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&P
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 & 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
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&P 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
"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