Laying in Wait: San Juan’s ‘Remarkable’ Mancos Shale Oil Wells

Billions of investment dollars are pouring into the Permian Basin in southeastern New Mexico where a frenzied land grab is underway. The same can’t be said about the San Juan Basin, far away in the state’s northwestern corner.

The San Juan Basin, known mostly as a natural gas play, has languished in recent years as drilling activity stalled and some of the basin’s largest and oldest producers exited.

Major companies ConocoPhillips, BP, Encana Oil & Gas (now Ovintiv) and WPX packed up and left the basin at the end of the 2010s, prioritizing their investments in higher-return locations such as the Permian.

A flurry of private capital filled the void left in their wake: Companies like DJR Operating and Enduring Resources are bringing online strong, liquids-rich production and delineating untapped areas of the San Juan Basin.

LOGOS Resources, a long-time San Juan operator, continues to be active under new ownership by private equity firm North Hudson Resource Partners.

Private E&P Hilcorp is one of the basin’s top gas producers after acquiring legacy San Juan assets from ConocoPhillips in 2017.

In 2020, BP sold its San Juan natural gas assets to Germany-based investment group IKAV.

Nevertheless, the San Juan Basin and the Four Corners region are living under the oversized shadow of the prolific Permian Basin. Other basins in the Rockies—Wyoming’s Powder River Basin and Utah’s Uinta Basin—are even garnering greater investment dollars.

But experts say the tailwinds of new drilling activity and oil and gas production growth will eventually gust across the San Juan, as top-tier basins mature and decline.

“We expect to see a resurgence in production in the late 2030s into the 2040s,” said Josh Dixon, senior research analyst at Wood Mackenzie.

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Mancos oil, Gallup play

Lack of activity in the San Juan Basin can be attributed in part to instability in natural gas prices.

“Historically, it has been known as a natural gas basin,” said Ryan Hill, principal analyst at Enverus Intelligence Research, “and I still think, quite frankly, a lot of people view it in that light.”

However, data shows the bulk of new horizontal drilling activity around the San Juan since 2020 has focused on the Gallup oil window and Mancos Shale.

It’s a small subset of the overall San Juan, to the south-southwest side of the basin.

DJR Operating and Enduring Resources are the two leading players developing the San Juan’s oil window—and they’re drilling wells with some “remarkable” results, Hill said.

Remarkable, he said, because Enverus is screening some of the Gallup oil wells at breakeven costs at less than $40/bbl, which is “extremely competitive.”

DJR Operating produced an average of approximately 13,143 bbl/d of oil and liquids during 2023, according to data from the New Mexico Oil Conservation Division.

DJR acquired San Juan assets from Encana Corp., now Ovintiv Inc., for $480 million in 2018.

Enduring Resources produced an average of around 11,985 bbl/d over the same period. Enduring picked up WPX’s San Juan assets for $700 million in 2018.

But it was EOG Resources’ perceived interest in the play that piqued the interest of analysts and operators.

EOG, well-respected across the industry as one of the few exploratory upstream producers, picked up more than 100 drilling permits and drilled two wells in the area in 2021 and 2022, state data show.

EOG later plugged and abandoned those two wells in April and May of 2023; the permits the company picked up have also since expired, Hill said.

“They’ve kind of walked away,” he said.

Based on early production results, EOG’s wells weren’t producing at the same level DJR was achieving with its wells, according to Enverus data.

It just wasn’t the kind of prodigious output that would justify entry into a new emerging play for an operator like EOG, Dixon said.

“DJR is, from our perspective, the number one operator and getting the most prolific results in the basin,” Hill said, “and EOG was definitely below that.”

EOG’s about-face from the San Juan Basin stands in stark contrast to the investment dollars the company is pouring into areas such as the Ohio Utica Shale or the Dorado gas field, near the Texas-Mexico border.

Location might have played a factor: EOG’s Gallup wells were toward the southeast of the play. DJR and Enduring have both been pushing in the opposite direction, toward the oil window to the northwest, Hill said.

But one of the biggest limitations for Mancos Shale oil and the Gallup oil window is its small size.

The Gallup oil window is a small play, maybe tens of wells wide by Enverus’ calculations. It’s not a massive, multi-stacked formation resource play like the Delaware or Midland basins in the Permian.

The Mancos Shale also has a significant amount of variability across the oily and gassy windows of the San Juan, Dixon said.

There are significant challenges to unlocking the San Juan’s oil window, but the prize of low-cost inventory might be worth the effort.

The pile of remaining quality oil inventory isn’t large, and it shrinks by the day as consolidation continues to sweep across Lower 48 resource plays.

The Permian has attracted the bulk of the dealmaking, with giants like Pioneer Natural Resources recently buttoned up by Exxon Mobil while Endeavor Energy Resources is in the process of being acquired by Diamondback Energy.

ConocoPhillips’ pending acquisition of Marathon Oil will combine their portfolios across the Eagle Ford Shale, the Bakken, the Permian and the Midcontinent.

With fewer M&A opportunities left in nooks and crannies around the major basins, inventory-hungry operators shouldn’t overlook the San Juan Basin, Hill said.

“If you have a smaller play that’s offering [$40/bbl] breakevens, these companies should absolutely be looking at that to backstop their inventory positions,” he said.

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