The San Juan Basin, located in northwestern New Mexico where the state borders Utah, Arizona, and Colorado at the Four Corners, was once a fruitful natural gas field.
The Basin produces dry natural gas, but unlike its neighboring basins, it hasn't produced significant amounts of crude oil in decades.
Once the price of dry natural gas dropped to decade-lows, however, producers were hurt even more.
It was the U.S. shale boom that caused this price drop, and while it was the reason for the struggle in San Juan, it may also provide a solution.
Resting roughly 5,000 to 12,000 feet below the Basin is the Mancos Shale, a deposit that is said to be rich in oil and other liquid fuels.
This shale deposit is late to the game. While other areas like the Bakken and Eagle Ford shales are producing thousands of barrels per day, Mancos only has a few wells.
But two companies are eager to be the first to make it profitable.
Encana Corp. (TSE: ECA), a Canadian oil and natural gas company, and Denver-based Bill Barrett Corp. (NYSE: BBG) are partnering up with local Farmington producers like Merrion Oil and Gas Corp. to begin development.
This development could provide a big turnaround for state production, which was hit on one side with the recession and on the other with the success of the shale formations in Texas and the Midwest.
Bill Barrett and Merrion have estimated reserves of 30 billion barrels in New Mexico alone, with 1.5 billion technically recoverable barrels – 5% of the 30 billion. The shale also extends into parts of Colorado, Utah, and Wyoming.
But Encana, which has already drilled seven wells in the region, is even more optimistic.
Merrion's president T. Greg Merrion told the Albuquerque Journal:
“Encana Corp. estimates like twice that amount of oil is in the play, and they say up to 8 percent can be recovered. The numbers are not set in stone. The jury is still out.”
But even if only 1.5 billion barrels are recoverable, Mancos will still make a splash. Merrion said:
“The Mancos oil play is the real deal. We could be on the cusp of another energy boom here in the San Juan Basin.”
The first of Encana's seven wells was able to produce 438 barrels of oil equivalent each day for its first thirty days. The company plans to drill four more wells by the end of the year.
Barrett plans to start drilling this fall, though the company is still uncertain of the cost. The company's executive vice president for exploration, Kurt Reinecke, has said that the cost could exceed $6 million.
Costs can be reduced if the company operates multiple wells on a single site with shared facilities, but it will still need between 300 and 500 barrels per day per well to achieve profitability.
But if the yields from Encana's preliminary wells are any indication, they should be able to do this easily.
From the Albuquerque Journal:
“There's lots of talk about other folks planning to drill test wells,” said Merrion Investment Manager George Sharpe. “I expect some bigger operators will start testing their positions and switch some of their active rigs from gas to oil.”
And success from Encana and Bill Barrett could soon bring other oil and gas majors, particularly those that have done well in other domestic shale deposits, to New Mexico.
The U.S. shale boom is far from over.
That's all for now,
Energy & Capital's modern energy guru, Brianna digs deep into the industry with accurate and insightful updates into the biggest energy companies and events. She stays up to date with the latest market moves and industry finds, bringing readers a unique view of current energy trends. For more on Brianna, see her editor's page.