Infrastructure investments deliver cost savings, reliability and safety for oil and gas company

James Fenton
The Daily Times

WPX Energy, with two drilling rigs running in the basin this year, believes laying pipelines prior to drilling adds up to smarter spending and increased safety, according to Ken McQueen, the company's San Juan Basin director. It is also part of a strategy that allows the company to continue producing petroleum even with depressed oil prices.

But the infrastructure comes with a sizable initial cost.

In 2013 and 2014, WPX dug trenches and laid 95 miles of pipe in the basin at a cost of $18 million.

By the end of this year, the company will have spent an additional $7 million — on 37 miles of pipelines already in place and another 55 miles to be completed by the end of 2015. "What pushed us past the decision point are the intangible benefits ... in addition to just the economic return," McQueen said. "No weather delays, no dust, higher safety — that factors into the project."

The pipelines also keep to a minimum the number of days the company flares gas, he said.

"We are limited to 60 days of flare time without additional permitting, so our strategy has been to try to minimize flare times out here," McQueen said. "In order to do that, what we're trying to do is to get our facilities built on location before the drilling rig ever gets there and also have a pipeline outlet in order to ship the gas to market."

Future infrastructure additions will come on a "just-in-time" basis for future drilling, McQueen said.

"We'll continue to build out the system as we move forward with additional drilling. We will continue to put in place what we consider the backbone on the system and as we drill additional wells on either side of that backbone, that system would continue to branch out to those locations."

The company lays three pipelines — one for water, another for gas and a third for oil — at a time, McQueen said. WPX collects and transports produced water and sends it to storage tanks, which improves the company's ability to recycle water from a well site.

"Today, about 45 percent of our total oil production is now being moved by oil pipeline," McQueen said. "That's a significant event because it really cuts down our truck traffic."

Bobtail trucks pull a trailer — the unit is called a "truck and a pup" — and can haul 180 barrels of oil at a time, on average. Since the pipelines were put into service, the company has cut its truck traffic in half, he said. McQueen said the weather can impact transportation costs, which a pipeline avoids. In heavy weather, like snow or rain, trucks typically have to "drop their pups," only being able to haul about half the amount of oil possible.

There are a number of "intangible" benefits — reduced wear and tear on leased oilfield roads, less dust and greater reliability — with fewer trucks on the road, McQueen said. The company's operations are also safer, he said.

WPX also saves $1.80 per barrel when transporting oil by pipeline instead of trucks, he said.

If we can't get oil and gas to market, we aren't making money. And when we can control the pipelines that get oil and gas delivered to market we're in a much better position to guarantee our future revenues."

Susan Alvillar, WPX spokeswoman, said the company's 2½ years in the San Juan Basin have made the infrastructure investment a smart financial move.

"We're at that point in the (San Juan Basin) where the confidence level is high that we would go ahead in advance (to pay the costs of the pipelines)," Alvillar said. "Until you really have that certainty, you really do not want to commit the capital nor risk the disturbance to the land that it would require to put these pipelines in and put them in service."

Wally Drangmeister, New Mexico Oil and Gas Association spokesperson, said that WPX's infrastructure projects are "cutting-edge," though not all companies have the holdings to make the investment possible.

"The integration level of WPX in the northwest corner of New Mexico is the cutting edge with a fully integrated system," Drangmeister said. "The thing that strikes me is that it requires large tracts (of land) to develop to do that. It would be harder to develop for smaller companies that have one or two wells, but it is a very impressive approach and shows how much forethought they have for their long term operations."

Drangmesiter seconded McQueen's claim that pipelines are the safest way to transport oil and gas, and a perennial industry preference.

"Pipelines are the safest, most efficient and best way to move liquids," he said. "When pipelines can be used in a cost-efficient basis, the benefits are there — the reliability, taking traffic off the roads — and those are big positives. The industry tries to do it whenever possible."

Earlier this year, WPX spent $4.5 million to build a Central Delivery Point, or CDP — an oil-processing facility off U.S. Highway 550 in Lybrook — that receives oil from the company's pipelines.

The facility, which then delivers oil to refineries by pipeline, processes around 16,000 barrels of crude oil per day and can do the same for other "partner" oil companies, McQueen said.

WPX plans to build another CDP later this year at the terminus of the 52 miles of pipeline that will be installed later this year. It will connect with the TexNew Mex pipeline, he said.

"A lot of crude that we're shipping (by pipeline) out of Lybrook will go to TexNew Mex," he said. "The fact that we're gearing up our oil production fits very nicely into (Western Refining's) plans to bring that oil pipeline back online and improves their oil supply to their El Paso refinery."

And the infrastructure is paying for itself, McQueen said.

"It pays for itself by the revenues that it recoups compared to what we would be doing if we had to truck the material out," McQueen said. "That increment we're saving is what we're using to pay for the pipelines project. WPX recoups the costs for the entire project over the course of development."

McQueen said the investment enables the company to have greater control over the future in an industry that cycles through booms and busts.

It's going to have a long-term payout, probably a 10-year pay-out," he said. "Here in the south part of the San Juan Basin, we made a decision to always make sure that we could always get our product delivered. And that's why we felt like we were better able to control our own destiny when we (invested in) pipeline infrastructure."

James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621 and Follow him @fentondt on Twitter.