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

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

George Lippman, who heads his own consulting firm based in ElPaso and has studied the basin for 30 years, estimates slightlymore than 4 Bcf/d of gas came out of the San Juan in 1998, up from3.9 Bcf/d the year prior, 3.8 Bcf/d in 1996 and about 1.1 Bcf/d in1988 just before coal-seam gas kicked in in a big way.

“I think we’re getting close to the top, but I think currentlyproduction is still climbing,” he said. “Coal-seam gas has startedto decline in the fairway, but that is being offset by increasedproduction from conventional wells in response to El Paso’s GlobalCompression Project, in which they lowered line pressures on theconventional side last year. It was completed late last summer, butI think we’re only just seeing the full impact of it. Theconventional production has been [increasing] the last few months.”

El Paso’s Global Compression Project consisted of adding about40,000 horsepower of compression, new gas dehydration facilitiesand 54 miles of pipeline looping placed strategically throughoutthe basin. It represented a $50 million capital investment designedto extend the productive life of the San Juan basin by loweringpressures on 70% of the wells. And it is partly responsible forsomewhat of an exploration revival.

“Everybody keeps saying next year, next year, next year it’sgoing to go down, but every year we’ve seen it continue to creepup,” said Bob Cavnar, senior vice president and COO of El PasoField Services. “With the Global Compression in the fall we’ve seena marked increase in throughput.” Cavnar said there has been a125,000 MMBtu/d increase on El Paso’s gathering system in the basinsince the start of the Global Compression Project last Septemberand he expects production to continue rising. “All the producers,especially the major producers, are continuing very strong drillingprograms in that area because we’re able to move more gas. And Iexpect to see some more improvement as we debottleneck more of thesystem. We still have a few pressure issues we’re working on now.”

A big question now, however, is whether the producers cancontinue to weather the storm in the commodity markets. In additionto decline rates in the basin, a major factor influencingproduction right now is the amount of capital available for E&ampPexpenditures. Oil prices have hit 20-year lows, but gas prices alsohave declined significantly, down 46 cents/MMBtu on average lastyear in the San Juan from 1997 levels and still falling.

“Overall, funds are down right now, but I think there’s stillconfidence 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 notcut back spending in the San Juan because of low commodity prices.”The cost structure is slightly lower out there than it is in manyother producing basins in the United States. It’s a very importantpiece of our business. It’s half of our production.”

Carrara said Burlington plans to drill about 400 wells over thenext five years in the San Juan and expects to maintain itsproduction levels of about 850 MMcf/d. “We think we’re good foranother five years.”

One promising recent event is an order by the New Mexico Oil andGas Conservation Commission approving another round of in-filldrilling in the Mesa Verde formation, the most productive formationon the conventional side in the San Juan. The order allows fourwells rather than two to be drilled on 320-acre parcels of land.”They will go to 80 acre [well] spacing. In 1974, they approvedin-filling going down to 160 acres and now here they are 25 yearslater going down even more. We’re talking another 7,000 futuredrilling locations that would be opened up,” said Lippman.

“In terms of drilling activity we’re going great guns rightnow,” said Ernie Bush of the New Mexico Oil &amp Gas ConservationCommission. “Things are really looking up for us as far as thenumber of rigs operating.

“But I think the jury is still out [on the potential impact] ofthis [well spacing] order because this is going to be a burden onthe Bureau of Land Management to manage locations. I know theoperators are very excited about getting after it and increasingthe well count. But it’s still going to be on a case-by-casebasis.”

Kevin Smith, a scout for HIS Energy Group, which keeps a closewatch on drilling activity throughout the Rockies, said the word onthe street is 1999 is going to be another good year for the SanJuan. “Drilling remains steady [on the New Mexico side of the SanJuan], which is a rarity in this day and age because of thedropping oil prices and the dropping gas prices,” Smith noted.”Permits for January were up. There were 114 new drilling locationsand workovers (up from only 97 at the same time last year), whichwas 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 SouthernUte situation. A lot of people are sitting on their hands becauseof that,” he said. The Southern Ute-Amoco decision by the 10thCircuit U.S. Court of Appeals last July stalled coal-bed methaneE&ampP activity throughout the Rockies because it shifted ownershipof the coal-bed methane to the coal owners – in the case it was theSouthern Utes and the federal government – from the landowners.Federal legislation passed last October grandfathered all existingleases, but it didn’t affect the San Juan leases involved in theSouthern Ute case. In fact all Indian lands were exempted from itsimpact. Amoco took the case to the Supreme Court, which has agreedto hear it and probably will make a decision on it this summer. Butif it decides not to reverse the lower court decision, ownership ofcoal-bed gas produced on Indian lands will be changed for good, anddevelopment may be stalled indefinitely. The case impacts gasproduced from coal on about 200,000 acres in the San Juan Basin ofColorado. Amoco said about 300 of the 600 wells it operates in thebasin are impacted.

“The largest single impediment to in-fill development in theColorado part of the basin is the ownership issue [triggered by theAmoco-Southern Ute case],” Rich Griebling, director of the ColoradoOil and Gas Conservation Commission, agreed. “If they were to losethat case, I think it throws into question a lot of wells andcertainly slows down development.

“There’s a lot of potential for stemming the projected declineon the Colorado side of the basin. It’s my sense that if in-filldevelopment were to proceed without the ownership issue limitingit, then you wouldn’t see a decline for several years.” Grieblingsaid there are at least 750 potential locations for in-filldrilling on the Colorado side, most of them on federal or Indianlands.

“If you look at production from the [Colorado] area, it’spushing 1 Bcf/d and has been increasing every year for the last 10years. You need a settlement and you need BP Amoco to make it acorporate priority to proceed with exploitation of thoseproperties,” said Griebling.

Burlington’s Carrara said despite the uncertainties the outlookfor the basin is still very bright. In the mid-80s, the Fruitlandcoals, which since have yielded tremendous amounts of gas, wereseen as a nuisance by San Juan producers trying to exploit the MesaVerde formation, the Dakota and other conventional plays.

“It took somebody taking a chance, it took some technology andinnovation to make the Fruitland coal-bed methane make sense toproduce. We still have the possibility of doing in-fill drilling inthe Mesa Verde and possibly other formations,” Carrara noted. “Wealso have the possibility of doing something with the source-rockshales out there. And then there are some exploration possibilitiesin the deep Pennsylvanian, which is the deepest formation outthere. Not much has been done in that either.

“You may not see the amount of growth in production that you’veseen in the San Juan Basin in the past, but the basin still has abright future.”

Rocco Canonica

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