting on their hands because of that," he said. The Southern Ute-Amoco decision by the 10th Circuit U.S. Court of Appeals last July stalled coal-bed methane E&ampP activity throughout the Rockies because it shifted ownership of the coal-bed methane to the coal owners - in the case it was the Southern Utes and the federal government - from the landowners. Federal legislation passed last October grandfathered all existing leases, but it didn't affect the San Juan leases involved in the Southern Ute case. In fact all Indian lands were exempted from its impact. Amoco took the case to the Supreme Court, which has agreed to hear it and probably will make a decision on it this summer. But if it decides not to reverse the lower court decision, ownership of coal-bed gas produced on Indian lands will be changed for good, and development may be stalled indefinitely. The case impacts gas produced from coal on about 200,000 acres in the San Juan Basin of Colorado. Amoco said about 300 of the 600 wells it operates in the basin are impacted.

"The largest single impediment to in-fill development in the Colorado part of the basin is the ownership issue [triggered by the Amoco-Southern Ute case]," Rich Griebling, director of the Colorado Oil and Gas Conservation Commission, agreed. "If they were to lose that case, I think it throws into question a lot of wells and certainly slows down development.

"There's a lot of potential for stemming the projected decline on the Colorado side of the basin. It's my sense that if in-fill development were to proceed without the ownership issue limiting it, then you wouldn't see a decline for several years." Griebling said there are at least 750 potential locations for in-fill drilling on the Colorado side, most of them on federal or Indian lands.

"If you look at production from the [Colorado] area, it's pushing 1 Bcf/d and has been increasing every year for the last 10 years. You need a settlement and you need BP Amoco to make it a corporate priority to proceed with exploitation of those properties," said Griebling.

Burlington's Carrara said despite the uncertainties the outlook for the basin is still very bright. In the mid-80s, the Fruitland coals, which since have yielded tremendous amounts of gas, were seen as a nuisance by San Juan producers trying to exploit the Mesa Verde formation, the Dakota and other conventional plays.

"It took somebody taking a chance, it took some technology and innovation to make the Fruitland coal-bed methane make sense to produce. We still have the possibility of doing in-fill drilling in the Mesa Verde and possibly other formations," Carrara noted. "We also have the possibility of doing something with the source-rock shales out there. And then there are some exploration possibilities in the deep Pennsylvanian, which is the deepest formation out there. Not much has been done in that either.

"You may not see the amount of growth in production that you've seen in the San Juan Basin in the past, but the basin still has a bright future."

Rocco Canonica

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