By Chuck Slothower email@example.com
Updated: 07/26/2012 10:48:04 PM MDT
FARMINGTON — Merrion Oil & Gas Co. announced this week that it has formed a partnership with Bill Barrett Corp. of Denver to test the potential for oil production in the Mancos Shale.
Merrion, a Farmington-based independent producer, had previously said it was partnering with a major company to explore the Mancos Shale. But Merrion had declined to identify its partner until Tuesday.
Barrett plans to drill two horizontal wells on Merrion acreage beginning this fall, assuming that all necessary permits are timely secured, Merrion Oil & Gas announced.
Geologists believe the Mancos Shale is rich in oil across a swath of the south San Juan Basin. Targeting the shale requires expensive horizontal wells and multistage hydraulic fracturing to free the oil. Horizontal wells cost several million dollars, while a traditional vertical well can be drilled into the Mancos Shale for less than $1 million.
Unlike in other shale plays, most acreage in the San Juan Basin is covered by existing leases after decades of natural gas production here. That gives the local independent companies that hold the leases a substantial bargaining chip.
“We have an acreage position, which is very difficult to come by in the San Juan Basin,” said George Sharpe, investments manager for Merrion Oil & Gas. “What they bring to the partnership is capital and expertise.”
Merrion has 25,000 acres available to drill, Sharpe said. The company has 19 employees.
Small independent companies do not have the resources to experiment with high-tech horizontal drilling. Larger companies such as Barrett do.
“There’s a learning curve that is expensive, and they’ve got the capital to sustain that, and they’ve got the drilling expertise of having completed similar wells in other basins,” Sharpe said. “They’re a great company. They’re very innovative.”
According to the deal, Barrett must drill two wells on Merrion’s acreage by the end of the year. The company may opt to drill more wells.
The first wells are set to be drilled in September near Huerfano, Sharpe said.
Merrion and Barrett are not the only companies exploring the Mancos Shale. Encana Corp., based in Canada, is partnering with Dugan Production Corp. to drill 12 wells targeting Mancos Shale oil.
The first well, Lybrook H36, yielded a 30-day initial production rate of about 440 barrels of oil per day, Encana disclosed to investors last month. Located about 50 miles south of Bloomfield in Sandoval County, the well was drilled to a lateral length of 4,100 feet and at a cost of $4.3 million.
“Those initial results were very promising and are certainly producing economical rates,” Sharpe said.
Encana has a 174,000 net-acre position in the basin, the company said.
Drillers throughout the nation are pursuing oil production while backing away from natural gas projects. Prices are driving the switch, industry officials say.
After dipping below $2 per thousand cubic feet in April for the first time in a decade, natural gas has somewhat recovered, settling at $3.13 on Thursday, according to the Henry Hub spot price.
Oil remains far more valuable, trading at $89.35 per barrel Thursday on the New York Mercantile Exchange.
Additional companies also are rumored to be pursuing partnerships targeting Mancos Shale oil.
Barrett in its most recent investor release touted its exploration in the Uinta Basin in Utah. The company also is exploring several basins in Colorado.
“I have emphasized the importance of execution in 2012 and our team is delivering,” chief executive Fred Barrett said.
Bill Barrett Corp. is traded on the New York Stock Exchange under the symbol “BBG.” Its stock closed at $19.66 per share Thursday.
While Mancos Shale exploration is in its early stages, the presence of oil holds out the hope of a major boom like that seen in the Bakken Shale of North Dakota.
“I’ll believe it when I see it, but that’s the hope — that it’ll rejuvenate the basin,” Sharpe said.
In North Dakota towns where the boom is happening, it’s impossible to rent a hotel room because they’ve been purchased by energy companies, Sharpe said.
“It’s not necessarily good to be that overwhelmed by success,” he said. “But it’d be nice to get a little bit of that.”