Analysis: Hilcorp’s increased well density application raises objections

George Sharpe
George Sharpe, Merrion Oil and Gas investment manager

Hilcorp has applied to the New Mexico Oil Conservation Division (NMOCD) to allow twice as many wells to be completed in the Mesaverde Formation than is currently allowed. If one Googles the application, the very first link is to New Mexico Climate Action’s website where the environmental organization sounds the alarm. 

Heavily quoted on their website is local cattle rancher, Don Schreiber, who claims this will add to the methane hotspot and turn the Four Corners into one large industrial site. He blames the closing of churches and schools in his community on the growth in the oil and gas industry. He goes on to get personal, calling Hilcorp a reckless “rip and run” corporation that fosters a “rules-be-damned” corporate culture.  

On another website, Mr. Schreiber implies that State Energy Secretary Ken McQueen and NMOCD director Heather Riley, both previously of WPX, are rushing through this application prior to Governor Martinez leaving office as a parting gift to the Industry. 

Yikes, this sounds like it will absolutely ruin the Four Corners! Let me explain why Hilcorp is making the application and discuss the impacts if approved. I will then address Mr. Schreiber’s objections and allegations.

The effect of increased well density

Approximately 10,000 wells have been completed in the Mesaverde Formation over the last 70 years, producing 15 Trillion Cubic Feet (TCF) of gas, or approximately 1.5 BCF per well. As much gas as that is, because the reservoir has such low permeability, there is still unrecovered gas in between the wells. Unless additional wells are completed in the formation, a significant amount of gas will be left in the reservoir.

Even without the increased density, there are still some existing Mesaverde locations to develop.  The problem is, because the reservoir is already significantly depleted, the average Mesaverde well drilled over the last 10 years will only recover an estimated 0.5 BCF of gas vs the 1.5 BCF historic average.  

The present value of 0.5 BCF produced over the 30-year life of a well is less than $500,000, which won’t pay the estimated $1MM drilling costs for a new well.  As a result, the number of Mesaverde wells completed in the last decade have dropped from over 200 per year to a low of 5 completions in 2016 (see graph below).  

There has been a recent uptick in activity since Hilcorp bought ConocoPhillips, as they have made 62 separate applications to add the Mesaverde in existing wellbores.  

FMN Mesaverde completions vs. time

So, how much gas is at stake?

The bottom line is that additional Mesaverde completions are economic only if added to existing wellbores already drilled to deeper formations. There are approximately 8,100 existing deep Dakota wells drilled in the Basin. Approximately 2,950 of those have already been completed in the uphole Mesaverde, leaving 5,150 Dakota wells as targets.  

At 0.5 BCF of gas per completion, that represents over 2.5 TCF of gas with a present value of over $2.5 billion. That will go a long ways toward sustaining some level of rig activity in the Basin, albeit workover rigs versus drilling rigs.  

Recomplete vs. new drilling chart

What about Mr. Schreiber’s Allegations?

Let’s run through them one at a time.

1. It will exacerbate the Methane hotspot, he says. Not true. Because existing wells will be recompleted, there will be no new surface disturbance, no new surface equipment, and thus, no new emission sources. Further, the majority of the methane in the area is coming from the Fruitland Coal outcrop. If the wells were the cause, there would be methane hotspots over the Hugoton Basin in Kansas and the Permian in Texas, each of which has 10 times as many wells as the San Juan Basin. As a side note, cows emit approximately 100 kg of methane per year, the equivalent of 2.5 tons of CO2. Perhaps ranchers should look in the mirror at their own impact before pointing fingers?  

2. Mr. Schreiber blames the closing of churches and schools in his community on too many oil and gas wells?  The exact opposite is true.  Over the last decade, the drilling rig count in the San Juan Basin has dropped from a peak of 43 rigs to the current level of 4. With each rig sustaining an estimated 250 jobs, that is a loss of almost 10,000 jobs in the area.  Churches, schools, and ancillary businesses have all suffered as these families have left the area. If anything, to the extent that environmental activists have contributed to the reduction in oil and gas activity, They share in the blame for the economic demise of their own communities.  

San Juan Area drilling rig count

3. Mr. Schreiber calls Hilcorp a “rip and run” company with a “rules-be-damned” corporate culture. Don’t kid yourself, no company gets to ignore the rules, especially in New Mexico, where Federal and State lands dominate the landscape. Hilcorp is a well-respected industry player, and Farmington is lucky to have them trying to stimulate activity in our economically challenged basin.  

4. Mr. Schreiber implies that Ken McQueen and Heather Riley are trying to rush this through during their lame duck term as a gift to industry. Where does that come from?  Neither Mr. McQueen nor Ms. Riley had anything to do with Hilcorp bringing forward this application, and they are giving it the full due process it deserves.      

In closing, I’m tired of the environmental activists saying whatever they want in an attempt to shut down the production of oil and gas. Increasing the allowed density for Mesaverde wells will generate additional economic activity at a time when our area desperately needs it. It will result in more gas being recovered, more royalties and taxes being paid to the State, and more jobs being retained in the region.

That will result in more churches and schools staying open and more restaurants staying in business. So, don’t let Mr. Schreiber scare you… it is a win-win-win for the community. 

George Sharpe is an investment manager for Merrion Oil & Gas of Farmington and a columnist for Energy magazine.