Basin Resources Spring 2017 by Majestic Media

4 Basin ResouRces

WinteR 2016

content Randall paRkeR’s Rig RepoRt

Don Vaughan

puBliSHER

Cindy Cowan Thiele EDiTOR

Dorothy Nobis Debra Mayeux CONTRiBuTiNG WRiTERS

Josh Bishop Curtis Ray Benally CONTRiBuTiNG pHOTOGRApHERS

YeaR-to-YeaR total pRoduction up 19 peRcent

Suzanne Thurman DESiGNER

Clint Alexander Tonya Daniell SAlES STAFF

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spiRit of conseRvation and innovation

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16 column

oil and gas are critical to our economy

column

Worth of a well?

column

oil and gas alone won’t save economy

conocophillips reports 17 a smaller than expected loss congressman votes to 20 overturn BlM planning rule grazing fees go down

new appointments

ipanM photo contest

column

let’s put politics a side

column

independent producers support review

Merrion Mentorship

ntec to provide coal

ntec to buy shares

national news

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Majestic Media 100 W. Apache St. Farmington, NM 87401 505-516-1230 www.majesticmediausa.com Basin Resources magazine is published four times a year by Majestic Media. Material herein may not be reprinted without expressed written consent of the publisher. Opinions expressed by the contributing writers are not necessarily those of the publisher, editor or Basin Resources magazine. Every effort has been made to ensure the accuracy of this publication. However the publisher cannot assume responsibility for errors or omissions. © 2017 Basin Resources magazine.

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6 BASIN RESOURCES

While oil and gas are critical to our economy:

Lawmakers also need to create a business climate benefiting new, existing industries It seems as though there will never be light at the end of this tunnel. The city of Bloomfield’s gross receipts tax (GRT) continues to decline and the city’s leadership team, like so many others across New Mexico, is struggling to cut a budget that is already cut to the bone and then some. As tough as it is, it is always during these tough times that we see the strength of our employees, our residents and our leaders. As Bloomfield’s mayor, I’ve watched employees take a pay cut with little or no complaining. I’ve watched them take on the responsibilities of fellow employees who have left positions open. I’ve seen employees cleaning public restrooms, running the vacuum, and emptying countless wastebaskets. I’ve seen teamwork like no other – people doing what has to be done when there is no one else to do it. I’ve also seen employees offer financial assistance to a co-worker who had unexpected medical problems, and doing it cheerfully and with good hearts. As I watch all of them working together, I am frustrated with the knowledge that I don’t know when the economy will rebound, so the city can return the pay cut it took from them and replace the people whose jobs they’re doing, in addition to their own. I also look to our leadership in Santa Fe, hoping for support for the oil and gas industry that our state is so dependent upon. It is revenue from the oil and gas industry that provides most of the funding for health care, our colleges and universities, and the public schools our children attend.

SCott eCKSteiN Mayor City of BlooMfield

It is the backbone of our economy and we must not weaken the backbone. Ryan Flynn, Executive Director of the New Mexico Oil and Gas Association, wrote in a column that appeared in the January 22 issue of the Albuquerque Journal, “. . . New Mexico is competing with other states for investment in the drilling of new oil and gas wells and the jobs and tax revenue that follow. Extreme diligence in the upcoming legislative session is needed to balance the budget and pave the way for economic and job growth.” As our legislators face the same dim light at the end of the same tunnel, it is my hope that they work together to create a business climate which benefits new and existing industries. As they look at ways to cut the state’s budget, I hope they view that budget the same way they view their personal budget. I hope they look at expenses with the same determination to make the best decisions with what little money there is available as they do their own. It is my hope that they work together to solve our current problems to get to the end of this tunnel, while making plans to help prevent traveling through this tunnel again. I hope both parties come together for the good of New Mexico and start a new path of greater economic development and

financial gain. The oil and gas industry has been critical to our state in the past and will rebound once again. In the meantime, however, we must look beyond the deep pockets of the oil and gas industry and find other industries that will provide the jobs and the economic growth New Mexico needs. San Juan County’s Chief Operations Officer Mike Stark shares my concerns about our local economy. “As one of our cornerstone industries, when the oil and gas industry suffers, so do the economics at both the state and local levels. With minimal oil and gas activity the past two years, San Juan County has seen the unemployment rate move from 5.6 percent to 8.3 percent. During the same time period, oil and gas property tax revenues to the county have declined by more than 60 percent.” “Gross Receipts Tax revenue, another measure of overall economic activity in the area, has declined over a trailing 12-month period by 12.5 percent. Obviously, this creates challenges in continuing to provide the same level of services to citizens at a time when services become more critical, due to unemployment or underemployment situations.” Mike Stark also added, “Our hope for the next 12 months is that, with the recent presidential election, regulatory stability will return to the oil and gas industry. More importantly, we are hopeful that oil and natural gas prices increase to a level that will allow for additional capital investment in our basin, and, ultimately, give more employment opportunities.”

* Eckstein 34

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BASIN RESOURCES 9

Randall PaRkeR’s Rig RePoRt For more than 20 years local oil and gas industry gets updates the rest of the nation would love to have Margaret Cheasebro Basin Resources randall Parker of Farmington distributes information about rig activity in the oil and gas field that no one anywhere else in the country is providing. and he does it for free. his rig reports cover activity in the san Juan basin of drilling rigs and workover and completion rigs. the single page report contains a lot of information. It lists the name of contractors and the rigs they have drilling at specific locations. at a glance people can tell how many rigs are drilling and how many are parked in the yard. It also shows which contractors have workover or completion rigs in operation and how many are sitting in the yard. Workover rigs pertain to rigs that are working over a well again in the hope of getting more production from it. a completion rig refers to a rig that has drilled the well, and that rig has just completed the job.

Why it works so well here “It would be really hard to do a report like this in a lot of areas in the country because of the amount of activity going on,” randall said. “You just have to keep it to an area, and we are isolated here.” the January 18 report showed that out of 20 rigs available among contractors in the san Juan basin, two were drilling wells. It

also showed that out of 78 rigs available, contractors were using 21 rigs for workover or completion jobs. there have been weeks when no rigs were drilling anywhere. oil and gas activity in the san Juan basin is probably at its lowest ever, randall said, based on the reports he has been collecting since the late 1990s. “You can see a little pickup, but it’s not enough to brag about. Is it going to pick up? Who knows?”

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Companies make it possible he credits the companies who send weekly information to him for making the rig reports possible. “the only way this report works is if companies will let me know who they are working for,” he said. “If it wasn’t for the contractors out there being supportive and being willing to report their activity, all it would be is just a blank piece of paper. I start getting reports on Mondays from companies. I put out the rig report on

10 BASIN RESOURCES Wednesday. Is it one hundred percent accurate? No. When I put out the report on Wednesday, they could have finished that job that morning and the rig could have gone to the yard, which I wouldn’t know until the next week. It’s as close to what’s going on in the basin as possible.” Randy Pacheco, general manager of A-Plus Well Service, said he looks at the rig report every week. “We’re very fortunate to have that information because it helps us gauge what’s happening in the industry,” he said. “When we know the rigs are busy, it helps us see where we’re at.” Email list grows When Randall started the reports almost 20 years ago, there weren’t many people on his email list. As people learned about the reports, more and more people requested them. His personal email list for the reports has grown to over 300 addresses. He works on the reports at home on his own time. “He’s got such a system set up,” said his wife, Karen Parker. “He never complains. He has guys leave messages on the answering machine saying, ‘Hey, can you add me to your email list?’ It doesn’t bother me at all to have him do it at home.” The list goes to companies in and out of the San Juan Basin who want to know what’s happening here. It also goes to Four Corners Economic Development. “People look at what’s going on out there in the field and if it’s enough to create jobs,” Randall said.

Idea came over coffee The idea for the report began over coffee. “I was at a coffee shop one time eating with a bunch of other guys,” Randall said. “We were just talking about how Baker puts out a rig report for the United States on drilling rigs only. They were talking about how it would be nice to have something for the San Juan Basin. I thought about it and started out very small, just a few companies in the late 1990s. It went from a small report to what it is now.”

Our process? We listen. Really listen. Kristy Visconti Financial Advisor .

4801 N Butler Suite 7101 Farmington, NM 87401 505-326-7200 www.edwardjones.com

Member SIPC

He worked in the oil and gas fields for many years until he retired in 2014, and during his travels for work in many states he has never seen a rig report like his. “I see companies like Chevron that put out reports daily about where their rigs are working. I’m sure other companies put out daily reports about where their rigs are working. But as far as seeing a report where it shows the different companies, I have never seen that.”

Takes 10 minutes It was initially hard to get the rig report started, but now that he has everything set up on an Excel spread sheet and companies report to him every Monday, it takes him about 10 minutes to put the report together. Six or eight years ago when oil and gas activity was brisk in the San Juan Basin, it took him two or three hours a week to put the report together. “I thought about stopping it then because it was taking more of my time than I really had,” he said. “Plus, I was working out of the area, so it was a little harder to keep up with things. Now it’s just a matter of doing it. It’s not a big hassle.” The information on the rig report is personally interesting to Randall because he spent a long career working in oil and gas. But he didn’t start out there.

Grocery store family He grew up in Littlefield, Texas, where he graduated from high school in 1974. His father ran a grocery store in nearby Amherst, Texas. “He sold groceries out front, and our living quarters were in the back,” Randall said. He and his siblings helped out in the store. When he attended South Plains College and Texas Tech, he did so with the intent of getting into the grocery business. He worked at Furr’s Supermarket, climbing the ladder from sack boy to stocker and checker and later to store manager in Hobbs and Artesia, New Mexico. “I knew nothing about oil and gas,” Randall said. “I never even thought about it. I always heard about the good money in it, but I just followed how I was raised.” When he was in Hobbs, someone asked him to put in an application for work in the oil field. He thought about it and decided to do it.

Started as roustabout “I started as a roustabout for Texaco in 1982 in Sundown, Texas,” he said. “As I got further into it, I went back to school and got the knowledge to continue on.” After three years as a roustabout, he advanced to a production tech job which involved checking on wells. From there, he worked in the safety department, then in the facility department where he helped to design well locations. “What drew me to the oil and gas more than anything was the www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 11 drilling side of it,” Randall said. “Something about seeing a drilling rig or workover rig or completion rig always had my interest. It was what I wanted to chase after?”

Move to FarmingtonIn 1990, when there was a downturn in oil, he moved to Farmington, where natural gas production was up. “Texaco needed a production tech in Farmington, and they needed someone to watch over their rig sites,” he said. “That’s the reason why I came to Farmington.” Though he kept his home in Farmington, eventually the job took him other places. For the last 12 years of his career, he was officed out of Houston, Texas. His work involved overseeing multiple rigs to be sure everything ran smoothly. “I didn’t do a whole lot of work,” he said. “The contractors out there are the ones doing all the work. Contractors make

the ones that are over the projects look good. We’re just in charge to make sure everything runs smooth, and we just hoped that everything went well.” Even though he was working at many different job sites in Texas and elsewhere, he continued to put out the rig report every week. When he retired in 2014 from the drilling and completion side of the industry, he took time off from work, but never stopped churning out the rig reports.

ferent things that are going on,” Ken said. “If the oil price goes up, we’re able to see if the rig count goes up. It helps us to show our students how it works. It also helps the college in terms of actually knowing what’s happening so it’s something we can forecast against. It’s been really good for us. And the industry itself uses that report to compare themselves against each other. It’s pretty cool.”

Report will continue Works part-time at college He began working part time at San Juan College’s School of Energy in 2015 as an industrial safety instructor. Ken Johnson, petroleum technology coordinator at the School of Energy, gets a copy of Randall’s rig reports every week. He uses those reports as a tool to keep his students informed. “We’re able to tell our students how the oil and gas industry is reacting to the dif-

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Randall has no plans to stop putting out the rig report. “I’ll probably do it until who knows when,” he said. “It must be something that people really like because it seems like each week I get one or two more people who want to be added to the email list. Plus there are companies out there that rely on it to make rig graphs. They show how the area is up and down. It gives the companies an idea of what is going on in the San Juan Basin.”

12 BASIN RESOURCES

The worTh of a well? How long is a string - it depends A company called Western used to have a TV ad that said, “If you don’t have an oil well, you should get one!” Hmm, maybe Walmart has some out back? But it brings up the question that haunts me in my dreams… “What’s a well worth?” That’s kind of like asking, “How long is a string?” It depends on a lot of variables. It does take a little bit of math to figure out, but it’s only fifth grade math, so stick with me!

Estimated ultimate Reserves The first variable is how much oil we think a well will make (Estimated Ultimate Recovery, or EUR). Let’s take the Mancos oil play as an example. There have been 203 horizontal Mancos wells drilled in the sweet spot along the Highway 550 corridor. Connie Dinning, our evaluations engineer, fit the production decline curve on these wells to predict

george sharpe invesTmenT

manager

merrion oil & gas

the EUR of each. The results are graphed below from lowest to highest. The median well in the middle of the pack is predicted to make 200,000 barrels of oil equivalent (BOE, which converts the gas production to an equivalent barrel of oil).

Net revenue The ultimate profit for a well (or anything else for that matter) is all the revenue minus all the costs. Starting with revenue, the net oil price in the basin (after trucking) is approximately $40/bbl. Therefore, the gross 100 per-

cent revenue is calculated by multiplying 200,000 barrels times $40/barrel, which equals $8 million. However, the operator doesn’t get to keep all that because they have to pay the landowner a royalty, and they may have other overrides burdening the revenue. Assuming a 12.5 percent royalty and a 2.5 percent override, 15 percent of the revenue goes to those entities ($1.2 million), leaving the operator $6.8 million in “net” revenue.

Less taxes and operating expenses Next, we have to pay the “Man”. Production taxes are approximately 8.2 percent, so $560,000 goes to local counties and the state. Please also note that half of all Federal royalty and 100 percent of royalty from any state lease goes to the state of New Mexico, primarily in support of schools and education. That’s a lot of money for each well drilled in the State. And a lot of jobs to go with. Operating costs can vary widely depending on specific well conditions. A Mancos well can cost between $5,000 and $10,000 per month to operate (which pays for a lot more jobs, by the way). Let’s be optimistic and use $5000 per month. Over a 20-year life, that adds up to $1.2 million.

Operating profit and present value The math to calculate operating profit is intuitive…it is the $8 million in gross revenue, less $1.2 million to the royalty owners, less $0.56 million in taxes, less $1.2 million in operating expenses, leaving $5.04 million to the operator. www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 13 That sounds like a lot. However, keep in mind that money comes in over a 20+ year life. If I’m going to give you $1 million, would you rather have it now or an “average” of 10 years from now? Now, of course, because if you invested in the stock market at an 8 percent return, it would be worth $2.16 million in 10 years. (Future Value = Present Value * (1 + interest)^years). If you invert that same ratio, $1 million 10 years from now is only worth $0.46 million today. Using that 0.46 multiplier, the Present Value (discounted at 8 percent) of the $5 million in the future is only $2.3 million today.

Total profit after drilling The question is, can you drill a Mancos horizontal for that less than $2.3 million? The answer, unfortunately, is “No.” It costs around $5 million to drill and com-

plete a one-mile Mancos horizontal. So the middle of the pack well will make its money back over 20 years, but it doesn’t even come close to generating a competitive rate of return. You are far better off putting your money in the stock market. Given that, it should come as no surprise that there is only one rig running in the San Juan Basin.

Hope for the future Connie’s predictions aside, there is some good news for the future. First, many companies are more aggressive predicting reserves than Connie (she is SO conservative). Second, if you dig deeper into the statistics, you would find that the operators have been learning over time (drilling longer laterals, more efficient fracks), and the more recent wells have been doing better and better. As a

result, WPX is predicting as much as 650,000 BOE vs. Negative Nancy’s 200,000 BOE median well. http//wpx-extranetmedia.s3.amazonaws.com/205162/wpx_3q_2 016_investor_update_final.pdf Consequently, WPX is planning to run one rig in the basin through 2017, spending up to $200 million to drill 40 wells. In addition, Encana plans to be active, and there are several newer private equity companies in town (Logos, DJ Resources, Juniper Resources, among others) who are putting together a land position with plans to drill. Let’s keep our fingers crossed that WPX is right. So how much is a well worth? How long is a string? It depends. But now, if you see one at Walmart, you can figure it out!

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14 BASIN RESOURCES

Oil and gas alOne wOn’t save new MexicO’s struggling ecOnOMy Politics, energy, and their near-term impacts on New Mexico’s struggling economy In the last edition of Basin Resources I discussed the impacts of a Trump presidency (and opposite political shifts here at home) on the energy sector, especially those most likely to impact New Mexico and the San Juan Basin.

Paul gessing President riO grande FOundatiOn

Already, Mr. Trump has followed through on a few of his pro-energy campaign promises including: • Abandoning the Trans-Pacific Partnership (thus shutting off potential LNG exports to Japan) • Jump-starting the Dakota Access and Keystone Pipelines (thus bringing additional supplies from Canada and the Dakotas to market) • Rolling back the Obama-era Clean Power Plan (thus offering at least a temporary reprieve to coal power plants nationwide) • Naming Scott Pruitt (a prominent opponent of EPA overreach) as the head of the EPA.

Numbers in mid-February from M&A specialists Dealogic showed that total oil and gas transactions in the first six weeks of the year have already reached $63.3 billion, with a full 98 transactions having been completed up to February 13.

Permian Basin The Permian Basin has been an epicenter of optimism with Austin-based driller Parsley Energy buying about 71,000 acres of Permian Basin land for $2.8 billion. The deal comes just a few weeks after Exxon Mobil Corp. announced it was buying the Permian Basin holdings of the Bass family,

of Fort Worth, in a more than $6 billion stock and cash deal that doubles its presence in the basin. One might expect that all of this activity is the result of continuously rising prices, but that’s not necessarily the case. After jumping from $48/barrel to the mid-$50/barrel range in late 2016, the price of oil has remained range-bound between $50 and $55. Now, what does this all mean for New Mexico-based producers and the state’s elected officials who rely so heavily on oil and gas revenues? The current price range and stability appears to be the result of OPEC’s production cuts and most nations actually sticking to those cuts (for now). On the flip side, U.S. producers have filled at least a portion of the gap, as have nonOPEC producers. In other words, assuming that U.S. production in particular continues to grow, as seems likely given the intense buying and selling of oil assets, it would appear that oil

With the exception of abandonment of the Trans-Pacific Partnership, each of these moves should have a positive impact both on American energy and on the broader economy. The stock market has responded with massive gains, although the broader impact on job creation and overall economic growth for President Trump and his progrowth/pro-energy policies remains to be seen. What we do know is that optimism abounds in the oil and gas sectors, even as prices have remained in the $50-$55/barrel price range. According to OilPrice.com, 2017 has been, so far, the best year ever for petro-deals. www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 15 prices are unlikely to go much higher. If OPEC decides to end production limits or cheating increases, prices could drop.

Other factors Additional factors affecting oil prices include the global economy and the potential that Trump’s election has ushered in a new era of stronger economic growth – read: more energy consumption. As mentioned earlier, the stock markets sure seem to believe this is happening.

OPEC Overall, I don’t see oil prices going up much. As OPEC dials back production in order to support higher prices, American and non-OPEC producers will step in. This may be the oil and gas equivalent of a truce, but the concern is that OPEC’s discipline crumbles and the market is flooded again.

The Future The future is uncertain, but oil and gas alone won’t save New Mexico’s struggling economy which has faced and will likely continue to face budget deficits and slow growth for years to come. Is the mid-$50 range the “new normal” in terms of prices? There’s no way to know, but it would seem to be the best the industry and the best the state of New Mexico can ask for. Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility

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16 BASIN RESOURCES

SPIRIT of Conservation and Innovation New Mexico will receive ConocoPhillips grant funds Debra Mayeux Basin Resources New Mexico and Colorado, along with nine other states, will receive a portion of the $1.2 million grant awards through ConocoPhillips and the National Fish and Wildlife Foundation’s SPIrIT of Conservation and Innovation program. ConocoPhillips announced the grants February 16, saying the funds will finance restoration and enhancement of important habitats while also helping to advance innovative water conservation technologies.

Nine organizations The money will go to nine organizations in alaska, Colorado, Kansas, Minnesota, Montana, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming. “The grants awarded this year through this innovative partnership, between the National Fish and Wildlife Foundation and ConocoPhillips will improve priority habitats for targeted fish and wildlife species in some of america’s most important landscapes,” said eric Schwaab, vice president of the foundation’s conservation programs.

Restore and protect grasslands The projects are set to restore more than 16,300 acres of grassland bird habitat, which will protect the whooping cranes in Texas and the lesser prairie chickens in Kansas, Schwaab said.

Stream flows There also will be an increase in part-

ner collaboration and will establish decision support tools, increase critical late season stream flows and develop innovative on-site tools for aquatic invasive species prevention, according to ConocoPhillips. “Identifying innovative species and habitat conservation solutions that help provide longlasting ecological benefits is a primary goal of our SPIrIT of Conservation and Innovation program,” said John Sousa, manager of communications, brand and community relations at ConocoPhillips. “Through our SPIrIT of Conservation and Innovation program and partnership with the National Fish and Wildlife Foundation, we are proud to support this

year’s winners and their pursuit to advance water and biodiversity conservation efforts.” This program is a public/private partnership dedicated to the investment in proven techniques for improving and restoring critical fish and wildlife habitat, while addressing longstanding conservation challenges. each of the nine grant recipients will match the $1.2 million in funding with $7 million in financial contributions or in-kind support. This program has invested more than $30.5 million since it was developed in 2005. These funds have gone toward the conservation and restoration of more than 214,000 acres of fish and wildlife habitat. www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 17

Fourth quarter report

ConocoPhillips reports a smaller than expected loss Debra Mayeux Basin Resources ConocoPhillips reported a loss of $35 million in the fourth-quarter of 2016. This was down from a $3.5 billion loss in the same quarter of 2015. The company’s full earnings for 2016 showed a net loss of $3.6 billion, with a full-year 2015 net loss of $4.4 billion. “Our recent performance highlights the significant changes we’ve made as a company to respond to a world of lower and more volatile commodity prices,” said ryan Lance, chairman and chief executive officer. The company's total realized price was $32.93 per barrel of oil equivalent (bOe). It was15.4 percent higher a year ago. “For the second quarter in a row our cash from operating activities exceeded capital expenditures and dividends paid.” Lance said the company is working to curb its losses. “Our capital intensity and cost structure are dramatically lower, we’ve increased our dividend, and our debt reduction and share buyback programs are underway. ... Our disciplined, returns-focused value proposition will enable us to deliver predictable performance to share-

F,” a prepared press release stated. “In alaska, the first phase of the Drill Site 2S project was successfully concluded. First production was achieved at alder in europe and development drilling continued in the Greater ekofisk area. aPLNG Train 2 achieved first cargo in australia and first oil was achieved at Malikai in Malaysia and at the bohai wellhead platform J in China.” The company also resumed its production in Libya.

2017 outlook flat 2 percent growth

Ryan Lance holders through the cycles,” he said.

Eagle Ford and Bakken Most of ConocoPhillips growth in the quarter took place in other countries, with only an increase of eight rigs in the lower 48. Those rigs were in eagle Ford and bakken. “record production levels were achieved in the oil sands assets in Canada, driven in part by continued ramp up at Surmont and first production from Christina Lake Phase

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ConocoPhillips stated that its outlook for 2017 results in a flat to 2 percent growth when compared to the full-year production of 2016. “Guidance for production and operating expenses is $6.1 billion, which results in adjusted operating cost guidance of $6.0 billion,” a press release stated. “The company’s 2017 guidance for capital expenditures is $5.0 billion; corporate segment net expense is $1.3 billion or $1.2 billion adjusted corporate segment net expense; depreciation, depletion and amortization is $8.0 billion; and exploration dry hole and leasehold impairment expense is $0.2 billion.”

18 BASIN RESOURCES

Year-to-Year total Production uP 19 Percent Muncrief: Operationally, we hit the mark in the fourth DEbra MaYEuX Basin Resources WPX reported in its fourth-quarter earnings reports that the San Juan basin has produced more than 1 million barrels of oil equivalent, or bOE, per day for WPX on a six-well pad in West Lybrook, over a 180-day production cycle, . The West Lybrook unit represented an average of approximately 1,000 barrels of oil equivalent per day per well.

San Juan County also in San Juan County, WPX reported “two successful step-out delineation wells in the Kimbeto Wash and North Escavada areas,” which have cumulative 160-day production of more than 250,000 bOE, which represents a “combined average of approximately 875 bOE per day per well.” In the Williston basin, “WPX completed a total of 19 Williston DuCs during fullyear 2016, including 14 in the fourth quarter. Nine 3-mile laterals on the Peterson, North Segment and Olive Mae pads had a combined average peak rate of 1,900 bOE per day. Ten 2-mile laterals on the Wells, Helena ruth Grant and Owl Comes Out pads had a combined average peak rate of nearly 2,600 bOE per day,” the company reported.

Williston Basin also in the Williston basin, WPX reported that new wells in 2016 ranked first in the basin for cumulative oil production over 90-day and 180-day periods. “The

WPX stock offering WPX Energy made a public offering of 45 million shares of its common stock beginning January 12, with total gross proceeds of approximately $600.8 million. “Pursuant to the offering WPX has granted the underwriters a 30-day option to purchase up to an additional 6.7 million shares of WPX’s common stock,” a statement from the company said. “The offering was upsized from the previously announced offering of 42 million shares of common stock with an option to purchase up to an additional 6.3 million shares.” The offering closed January 19, with

the statement that the underwriters intend to offer shares from time to time for sale in one or more sales on the New York Stock Exchange, according to a press release from WPX. WPX stated that it intends to use the net proceeds from the offerings and cash on hand to finance the acquisition of assets from Panther Energy Company II, LLC, and CP2 Operating LLC. The offering was not made on the condition of the acquisition, and if the acquisition was not consummated, WPX stated it would use the net proceeds for working capital needs or general corporate purposes.

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BASIN RESOURCES 19 90-day data was derived from more than 400 locations, including nine WPX wells,” the company said. “The 180-day data was derived from nearly 250 locations, including six WPX wells. These results highlight the success of how WPX continues to evolve its completion designs.” These basins, coupled with other WPX production, gave the company a record oil output during the last quarter of 2016. The growth represented a rate of 30-40 percent growth with its oil production averaging 44,700 barrels of oil per day. This was 15 percent higher than in the third quarter.

Hit the mark in the fourth quarter “Operationally, we hit the mark in the fourth quarter and achieved more than we set out to do by bringing some of our expected oil volume growth online ahead of schedule,” said Rick Muncrief, chairman, president and chief executive officer. “We accomplished this even as we continue to do the necessary work to build an even deeper portfolio of projects that drive sustained, profitable growth. Our overriding objective is long-term value creation on a per share basis.” WPX reported an unaudited fourthquarter 2016 net loss attributable to common shareholders of $175 million, or a loss of $0.51 per share on a diluted basis, primarily associated with non-cash net losses from the company’s hedge book that result when rising commodity prices

Options

2017. Similar to its hedging strategy to protect revenues, WPX also has worked to control costs by implementing a supply chain management function over the past two years. The capability has allowed WPX to self-source completions in the Delaware and Williston basins. Approximately 70 percent of WPX’s 2017 D&C costs are currently under contract, which helps mitigate potential inflation as demand for oilfield services increases, the company stated in a prepared release.

These options include the potential for a joint venture. WPX expects to complete this process by the end of second-quarter

Editor’s notE: the WPX press office contributed to this story.

are higher than underlying contractual prices. The company’s adjusted net loss in fourth-quarter 2016 was $54 million, or a loss of $0.16 per share. During the fourth quarter, WPX also initiated a process to evaluate strategic options for midstream infrastructure in the Delaware Basin specifically focused on crude oil gathering and natural gas processing.

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20 BASIN RESOURCES

Congressman votes to overturn BLm pLanning ruLe Pearce: Rule strips local governments of ability to coordinate in land use planning Debra Mayeux Basin Resources Congressman Steve Pearce, r-N.M., voted February 7 to overturn the bureau of Land Management’s Planning 2.0. rule when he voted for the Congressional review act, which gives Congress the ability to overturn recently created federal regulations with a joint resolution passed by both chambers and signed by the president. Pearce said the 2.0 rule was a lastminute effort by the Obama administration to impose new regulations on the oil and gas industry in New Mexico. The 2.0 rule dealt with the bLM’s planning regulations by “affirming the important role of other Federal agencies, State and local governments, Indian tribes and the public during the planning process,” according to the rule. This rule also states that it “enhances opportunities to public involvement and transparency during the preparation of resource management plans.” Weakens input from surrounding communities Pearce said the rule, actually “strips local governments of their ability to coordinate in local land use planning with the agency on behalf of the people.” He added that it “ultimately weakens input from surrounding communities and

local citizens who are directly impacted by the management of federal lands.” The bLM argues that the rule allows the bLM to look at the impact on wildlife habitat and, then, consider the demand for renewable and non-renewable energy sources.

collaboration and should not be included in the process at the same level as the general public.”

New Mexico Farm and Livestock Bureau

Special interest groups Pearce said the rule prioritizes “special interests over the protections of citizens.” More than 60 organizations supported overturning the bLM Planning rule 2.0, including The New Mexico association of Counties, the New Mexico Oil and Gas association, the New Mexico Coalition of Conservative Districts and the New Mexico Farm and Livestock bureau. “although the New Mexico association of Counties appreciates the efforts of the bureau of Land Management to update their governing rules, the proposed bLM Planning 2.0 rule does not go far enough to ensure that local governments have meaningful engagement in decisions that affect their communities,” said Tyler Massey, president of the New Mexico association of Counties. “Counties must be involved in government-to-government

Chad Smith, CeO of the New Mexico Farm and Livestock bureau, pointed out that 40 percent of the state’s lands are under federal management, and then the government adds red tape to the process of being able to utilize that land. Smith applauded the resolution to repeal the rule, saying it would “ensure that we may continue the best management practices under multiple uses.” Smith added, “Safe-guarding multiple uses of federally managed lands is the best possible stewardship for our land and the safest way to insure that those lands are in the best possible conditions for future enjoyment and productivity.”

NMOGA The New Mexico Oil and Gas association also stated the need for stakeholder and local government involvement in planning decisions for public lands. “The rule weakened the ability of local governments and other local stakeholders to impact land use planning that directly affects them,” said ryan Flynn, executive director of NMOGa. “The states play an important role as incubators of innovative land management practices in our nation.”

www.basinresourcesusa.com • SPRING 2017

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GrazinG fees Go down BLM plans a 24-cent decrease per head each month on public lands Debra Mayeux Basin Resources The bureau of Land Management has announced a $0.24 decrease in the public-land grazing fee for 2017. The announcement came January 31 when the government agency announced the fee would drop from $2.11 per animal unit per month (auM) to $1.87 per animal unit per month for public lands and $1.87 per head month (HM) for lands managed by the u.S. Forest Service. The auM or HM are treated as equivalent measures for fee purposes, and they are used on public lands to count for one cow and her calf, one horse, or five sheep or goats for one month. The fee was determined by a congressional formula established in 1978 under the Public rangelands Improvement act, and it has continued under president executive Order issued in 1986. The

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order states that the fee cannot be less than $1.35 and any decrease or increase cannot exceed 25 percent of the previous year’s level. The new fees are effective in March and will apply to nearly 18,000 bLM grazing permits and 6,500 Forest Service grazing permits. This new fee of $1.87 will apply to grazing in 16 Western states including arizona, California, Colorado, Idaho, Kansas, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, utah, Washington and Wyoming. The bLM, an agency of the u.S. Department of the Interior, manages more land – over 245 million surface acres – than any other Federal agency. Most of this public land is located in 12 Western states, including alaska. The Forest Service, an agency of the u.S. Department of agriculture, manages approximately 193 million acres of Federal lands in 44 states, Puerto rico, and the Virgin Islands. The bLM manages more than 245 million acres of public land, the most of any Federal agency. This land, known as the National System of Public Lands, is primarily located in 12 Western states, including alaska. The bLM also administers 700 million acres of sub-surface mineral estate throughout the nation. The bLM's mission is to sustain the health, diversity, and productivity of america's public lands for the use and enjoyment of present and future generations. In Fiscal year 2016, the bLM generated $4.1 billion in receipts from activities occurring on public lands.

22 BASIN RESOURCES

Leaves san Juan County for the state house

Ken McQueen named new cabinet secretary for state EMNRD Gov. Susana Martinez named Ken McQueen as the new cabinet secretary of the New Mexico Energy, Minerals and Natural Resources Department in December. Martinez’s appointment of McQueen, who has more than 35 years of domestic and international energy experience, comes at a time when city and state officials are struggling with a $69 million budget shortfall due in part to a downturn in oil and natural gas prices. McQueen's experience in- Ken McQueen

cludes serving as the vice president of the San Juan Bason’s WPX Energy since 2012. He has also worked as a director, manager and engineer at the company and managed its assets in the Four Corners area of New Mexico and Colorado. He holds a B.S. in Petroleum Engineering from the University of Tulsa, where he previously served as an adjunct professor in Petroleum Engineering and the Chairman of the School’s Industry Advisory Board. McQueen held memberships in New Mexico Oil and Gas Association’s (NMOGA) and was on the Board of Directors, the

* McQueen 34

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NewMexicoHighlands.com/Farmington www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 23

LegisLative assignments New Mexico Congressman on 2 natural natural resource subcommittees Debra Mayeux Basin Resources u.S. Congressman Steve Pearce, r-N.M., has been appointed to serve on the energy and Mineral resources Subcommittee and the Federal Lands Subcommittee of the House Committee on Natural resources. Pearce previously served as the ranking Member of the Subcommittee on energy and Mineral resources, which is responsible for overseeing domestic energy production and mining on federal lands. He also was the chairman of the Subcommittee on Federal Lands, which is responsible for covering all matters related to the National

Park System, u.S. Forests, public lands and national monuments. “I’m honored to represent the priorities of Southern New Mexico on these subcommittees,” Pearce said January 31 in a prepared statement released by his office. “I understand the vital role I have in ensuring our nation’s resources are produced in a responsible manner and our federal lands are properly utilized and mainSteve Pearce tained.”

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Pearce will play a key role in creating jobs and growing the economy through reliable energy resources and proper lands management. “I’ll remain committed to strengthening our reliance on domestic energy resources and protecting multiple uses on federal lands to create jobs throughout our communities in Southern New Mexico and across the nation,” he said.

24 BASIN RESOURCES

Living together Wildlife and the oilfield co-exists peacefully in New Mexico The Independent Petroleum Association of New Mexico wants your best photos and videos. The premise that man and nature cannot co-exist, that where man encroaches, wildlife scatters and dies out, is simply untrue. When the Alaskan pipeline was being built, environmentalists bemoaned the fate of the caribou, saying the animals would suffer immensely. The exact opposite happened. In Prudhoe Bay, about 50 miles west of the Arctic National Wildlife Refuge, the number of caribou has quintupled since production began in early 1978. The caribou often use the oil field equipment and the adjoining Alaskan pipeline for a windbreak and warmth. Much of the year the temperature in this region is a frigid 40 degrees below zero.

First place - Bobcat by Ben Ackman of Carlsbad Second place - Roadrunner by Francisco Rivera of Bloomfield Third place – Chipmonk by George Reid of Bloomfield

Wildlife abounds In New Mexico oil fields, many species of wildlife use equipment in a productive manner. Birds will use elevated surfaces as foundations for nests. Deer, like the caribou, use the equipment for a windbreak and warmth. There is so much wildlife in the oilfield that in 2004 IPANM created a contest where oil field workers and others could win cash prizes for the best photo or video demonstrating wildlife adapting to manmade changes in their environment.

Contest Tips Zoom out and include enough of the oilfield equipment so it is identifiable. Balance the photo content between the wildlife and the equipment — both are important. Use the highest quality settings available on your camera. Higher resolution photos work the best. First Place - $1,000 Second Place - $500 Third Place - $250 You can enter the contest and upload photos at ipanm.org. For more information call IPANNM at 575.622.2566. www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 25

LEt’s Put POLitiCs A siDE Time for all of us to work as a national team to make the U.S. a world leader in energy independence Energy independence has always been a topic of much conversation and countless columns and articles in the media. It was during the Arab Oil Embargo of 1973, the energy crisis of 1973-1974, that the United States first experienced the possibility that it could run out of oil when the U.S. provided aid to Israel during the Yom Kippur War in 1972. The Organization of Petroleum Exporting Countries (OPEC) increased oil prices and instituted an oil embargo that cut the U.S. off from Middle East oil. By the end of 1973, the embargo increased the cost of a barrel of oil to $12 – up from $8 in less than a year. `The OPEC embargo was lifted in 1974. By that time, however, the energy crisis that was created by the embargo had wreaked economic havoc in the United States that created a devastating recession. Experts in the economic and political fields who had studied the after effects of the embargo, encouraged our country’s leaders to explore techniques that would place the United States in a more oil-independent position.

Not much has changed Unfortunately, little has changed since the 1970s regarding our energy independence. It is still a much cussed and discussed topic of almost every elected official, economist, and energy industry leader. And it still remains just a discussion. It is time for the United States to look at its strategy for the next 5 to 10 years. It is time for our leaders to begin efforts to be energy efficient and energy independent. We need to look to the future and determine how we want to grow and how to make our economy – especially here in the San Juan Basin – more energy versatile. We need to

RANDY PACHECO

engage our elected officials, the leaders in the oil and gas/energy industry, and those who want to be part of the solution to energy dependence in conversations, focus groups, meetings and forums to share their ideas and their visions for working together to become less economically dependent on the foreign energy industry. Time to get serious about policies Now, today, is an opportunity for the United States and the energy industry to get serious about policies that will, in the next ten years, make us energy independent. Now is the opportune time to make those policies and to move forward with that strategy. We need to repeal some of the Bureau of Land Management and Environmental Protection Agency’s regulations on oil and gas and we need to take a stand and position the United States as a leader in energy development. Over the next 3-5 years, we need to work with countries across the world and to export our products. We need to seize the opportunity to change the way the world produces energy. For too many years, oil has been used as a political weapon to control the world. It is time – and this is the opportunity – for the United States to take a look at the energy industry and to change the way the world uses – and missuses – an industry that is critical

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to every country all over the world. Propell Technologies, in a website article in July of 2014, gave six reasons why energy independence is so important to the United States: • Producing our own energy eliminates the pressing need to remain on “friendly” terms with oil-rich Middle Eastern countries that possess anti-democratic ideologies • Lower energy costs from the elimination of high priced imported oil will stimulate the economy and drive job growth • Energy independence will strengthen our standing as a super power and provide leverage in dealing with rogue or terrorist nations who threaten global oil supply • U.S. economy will become less susceptible to damage from volatility in global oil prices providing and enabling steadier growth • U.S. balance of trade will improve further, driving U.S. economic and job growth • Small and medium enterprise (SME), an outsize influence on domestic economic growth and a sector especially susceptible to damage from energy price volatility, will benefit It is time to put politics aside in our country and work as a national team to make the United States a world leader in energy independence. It is time to rethink and repeal regulations that limit our ability to create an environment that embraces energy independence. It is time we become – and remain – independent of the need to import energy from other nations. It is time to take what we’ve learned from the last almost 45 years and put that knowledge to work. It is time, and the time is now.

26 BASIN RESOURCES

Independent producers support congressional review Businesses of all types have been subjected to an unprecedented number of federal regulations this past year. The Congressional Federal Register ended calendar year 2016 with a record 97,110 pages, consisting of 3,853 regulations, more than 10 regulations per day. A number of significant oil and gas regulations were finalized by the Obama administration just before Inauguration Day. Article I, Section 8 of the U.S. Constitution places the responsibility to make “all Laws” in the hands of the legislative branch, the U.S. Congress. Recent Bureau of Land Management (BLM) regulations, such as Onshore Order No. 3 (Site Security), Onshore Order No. 4 (Oil Measurement), Onshore Order No. 5 (Gas Measurement) and Onshore Order No. 9 (Venting & Flaring) will have a disproportionate impact upon San Juan Basin oil and gas well operators. The cumulative impact of the associated compliance costs will likely cause many of the marginal natural gas wells in the San Juan Basin to become uneconomic, accelerating unnecessarily either their temporary or permanent abandonment. San Juan County leaders have recognized these burdens and have written several letters cautioning against unwarranted implementation of such new federal rules. Under the Trump administration and a receptive Congress, operators may find

tom mullIns Independent petroleum AssocIAtIon of nm

relief from some or all of these recent dictums. The Federal Congressional Review Act is a subsection of the Small Business Regulatory Fairness Act of 1996, which allows Congress, by majority vote in both the House and Senate, to disapprove executive branch regulations and rules within sixty (60) days of their enactment. President Trump has indicated his willingness to sign some of these resolutions if they reach his desk in a timely fashion. Since the above mentioned Onshore Orders went into effect on January 17, the U.S. House has passed House Joint Resolution (HJR) 74 to repeal OSO No. 9, and the House is considering HJR 56, sponsored by New Mexico Congressman Steve Pearce, to repeal OSO No. 3. Additional resolutions to repeal these remaining BLM regulations, and other burdensome federal regulations upon businesses, are expected in the coming weeks. Federal, state and local politicians must remain cognizant of the consequences as-

sociated with adding new regulations and costs upon the many marginal producing wells in our area. The federal government defines a marginal producing well as producing less than 15 barrels of oil equivalent per day, equating to 90 thousand cubic feet of natural gas per day. New natural gas producing wells decline in production quite rapidly within their first year, but often have an extended life of more than 40 years as a marginal producer. With so few new wells being drilled in the San Juan Basin, ensuring that a responsible federal regulatory structure exists, which should include reasonable regulatory grandfathering provisions, will ensure that more than 10,000 long-life marginally producing natural gas wells can continue to contribute to our local and national economy. Independent New Mexico producers are supportive of recent congressional efforts to repeal all of these burdensome federal regulations through use of the Congressional Review Act, which local operators believe will help the basin’s business community. Tom Mullins is a registered professional Petroleum Engineer; the Engineering Manager of Synergy Operating, LLC. He is currently serving as president of the Independent Petroleum Association of New Mexico (IPANM). More information can be found at www.ipanm.org

www.basinresourcesusa.com • SPRING 2017

BASIN RESOURCES 27

The 2016 Merrion Engineering Mentorship Class — courtesy photo Front: Deanna Manwell, Hosman Caraveo, Omar Reyes, Danielle Andrews, Melanie Kemp, Lexie Jackson, Vincent Gomez, George Sharpe, Micaela Olivas, Abigail Nakai, Paige Thompson, Meg Mullins, Christian Jones Back: Jordan Domingo, Adrian Waddoups, Kaitlynn Graffeo, Cody Calkins, Allie Jones, Richard Cross, Ethan Martinez, Noah Maestas, Sol Rascon, Nick Granger, Ned Merrion, Diego Sanchez-Morales, Riely Lucero, Dyllan Taylor, Cameron Baca, Hugo Guiterrez Jr., Jared Williams, Jimmy Herrera

SeniorS intereSted in career in petroleum engineering

Sign-up begins for 2017 Merrion Oil and Gas Petroleum Engineering Mentorship Program Debra Mayeux Basin Resources High school seniors interested in learning about a career in petroleum engineering can sign up for the Merrion Oil and Gas Petroleum engineering Mentorship class, which begins in Fall 2017. “It ain’t rocket surgery,” said George Sharpe, who leads the program. “yes, the sad reality is a high school student can do my job.” Sharpe claims he is teaching the students to gamble, but in reality he is teaching them to make predictions on the value of an oil and gas well. “The mentorship students learn to use these simple tools to predict the future production from a well,” Sharpe said. “They then build a cash flow analysis

spreadsheet that turns those predictions into dollars and cents.” Sharpe in his analogy compares an oil reservoir to a big Gulp drink, in which students calculate the volume of oil in a reservoir just like they would the volume of liquid in the drink. The sandstone rock is similar to crushed ice and the carbon dioxide in the soda is like the gas coming out of the ground when the pressure is released from putting a straw in the container. The pump essentially would be the straw. He compares a gas reservoir to a scuba diving tank or a basketball filled with air. “When you drill a well into a gas reservoir, or open the valve on your scuba tank, or poke a hole in your tire, gas flows out because the reservoir pressure inside is greater than the surface pressure outside,”

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Sharpe said. These are analogies the students will learn to use in order to make those predictions about the value of a well. “The mentorship students learn to use these simple tools to predict the future production from a well,” Sharpe said. “They then build a cash flow analysis spreadsheet that turns those predictions into dollars and cents.” Merrion Oil and Gas takes the students’ predictions and bids on the property. “Merrion tries to buy the property in an online auction, occasionally successfully.,” Sharpe said. “This last year we bid $330,000 on some gas wells in Wyoming, but were bridesmaids again.” any student interested in participating in the program is welcome to contact Sharpe at 505.402.5798 or by email at gsharpe@merrion.bz.

28 BASIN RESOURCES

Agreement for 15 yeArs NTEC to provide coal to Four Corners Power Plant Debra Mayeux Basin Resources Navajo Transitional energy Company will be providing coal to Four Corners Power Plant for the next 15 years, after reaching an agreement on January 1 with The North american Coal Corporation and its subsidiary bisti Fuels Company, LLC. “We believe this new contract mining relationship will help to ensure the Navajo Nation continues to receive significant coal royalties for the coming years,” said Clark Moseley, CeO of Navajo Transitional energy Company, or NTeC.

The plan is for the Navajo business entity to mine an estimated 6 million tons of coal per year for the purpose of keeping the Four Corners Power Plant operational. Navajo Transitional energy Company and North american Coal have been in negotiations since 2015 in preparation for a complete transfer of control over Navajo Mine from bHP billiton to North american Coal to Navajo Transitional energy Company, according to Moseley, who said “During this time, NTeC and North american Coal have achieved much and learned to work in a collaborative manner.” He added, “We continue to believe that NTeC, working together with North

american Coal, will meet our contractual duties with Four Corners Power Plant.” Steven Gunderson, chairman of the board of NTeC, said this contract shows the Navajo Nation is ready and able to “effectively engage with business interests that operate on a national and global scale to secure jobs and revenue for the Navajo Nation and its people.” Navajo Mine employs 340 people, most of whom are Navajo, and NTeC was created by the Navajo Nation in 2013 to purchase Navajo Mine from bHP billiton in order to secure those jobs, as well as the nearly 350 people employed at Four Corners Power Plant.

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NTEC tries to buy shares in APS Four Corners Power Plant Debra Mayeux Basin Resources Navajo Transitional energy Company, or NTeC, is in negotiations with arizona Public Service in an attempt to purchase a 7 percent interest in the Four Corners Power Plant in Fruitland. The option to buy has been called “a valid option” by NTeC CeO Clark Moseley. “We’re under discussions with aPS regarding the acquisition of that 7 percent ownership,” he said.

NTeC is a Navajo-owned business that owns and operates Navajo Mine, the sole provider of coal to Four Corners Power Plant. The board of NTeC approved a purchase of 7 percent interest in the plant during a meeting in December 2015. This 7 percent interest became available when el Paso electric made a decision to sell its interest in the plant, because of “concerns about the environmental impact of coal-produced energy,” according to a press release from NTeC. Moseley, however, said he could not discuss the possibility of the purchase,

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nor would he comment on the possible benefits of the investment. NTeC is in “active business negotiations with aPS.” a communications consultant with aPS has confirmed the company was notified by NTeC that the Navajo-owned company wants to acquire the 7 percent interest in the plant. annie DeGraw, of aPS, confirmed the purchase was in accordance with the provisions of the coal agreement between the two entities. “Pursuant to that agreement, they have up to one year to complete the acquisition,” she said.

30 BASIN RESOURCES

Imports set for declIne

U.S. crude oil imports from Saudi Arabia and Iraq recently increased, but may decline soon U.S. crude oil imports from Saudi Arabia and Iraq, two of the United Statesâ&#x20AC;&#x2122; main sources for imported crude oil, have risen since reaching relatively low points in 2014 and 2015. On a combined basis, crude oil imports from these countries are the highest since late 2012. However, recent market developments, including the November 2016 agreement among certain members of the Organization of the Petroleum Exporting Countries (OPEC) to reduce production and the recent widening of price differences between Dubai/Oman crude oil and U.S.-produced Mars crude oil, suggest that U.S. imports from Saudi Arabia and Iraq are now becoming less attractive to U.S. refiners. In late 2016, high production in Saudi Arabia and Iraq, as well as seasonally low internal demand in Saudi Arabia, contributed to record crude oil exports from Iraq and near-record exports from Saudi Arabia, according to data from the Joint Organizations Data Initiative (JODI). Saudi crude oil exports reached 8.3 million barrels per day (b/d) in November 2016, the highest level since May 2003, before declining to 8.0 million b/d in December. Saudi exports generally increase from August to November as seasonal declines in domestic consumption increase availability of crude oil for export. In Iraq, exports reached a record high of nearly 4.1 million b/d in November 2016 and remained at that level in December. According to JODI data, Saudi and Iraqi production levels were relatively high prior to the pledged January 2017 production cuts , with December 2016 volumes up 321,000 b/d and 700,000 b/d, respectively, from their year-ago levels, creating an opportunity

to increase exports. Although crude oil exports from Saudi Arabia and Iraq increased in November and December, transit times result in delays before these shipments arrive in the United States. Shipments take about seven weeks to reach the U.S. Gulf Coast from the Persian Gulf after traveling around the southern tip of Africa. Using a smaller vessel capable of transiting the Suez Canal in Egypt, a voyage from the Persian Gulf to the U.S. East Coast takes an estimated five weeks. Traveling from the Persian Gulf to the U.S. West Coast on a Trans-Pacific route requires about six weeks. Given transit times, cargos exported from Saudi Arabia and Iraq in November and December 2016 would be expected to arrive in the United States between December 2016 and February 2017. Imports from Saudi Arabia into the United States increased for five consecutive weeks, rising from 1.0 million b/d for the week ending January 6 to 1.3 million b/d for the week ending February 10. Similarly, U.S. imports from Iraq grew for five consecutive weeks, increasing from 373,000 b/d for the week ending December 9, 2016, to 723,000 b/d for the

week ending January 13, 2017. The trend of increasing U.S. imports from Saudi Arabia and Iraq seems unlikely to continue, given recent market developments. The price difference between Dubai/Oman medium, sour grade oil, which serves as a benchmark price for similar grades produced throughout the Middle East, and Mars, a U.S. crude oil with similar properties, was relatively low during 2016. For this reason, medium and heavy crude oils from Saudi Arabia and Iraq were relatively attractive to U.S. refiners because they produced a profitable slate of finished products when processed in complex refineries. After OPEC announced crude oil production cuts in late November 2016, the relative price of Dubai/Oman crude oil rose because the supply reductions pledged by Middle East producers disproportionately affected medium, sour crudes. In January 2017, the price premium of Dubai/Oman over Mars reached its highest level in more than a year, likely encouraging U.S. refiners to process more domestic medium, sour barrels while reducing imports of comparable grades from the Middle East.

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U.S. oil drilling increasingly focused in Permian Basin U.S. drilling activity is increasingly concentrated in the Permian Basin, which spans parts of western Texas and southeastern New Mexico. The Permian now holds nearly as many active oil rigs as the rest of the United States combined, including both onshore and offshore rigs. Exploration and production companies are increasing merger and acquisition (M&A) spending in the United States, recovering from a low period of M&A spending in 2015 and the first quarter of 2016. This change is attributed to two key factors. First, weekly average West Texas Intermediate crude oil spot prices averaged between $40 per barrel (b) and $50/b since mid-April, an increase from prices averaging near $30/b in the first quarter of 2016. Second, improved credit conditions, as reflected in lower spreads in the yields between energy bonds and U.S. Treasury bonds, suggest improved investor sentiment in the U.S. upstream oil sector. Several of the larger M&A deals involved Permian Basin assets, where drilling and production is beginning to increase. Based on data through November 10, the second half of 2016 already has more M&A spending than the first half of

2016, but on fewer deals. The 93 M&A announcements in the third quarter of 2016 totaled $16.6 billion, for an average of $179 million per deal, the largest per deal average since the third quarter of 2014. Although only 11 of the 49 deals so far in the fourth quarter of 2016 are in the Permian Basin, they accounted for more than half of total deal value Merger and acquisition activity includes the sale of assets from one entity to another, which does not necessarily lead to an increase in exploration investment or production. A company may engage in M&A to diversify its portfolio or to position itself for future opportunities. Another company may sell property to increase liquid assets on its balance sheet.

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Continued increases in the U.S. rig count, however, suggest companies are beginning to invest capital in development projects. Continued investment could lead to an increase in crude oil production in the Lower 48 states, which has been declining since April 2015. EIAâ&#x20AC;&#x2122;s most recent Short-Term Energy Outlook (STEO) forecasts that production will increase in the second quarter of 2017. However, this production forecast is predicated on the expected price of West Texas Intermediate crude oil, which is highly uncertain. Significant divergence of actual prices from the projected path could change the pace of drilling new wells, which would, in turn, affect the production forecast.

32 BASIN RESOURCES

Permian region on the rise

U.S. crude oil production increases following higher drilling activity U.S. crude oil production increased for the second consecutive month in November 2016, the first time this has occurred since early 2015. Increased drilling activity in the Permian region, which spans Texas and New Mexico, as well as the start of a number of new projects in the Federal Offshore Gulf of Mexico, more than offset declining production from other regions in October and November 2016. Increased drilling in the Permian region responded relatively quickly to a rise in the West Texas Intermediate (WTI) crude oil price, which increased from an average of near $30 per barrel in the first quarter of 2016 to $45/b or higher beginning in the second quarter of 2016. In the Gulf of Mexico, the new projects that came online in the last quarter of 2016 were planned and approved during the 2012-14 period. U.S. crude oil production averaged an estimated 8.9 million barrels per day (b/d) in 2016, and monthly U.S. crude oil production increased by 232,000 b/d in October and by 105,000 b/d in November. Production in the lower 48 states increased by 104,000 b/d in October and decreased by 2,000 b/d to average 6.7 million b/d in November, while Gulf of Mexico production increased by 85,000 b/d in October and by 89,000 b/d in November. Changes in Alaskan oil production make up the remaining differences. The Permian region was the only area covered in the Energy Information Administration’s Drilling Productivity Report (DPR) that did not experience a month

with a year-over-year production decline throughout 2014–16. This region benefits from a number of highly productive formations located within what is an established oil-producing region that allows producers to continue operations despite low prices. When the WTI spot price rose to more than $45/b in May 2016, the Permian experienced a rapid growth in drilling rigs, increasing by 85 rigs from May to November 2016, suggesting that some operators can generate positive returns in the region at those prices. In contrast to the Permian, other onshore regions in the United States experienced year-over-year production declines in November. However, recent drilling activity suggests that production may be increasing in these areas as well. According to Baker Hughes, the total U.S. oil-directed rig count increased by 123 rigs since November 2016, with 39 percent of the increase occurring in regions outside of the Permian. Since the end of November, the number of active oil rigs has increased in the Eagle Ford by 23, in the

Williston by 3, and in the Cana Woodford by 12. Production in the Gulf of Mexico is less sensitive to short-term price movements than onshore production in the lower 48 states because of the time needed to complete large offshore projects. The Gulf of Mexico projects that started producing in the second half of 2016 collectively produced more than 100,000 b/d in November and contributed to overall production increases. Current crude oil prices above $50/b, combined with increasing drilling rig counts in several onshore basins, suggest U.S. crude oil production will likely continue to increase. The February Short-Term Energy Outlook (STEO) also forecasts year-over-year Gulf of Mexico production to increase by 30,000 b/d in 2017 and by an additional 140,000 b/d in 2018 to reach a total of 1.8 million b/d. Total U.S. crude oil production from the Lower 48 states, the Gulf of Mexico, and Alaska is expected to average 9.0 million b/d in 2017 and 9.5 million b/d in 2018.

www.basinresourcesusa.com • SPRING 2017

34 BasiN resoUrces

McQueen

Eckstein

continued from 22

continued from 6

Ryan Flynn also wrote in his column, “While our state continues to face challenges, I believe we are up to the task of improving our economy and adding jobs and new revenue. What is needed now is calm thinking and sound policies that will get us through these next couple of years and set the stage for ongoing success. “The oil and gas industry in New Mexico is proud to be a part of our great state, and will continue to do our part to responsibly produce the energy we use, provide good paying jobs and, in the process, produce the taxes and other revenues that are so important to securing our future.” Mr. Flynn is on target with his comments. Oil and gas will always be critical to our economy in the Land of Enchantment. By working together with the industry – while creating opportunities for other businesses to discover all New Mexico has to offer – this tunnel may come again, but it will be shorter and with a much brighter light at the end.

N.M. State Land Office Advisory Board, and was a member of SPE. He has been active in a number of New Mexico initiatives, including NMOGA’s horizontal rules committee in 2011. He was also a co-recipient of the 2013 Restore New Mexico Award from the state BLM office. “I am happy to have Mr. McQueen serve in my administration,” Martinez said in a statement. “With his extensive knowledge and experience in the engineering field, I’m confident that he will “The governor has a visionresponsibly manage our natural resources, which are ary plan for energy in New so important to our state." McQueen took over for David Martin, who reMexico that will diversify tired earlier this in 2016. our energy production...” In his new position McQueen has begun working on implementing the governor’s energy plan, — Ken McQueen which promotes production from “all sources of energy” to create jobs and diversify the economy, a news release stated. McQueen is also working on the Rio Grande Trail, a 500-mile project that will extend from Colorado through New Mexico into Texas. Stakeholders in that project include state, local, tribal and private groups. “The governor has a visionary plan for energy in New Mexico that will diversify our energy production and create thousands of jobs while protecting our state’s natural beauty,” McQueen said in a statement. “I look forward to continuing the work of the department in implementing her vision.”

advertisers directory AWC..................................................23 5691 US Hwy 64 Farmington, NM 505-324-1690 www.AWCCompressors.com BM Technology & Supply ...................28 2303 Bloomfield Hwy. Farmington, NM 505-326-9144 Calder Services .................................31 #7 RD 5859 Farmington, NM 505-325-8771 Edward Jones/Kristy Visconti .............10 4801 N Butler, Suite 7101 Farmington, NM 505-326-7200 www.edwardjones.com Four Corners Community Bank ...........17 505-327-3222 New Mexico 970-565-2779 Colorado www.TheBankForMe.com

Halo Services....................................35 70 CR 4980 Bloomfield, NM 505-632-7007 Highlands University .........................22 505-454-3004 nmhu.edu/energy Kelley Oilfield Services ......................36 3601 N. 1st Suite M 505-632-2423 Bloomfield, NM www.kosinm.com Kozi Homes.........................................7 Farmington, NM 505-327-9008 www.KoziHomes.com Navajo Transitional Energy Company....2 www.navajo-tec.com Partners Assisted Living....................16 313 N. Locke Ave. Farmington, NM 505-325-9600 www.partnersassistedliving.com

PMS..................................................26 1001 West Broadway Ave. Farmington, NM 505-327-4796 www.pmsnm.org QuickLane Tire & Auto Center ............13 5700 East Main St. Farmington, NM 505-566-4729 Reliance Medical Group .....................19 3451 N. Butler Ave. Farmington, NM 505-324-1255 www.reliancemedicalgroup.com Rush Truck Centers ............................3 6521 Hanover Road N.W. Albuquerque, NM 505-839-3600, 800-357-6643 www.rushtruckcenters.com

San Juan United Way .........................29 Farmington, NM www.nmdvs.org Summit Truck Group ..........................15 5444 US Hwy 64 Farmington, NM 505-325-3521 www.summittruckgroup.com SunRay Casino ..................................21 Farmington, NM 505-566-1200 Ziems Ford Corners...........................33 5700 East Main Farmington, NM 505-325-8826

San Juan College ................................5 Farmington, NM www.nmdvs.org

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