Column: Marginal wells could remain active with royalty reductions Dr. Daniel Fine
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The oil price collapse has put at risk marginal or stripper well production in New Mexico and the United States.
There are 15,000 such producing wells in the state yielding an average of less than three barrels per day. Over 400,000 are working in the country. Combined, some 15 percent of total oil production is from stripper wells. Stripper wells include natural gas wells with marginal production.
Since the shale oil extraction breakthrough beginning in 2009, service costs have increased. Most stripper owners require a $70 price per barrel of oil (West Texas Intermediate) to avoid shut-in. The decision to shut-in is not taken lightly. In New Mexico if there is no production reported for 60 days, the lease is lost. Once shut-in or abandoned, stripper wells’ oil production and reserves are lost to the state and the country.
It is uneconomic to drill a well from shut-in or abandoned status for three barrels per day.
Stripper production is a strategic privately held oil reserve and has provided, since 1973, an offset against supply disruption. It is recognized by the Organization of Petroleum Exporting Countries, which is in a price war against American shale producers and stripper well production, that both operators are high-cost producers. The organization’s objective is more OPEC oil and less American — Southwest and North Dakota — in the market.
The stripper producer must decide whether to lose money and hold his lease or shut-in as abandonment which surrenders the lease. It was this circumstance that New Mexico considered in 1994 when the state Legislature passed a bill into law that provided royalty rate reduction. Lowering the royalty rates paid by stripper well owners to state and the federal governments provides an economic incentive to avoid shut-in.
Over a million barrels a day production could be lost without royalty rate reduction.
This program has not been promoted and today is not widely known by the stripper owners as it languished in the New Mexico State Land Office while the price of oil remained high. Fewer than 400 wells are registered for program incentives out of nearly 5,000 operating wells. A recent effort to reactivate and upgrade the program through an amendment that would raise the qualification from three to six barrels per day — 10 barrels at 20,000 feet in well depth — failed.
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