Is southeastern New Mexico the new sweet spot for shale?
Over the last year, ‘permania’ has become so frenzied that the land rush drove exploration rights prices in West Texas sky high — and along with it, equipment and labor costs. So, what’s next?
While most analysts and oil companies focus on the larger portion of the Permian in Texas, southeastern New Mexico — home to the smaller part of the shale play with part of the Delaware Basin — has seen increased deal and drilling activity in recent months.
Now, shale drillers and oil majors want access to the Permian without paying the high prices and costs in Texas. And they’ve started using cheaper New Mexico as a kind of ‘geological back door’, as Bloomberg’s David Wethe put it, through which they can boost their position in the Permian.
Exxon did it in January this year, by buying companies owned by the Bass family, with an estimated resource of 3.4 billion barrels of oil equivalent in New Mexico’s Delaware Basin.
In total, oil and gas firms poured $13 billion into New Mexico via mergers and acquisitions in the past two years, Steve Vierck, president of the Economic Development Corporation of Lea County, tells Bloomberg.
Lea County’s rig count was 38 rigs at the end of last week, out of New Mexico’s 69 rigs. Since May this year, the rig count in Lea County has risen every month. In October 2016, the rig count in the county was just 17.
New Mexico’s rig count as a whole increased by 4 rigs last week alone, and is now 38 rigs up from the same week last year, Baker Hughes data shows.
New Mexico’s field production of crude oil has doubled in the past five years, to 462,000 bpd in August 2017, according to the latest available EIA data.
New Mexico “may well be the next wave,” Haag Sherman, CEO at Houston-based investment firm Tectonic Holdings LLC, told Bloomberg.
“If Exxon’s looking at it, that’s probably a good sign,” Sherman noted.
According to Sam Cobb, the mayor of Lea County’s biggest city, Hobbs, oil companies have long-term plans for New Mexico’s part of the Permian.
“They’ve made it very clear this area is where they’re investing heavily and plan on doing it for a long time,” Cobb tells Bloomberg.
While New Mexico sees increased activity in deal-making, West Texas M&As have started to slow down, and signs have emerged that parts of the Permian may be heading toward hitting its geological constraints.
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Still, Texas is undoubtedly the Permian leader. But smaller New Mexico has cheaper exploration rights per acre than West Texas where the ‘Permania’ drove land prices to unsustainable highs. Recent deals in New Mexico ranged between 18,000 and $24,000 an acre, while in Texas, the exploration rights that sold at $19,000 per acre two years ago are now selling for $30,000, according to drilling Info data quoted by Bloomberg.
New Mexico may have cheaper prices and costs, but it also has some takeaway capacity and oilfield infrastructure constraints. However, two pipelines planned for the Delaware Basin in New Mexico could ease those constraints. Once they enter into service by the end of 2018, drilling and oil production in the state will further speed up, Lea County’s Vierck told Bloomberg.
Oryx Midstream Services II is building a new 220-mile regional crude oil transportation pipeline serving the Delaware Basin with initial capacity of up to 400,000 BPD. The pipeline that will serve production from every active county in the Delaware Basin including Lea and Eddy counties in New Mexico and Loving, Reeves, Ward, Pecos, Winkler and Culberson counties in Texas, is expected to be in full service by the end of 2018.
Andeavor said in August that it had received sufficient commitments from third-party shippers to warrant construction of the 130-mile-long Conan Crude Oil Gathering Pipeline system in the Delaware Basin that will transport crude oil from origins in Lea County in New Mexico and Loving County in Texas, to a terminal to be constructed in Loving County.
The system is under construction and is expected to begin commercial service in the middle of 2018.
While everyone is focused on West Texas, New Mexico’s much smaller part of the Permian can become the hottest part of the world’s most famous shale play.
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