An impressive array of reservoirs-stretching across almost the entire Paleozoic Era-produce oil, gas and condensates in the Permian Basin, one of the venerable petroleum basins of the United States. Southeast New Mexico is its own distinct corner of the Permian, hosting portions of the broad Northwest Shelf, deep Delaware Basin and arching Central Basin Platform. Although New Mexico meets any definition of mature, it remains a powerhouse producer, with much oil and gas still to be recovered. Today, drilling activity is brisk, with some 60 rigs turning to the right in Lea, Eddy and Chaves counties, more than double levels of a year ago. The current up-tick in drilling harkens to the fundamental attractions of southeast New Mexico. The area is blessed with multiple objectives, high-rate wells, webs of first-rate infrastructure, immediately accessible services, and hearty commodity prices. Public and private firms of all sizes appreciate its attractions. Gas prospecting, particularly for Pennsylvanian reservoirs, is the focus of many operators; shallow-oil drilling for bread-and-butter Permian reservoirs is also popular. "The sustained high prices are encouraging a high activity level in southeast New Mexico," says Jeff Harvard, president of the Independent Petroleum Association of New Mexico (IPANM), and president of privately held Harvard Petroleum Co. LLC. "There continues to be significant opportunity in southeast New Mexico." Robust drilling budgets Independents, both large and small, are driving the drilling activity. Yates Petroleum, the Artesia-based family firm that has been a major force in the area since the early days of its oil and gas industry, was running eight rigs at press time. Devon Energy Corp., the largest publicly traded independent active in southeast New Mexico, was also running eight rigs this summer. Currently, Devon produces 175 million cubic feet of gas equivalent per day, operates close to 1,000 wells and has 350 billion cubic feet (Bcf) equivalent of proven reserves in southeast New Mexico. The Oklahoma City-based firm has been involved in the area for years, building an enviable position through such transactions as its PennzEnergy, Santa Fe Snyder, Concho Resources, Mitchell Energy and Ocean Energy acquisitions and mergers. This year, the company plans to spend $81 million in the area. "We will have between five and 10 rigs running throughout the balance of the year," says Don DeCarlo, vice president and general manager, western division. "Southeast New Mexico is a geologist's dream because of the multiple pay opportunities. The reserves are long-lived, and heavily weighted toward gas. The markets are wonderful, the pipelines are in place and there is plenty of capacity." The independent owns 380,000 net acres, making it one of the largest leaseholders in this corner of the Land of Enchantment. The expansive acreage position is both a tremendous asset and a liability, as Devon is always fighting lease expirations. A good amount of its leases are federal, carrying 10-year terms, but a higher portion are state leases with five-year terms, says Todd Tipton, manager of exploration and exploitation. "The five-year terms really push us to get acreage evaluated, either on our own account or through joint ventures or farm-ins." The company has numerous gas projects scheduled, and one of its strategies is to accelerate its activity in the Morrow play. This year, it is allocating $45 million to gas drilling, for a mix of prospects ranging from high-potential, 15,000-foot Morrow gas tests in central Lea County to much shallower tests in northern Eddy County. "We also have two to three very large prospects that we will be testing this year, that have gross potentials of as much as 50 billion cubic feet," says DeCarlo. Devon also plans to spend $21 million of its budget on shallow oil plays. It is pursuing Delaware and Bone Spring targets at depths between 3,000 and 11,000 feet in the Potato Basin/Ingle Wells area, which straddles the boundary between Lea and Eddy counties. It has 30 wells planned there in 2003, for a total investment of $15.7 million. Operators rarely drill dry holes in this low-risk, very active area, in which a typical well will make 100,000 to 125,000 barrels of oil, along with associated gas. The occasional 25,000-barrel producer does occur, but not frequently enough to discourage drilling. In northern Eddy County, the company plans 15 wells in Red Lake Field, a shallow Permian San Andres and Yeso waterflood that it operates in northern Eddy County. The wells, which cost about $200,000 apiece, can produce 50 to 70 barrels of oil per day. Devon is drilling both stepouts and infill locations in Red Lake, which has a number of discrete oil pools. "We have a lot of locations, workover and secondary-zone completion opportunities at Red Lake, and we plan to keep our production there stable to slightly growing for many years to come," says DeCarlo. Another independent with an extremely active drilling program is Concho Resources, a Midland-based firm that was running five rigs in southeast New Mexico at press time. The company is funded with private equity, and its investment group is led by Yorktown Energy Partners. Concho is now in its second incarnation. In June 2001, Devon bought Concho Resources Inc. The firm had been in business for four years, and was exclusively a Permian Basin company, with the largest portion of its reserves in Lea and Eddy counties. About six months prior to that sale, the principals had formed Concho Oil & Gas to take advantage of an acquisition opportunity. That entity bought a set of southeast New Mexico properties from a private party in February 2001. In July 2002, the company added to that purchase with its $222-million acquisition of Ricks Exploration Inc., whose assets were distributed about 75% in the Permian Basin, 20% in the Midcontinent and the remainder in the Texas Gulf Coast. Additionally, the company recently changed its name back to Concho Resources Inc. "Southeast New Mexico is our most active area at present, both in terms of our existing asset base and capital spending," says Steven Beal, president and chief operating officer. Concho's 2003 budget for the Permian Basin is $45 million, representing 65% of the company's total budget of $71 million. It plans 80 wells in the basin, in which it holds about 90,000 net acres. The lion's share of that capital is dedicated specifically to southeast New Mexico. Although it has now extended its reach beyond the focus of the first company, the new Concho still sees southeast New Mexico as one of its core operating areas. "We have devoted a lot of effort and attention to southeast New Mexico, and we are continuing to grow that area along with others." The area has several characteristics that appeal to Concho, including its stacked producing horizons, established infrastructure, and mature service and supply sector. Beal views southeast New Mexico as a lower-risk play, principally an area for infill and extension drilling. "It's not elephant-hunting country, but we believe, in spite of the fact that a significant number of companies play the area, that large opportunities do exist. Acreage is still available in prospective areas." Generally, Concho has devoted more attention to the Morrow than any other play. Its current property portfolio is 75% gas, but it has had success in Wolfcamp, Delaware and Bone Spring oil prospects as well. An independent that has been increasing its presence in southeast New Mexico is Irving, Texas-based Magnum Hunter Resources Inc. The company-which operates more than 400 wells in the area-plans to drill approximately 24 wells in Lea and Eddy counties this year, 18 of which will be operated and five nonoperated. Presently, it is running two rigs through its subsidiary Gruy Petroleum Management Co. "We work across most of southeast New Mexico," says Brad Davis, senior vice president. "We're particularly interested in the Morrow/Atoka gas play, and we've also developed a couple of Strawn reefs." Magnum Hunter entered southeast New Mexico in 1997 when it made a large acquisition from Burlington Resources. In September 2001, it added to that position by purchasing assets from Mallon Resources Corp, including interests in 23 fields. Since that time it has drilled 30 successful wells and completed these for an average initial potential of 2 million cubic feet per day. "Last year we produced about 24.5 million cubic feet equivalent per day in southeast New Mexico, and we're looking to average 35 million per day in 2003. It's a fairly significant bump." A company that has its roots in the Texas Permian Basin has now jumped into southeast New Mexico. Denver-based Tom Brown Inc. closed on its purchase of Matador Petroleum Corp. at the end of June. Matador had been active in the Morrow play for a number of years; the acquisition brings Tom Brown 115,000 gross acres in Lea, Eddy and Chaves counties. Between December 1998 and March 2003, Matador successfully completed 17 Morrow wells. At press time, Tom Brown had two rigs running on its new properties. Tom Brown also gains interests in the Eumont area in east-central Lea County, where Matador owned 3,700 gross acres. Permian carbonate reservoirs there occur at depths of around 7,000 feet; Matador had drilled 30-plus wells in the area between April 2000 and March 2003. Chi Energy Inc., a privately held independent based in Midland, also works southeast New Mexico. Says Bill Bergman, president: "We've kept one Morrow rig running steadily for five years now, mainly in Eddy County. Presently we have two deep rigs running, and this year we expect to drill 16 to 18 wells, mainly for Morrow." Gas objectives The Morrow is southeast New Mexico's most important nonassociated natural gas reservoir, and it remains a perennially popular target. Drilling continues in this trend today because Morrow reservoirs are notoriously challenging. It is a fluvial-deltaic sandstone reservoir, stratigraphically complex with a heavy diagenetic overprint. Gas production was initially developed in the Morrow in the mid-1950s, and most of the larger fields were discovered by the 1970s. According to a 2000 survey by the New Mexico Bureau of Mines and Mineral Resources, southeastern New Mexico is home to 269 Morrow pools that have produced more than 5.5 trillion cubic feet (Tcf) of gas. Current activity is being fueled by both infill drilling and stepouts. A few years ago, the New Mexico Oil Conservation Division began allowing tighter spacing on Morrow Fields, approving up to two wells on each 320-acre spacing unit. "Certainly the ability to add that additional Morrow well to a spacing unit-if the technical people are comfortable with the potential drainage issues-has added to activity," says Concho's Beal. Companies also continue to extend and define the boundaries of the play. In northern Eddy and southern Chaves counties, Morrow prospects are fairly shallow, occurring at around 8,000 feet. Mid-depth Morrow wells, in central Eddy County, are 11,000 to 12,000 feet. To the east in central Lea County, the Morrow occurs as deep as 15,000 feet. Morrow well costs depend on depth and the number of casing strings required. Typically, a $1.2-million well in the shallower portion of the play might recover 2- to 3 Bcf, while a deep penetration could run $2.5 million and recover 5- to 8 Bcf. "Southeast New Mexico has 'little E' exploration opportunities," says Devon's Tipton. "There are not big wildcat plays here, but you sure can look deeper below the Morrow and find untested Devonian structures, particularly on the eastern side of Lea County, that have potentials as great as 50 Bcf." Today, the key to Devonian exploration is 3-D seismic mapping and proper depth-conversion techniques. "There are cases where the crests of structures have not yet been drilled." Other popular gas targets include the Pennsylvanian Atoka, Permian Wolfcamp and Strawn. Often, these are secondary reservoir objectives that are evaluated during drilling of Morrow tests. Shallow-oil drilling A compelling story in southeast New Mexico during the past several years has been the resurgence of shallow-oil exploitation. Successful field redevelopments and extensions have surprised many observers of this old area. Perhaps the most intriguing example has been the development of the Dagger Draw and Indian Basin areas. Initially, these Upper Pennsylvanian Cisco and Canyon fields were developed as structural pools, but were actually much more extensive stratigraphic traps, says Ron Broadhead, principal senior petroleum geologist with the New Mexico Bureau of Geology & Mineral Resources in Socorro. Both fields produce from very porous and permeable dolomites. Originally discovered in the 1960s, the pools were thought to be simple solution-gas-drive reservoirs. Wells would produce gas for a while, then apparently water out. That was only the tip of the accumulation, however. Operators began to pump some of the downdip wells, and the wells produced prodigious volumes of water along with commercial quantities of oil and gas. Current activity is centered in Indian Basin, an expansive field operated principally by Devon Energy and Marathon Oil. "We went into the older wells and began to drop submersible pumps into them and produce 3,000 to 4,000 barrels of water per day," says Devon's DeCarlo. After an initial period of pumping, the wells start to make oil and gas. Along with thousands of barrels of water per day, an Indian Basin well will make 1- to 3 million cubic feet of gas and 100 to 500 barrels of oil per day. Even higher rates are possible: Devon has drilled two wells this year that have each come in for more than 1,000 barrels of oil per day. The physical occurrence of the water in relation to the oil and gas is not clear, however, and there are diverse opinions about the producing mechanism of the reservoirs. "Even if a well is on top of the structure, it still makes water," says Tipton. "Most people think the oil/water contact is tilted, but there are different schools of thought." What is known is that the wells will not flow by themselves, and the wells further downdip produce more oil and more water. "It's a complex field, both structurally and stratigraphically. We see at least four separate reservoirs, and we see evidence of compartmentalization, such as water on top of gas." Despite its puzzling aspects, Indian Basin has surpassed all expectations, says DeCarlo. "To date, we have produced a quarter-Tcf net to the company from what was once considered a depleted field. We're amazed and pleased. These are outrageous wells. They pay out quickly and generate a tremendous amount of cash flow." Today, extension drilling continues to move steadily downdip, and development is concentrated on infill work in the 320-acre spacing units, which can be drilled down to optional 80-acre sites. A completed well is typically 8,000 to 9,000 feet deep, and costs around $1.3 million. Presently, the company is producing 100 million cubic feet equivalent per day from some 60 wells. This year, it will spend $15 million at Indian Basin; at press time, Devon had already completed 10 wells in its 2003 program and was running two rigs. Marathon, the other major operator at Indian Basin, operates the gas plant. (The production is sour, so the gas must be processed prior to sale.) In 2002, Marathon's gross production was 9,000 barrels of oil and 165 million cubic feet of gas per day from Indian Basin. Last year, it drilled eight development wells, mainly in the eastern portion of the field; this year, it has budgeted seven new well completions and several recompletions. In 2002, the company won a Chairman's Stewardship Award from the Interstate Oil & Gas Compact Commission for its resource conservation efforts in Indian Basin. The company treats its produced water, removing the H2S, so that it can be used in its drilling operations. It also has reduced air emissions by upgrading to nine "clean burn" compressors. As a result of these efforts, Marathon saved 100,000 barrels of groundwater and reduced its natural gas consumption by 350,000 cubic feet per day. Like Marathon, Devon notes that it also conserves large volumes of fresh water by using treated produced water as a drilling fluid. Operators are active in other shallow oil plays as well. The Permian Delaware and Bone Spring intervals are popular targets throughout much of southeast New Mexico. North of Roswell in Chaves County, a number of companies are drilling an Ordovician/Pennsylvanian play that features depths of less than 6,000 feet. Midstream attractions A new player in southeast New Mexico's busy midstream sector is Tulsa-based Frontier Energy Services. In May, the private firm purchased ConocoPhillips' Maljamar gas plant and gathering system in far western Lea County. "This acquisition is our first entry into the Permian Basin," says James Lind, executive vice president. Frontier is a relatively new firm, founded in March 2002. It is strictly a midstream company, and currently treats or processes about 230 million cubic feet per day for third parties. In addition to its new plant in southeast New Mexico, it operates in facilities in Oklahoma and the Texas Panhandle. What initially sparked Frontier's interest in southeast New Mexico was the potential for more gas production from its old oil fields and its many producing horizons. "Producers out here can complete from any one of nearly a dozen different horizons. The infill and recompletion potentials are outstanding." Frontier kicked off negotiations for the plant in September 2002, after Conoco and Phillips were ordered to sell certain assets as part of their pending merger. During the short period of time between the beginning of talks and closing of the sale, drilling activity shot upward. "The plant has a nameplate capacity of 60 million per day, and we are currently moving 70 million per day. When we first started negotiating, there was nowhere near that much gas." Interestingly, the increase in supply for the Maljamar plant is coming in both as associated gas-low-pressure casinghead gas that is produced along with oil-and as nonassociated gas. "We're particularly excited about southeast New Mexico, because it seems to be one of the anomalies of the producing regions," says Lind. "The activity is phenomenal. It has a strong production profile, and more supply is being added than there is capacity." Indeed, Frontier's biggest challenge is finding a way to rapidly increase its capacity in this new area. It had scheduled a reasonably aggressive expansion for next year, and now it's working to complete the expansion this year. Its two-phase plan first envisions additional dehydration and bypass facilities to increase the amount of high-pressure sweet gas the company can take. This phase would allow a capacity increase to 80 million per day. In the second phase, planned for 2004, an additional amine treating and processing facility would boost total capacity to 100 million per day. Because of the presence of federal and state land in its new area, Frontier has a number of regulatory hurdles that it must jump. "The permitting is a time-consuming process, but we are committed to the expansion. We believe that the supply will continue to grow in this area, and that our facilities are needed." Challenges remain Although the benefits of working in southeast New Mexico are myriad, operators still face some daunting challenges. Drilling costs are rising in lock-step with the ramped-up programs. Rig availability is fast becoming a concern, particularly for deeper projects. Prospects might be abundant, but assembling acreage to form a drilling unit can be daunting. Finding and development costs, always a concern in a mature region, are fairly stiff. And, New Mexico's goodly portion of federal lands means that operators must cope with the complex and, at times, frustrating federal bureaucracy. "Some 34% of New Mexico's land is federal and 11% is state, which means that operators must be able to work on federal, state and private land to be successful," says Dan Girand, regulatory affairs director for Artesia-based Mack Energy Corp. Access to public lands is a growing issue in New Mexico. Operators in the southeastern portion of the state are particularly impacted by the Endangered Species Act, which causes restrictions on oil and gas operations for a quarter of the year due to the threatened lesser prairie chicken, says Girand. Some 62% of Eddy County, home to Carlsbad National Park and portions of the Lincoln National Forest, is owned by the federal government; federal lands comprise 32% of Chaves County and 17% of Lea County. Substantial amounts of land are also owned by the state-31% of Lea County, and 18% each of Eddy and Chaves counties-and New Mexico is trending toward increased regulation of oil and gas activities. "As an operator, our biggest test is finding good prospects on available leases and then being able to jump through the regulatory hurdles to get the prospect drilled," says IPANM president Harvard. Furthermore, all the operators are constantly fighting the decline curve in this mature area. "The challenge for us-and industry in general in the Permian Basin-is maintaining volumes at current activity levels," says Devon's DeCarlo. "We generate a tremendous cash flow, and our job is to keep the asset base in shape and keep our production stable. "Capital discipline is crucial, and as the area continues to mature it becomes more of a challenge to spend our money wisely."