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FARMINGTON — Record low oil and gas prices are driving an increase in the number of shut-in wells in the state's two production zones — the San Juan and Permian basins.

The trend has caused state and federal regulators to make policy changes as they try to adapt to a trend exacerbated by record-low crude oil and natural gas prices on the commodities market.

The New Mexico Oil Conservation Division

New Mexico Oil Conservation Division Director David Catanach said in a phone interview earlier this month that the state opted to make a policy change to its "inactive well rule" in place of overhauling it altogether to speed up implementation.

The policy change was prompted, Catanach said, in part by input from industry and lawmakers and is intended to keep low producing wells, which may not be profitable, from being permanently abandoned.

"Prior to the change, you had 15 months," he said. "You had to reactivate (the shut-in well), plug it or put it in approved temporary abandonment status."

The state also has a vested interest in maximizing the production potential of every oil and gas well, Catanach said. "You basically lose the oil and gas reserves forever because you're not likely to reenter a well, unplug, test the casing – you can’t produce the wells at that point. Once a well is plugged and abandoned, there’s not enough economic incentive to bring it back. It just costs too much."

Based in Santa Fe, the division regulates oil, gas, and geothermal activity in the state. Using well production data, the division issues permits for new wells, enforces the division's rules, which are guided by the state's oil and gas statutes, and aims to ensure that abandoned wells are plugged following the law and the land responsibly restored after production is completed.

"We had some discussions with operators late last year who told us that they were having issues, especially gas wells in the San Juan Basin," Catanach said, "and we thought we would try something. We thought a rule change, which can take anywhere from 6 to 12 months, would be more cumbersome than a policy change, because we knew that operators needed some immediate relief."

That effort resulted in a policy change instituted in April that extends the time operators are allowed to shut in wells "that are uneconomic at current (commodities) prices," he said.

Catanach said state Rep. James Strickler, R-Farmington, asked if "the OCD could take a look at (the issue) and provide some help to operators," he said. "We did get together and formulated what we think is a good policy."

This plan allows operators to apply to the OCD to shut in wells for longer than the current 15 months, he said.

"Now the operator can apply to us to shut in wells under this program, but they have to demonstrate to us that there is an economic need to shut in the wells," Catanach said.

Operators can request a three-year extension on top of the previous 15 months allowed under the state rule, Catanach said.

Strickler, who is a landman and has been in the oil and gas industry for more than three decades, said that the update is a good compromise, though he said he would like to see the state rule match a similar rule in neighboring Texas.

"The New Mexico shut-in policy was antiquated and just didn't reflect low commodities prices," Strickler said. "In Texas,  you can shut in a well as long as you want to. It's up to the operator. the New Mexico rule doesn’t reflect the real world today. It's more like Colorado's rule. But this is a move in the right direction, and it's better than what we had."

Catanach said the policy change was designed to allow low-producing wells to weather the extended bust cycle and be put back into production when commodities prices rise.

"We don’t want to waste reserves that might be economic to produce at a later time," he said. "We also want make sure that when when we allow these wells to be shut in that they pose no threat to any ground sources of water, to public health or to the environment."

Catanach said he broke the news of the policy change at the Four Corners Oil and Gas conference at McGee Park last month.

"It went over well," he said of his presentation there. "The operators are happy with the program."

But, so far, only 11 operators have applied for the added time, he said. Four or five of those operators are based in San Juan County, he said. And 536 shut-in wells have been approved so far under the new program, he said.

Operators are required to test each shut-in well's integrity after 27 months and annually thereafter, the equivalent of roughly two tests, Catanach said.

"We anticipate that when the price goes up that these wells will become reactivated," he said.

Wells that are shut in for more than 15 months will require additional insurance on top of the bonding required, Catanach said, because inactive wells pose a greater risk. Insurance rates are based on the depth of the well, he said.

The division oversees approximately 59,000 production wells in New Mexico, including wells on state, fee (private acreage) and federal lands.

U.S. Bureau of Land Management

Rick Fields, the Bureau of Land Management's Farmington Field Office manager, said in an email that the federal agency has no existing policy on inactive wells, but has begun the process of creating one.

"(The BLM is) developing a statewide policy for shut-in wells in the interest of the American people," Fields said.

Once a policy is drafted, the BLM will consult with industry groups like the New Mexico Oil and Gas Association and the state branches of the Independent Petroleum Institute, Fields said.

Shut-in wells are not tracked, Fields said, but guidelines over the agency's response can be found in what is commonly known as "the Gold Book."

The book, formally called "The Surface Operating Standards and Guidelines for Oil and Gas Exploration and Development," provides information for operators on the agency's requirements for obtaining permit approval and on how to comply with regulations during oil and gas operations on public lands.

Fields said the book is a condensed form of the agency's onshore orders and includes a section on well production, which has a section on inspections and enforcement.

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

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