Operators idle wells and wait for prices to rise

James Fenton
Head mechanic Gary Payne describes the workings of a high-pressure heated separator on Sept. 13 at Dugan Production Corporation in west Farmington. Dugan Vice President John Alexander stands in the background.

FARMINGTON — As the downturn in the Four Corners energy economy extends into its 23rd consecutive month, some local companies are managing to keep their operations running without significant disruption.

Dugan Production Corp. on Murray Drive in Farmington is one of the longest running oil and gas outfits in the San Juan Basin, established by oilman Tom Dugan in 1957.

The independent operator — which opened a second group of offices off Troy King Road, adjoining a 165,000-square-foot production facility called Dugan West about 10 years ago — has yet to lay off any of its 160 employees during the current slump and, so far, doesn't see a need to.

Dugan Production Vice President John Alexander said the company survives in good times and bad because it adheres to a basic principle of business.

John Alexander, vice president of Dugan Production Corporation, on Sept. 13 talks about how the company is handling the downturn in the oil and gas industry at company offices  in west Farmington.

"There's only one secret — don't spend more money than you've got," Alexander said. "It's one of the fundamentals of any business. ... We've had to borrow money at times, sure, but we've been able to do it through pretty good rates from people. You just don't spend more money than you've got. That's easy to say. Harder to follow."

While the company has kept its workers, it has done away with overtime hours, Alexander said. Companies that have borrowed more than they could pay are in the worst situation, he said.

Surviving during a prolonged "bust" cycle that saw crude oil prices plummet by more than $100 per barrel since late 2014 means carrying little or no debt and always looking for ways to save, even in "boom" times. That is the key to longevity in a volatile industry, he said.

Alexander said the company, like the rest of the struggling sector, is eagerly, but patiently, watching for signs that prices are on an upward trend.

A sign in an office window at Dugan Production Corporation as seen on Sept. 13 in west Farmington.

Gary Payne oversees all the production operations at Dugan West. Payne said the company buys used oilfield equipment like old compressors, separators or engines that power pumping jacks, and then a crew of welders, mechanics and other workers rehabilitate the equipment by adding new engines and other component parts to help the equipment begin a second life.

"We've always run a pretty tight ship. When we fix something, we fix it right, so we don't have to go back and re-work on something," Payne said during a tour of the facility earlier this month. "That really hasn't changed a whole lot, except we look a lot harder for really good buys."

A worker paints field equipment on Sept. 13 at Dugan Production Corporation in west Farmington.

The repair and rebuilding crews save the company money. Payne said the mammoth facility also serves as a repair and maintenance shop for the water-hauling trucks the company runs under its subsidiary company Gunga Din, a name chosen by Alexander after the heroic water-carrier in the 1892 Rudyard Kipling poem of the same name.

Dugan owns about 1,000 wells in the San Juan Basin and about 40 in the southeast corner of the state.

Alexander said in the last year, the company has shut in about 100 of its marginal wells because they are not "economical" enough to keep in operation. The company's field workers continue to visit the wells along with operational ones on a regular basis and file monthly reports on them with state and federal agencies.

Shutting in wells while waiting for prices to improve isn't necessarily all cost savings, since maintenance and site inspections are still required, and, depending on the kind of crude oil the well produces, a well can become clogged with paraffin, requiring longer — and costlier — startup times, he said.

"The only thing that will pull us out of this is increased commodities prices," Alexander said. "You cannot save enough money to save your way out of this. You just cannot. It cannot be done."

Another local independent, A-Plus Well Services, is waiting along with Dugan and the rest of the industry to see crude oil prices improve.

A-Plus General Manager Randy Pacheco stepped down as dean at the School of Energy last year, and went back to work in the industry he loves, even at a time of layoffs and bankruptcies.

A-Plus' specialty work is "plugging and abandoning" oil and gas wells, a process of permanently retiring a well after it has ceased producing fossil fuels or is no longer profitable.

State regulations require operators to follow certain procedures when retiring a well and permanently vacating a lease site where the well is located. Pacheco said the reasons for doing so are many. Permanently retiring a well is the last stage in a well's life cycle, which is followed by restoring the land to a semblance of its former state after surface equipment such as a pump jack or a compressor is hauled away.

Mechanic Chris Tache works on a motor designed to run a gas compressor on Sept. 13 at Dugan Production Corporation in west Farmington.

Pacheco said the reason A-Plus isn't busier is that state rule changes made earlier this year give operators more time to either restore a well to active production before closing it permanently. The changes were made to provide a wider window for prices to rebound, allowing some of the idle wells to be put back into operation, which means more tax revenue for the state.

The New Mexico Oil Conservation Division, or NMOCD, tracks the number of wells operators plug on an annual basis.

NMOCD Director David Catanach offered some relief to operators in the San Juan Basin and statewide in April when he opted to amend the agency's "inactive well rule," which grants operators who demonstrate an "economic need" an extra three years beyond the 15 months that is allowed under the state rule to sit on a non-producing well without having to take action. Added extensions are possible after that, if an operator can demonstrate the well is still too costly to operate.

Beth Wojahn, NMOCD spokeswoman, said it's too early to tell whether the policy change will slow the number of wells closed or if San Juan Basin operators will prematurely close wells because of the prolonged "bust."

And since operators are allowed up to one year to do the environmental restoration on a site after completing plugging operations, data on the number of plugged wells for 2015 and 2016 are incomplete, Wojahn said. As of early August, 250 wells are listed on the OCD's website as having been plugged. There are 566 wells listed for 2015, 725 wells in 2014 and 945 wells in 2013.

Wohajn said the OCD updates well numbers as they come in. ​​

Pacheco said it's a matter of time before prices for crude oil and natural gas improve on the commodities market. Like the rest of the industry the Farmington independent is taking it one day at a time.

"We’re not up but we’re not down significantly," Pacheco said. "The industry is cautiously looking at their wells and economics right now. (Plugging wells) is not a boom for us. We’re staying steady because everybody has some wells (to service). Companies are watching their budgets and moving slowly, still staying steady to their obligations. That's just how it is."

John Alexander, Dugan's vice president, said that although the slump is nothing new for the 57-year-old independent company, it has lasted longer than expected. The focus on day-to-day operations remains the same, he said.

"We're in a mode of doing exactly what we have to do each day and trying to keep our wells producing," Alexander said. "That's true no matter what the (market) says. Control your own destiny. That's our philosophy."

James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621.

Work continues at Dugan Production Corporation on Sept. 13 on West Piedras Street in Farmington.