Southeastern New Mexico

Multiple plays make southeastern New Mexico an attractive place to drill. But to protect the Lesser Prairie Chicken, drilling is banned between March 15 and June 15 each year.

?Southeastern New Mexico’s portion of the Permian Basin, centered in Lea, Eddy, Chaves and Roosevelt counties, makes some 33% of the state’s gas output and 95% of its oil production. Oil and gas tax revenues comprise some 30% of the state’s budget. Yet, operators in this corner of the state face a few obstacles.

In the past, major oil companies produced most of the oil and gas in New Mexico, but in recent years, smaller independents like Artesia, New Mexico-based Marbob Energy Corp. have overtaken them.

“New Mexico’s Permian Basin has been productive for over 80 years,” says Raye Miller, secretary and treasurer of closely held Marbob. Miller is also chairman of the New Mexico Oil and Gas Association (NMOGA), advisory council member for New Mexico’s Bureau of Land Management, chairman of the New Mexico State Land Office’s Advisory Board and a city councilman in Artesia.

Multiple plays make southeastern New Mexico an attractive place to drill. But to protect the Lesser Prairie Chicken, drilling is banned between March 15 and June 15 each year.

“Every time we think we have exhausted all of the ideas, new ideas and new projects are found. We believe that, if oil and gas is a viable commodity 100 years from now, there will still be oil and gas production in Southeast New Mexico,” says Miller.

Some areas have recently seen an increase in leasing activity, he says. For example, in northern Eddy County, the Abo-Wolfcamp horizontal oil play is being leased by Cimarex Energy Co., Concho Resources Inc. and several other producers.

“Cimarex has been drilling both shallow and deep gas wells with a very aggressive capital budget. They have about 17 rigs contracted in the Permian Basin. Also there are the more traditional producers there, like Devon Energy Corp., but they are not as active as Concho and Cimarex,” says Miller.

In fact, Midland, Texas-based Concho, one of the most active players in the area, recently announced plans to acquire privately held, Midland, Texas-based Henry Petroleum for $565 million in cash, partly to capture Henry’s southeastern New Mexico assets.

In southern Eddy County, leasing activity is picking up. EOG Resources drilled some Barnett shale wells just across the state line. Chesapeake Energy Corp. acquired EOG’s interest in the project and drilled some more.

“Apache (Corp.) also has some shallow developments in Lea County. T­­­­he Permian Basin continues to encourage development due to its multi-stacked pay zones,” says Miller.

Land regulation
Access to public lands has been an issue here for years. New Mexico owns 31% of Lea County, for example. That is a problem because the state administration “appears to be less than oil and gas friendly,” Miller says.

The New Mexico Oil Conservation Division (OCD), which regulates oil and gas activity, gathers data and issues permits, among other duties, has undertaken a series of rule-making initiatives during the past several years that have changed the playing field here.

On May 9, the OCD signed the final version of its oil and gas waste-pit rule. As a result, most drilling operators are now turning to the more expensive closed-loop system. The system uses above-ground tanks to manage drilling or workover fluids without the use of excavated surface impoundments or temporary pits.

“Our company used to have a drilling pit on each location. Since December 2007, all of our rigs are running closed-loop systems,” says Miller. “That’s the most economically sound decision because under the new regulations, the liability and cost of closing a pit is much greater.”

Additional restrictions also exist on federal lands in some parts of southeastern New Mexico. A drilling ban from March 15 to June 15 is in place to protect the Lesser Prairie Chicken, an upland, grassland-nesting bird present in Eddy, Chaves and Lea counties.

“Basically, if a driller hasn’t spudded his well by February 1, he can’t get it drilled in early March, so effectively his shutdown period is from February 1 to June 15,” says Miller. There are also other endangered-species issues, such as involving the Sand Dune lizard, where producers must work with Bureau of Land Management (BLM) staff biologists for approval of each drilling location.

Operators like Marbob are attempting to increase production in spite of such new regulations. While the company, focused in Eddy and Lea counties, saw a slight decline in its production rate last year, production this year has picked up. “We are running five drilling rigs and eight pulling units. We are also making an effort this year to replace more reserves than we produce,” Miller says.

Fortunately, plenty of rigs are available for producers and pipeline capacity is keeping up. Occasionally it may be difficult to acquire steel for casing, but area producers find their greatest struggles when “trying to jump some of the regulatory hurdles,” according to Bob Gallagher, president, NMOGA.

“With oil prices sustained at high levels for longer than any on record, there are a lot of new wells being drilled. New Mexico is now the sixth-largest producer of U.S. crude oil. Operators are very busy ramping up both new and enhanced oil production projects,” he says.
“Before we knew the final open-pit rules, there were a lot of projects that slowed down or were put on hold.”

In fact, a few drillers moved rigs from New Mexico to other states because they were unsure of what the new pit rule would contain. “We are starting to see those come back since the pit rule has been adopted and it is not a jump-off-a-40-story-building type of rule. I think we have worked out a compromise that is doable,” he says.

“We are seeing the investment come back and a number of rigs come back.” In June, the weekly average rig count increased to 76 from 68 in January.

Potash industry
Another stumbling block for the area is the land dispute with local potash miners. Potash, or carbonate of potash, is an impure form of potassium carbonate used in manufacturing glass and soap and as a fertilizer.

“There has been a long, drawn-out legal battle between the energy industry and the potash industry,” Gallagher says. “The fight is over how many acres have been designated as off-limits to E&Ps.”

Gallagher believes the potash industry’s acreage for mining is too widely drawn. Oil and gas producers want a compromise, especially involving areas known to be hydrocarbon-producing fields.

The Morrow formation gas play, in the Delaware Basin region, has recently received considerable industry attention for its significant future resource potential, but has been hampered by government regulations protecting potash resources.

During the past 70 years, the federal Interior Department has set aside 777 square miles of southeastern New Mexico, referred to as the Secretary of the Interior’s Potash Area (SPA), to preserve potash resources. Oil and gas drilling are severely limited within the SPA, and leases are managed by the BLM.

Some operators, aided by 3-D seismic, have drilled a few directional wells to target Morrow reservoirs while avoiding potash resources near the boundaries of the protected area. Others used horizontal wells to develop the nearby shallower Brushy Canyon formation.

Otero County
Another area blocked from drilling is Otero Mesa, a roughly 2-million-acre section of public land that covers Otero and Sierra counties. Overall, the regulatory environment in New Mexico has been hostile, says Gallagher. “But we believe the BLM will be in a position to offer some leases on Otero Mesa in the latter part of this year,” he adds.

George Yates, president and chief executive of private, family-owned Heyco Energy Group, which discovered and operates the only producing field in Otero Mesa, the Bennett Ranch Unit (located on federal land), disagrees. “Otero is dead as a doornail,” due to regulatory restrictions, he says. Yates’ Bennett Ranch partners are Rudman Partnership, based in Dallas, and ConocoPhillips.

Roswell, New Mexico-based Heyco operates in southeastern New Mexico under a joint venture called Nadel & Gussman Heyco. In addition, the E&P has an active nonoperated drilling program in East Texas through subsidiaries, Rosetta Energy Partners and Heyco Development Co. It also owns Heyco International, focused on northern Spain, onshore U.K. and Morocco.

“The main issue in Southeast New Mexico is that while the geology has sustained us through several generations, and will continue to do so, thanks to the use of improved technology, we have governance that impedes progress,” Yates says. “The industry cannot live up to its potential. That’s very unfortunate, and we hope that will change over time.”

The company has two Bennett Ranch wells in Otero County that are shut in. “We made the first Bennett Ranch discovery in 1998. The state of New Mexico, through regulatory action, has deliberately prevented development of our field and the larger area,” says Yates.
When Heyco drilled the first Otero Mesa well, in what was then called the Oro Grande Basin, it was 70 miles from the next oil or gas producer. The E&P drilled a fairly large structure, but lost its first well because freshwater drilling caused the shales to swell and stick the drill pipe.

“To overcome problems with desiccated shales and lower-pressured formations, we drilled our next well with air. On our second attempt, we discovered flowing gas from a sill in the Mississippian formation that is essentially equivalent to the Barnett shale,” he says. The formation, at 4,500 feet, sustained flow rates of around 5 million cubic feet per day.

Heyco drilled its second well in 2001, completing it for around 2 million cubic feet per day from Canyon sand, which is also present in the first well. This well was also drilled with air.

“After we completed our first well, environmental groups realized we were opening up a new area for drilling and went on the offensive. At an environmental rally in Santa Fe, Bill Richardson, the governor of New Mexico, pledged to use the state administrative agencies to shut us down. And, he did,” Yates says.

The OCD pushed through Rule 21, which requires freshwater drilling and a closed-loop drilling system despite Heyco’s testimony that air drilling, which for safety requires a pit, is the only practical drilling method.

“It’s not a happy story. New Mexico has taken a very prospective new basin out of our nation’s resource base and has created a much higher-risk environment for oil and gas companies and their capital,” he says.

Wolfcamp sand
Meanwhile, Yates says the active plays in southeastern New Mexico that Heyco is involved in developing are the Morrow, Strawn, Atoka and Bone Springs, primarily in Eddy and Lea counties. In the past two years, the Wolfcamp sand section has been a very active play due to horizontal drilling. While Heyco has interests in the play, Parallel Petroleum Corp. and others have been leaders in it.

Midland, Texas-based Parallel’s project consists of three areas primarily targeting the Wolfcamp formation at about 5,000 feet. The Wolfcamp gas-producing formation historically has been only marginally economic due to low per-well producing rates and low gas prices, but recent reports indicate it is now under more efficient exploitation using horizontal drilling and new fracture-stimulation technology.

Heyco’s southeastern New Mexico reserves and production are both gas (55%) and oil (45%), although Yates says the company’s future may be more gas than oil.

The gas in the Morrow, Strawn and Atoka plays of the Pennsylvanian is rich with good liquid content. The Bone Springs play is primarily sweet, 37? gravity crude with substantial quantities of casinghead gas.

Yates says the area’s biggest technical breakthrough has been the application of multi-stage horizontal fracturing techniques.

“There are a lot of stacked reservoirs in the Permian. Not all of them have good permeability with good reservoir characteristics but all have potential with newer completion technology. There is still a lot to discover here. As technology improves, we simply have more tools,” he says.

“We are still drilling our primary targets of Morrow, Atoka, Strawn, Bone Springs and some shallower objectives, and we are using the newest technology, particularly in the Bone Springs sands. Reserve sizes tend to get a little smaller as time goes on, particularly in the Morrow, but higher gas prices help maintain a level of activity despite regulatory impediments.”

Related Document: SE New Mexico Gas Production (PDF)