Shut-in wells to increase as low prices linger
FARMINGTON — As oil and gas prices on the commodities market continue to remain at record lows, oil and gas producers in the San Juan Basin are adjusting to the economic reality with layoffs and other measures to control spending and try to pay down debt.
And some operators are being forced to shut-in wells that are just too costly to continue to operate.
Independent operator Tom Mullins, who runs Synergy Operations LLC in Farmington, said deflated oil and gas prices have caused him to shut-in 70 percent of his company's wells around the beginning of March.
Earlier this month, Mullins visited one of those wells, a coal-bed methane well perched on a three-quarter-acre pad on a mesa just west of La Plata Highway on county land just outside the Farmington city limits.
The well site is a prime example of the impacts of the current economic reality and the many stakeholders impacted by the loss of production, he said.
Mullins' well, which was producing about 90 Mcf, or thousand cubic feet, of natural gas per day, has been sitting idle for three months.
"Each of these things roll downhill," Mullins said. "Nobody's getting any money."
Shutting-in a well pad starts with turning off the pump jack, shutting down the natural gas compressor and closing valves on well pad equipment, including those on water tanks and separators, he said.
The loss of production means Mullins is no longer selling the gas the well produces, but it also means other stakeholders are no longer seeing any revenue, he said.
The company that sends a water hauler a couple of days each week to remove the roughly 60 barrels of produced water the well makes a day has been notified by Mullins not to come remove water from the well pad's 400-barrel water production tank anymore, he said.
And that's just one piece of the lost economic pie, he said.
"So the water hauler guy's not getting any money, and the compressor guy's not getting any money," Mullins said as he walked around the well pad, inspecting the various component parts of the dormant facility. "The contract operator that we hire who comes out here daily — when it's running — he's not getting any money. And guess what? We're not getting any money, either. And neither are the school kids and the government and everybody else. Nobody's getting any money. That's what is the definition of a shut-in well. Everybody loses."
Enterprise, the gas company that collects natural gas from Mullins' well, is no longer receiving any gas to sell. Shut-in wells also end any severance and ad valorem tax revenue, he said.
After the well on federal land has been shut in for a year, the government will send Mullins a letter requiring him to either start-up production again within 20 days' time or plug and abandon the well, which essentially spells its permanent retirement in most cases, he said.
"We hope, if prices improve, that we can produce this well again," he said. "(Regardless), we will produce this well before March 1st of next year, whether we are losing money on it or not, but we're only going to produce it for a couple of days to get in compliance. Then I should have another year. But that's not what we want to do ... But for right now, that would be the compliance measure, given where we are."
Mullins said he will not be able to afford to operate his shut-in wells again unless the price of natural gas, which was around $1.74 an Mcf in May, climbs back up into the $2.40 to $3 an Mcf range.
Mullins estimates the state, which relies on the oil and gas industry to provide about a third of its annual general fund budget, will be $1 billion short this year.
A dozen of Mullins' shut-in wells on about 11 acres in the Nageezi area recently were the subject of a complaint sent to Victoria Barr, district manager of the Bureau of Land Management's Farmington Field Office. The complaint came from a resident of the area, Anna M. Yazzie, who said the wells are in violation of BLM rules.
"Multiple pipelines are on the surface and not connected to any gathering system, tanks are full of water and oil, there are no signs on some of the well sites, roads are crisscrossing the landscape with no purpose and debris is all around the area," Yazzie said in the letter.
Rick Fields, the new BLM Farmington Field Office manager, said in a phone interview that he sent bureau officials to investigate the Nageezi wells the day after his office received Yazzie's letter. He said that while there were some concerns over the condition of the wells and roads that lead to them at the site, the problems weren't major.
"(Mullins' Nageezi area wells) were nothing out of the ordinary," Fields said. "We were on it within 24 hours, which I would say is a pretty good response."
Fields said the well sites posed no environmental risk and the field office would soon complete an order that would spell out what Mullins would need to do to comply with BLM rules and regulations.
"It's not an environmental issue," Fields said. "The roads had degraded and we’re going to make him repair them. There's some poly pipe strung out (at the site) but never installed. Really, it’s more of a visual issue than an environmental issue. It's not like there’s oil-and-gas lines leaking. They’re unused. There is no environmental hazard and the wells are not releasing gas. There was no great pollution threat."
Fields said shut-ins are increasingly common, especially in a bust cycle like the one the basin is experiencing now. He said the BLM is currently revising its regulations that apply to shut-in wells.
"Shut it down and plug it, it’s a pretty serious economic impact on the company," Fields said. "It’s the fact that there’s going to be more (shuts ins) and it’s good practice to take a look at it. We’re looking at non-producing well shut-ins.There comes a point where it costs more to pull it out of the ground than to shut it off. But you want to make sure it’s environmentally safe at the same time."
Fields said the state's Oil Conservation Division is currently reviewing its policies over shut-in wells given the economic challenges faced by the industry.
Allison Scott-Majure, state Environment Department spokeswoman, did not return requests for comment on this story by deadline.
Mullins said he was alerted to the complaint but not shown the letter. He went to the field office and met with Fields earlier this month.
He said that he hasn't yet received a compliance order from the BLM nor was he shown or given a copy of Yazzie's letter when he met with Fields at the BLM,
When The Daily Times showed him a copy of Yazzie's letter, Mullins said he'd resolve the problem within the time the BLM gives him to do it.
At his gas well off La Plata Highway, Mullins saw that a posted well site sign, which includes the American Petroleum Institute identification number for the well, was lying on the ground. He went to his truck and retrieved a drill, drilled fresh holes into the sign and rehung it.
Mullins said he didn't know what caused the sign to fall from the fence where it was originally posted. He said vandalism was not likely, but possible. As he repaired the sign, the wind blew in increasingly powerful gusts on top of the mesa. Weather was another possibility. Ultimately he said, he'd return with a more permanent solution.
The sign was just another example of the challenges to operators who, like the state and federal regulators who oversee production in New Mexico, can't be at every well site all the time.
He said his dozen Nageezi wells were originally drilled in 2007, when natural gas prices were above $4 an Mcf. He said it is his desire to reopen 70 percent of his company's wells as soon as possible. In the meantime, he said "as a sane and rational person," he will ensure Synergy follows the law.
"I believe we're in compliance with all applicable regulations," Mullins said. "And if we're not, we will get in compliance with all applicable regulations."
James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621. Follow him @fentondt on Twitter.