Relationship between CrownQuest Operating, LLC and CrownRock, L.P.
CrownQuest entered into an administrative support agreement with CrownRock, L.P. at the time of CrownRock’s formation in 2007. Substantially all of the time of CrownQuest’s employees is allocated to the operation of CrownRock’s properties and the provision of general and administrative services to CrownRock. In addition, CrownQuest operates approximately 98% of CrownRock’s total net wells, and the wells CrownQuest operated for CrownRock provided approximately 99% of CrownRock’s average daily production for the year ended December 31, 2015.
CrownRock, L.P. is an independent oil and natural gas company engaged in the acquisition, development, exploitation and exploration of oil and natural gas properties. Our assets are located in Texas, New Mexico and Utah, and our operations are primarily focused on the development of our core Permian Basin assets. We were organized as a limited partnership in February 2007 by affiliates of our management team and Lime Rock Partners IV, L.P., a private equity fund focused on the oil and gas industry.
CrownRock’s core properties, and therefore the properties which CrownQuest operates, consist of approximately 103,000 net acres in what we consider to be some of the best acreage in the Permian Basin of West Texas, specifically, the Northern Midland Basin. This is where we intend to focus primarily on drilling horizontal targets on multiple benches. The Permian Basin of West Texas is characterized by an extensive production history, predominately oil-focused drilling targets, abundant infrastructure, wells with long reserve lives, and multiple producing horizons. The Wolfberry play is a modification and extension of the Spraberry play, while the Wolfcamp Shale utilizes horizontal drilling in the historic Spraberry play, the majority of which is designated in the Spraberry Trend Area Field. According to the latest information available from the Energy Information Administration of the U.S. Department of Energy (the “EIA”), the Spraberry Trend Area ranks as the second largest oilfield in the United States by proved reserves and as the fourth largest by estimated oil production. Based on the returns we have generated through our drilling to date, the number of undrilled locations in our drilling plan, and our observation of the activity and results of other operators in this area, we believe the Midland Basin represents one of the premier oil and natural gas development opportunities in North America. We have spent much of 2016 preparing to accelerate our horizontal activity. This has included identifying potential horizontal drilling locations plus identifying optimum spacing between wells, including interval spacing between zones or benches. The resulting data will be important in guiding our future development plans.
In January 2015, we initiated our horizontal program, which has generated strong economic returns thus far. Since then, our horizontal drilling results and the drilling results by operators offset to our acreage have led us to further assess our horizontal drilling inventory and expand our horizontal development plan. We believe, based on our analysis of data acquired through our horizontal drilling program during 2015 and 2016 along with the horizontal drilling results achieved by operators offset to our acreage, that multiple benches contained within our acreage may be prospective, which could substantially increase the ultimate hydrocarbon recovery of each surface acre we have leased in the Permian Basin. We believe there are a significant number of horizontal locations on our acreage that will allow us to target the Wolfcamp, Spraberry, Pennsylvanian and Clearfork/San Andres formations. We spudded our first horizontal well in the Northern Midland Basin in January 2015 and have drilled or are drilling 28 horizontal wells as of September 30, 2016.
From January 2015 through September 30, 2016, we have drilled or were drilling 28 gross horizontal wells in the Wolfcamp Shale, ten of which were drilled in 2015 and 18 of which were drilled in 2016. Also during the same period, we commenced drilling two gross horizontal wells in the area targeting zones other than the Wolfcamp.
Although our emphasis is on our horizontal program, we continue to strategically drill vertical wells in order to hold acreage to all recognized productive depths, optimize capital returns in our best areas, and assure the continuation of our horizontal program. From October 2007 through September 30, 2016, we have drilled 1,041 gross vertical wells in the Midland Basin. From late 2007 through 2013, we drilled and participated in a large number of Wolfberry tests. By the beginning of 2011, we had largely refined our drilling and stimulation process and moved into a larger scale development mode.
Spade Ranch. We currently have 52,000 net acres in the Spade Ranch property located in Mitchell County, Texas, on the eastern shelf portion of the Permian Basin. In 2013, we shot a 3D seismic survey over the Spade Ranch and, in 2016, we are drilling prospects identified from our geophysical work. Since 2010, we have drilled eight exploratory wells which were sufficient to perpetuate our continuous drilling obligation under the lease. Four of the wells are currently producing at marginal oil rates. Two of the five wells drilled in late 2014 through 2015 had modest oil shows and are temporarily abandoned. We are currently completing our first well in 2016 and plan two more seismically based well locations in 2016.
San Juan Basin
The San Juan Basin is located in the Four Corners region of the Southwestern United States, with the main portion located in northwestern New Mexico. We own 8,160 gross (4,080 net) acres in the San Juan Basin of New Mexico. Approximately half of our net acres are on Native American tribal lands. We have not drilled any new wells since 2010, and we have not scheduled, and do not currently plan to schedule, any drilling activities in 2016. Our current plans are to focus on existing production. CrownQuest operates 99% of our net total wells in the San Juan Basin.
The Paradox Basin is located mostly in southeast Utah and southwest Colorado. We own approximately 10,111 gross (4,938 net) acres in the Paradox Basin of Utah. We also hold 50.7% of the equity interests in, and serve as the managing member of, Abajo Gas Transmission Company, LLC, a Utah limited liability company that holds a gathering system in the Paradox Basin that services our properties. CrownQuest operates 100% of our net total wells in the Paradox Basin.