Robert W. Gilmer

English

Research Papers in Economics

Unconventional 
Natural Gas Drive 
New Mexico
Rig Count
Just as El Paso was among
the last to feel the effects of
this recession, it may be
among the last to pick back
up. Strong U.S. growth will
be the first and most
important step in getting El
Paso growing.
Just as El Paso was among
the last to feel the effects of
this recession, it may be
among the last to pick back
up. Strong U.S. growth will
be the first and most
important step in getting El
Paso growing.
FEDERAL RESERVE BANK OF DALLAS  • EL PASO BRANCH ISSUE 1 • 2005
Crossroads
ECONOMIC TRENDS IN THE DESERT SOUTHWEST
il and natural gas in New Mexico are found
in two important producing regions: the San Juan
Basin in the northwest and the Permian Basin in
the southeast. Although oil seeps were evident
and small quantities of oil were reported in water
wells of the San Juan Basin as early as the 1880s,
commercial quantities of oil were not discovered
in New Mexico until the Hogback pool near
Farmington in 1922. This discovery set off a
search for oil throughout the state’s northwest
quadrant.
Oil in southeast New Mexico began with
Rupert Ricker’s return from World War I, his deci-
sion to lease land from the University of Texas
and, in 1921, to spud in Santa Rita No. 1 (named
for the patron saint of hopeless causes). His Big
Lake field in Texas turned the Permian Basin into
one of the world’s great oil plays. By 1924, oil
exploration had spread westward to the vicinity of
Artesia and Hobbs and the state’s four southeast-
ern counties became a major producing region of
the Permian Basin.
Early energy exploration in New Mexico was
almost completely driven by oil. But markets and
transportation for natural gas developed rapidly
after World War II. A pipeline built by the El Paso
Natural Gas Co. in 1950 was important in con-
necting the isolated and gas-prone San Juan Basin
to California. Another pipeline quickly followed to
Washington and Oregon.
Today the tail has grown to wag the dog. Chart
1 shows that based on energy content, natural gas
has ruled the modern era of hydrocarbons in New
Mexico. Oil’s share of production peaked at just
over 40 percent in 1983; it has fallen to 19 percent
today. The favorable trend for gas is being rein-
O
Cyclical Differences
Emerge in Border City
Economies
See page 5
Unconventional 
Natural Gas Drives 
New Mexico
Rig Count
Today’s natural gas fields
are uniformly spread
over vast areas of coal,
shale or impermeable
limestone or sandstone.
Today’s natural gas fields
are uniformly spread
over vast areas of coal,
shale or impermeable
limestone or sandstone.forced yet again by the develop-
ment of unconventional, or con-
tinuous, gas reserves in the state.
No more is production limited to
domes or anticlinal structural
traps of conventional gas; today’s
fields are uniformly spread over
vast areas of coal, shale or im-
permeable limestone or sand-
stone. As New Mexico’s rig
count reaches some of its high-
est levels since 1986 (Chart 2),
unconventional gas drives the
search for hydrocarbons.
Important Industry
Oil and natural gas explora-
tion and production make up an
important industry in New Mex-
ico. The industry directly em-
ploys 12,200 wage and salary
workers in the state, a number
that has jumped 10.2 percent in
the last 12 months. These are
well-paid jobs; New Mexico’s
natural resource and mining jobs
pay 24.9 percent more than those
in construction, 44.7 percent
more than manufacturing and
56.6 percent more than finance.
Oil and natural gas are im-
portant to the state’s finances as
well. In 2000, for example, the
oil and gas industry paid $165.1
million to the state government
in severance taxes, $169.5 mil-
lion in emergency school taxes,
and $34.6 million in conserva-
tion, equipment and other taxes.
The combined $369.2 million was
10.9 percent of state govern-
ment revenues. In addition are
various gross receipt, ad val-
orem and corporate taxes paid
either to the state or other levels
of government.
Table 1 shows how New Mex-
ico ranks among various states
and regions in oil and natural
gas reserves. It is No. 5 in oil
reserves, behind the federal off-
shore, Texas, Alaska and Cali-
fornia. It is No. 4 in natural gas
reserves, behind Texas, the fed-
eral offshore and Wyoming. The
eastern part of the state—home
to the Permian Basin—has 98.7
percent of the state’s oil re-
serves, while the San Juan Basin
in the west has 80 percent of the
state’s natural gas reserves.
Oil and gas production fol-
lows the pattern set by reserves.
In 2004, 95.7 percent of the
state’s oil production and 35.7
percent of natural gas came from
the Permian Basin, with the San
Juan Basin serving as a virtual
mirror image in providing the
rest. These shares have held
steady for 20 years.
What has changed rapidly
since 1984, however, has been
the role of oil versus natural gas.
Between 1984 and 2004, New
Mexico oil production grew 46.2
percent, while natural gas grew
292.3 percent. This shift to nat-
ural gas reflects its abundance,
low price and desirability as a
clean fuel, especially for elec-
tricity production. In April 1988,
35.1 percent of working rigs in
the United States were drilling
for natural gas. In April 1994, that
share was 55 percent and by
April 2004, 86.2 percent. Chart 3
illustrates the rapid growth of
gas production in both the San
Juan and Permian basins.
Unconventional Gas
Geologists call it continuous
gas, but it is also called uncon-
ventional gas or even weird gas.
Whatever you choose to call it,
Chart 1
Share of Oil and Natural Gas Production in New Mexico
Percent
’04 ’02 ’00 ’98 ’96 ’94 ’92 ’90 ’88 ’86 ’84 ’82 ’80
Gas Oil
0
10
20
30
40
50
60
70
80
90
100
NOTE: Based on gas valued at oil-equivalents in terms of energy content.
SOURCES: New Mexico Institute of Mining and Technology; GO-TECH, octane.nmt.edu; 
author’s calculations.
Chart 2
Number of Rigs Working in New Mexico, 1989–2005
Number of rigs
0
10
20
30
40
50
60
70
80
Permian Basin
San Juan Basin
Mar.
’05
Mar.
’03
Mar.
’01
Mar. 
’99
Mar.
’97
Mar. 
’95
Mar.
’93
Mar.
’91
Mar. 
’89
SOURCES: Smith Tool Activity Tracking System, www.smith.com/stats/new; author’s calculations.
Crossroads 2you must give it due respect for
its growing importance. The De-
partment of Energy reports the
share of unconventional gas dou-
bled from 17 percent of Lower
48 natural gas supplies in 1990
to 35 percent in 2003. By 2025 it
is projected to be 44 percent—
matching the role of conven-
tional gas—with the remaining
12 percent of domestic supplies
imported.
Unconventional gas is meth-
ane or another light hydrocar-
bon similar to that found in the
conventional anticlinal trap, but
it is stored in the earth and pro-
duced differently.
1 It is stored 
uniformly in a formation that 
extends over a wide area but is
trapped in a rock formation that
requires additional resources to
free it. New technologies have
been developed to drill and
complete and stimulate these
wells. 
Tight gas is trapped in an
unusually impermeable sand-
stone or limestone formation.
The problem is to get the low-
permeability formation to release
sufficient gas to flow in eco-
nomic amounts to the well bore.
Hydraulic fracturing was first
developed in the 1940s and
applied to tight formations in
the 1970s. Water is injected under
high pressure, cracking the for-
mation and opening fissures
that boost gas production by a
factor of 10 or more. New Mex-
ico’s San Juan Basin was the first
western gas basin to produce gas
from tight sandstone formations.
The San Juan Basin is also
known as the initial proving
ground for coal-bed methane.
Coal-bed methane is a by-prod-
uct of the formation of coal from
plant material, not a result of the
high temperatures and pressures
that turn organic material to con-
ventional natural gas found in
structural traps. The coal-bed gas
reserves remain trapped in the
coal seams as long as the water
table lies above it. To release the
gas, a well is drilled and water is
pumped out to lower the water
table and release the gas to flow
to the well bore. As the water
table falls, the well produces less
water and more gas over time.
Coal-bed methane accounts for
about 45 percent of the San
Juan Basin’s annual gas produc-
tion.
The third important form of
unconventional gas is Devonian
shale. Shale is a nonpermeable
rock, a clay compacted by pres-
sure. Free gas is stored in the
rock pores or in natural frac-
tures. As with other unconven-
tional gas types, the gas is
stored continuously, and hy-
draulic fracturing is used to make
it flow freely. The San Juan Bas-
in’s Mancos and Lewis forma-
tions are important producers
for this form of gas. The Lewis
formation, for example, has be-
come a secondary and shallower
target on the way to deeper
tight-sand formations. Although
research and technology have
been important in producing all
forms of unconventional gas,
shales are particularly challeng-
ing; there is no universal for-
mula for success in freeing the
gas from the formation.
Development of technologies
to successfully exploit uncon-
ventional formations was the pro-
duct of tax credits offered on
wells drilled from 1979 to 1993.
Throughout the 1990s, subsi-
Table 1
Oil and Natural Gas Reserves by State and Region, 2003
Millions Billion
Oil of barrels Natural gas cubic feet
Federal offshore 5,120 Texas 48,717
Texas 4,583 Federal offshore 23,033
Alaska 4,446 Wyoming 22,716
California 3,542 New Mexico 18,226
New Mexico 677 East 3,661
East 668 West 14,565
West 9 Colorado 15,839
United States 21,891 United States 197,145
SOURCES: Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids
Reserves 2003 Annual Report, November 2004.
Chart 3
Natural Gas Production in New Mexico, 1979–2004
Million cubic feet
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
’04 ’02 ’00 ’98 ’96 ’94 ’92 ’90 ’88 ’86 ’84 ’82 ’80
San Juan Basin
Permian Basin
SOURCES: New Mexico Institute of Mining and Technology; GO-TECH, octane.nmt.edu;  
author’s calculations.
Issue 1 • 2005 3dies on production from these
wells paid about $1.05 per thou-
sand cubic feet of unconven-
tional gas delivered to market.
The tax credits are now gone,
but the technologies developed
continue to lower the cost of
delivering this gas, making it
highly profitable at today’s prices.
Continuous gas wells typically
have lower capital costs because
they are shallower and use smal-
ler rigs; in addition, there is little
risk of a dry hole because the
gas is uniformly spread over a
wide area. The wells also tend to
be long-lived. The small number
of rigs needed to explore and
develop the San Juan Basin (see
Chart 2) is in large part a func-
tion of these no-miss, long-lived
features of continuous gas. 
The Permian Basin, although
best known as an oil basin, has
benefited from these technolo-
gies as well. For example, the
Morrow sandstones became an
important gas play in southeast
New Mexico in the late 1990s.
Interest runs high throughout
the basin in effective stimulation
of low-permeability carbonates
and sandstones and effective
production from regional shales.
Despite the San Juan Basin’s rep-
utation for unconventional gas
production, the Permian Basin
in New Mexico has kept pace.
From 1984 to 2004, northwest
New Mexico saw gas production
rise by 301 percent, but south-
east New Mexico was right be-
hind at 279 percent.
Outlook
The next 20 years of New
Mexico oil and gas are secure,
based on the state’s existing and
proven reserves. These reserves
will, however, require further
development. In the early 1990s,
coal-bed methane dominated
the activity in the San Juan
Basin. Today, as coal-bed meth-
ane fields peak, we see activity
swinging toward tight sands, with
shale as a secondary target. A
recent study by the New Mexico
Institute of Mining and Technol-
ogy predicted 16,000 subsurface
completions over the next 20
years in the San Juan Basin. The
study concluded with a remin-
der of the challenge of balancing
this development with land-use
and environmental issues.
This reminder about environ-
mental sensitivity is offered again
by two recent controversies out-
side the traditional geography of
New Mexico oil and gas. The
Raton Basin, a 6 million-acre 
region that straddles the line be-
tween Colorado and New Mex-
ico’s Colfax County, is one such
case. Development of 8 trillion
to 12 trillion cubic feet of coal-
bed methane reserves was slowed
for many years by a lack of infra-
structure. The first pipelines en-
tered the area in 1994 and 1998.
With the basin now about 50
percent developed, oil compa-
nies have just begun to move
from southern Colorado and into
northern New Mexico. This en-
tails drilling in the Carson Na-
tional Forest, and the permitting
process has provoked doubts and
opposition from environmental-
ists and outdoors enthusiasts.
Opposition centers primarily on
the creation of a web of inter-
linking roads through wilder-
ness areas to connect hundreds
of well pads. 
Similar opposition has sprung
up against drilling in the Otero
Mesa region of the Chihuahuan
Desert, west of Carlsbad and
northeast of El Paso. According
to environmentalists, this partic-
ular stretch of desert is home to
unique grasslands, endangered
wildlife and the largest un-
tapped reservoir of drinking
water left in New Mexico. The
oil industry has found enough
natural gas to justify develop-
ment of the fields and a pipeline
to market. The question—as al-
ways—is where to strike the
balance between development
for today’s needs and conserva-
tion for the future.
—Robert W. Gilmer
Gilmer is a vice president of the
Federal Reserve Bank of Dallas.
Notes
1 Some definitions of unconventional
natural gas resources include gas
trapped below 15,000 feet, although
drilling to these depths is no longer a
technological challenge. Others in-
clude geopressured zones or methane
hydrates that pose largely unmet
technological challenges. We consider
here only continuous gas in tight
formations, coal-bed methane and
Devonian shale.
Crossroads 4
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Unconventional natural gas drives New Mexico rig count

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Unconventional natural gas drives New Mexico rig count

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