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Oil production in Permian booming, but uncertainty surfaces

Copyright © 2018 Albuquerque Journal

New Mexico is riding another record year in oil production, fueled by an industry stampede to pump crude in the Permian Basin.

Output is expected to sail past 200 million barrels by year end, up from last year’s record production of 171 million barrels, and more than twice the 85 million barrels produced in 2011.

An oil pump jack at work in the unincorporated community of Maljamar in Lea County. (Jim Thompson/Albuquerque Journal)

That’s good news for state coffers, with an expected $1.2 billion in new money that could well hit $1.5 billion by the time the new legislative session starts in January.

Still, the oil and gas industry is notoriously volatile, and many things could easily turn today’s boom into tomorrow’s bust. That includes a precipitous drop in prices since late October, thanks largely to surging U.S. output that’s feeding world oversupply at a time when the global economy appears to be slowing and demand is declining.

In addition, the oil gusher in southeastern New Mexico is stretching local infrastructure to the limit, substantially slashing income for local producers who pay premium prices to transport crude from field to market through jammed-up pipelines. That, plus the prospect of greater environmental regulation as newly elected officials take office next year, is feeding uncertainty about the future.

For now, however, industry representatives and government officials are celebrating New Mexico’s good-news gusher.

“We’re on pace this year to leap past last year’s record oil production,” said New Mexico Oil and Gas Association Executive Director Ryan Flynn. “We continue to see unprecedented industry growth and strength.”

The numbers game

Legislative Finance Committee Vice Chair Sen. John Arthur Smith, D-Deming, said the state could earn between $200 million and $300 million more in new money through the U.S. Bureau of Land Management’s next oil lease sale in December. During the last sale in September, New Mexico’s share of auction proceeds generated $467 million in new revenue for the state.

“We’ve been anticipating $1.2 billion in new money for next year, but we could get another shot in the arm from next month’s lease sale,” Smith said. “I’m guessing it could generate $250 million more for New Mexico, putting us near the $1.5 billion ball park.”

An oil rig at work in the Delaware Basin in Lea and Eddy counties, one of the most productive oil and gas zones in the U.S. today. (Roberto E. Rosales/Albuquerque Journal)

New Mexico oil production jumped by 38 percent in the first eight months of 2018, from 108.2 million barrels in the January-August period last year to 148.8 million barrels this year, according to the state Oil Conservation Division.

That reflects immense productivity in New Mexico’s side of the Delaware Basin, an oval-shaped rock formation within the Permian that protrudes from southwest Texas northward into Lea and Eddy counties. The area has become one of the country’s most prolific oil and gas zones, generating some of the highest returns for oil firms operating in the U.S., and making New Mexico the third-largest oil-producing state in the nation as of last year.

Horizontal drilling and hydraulic fracturing have cracked open difficult-to-reach pools of hydrocarbons trapped in hard shale rock, inspiring a California-style gold rush in the Permian and some other basins, such as the Bakken in North Dakota.

But it’s a double-edged sword. Ballooning U.S. output contributed to global overproduction in 2014 that slashed prices from above $100 per barrel to below $30, causing a three-year industry bust that ended in fall 2017, after the Organization of Petroleum Exporting Countries agreed to collectively cut production by 2 million barrels per day.

Companies are racing to install new pipelines for crude and natural gas in the Permian to alleviate the stress on current infrastructure. Pictured are pieces of pipe about to be installed near Jal in southeastern New Mexico. (Jim Thompson/Albuquerque Journal)

The OPEC cut helped raise prices for U.S. benchmark West Texas Intermediate to a range of $65 to $75 per barrel for most of this year. But in late October, prices crashed again, dropping to about $51 per barrel on Friday.

The latest decline again reflects expanding U.S. production, plus a recent increase in output by OPEC countries and Russia to offset a decline in oil from Iran after President Donald Trump reimposed sanctions on that country.

The U.S. reached an all-time high of 11.6 million barrels per day in early November, according to the Energy Information Administration. It’s now the world’s No. 1 oil producer.

The EIA expects daily U.S. production to climb above 12 million barrels next year, raising concerns that prices could drop more, even if OPEC cuts output again at its next meeting in December, said Daniel Fine, a long-time oil industry consultant in New Mexico.

“The global economy is slowing and demand is sluggish,” Fine said. “We could be looking at oversupply next year that’s even greater than in 2014. I see prices touching down at $50 a barrel rather quickly, and maybe even slightly lower at $48 or $49.”

During the last downturn, producers cut costs through technical and operational efficiencies, allowing them to continue producing profitably even when prices ranged between $45 and $50 a barrel.

“The break-even point varies company by company, but I don’t see production dropping now based on current prices,” Flynn said. “We’re still in a strong position, even with the recent price dip”

Other uncertainties

Lack of adequate infrastructure complicates things because extra transportation costs have sliced as much as $16 or $17 per barrel from the final price local producers receive for crude, and sometimes more, said long-time oilman and former Lea County commissioner Gregg Fulfer.

“With the pipeline issues, some of us are taking a $20 hit on the price per barrel,” Fulfer said. “That’s a lot. All our tanks are backed up waiting on oil haulers to get crude moved out of here.”

A number of large pipeline projects are under construction, which could significantly increase capacity by late 2019. Service companies are also hauling more crude by truck and rail, Fulfer said.

Apart from prices and logistics, industry is also concerned about forthcoming environmental regulations under governor-elect Michelle Lujan Grisham and incoming State Land Commissioner Stephanie Garcia Richard. Both have called for state-level restrictions on methane emissions, and environmental groups are ready to lobby for more aggressive regulation in general, said Jon Goldstein, the Environmental Defense Fund’s director of regulatory and legislative affairs.

“They ran on pro-environmental platforms, and they received strong mandates for more regulation of oil and gas activities,” Goldstein said. “Come January, I believe we’ll see a number of state initiatives to address issues.”

Industry wants to work with officials to find common ground on environmental concerns, but overzealous regulation could drive investment away, Flynn said.

“We’re at a pivotal moment now with the political climate in New Mexico and what choices the state will make,” Flynn said. “New Mexico’s unique geology offers some of the best-producing wells in the Permian, but industry here has to compete for capital, and adverse decisions can drive production and investment over the border to Texas.”

Despite all the uncertainties, business remains brisk in southeastern New Mexico, said Larry Scott, owner of Lynx Petroleum in Hobbs and a Republican state representative.

“Things are still very busy here,” Scott said. “We have about 100 rigs running and generating a lot of new production. With a reasonably stable market, we expect that to continue.”

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