From the Farmington Daily Times

FARMINGTON — Hampered by low natural gas and crude oil prices and leery of pending revisions of federal regulations intended to tighten oil and gas industry regulations, San Juan County operators are making payroll cuts and closing wells as they struggle to keep running.

Tom Mullins, owner/operator of Synergy Operations LLC in Farmington for more than 20 years, has worked through previous bust cycles. But this one has had staying power and the loss of revenue from a reduction in severance taxes already has hurt local and state budgets, he said. And the proposed changes to federal regulations will multiply the negative impact, he added.

Mullins said that 75 percent of the natural gas wells in the San Juan Basin qualify as marginal, according to the federal government’s measurement. Wells that produce fewer than 90 Mcf — an Mcf is a thousand cubic feet of natural gas — a day are classified as marginal. Older, low-volume natural gas wells in the basin produce an average of 35 Mcf a day, and are at risk of being temporarily closed if currently proposed federal rules, including the Bureau of Land Management’s propose update of the venting and flaring rule, are finalized later this year, he said.

Twenty-five percent of the basin’s natural gas wells are “cash-flow negative” at $2 per Mcf, according to New Mexico Oil and Gas Association spokesman Wally Drangmeister. Natural gas was selling on the commodities market for $1.85 per Mcf on March 16.

Drangmeister said an additional 12.5 percent of wells would qualify as “uneconomic” under proposed federal regulations that include the updated BLM venting and flaring rule. The BLM rule would require operators to retrofit their natural gas facilities with stronger pollution controls such as low-bleed pneumatic valve controls. He said it would cost, roughly, $5,000 per well to comply.

Drangmeister said the total — 37.5 percent of the wells in the basin — are at risk of being plugged or closed permanently by the double whammy of low natural gas prices and the impact of the pending BLM rule changes.

“Yes, this financial stress is severe. (Commodities prices alone) are making impacts on everyone who produces natural gas in the San Juan Basin,” Drangmeister said. “If you’re temporarily shutting wells in, it’s no small feat. You still have operating and maintenance costs with no revenue. (The cost of) these lower producing wells really add up.”

And as operators cut production, government loses tax revenue. In fiscal year 2014, San Juan County alone delivered $349 million to the state’s general fund. And, of that total, $45 million came from marginal wells, Drangmeister said.

Mullins said his company temporarily closed 15 percent of its production on March 1. Synergy is down to three employees. He laid off five workers over the last year, which allowed him to continue operating, he said.

And, Mullins said, the persistently low market prices for natural gas only makes the misery worse.

A price per Mcf is set monthly and daily on something called the “San Juan Basin Inside,” which is regulated by the  Federal Energy Regulatory Commission, and generally sets a lower price that market prices, Mullins said. The March 2016 monthly price for natural gas was $1.52 per Mcf. The last time prices were lower was in October 2001, Mullins said, when an Mcf sold for $1.37.

Mullins is also Independent Petroleum Association of New Mexico board vice president, representing the northern half of the state.

The Roswell-based organization, with a membership of about 300 independent oil and natural gas producers, promotes education about the industry — especially the industry taxes and fees that go to the state’s general fund — and promotes legislation that supports the oil and gas sector.

A recent bill sponsored by state Rep. James Strickler, R-Farmington, sought to offer oil and gas companies some relief, but it did not survive the 30-day session. Strickler’s bill was aimed at adjusting Severance Tax and Emergency School Tax rates for oil and gas wells that produce fewer than 10 barrels of oil or 60 Mcf of natural gas per day.

But Mullins said the ultimate misery is still to come. The boom in shale oil production has had an impact on the natural gas market.

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