ExxonMobil faces a potash problem in the Permian Basin

Exxon

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It paid $5.6 billion in 2017 for prime acreage in New Mexico’s fast-growing Delaware region, part of the broader Permian region, which stretches into Texas, and is now a pillar of the company’s growth plans.

But more than a quarter of Exxon’s best acres in New Mexico coincide with underground potash mines, according to oil analytics firm FLOW Partners LLC. Because of the regulationshigh drilling costs and safety concerns for underground miners, Wells in that area are more expensive to complete And less productive, say people familiar with Exxon’s operations, industry executives and analysts.

And according to the people, Exxon’s efforts there will produce less oil and gas, and ultimately less profits, than other areas in the Permian. Exxon spokeswoman Megan McDonald said the company did not disclose to investors that the land it bought in the potash area could be affected by these issues because it did not consider them material.

Ms. MacDonald said Exxon can produce from almost anywhere, despite the potential challenges. Exxon has not deviated from plans to drill around the potash region, and the challenges have not affected the company’s broader plans. “There is nothing to disclose,” she said.

Exxon knew that some of its drilling efforts would entail maneuvering around active mines when it got on the ground, and thought its engineering skills could handle the problem. Operational issuesAccording to people familiar with its operations. But a confluence of challenges It made digging there more difficult than Exxon initially expected, the people said.

In October 2018, XTO Energy Inc. Exxon subsidiary failed to coupling on the hard casing of one of its wells near a mine during fracking, according to interviews and emails reviewed by The Wall Street Journal. The pressure from the coupling failure pushed liquid and natural gas past buffer zones intended to protect potash mines, and ended up blowing a hole out of a nearby 1970s exploration hole.

Several workers have been evacuated from a nearby mine after a call from Exxon. No injuries were reported, but the incident sparked calls from the largest mining company in the area.

Basil Potash a company ,

For stricter regulations on oil operations.

Ms. McDonald said that oil and gas have been developed safely alongside potash for decades, and that Exxon and other companies are producing oil safely in potash areas.

In 2012, the Ministry of the Interior enabled further development of oil and gas on the nearly 500,000 protected acres set aside for potash development, the year after the two industries began meeting together as the Joint Industrial Technical Committee to facilitate cooperation. But some Permian oil executives said they avoided buying land in the potash region for years given strict regulatory requirements that sometimes require an 18-month wait for drilling permits. The region is also far removed from the rest of the oil patch and energy companies, pipelines, and services that help get the oil to market, adding to costs.

Exxon has approximately 1,200 drilling sites in the potash region, according to FLOW Partners. Wells drilled by Exxon in the potash region are 5% to 10% less productive than wells outside that region, in southern parts of Delaware they are more prolific, according to investment firm Pickering Energy Partners.

These wells are underdeveloped in part because drilling near the mines requires companies to operate from so-called drilling islands, packing wells tightly from one site and then drilling laterally to get under the mines. As a result, producers have fewer locations to choose from for their wells, and often can’t tap all of the oil they’re targeting.

Jason Jarre, Exxon’s director of unconventional well operations, said the company has been drilling longer, horizontal sections, which allow it to access more underground potash and has become a more efficient producer in recent years. Exxon said it would increase its oil and gas production in the broader Permian region by about 20 percent this year.

Regulatory restrictions and safety concerns can add other costs. For example, companies typically use an additional series of steel casings around their wells in the region, which adds about $1 million in steel costs. Some executives have estimated that drilling wells in the potash region is about 25% more expensive than drilling regular oil and gas wells.

“You have to go so far as to develop all your leases off the drilling island, and they don’t promise that you’ll develop every barrel you have,” said John Smitherman, a former executive at Bopco LP, the private oil company. whose assets Exxon bought in its 2017 deal, and the former co-chairman of JITC.

In recent months, oil companies and Intrepid have clashed over safety concerns. Much of Intrepid’s concern stems from the 2018 accident, CEO Bob Gurnaivas said. It is urging regulators and their oil and gas counterparts on the Joint Commission to expand a planned third-party study to include the search for the appropriate size of buffer zones between wells and mines.

Intrepid said it is willing to sacrifice its reserves if a study finds that industries need larger buffer zones to keep workers safe underground. Oil executives say such a study is unnecessary, and that larger buffer zones would leave them with fewer places to drill, and take up production.

After metallurgical testing after the 2018 accident, Exxon said it determined that the heat treatment process on the cracked coupling caused a section of the pipe to become more brittle. She said the company has overhauled its design well with thicker casing joints, among other changes, and has conducted other safety studies.

“Representatives from both industries actively collaborate on safety protocols and best practices,” said Ms. MacDonald.

Mr. Gournaivaz said he is concerned about current buffer zones of half a mile for gas wells and a quarter mile for oil wells, which were created at least a decade ago and do not take into account modern oil and gas extraction methods.

Officials at the Land Management Office of the Ministry of Interior said that they are currently contracting to conduct a study on designing wells for oil companies operating in the potash region, but the study will not focus on buffer zones.

Write to Collin Eaton at [email protected]