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San Juan region scrambles to shift to new economy

Copyright © 2017 Albuquerque Journal

Walt Floyd, left, Kenneth Aagesen and Paul Tso work on a rig drilling for natural gas in the San Juan Basin. (Jon Austria/Farmington Daily Times)

Christmas brought a new lump of coal-fired headaches to San Juan County.

Two of the four generating units at the San Juan Generating Station near Farmington permanently closed just before the holidays.

That long-awaited shutdown marks the first stab in Public Service Company of New Mexico’s plan to completely shutter its 50-year-old coal-fired facility by 2022 to comply with environmental regulations and transition its electric production to more modern, sustainable technologies.

Two of the four units at the San Juan Generating Station were shut down just before the Christmas holiday. It’s a first step in Public Service Company of New Mexico’s plan to completely shutter the 50-year-old coal-fired facility by 2022. (Jon Austria/Farmington Daily Times)

But the plant’s partial closure rips another hole in the San Juan area, already battered by low natural gas prices that have depressed the regional economy for nearly a decade.

Now, with San Juan’s gradual shutdown, plus closure of three generating units in 2013 at the nearby Four Corners Power Plant, local government and business leaders are under pressure to build employment opportunities for the area’s energy-related workforce, long dependent on coal mining, utility jobs and natural gas production. It’s a double whammy to San Juan’s fossil-fuel industries, creating a perfect storm that’s rippling across the region’s economy.

“When the San Juan station and the coal mine connected to it closes in five years, it will be a big hit to the entire community,” said Alicia Corbell, business retention and expansion director at the Four Corners Economic Development organization. “Together, those facilities represent about 10 percent of the property tax revenue in San Juan County.”

A service road leads to entrance portals at the San Juan Mine in northwestern New Mexico. The mine, run by the Westmoreland Coal Co., supplies the San Juan Generating Station’s coal-fired plants. (Jon Austria/Farmington Daily Times)

The Westmoreland Coal Co., which runs the San Juan mine that supplies the electric generating station, reduced its workforce by 70 since the summer. At the generating station, PNM is relying on attrition to right-size its employee count.

The two entities reduced their combined workforce from 650 last January to about 550 now. And with some 950 indirect jobs connected to those facilities, many local businesses and workers are impacted, said Farmington Chamber of Commerce President and CEO Audra Winters.

“The coal and power plant issues come on top of the problems in oil and gas,” Winters said. “People are either moving out of the area or traveling back and forth from jobs in other places. Those are big challenges for us here, with trickle effects on the local economy that many businesses are suffering from.”

Three units at the Four Corners Power Plant near Farmington were shut down four years ago. (Farmington Daily Times)

Despite the challenges, regional leaders say better times are ahead thanks to broad, collaborative efforts to diversify the economy away from its dependence on energy, as well as an uptick in the natural gas industry that could gain force in coming years.

“It’s not all doom and gloom here,” Corbell said. “A lot of good things are happening, and I believe there are brighter days ahead.”

Jose Lopez works fabrication equipment at Process Equipment Service Co. in Farmington. The family-run business has developed new domestic and foreign markets in recent years. (Jon Austria/Farmington Daily Times)

But economic diversification takes time, and San Juan faces a steep climb out of its current situation.

The slide down began with the Great Recession, from which San Juan never really emerged due to persistently low natural gas prices. The San Juan Basin in the Four Corners area, one of the nation’s biggest natural gas hot spots, reached peak output of 1.68 trillion cubic feet in 2001, when prices hovered around $9 or more per 1,000 cubic feet, or Mcf.

But the shale-gas revolution has opened up vast new natural gas deposits in other states, creating a prolonged market glut. That, combined with the recession, gutted wholesale prices to a range of $2 to $3.50 per Mcf in recent years. The price was $2.54 as of Dec. 20, said T. Greg Merrion of Merrion Oil and Gas Corp. in Farmington.

San Juan’s rig count dropped from about 40 before the recession to zero last January, as new exploration and drilling ground to a halt, although it has since recovered somewhat.

“Prices plummeted and the rig count dropped because new technologies opened up more natural gas basins in the country,” Merrion said. “It’s been a struggle here ever since.”

That, plus the recent decline in coal-related activities, pushed San Juan’s unemployment rate to 9.5 percent by last January, reflecting both the high number of people out of work and declining population as workers sought jobs elsewhere. San Juan’s population fell by almost 10 percent, or nearly 13,000 people, from 20011-2016, according to the U.S. Census Bureau.

Orlando Begaye works on equipment at Process Equipment Service Co. in Farmington. (Farmington Daily Times)

With the San Juan Generating Station’s pending closure in 2022, things could get worse before they get better. About 930 direct jobs will disappear in the next few years due to the plant shutdown and general decline in regional coal mining, representing a $122 million loss in annual income, according to a new report that Highland Economics LLC prepared for the Northwest New Mexico Council of Governments last February. Counting indirect employment and induced ripple effects, the region could lose up to 3,180 jobs and $213.3 million in annual income, cutting annual tax receipts for local, tribal and state government by $43.3 million.

Still, there are signs of improvement in the oil and gas industry. For one thing, production declines have given way to a slow rebound.

Output hit bottom in 2013 at 1.228 trillion cubic feet of natural gas, 27 percent below the 2001 peak. Since then it’s risen slightly, reaching 1.279 trillion cubic feet in 2016.

New players are buying up assets in the basin and reinitiating some activities. This summer, Hilcorp San Juan LP paid $3 billion to acquire roughly 12,000 wells from ConocoPhillips. It’s now reworking those assets to pump up production, Merrion said.

Others, like BP PLC, are drilling new natural gas wells in the Mancos, a hard shale-rock formation in the San Juan that operators can now crack open with modern technologies.

In June, seven rigs were operating in the basin, although that’s since declined to three. Those activities markedly cut the county’s unemployment to 6.5 percent as of October.

The Highland Economics report has galvanized regional leaders into collaborative efforts to diversify the economy, said Four Corners Economic Development CEO Warren Unsicker. About 140 people attended a Four Corners Future Forum in November, with more summits planned for 2018.

“That report brought everyone to the table,” Unsicker said. “That includes local communities and tribes from throughout the four-state region to identify potential synergies we can tap into collaboratively to advance broad economic goals.”

Among other things, San Juan leaders want to build the region’s tourism, agriculture, food processing and alternative energy industries; encourage light manufacturing to support those things; and retrain energy-related workers for new employment opportunities.

A welder works at the Process Equipment Service Co. plant in Farmington. The company has long focused on the natural gas industry but has expanded into oil. (Jon Austria/Farmington Daily Times)

Existing businesses are also diversifying their products and markets, such as the family-run, Farmington-based Process Equipment & Service Co., which has focused on the natural gas industry since 1970. It now has expanded into oil, and developed many new domestic and foreign markets.

“We’ve grown from 180 employees in 2016 to 340 today, and we’re still adding more people to keep up with demand,” said President and CEO Kyle Rhodes. “We believe there are a lot of opportunities other companies can also tap into by diversifying, but you need courage and drive to do it.”