In August, citizens of the New Mexico town of Hobbs will celebrate the opening of Murray Elementary School, a 53,000-square-foot facility with expected enrollment of more than 450 students. Four years ago, they opened a new Freshman High School. Their high school football stadium seats 13,200, the largest of its kind in the state, and may undergo a $15 million renovation that will include luxury suites.

These are ambitious, expensive projects for a population of around 36,000, but Hobbs—where unemployment is a mere 3.2%—is located in Lea County, birthplace of New Mexico’s Permian Basin oil and gas business. Lea County and neighboring Eddy County are home to its recent renewal.

In fiscal 2013, Hobbs Municipal Schools received more than $56 million in state funding, 31.5% of which, or $17.65 million, was derived by revenues attributed to the oil and gas industry. In total, oil and gas accounted for about $1.7 billion of the state’s $5.59 billion budget that year. Early figures from the New Mexico Oil & Gas Association for fiscal 2014 elevate that percentage to 35%.

By comparison, oil and gas revenue accounts for about 13% of Louisiana’s state budget.

“With oil and gas prices being down, that percentage will likely be lower in the fiscal year we’re in now, but we’ve gone back eight years and it’s certainly going to be in the mid- to high 20s in the worst of circumstances,” Wally Drangmeister, vice president and director of communications for the association, told Midstream Business. “It’s extremely important to all aspects of state government here in New Mexico.”

The New Mexico portion of the Permian’s oil and gas industry sustains 94,000 jobs, generates $22.7 billion in economic output and contributes $10.2 billion to the gross state product of the state, according to a 2014 study by Texas Tech University in Lubbock.

But given the state’s reliance on energy for its coffers, members of the oil and gas community wouldn’t mind a friendlier atmosphere in which to work.

“It is a tremendous challenge for any company to operate in New Mexico compared with stepping straight over the state line into Texas,” Larry Risley, former president and COO of New Mexico-focused producer Cross Borders Resources Inc., told Midstream Business. “It’s night and day. It just continues to amaze me the grit that many of the companies have that continue to operate in New Mexico under the circumstances that are found there.”

Disenchanted

Drangmeister doesn’t dispute that challenges exist in the land of enchantment.

“The biggest difference [between Texas Permian and New Mexico Permian] is the amount of production and issues related to dealing with the [federal] Bureau of Land Management [BLM] on federal acreage,” he said. “Around 50% of oil and gas production in New Mexico comes on federal land, so it is an issue dealing with the Bureau of Land Management [BLM]. There’s been some frustration with the resources that are available to process rights of way and drilling permits and the like. There are a lot of rules in place.”

Unconventional production bolstered annual crude oil production in New Mexico by 70.3% to over 100 million barrels (bbl) between 2007 and 2013, the U.S. Energy Information Administration reported.

The swiftness of the ramp-up overwhelmed the midstream system’s ability to respond.

“What you’re finding at this point is that the pace of development, particularly as it occurred last year, was virtually straining everyone’s facilities,” Raye Miller, president of Artesia, N.M.-based Regeneration Energy Corp., told Midstream Business. “Every gas plant was full. New plants were being constructed and virtually as soon as they were online and operational, they were being filled with gas.

“A good portion of our lands are owned by the State of New Mexico and the United States government, administered by the BLM,” Miller said. “Rights of way for gathering lines and connections have just been dreadfully slow. It winds up being a thing where in most cases, those rights of way will actually allow gas that has been flared to be processed and sold, so it becomes environmentally advantageous. You’d think that the BLM would be stressing to their folks to get those rights of way processed as quickly as possible to reduce the amount of emissions into the environment through flaring and all, but that certainly doesn’t seem to be the priority and this administration doesn’t seem to, well, I don’t think they’re enamored with any fossil fuel.”

Midstream scramble

Miller admits that the New Mexico Permian does not compare in flaring issues with relatively new plays like the North Dakota Bakken, where the sudden emergence of oil and gas has caused major concerns because infrastructure cannot be built quickly enough to accommodate it. New Mexico, by contrast, dates its oil history back to the first flow from the Midwest State No. 1 well in Hobbs on June 13, 1928.

“We have had better luck with the need to flare compared to other places because, while the Permian Basin certainly has decades if not centuries of future development potential, it’s not a frontier area,” Drangmeister said. “There’s quite a bit of gas gathering and processing infrastructure in place. The challenge is always to get the next well hooked up with right of way and easement and other agreements. It’s probably not been as much of an issue in terms of the duration of flares that maybe it has been in other parts of the country.”

But the limitations are enough of a problem to cause economic concerns, Risley said.

“You would have a wonderful oil well and you would have the issue with the associated gas,” he said. “We found ourselves in more than one situation where our operator had to shut in our well because there was not the pipeline capacity to take away the gas.

“From the standpoint of risk and well economics, you’re always concerned that your well may not come back completely, since you’re shutting your well in, and that’s always an issue for an operator,” Risley said. Many wells are now horizontal, offering the promise for high-volume flowback, high cash flow with quick return on investment and in a large program often disturb less surface area.

“That’s helpful, but it brings up considerable volumes of oil and gas and it just exacerbates the situation with putting in facilities. These service companies are doing their best to put in gas pipelines, etc., but they have quite a challenge to stay up with the activity,” he added.

More challenges

With the exception of Yates Petroleum Corp., most of the major operators in New Mexico are based out of state. The top gas producer is Houston-based ConocoPhillips Co., with 2013 production of 417 billion cubic feet (Bcf) that roughly equaled output of the next seven producers. The company operates mostly in northwestern New Mexico’s San Juan Basin, but maintains more than 1,100 wells in southeast New Mexico and paid more than $17 million in production taxes in the Permian region.

The state’s top oil producer and No. 2 gas producer in 2013 was Midland, Texas-based Concho Resources Inc., which concentrates its efforts in the New Mexico Shelf area of the Permian. The Shelf is a narrow crescent, just north of the Delaware Basin and mostly in Eddy County. Concho began drilling vertical wells targeting the Shelf ’s Yeso formation in 2006 and started horizontal drilling in 2012.

Occidental Petroleum Co.’s Centurion Pipeline subsidiary boasts 2,900 miles of oil gathering and common carrier pipelines from southeast New Mexico to the Cushing, Okla., hub. The system’s throughput capacity is 400,000 bbl with storage capacity of 5.8 million bbl. Oxy ranked No. 13 among the state’s gas producers with 24.8 Bcf in 2013 and No. 2 among oil producers with nearly 8 million bbl of output.

Yates, based in a glass-and-stone headquarters in Artesia, in Eddy County, traces its history to the Illinois State No. 3 well, which struck oil at 1,947 feet early in the last century. It was the first well discovered on state land and the site was chosen on pure intuition by Mary Yates, wife of the company’s founder, who accompanied a three-man team to the field in a Model T. Yates ranks No. 10 among both oil and gas producers, with 2013 output of 3.7 million bbl and just under 31 Bcf.

Promising horizon

Unconventional production has reinvigorated New Mexico’s energy business and its economy, but it’s not a shale revolution.

“There’s the Avalon Shale section in the Bone Spring formation that has seen some development and that’s truly a shale play,” Miller said, “but the majority of activity that’s currently going on in Eddy and Lea counties in the horizontal work is actually in Bone Spring and primarily in traditional sand sections.”

And the Permian is a choice area to operate because of the rock, which mostly consists of medium- to very finegrained clastics, gypsum and carbonates.

“The good thing about that part of the world, which is similar to the Texas side of the Permian Basin, is that you have the potential for multiple stacked pays—you have many opportunities to make a well,” Risley said. “I’ve worked in other basins, where you’ll get down to 10,000 feet and you’ll still have one or two targets that you’re drilling the well for. The Permian Basin in general can be forgiving. You can miss a target and have something up the hole to back into. You may not get your full investment back, but for something that you set pipe on, there’s a chance that you may be able to break even. That’s very attractive. Obviously, there’s money to be made in New Mexico or companies wouldn’t continue to put their capital at risk there.”

The rig count decline in the state has mirrored the fall-off in the Permian Basin as a whole, according to Baker Hughes Inc. statistics. New Mexico’s total of 102 at the end of 2014 had tumbled to 68 by the end of February and the basin’s count of 536 was down to 355.

Drilling dropoff

“In general, the number of drilling rigs held on an amazingly long time largely through the end of 2014,” Drangmeister said. “We certainly don’t expect it to dry up completely. There are many different companies that were doing a great amount of drilling and development many years ago when the price of oil was similar to what it is now. We are starting to see a reduction in drilling of some wells that are not in the midst of wellknown formations.

“The risk is just too high,” he said. “You can’t bet on the fact that prices will go up. Many producers in New Mexico are producing in areas where they know a lot about the formations, it’s a very logical next step in the wells they’re drilling. Their risk is relatively low.”

And despite its long-time contribution to the state’s economy, the energy industry faces particularly stiff pushback from an environmentalist movement with a stronghold in the state capital of Santa Fe.

“Santa Fe tends to be one of those places—like Boulder, Colo., and Berkeley, Calif.—there’s a different vibe here in this community,” Drangmeister said. “They’re not necessarily fully knowledgeable of what happens in the industrial process, much less oil and gas development, and Santa Fe’s the home of the anti-advocacy industry in the state.”

Every producing area has its own set of business challenges. It’s not unique, but it can be frustrating to those trying to be responsible corporate citizens as they produce energy.

In certain areas of New Mexico, “It’s a not-in-my-backyard type of viewpoint,” Risley said. “We’ve seen it elsewhere in the country so it’s not new by any means, but even California, with its tremendous regulations and such, has been able to partner with the industry and continue to develop its resources. Significant partnering to help resolve issues certainly is ongoing in New Mexico among government-related agencies, citizens of the state and operators. However, with these business headwinds, New Mexico appears to fall short in its capability to attract increased investment.”

And yet, the outlook is promising.

'Spikes and lulls’

“Obviously, commodity price fluctuations cause spikes and lulls in activity levels,” Miller said. “With prices in the $40s and $50s for crude oil, the rig count drops substantially. But the future for the New Mexico side of the Permian is just absolutely outstanding as commodity prices recover. We couldn’t be happier.”

Persistence in the Permian extends beyond the drilling fields to the battles with bureaucrats and accommodations with lizards and chickens. But the rewards are rich as well.

In Eddy County, oil and gas operations valued at more than $5.5 billion lifted government budgets by more than $1.1 billion.

Challenges aside, New Mexico can be a profitable place for oil and gas.

Joseph Markman can be reached at jmarkman@hartenergy.com or 713-260-5208.

Which Came First, The Chicken Or The Permit?

Joseph Markman, Associate Editor


A male lesser prairie chicken seeks a mate in the grasses of eastern New Mexico. Federal regulations curtail oil and gas development in protected areas during the species’ mating season. Source: USDA Natural Resources Conservation Service

Before the sun rises over an abandoned oil and gas drilling pad in southeast New Mexico, male lesser prairie chickens strut, looking for some action.

The courting ritual of this species for a desired hen involves, as described on the U.S. Department of Agriculture website, a deep bow, raising of neck feathers and a dance in which rapid foot stampings are performed in short bursts. Between dances, the males gobble and emit a laughing cackle that can be heard up to a mile away.

It’s a workable process, especially if you’re a lesser prairie chicken.

Not so much if you’re a producer seeking to extract hydrocarbons within the chickens’ habitat, which takes up much of eastern New Mexico and all of the Permian Basin oil and gas areas of Lea and Eddy counties. The species is designated as threatened by the U.S. Fish and Wildlife Service, and its presence in that area limits drilling, fracking and production.

“[The U.S. Bureau of Land Management (BLM) doesn’t] allow us to drill in the spring when the chickens might be mating,” Raye Miller, president of Regeneration Energy Corp., told Midstream Business. “So from March 1 to June 15, we’re not allowed to drill in those areas. If you’re utilizing a pulling unit, workover rig or other piece of machinery, the engines are not allowed to be fired for those pieces of equipment until 9 a.m. so the chickens have the early morning quiet to squawk and yell at one another.”

Another potential challenge to oil and gas activity is the habitat of the dunes sagebrush lizard, a species that lost 1 million acres of habitat to energy operations and cattle grazing. The lizard is not listed as threatened, but the process of making that decision has been challenged by a former Fish and Wildlife Service official based in Texas who claims he was forced out of his job as a result, the Houston Chronicle reported.

For now, the lesser prairie chickens’ family planning is a matter of strategic planning for producers.

“If you can’t drill in March, you basically need to have spudded your well by Jan. 1 so that you’re for sure out of there,” Miller said. “If you have a problem with a rig on a particular hole, the BLM does not want to grant exceptions that allow you to be out there past the first of March.”

Drilling scheduling issues come with the (mating) territory, but what if the chickens don’t show?

“The number of prairie chickens in Eddy County, N.M., is just virtually nil,” Miller said. “If there are no chickens to hear the noise, what difference does the noise make? But there have been sightings at various times over the years, so if there is the possibility of a group of chickens being in an area, then the restrictions are applied even if there is no clear evidence the chickens are in the area actively at this point.

“It makes it very difficult.”

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