Although it will take another year or more to fully assess the value, Rapid City, SD-based Black Hills Corp. is staking a lot of its long-term oil and natural gas value on its Mancos Shale acreage in both the Piceance and San Juan Basins, CEO David Emery said during a 3Q2012 earnings conference call Thursday.

While reporting increased net income for 3Q2012 compared with 3Q2011, Emery said he sees “tremendous upside opportunities” in the Mancos. Black Hills will be working to prove up the full value of the play into 2014, he said.

“In 2013 we will continue to pursue shale opportunities in both the Piceance and San Juan Basins. Combined, our oil and gas properties [in those two basins] have a total potential in excess of 2 Tcf of natural gas, which is more than 16 times our current proven reserves.”

Emery said the estimated potential is based on adding up to 460 wells. For 3Q2012, Black Hills reported strong oil/gas production gains, but they were offset by lower than average natural gas wholesale prices (under $3/Mcf) and higher depletion expenses.

During the third quarter, Black Hills also closed the $227 million sale of its Williston Basin assets in North Dakota, which amounted to about 18% of its overall oil/gas assets, Emery said.

In response to questions from analysts, Emery said the $90-100 million capital expenditures for the Mancos include a strategic program attempting to pinpoint the long-term overall value of the company’s acreage there through a three-part effort.

Starting first in the Piceance and then moving into the San Juan, Black Hills needs to first prove up its acreage, then determine the best well design for hydraulic fracturing (fracking) and horizontal drilling, and finally come to some conclusions about well spacing, Emery said. Ultimately, this will help the company determine whether it develops these assets on its own or brings in partners, he said.

“First we want to drill two or three more wells in each of the Piceance and San Juan, probably starting in the Piceance first because it has the richer gas. Then we need to answer two questions related to productivity, and one of those involves well design. How long the laterals should be and how many fracking stages will need to be determined.

“Hopefully we’ll get a better sense of what the optimum well design is, and finally what the optimum spacing is [160, 80 or 40 acres]. We know we have the potential to drill as closely as 40 acres apart. Until we get these three things done, we won’t know the true potential of what we have.”

Emery thinks it will take into part of 2014 to get “adequate answers,” and then Black Hills will look at its options –“keep it all ourselves, bring in partners, or sell a portion of it.”