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Oil and gas industry faces huge loss

1688404

A pumpjack works north of Carlsbad in this September 2019 file photo. (Eddie Moore/Journal)

Copyright © 2020 Albuquerque Journal

With oil prices plunging to their lowest level in 22 years, state legislators are projecting an imminent budget crisis that’s likely to force the New Mexico Legislature into special session.

Sen. John Arthur Smith, chairman of the Legislative Finance Committee, said the state could be facing a $1 billion loss in oil- and gas-related revenue if the crisis continues through this year and into 2021.

In a Thursday letter to legislative leaders, Gov. Michelle Lujan Grisham indicated a special session is inevitable but said state officials need to have updated revenue estimates and a better understanding of federal emergency assistance before such a session is called.

She said the special session would likely focus on adjusting proposed spending levels for the budget year that starts in July, addressing public health needs and crafting an economic relief package for workers, businesses and New Mexico communities.

The Democratic governor also said her staff was looking at ways to possibly call a special session without all 112 legislators being present in the state Capitol, as the state has barred public gatherings of 10 people or more in an effort to slow the spread of the coronavirus.

“Over the past days, my office has been in communication with legislative leadership and staff about the type of tools that might be available to make such a modification possible, and the legalities of these steps,” Lujan Grisham said in her letter.

The problem is that no one knows how long the economic shutdown from coronavirus will last, nor how long the price war between Russia and the Organization of Petroleum Exporting Countries will continue. Those two events together pushed the price of U.S. benchmark West Texas Intermediate to $20.06 a barrel Wednesday afternoon, its lowest level since 1998.

That compares with $41.28 just two weeks ago and nearly $60 a barrel in early January.

During the 30-day session that ended last month, legislators based a $7.6 billion budget plan for the 2021 budget year on oil averaging $50 per barrel. But for every $1 drop in price, the state loses an average of about $22 million in direct oil and gas revenue over a year.

When the price hit $22 a barrel Wednesday morning, Smith told the Journal the state could lose between $600 and $700 million in direct revenue and nearly $1 billion if gross receipts taxes related to industry activity are factored in.

And with the price still dropping, losses could go even higher as the crisis drags on.

“We’re looking not at ‘if’ there will be a special session but when, although we first need to let things settle a bit more,” Smith, a Deming Democrat, told the Journal. “… We’re still trying to figure out where things are going, because we’re still on a downward trajectory and we need to wait a bit before we jump.”

Top New Mexico House Republicans on Thursday urged the governor to call a special session soon to address the state’s budget situation.

Among other steps, the GOP lawmakers suggested that current spending levels be kept in place and that work begin on crafting a new budget plan for the fiscal year that starts in July, based on revised revenue estimates.

“It is fair to say New Mexico has never faced such a challenging time in our history as we try to address the spread of COVID-19 as well as the effects of rapidly declining economic activity and crashing oil prices,” the letter from the three top-ranking House Republicans says.

State and industry leaders are hoping for at least a modest rebound in oil prices heading into summer, as the coronavirus contagion slows and businesses and consumer demand bounce back.

But longtime industry expert Daniel Fine, an energy researcher with New Mexico Tech in Socorro and author for the Heritage Foundation, said the situation looks grim for both the Permian Basin in West Texas and southeastern New Mexico, and for the northwestern San Juan Basin in the Four Corners region.

“The damage from this crisis will be greater and last longer than the last industry downturn, in 2014-2016,” Fine told the Journal. “Production in the Permian Basin will have to decline by at least 600,000 to 700,000 barrels of oil per day or more before the situation gets any better.”

That represents nearly a 20% decline from the roughly 4 million barrels a day now produced in the Permian. And as the crisis continues, production drops could grow more severe.

Investments cut

Companies across the board have announced immediate investment cuts ranging from 20% to 40%. That includes deep-pocketed majors like ExxonMobil and Occidental Petroleum.

Occidental said it will cut spending this year by 32%. And Exxon said in early March that it would lower its global investments from the top end of this year’s projected range of $30 billion to $35 billion to the lower end of that range.

Exxon said its heaviest spending cuts would occur in the Delaware Basin, an oval-shaped reservoir within the Permian that extends from southwestern Texas northward into Lea and Eddy counties. It planned to reduce its operating rigs there by 20%.

Exxon’s announcements, however, came before price-stabilization pacts between OPEC and Russia collapsed in the second week of March.

An agreement by those countries in effect since 2017 had, until now, suppressed world production by about 2 million barrels a day, leading to moderately stable WTI prices in the $50 to $60 range.

But when that agreement expires March 31, Russia, Saudi Arabia and other OPEC countries are expected to ramp up production, flooding global markets with unprecedented levels of supply as they fight to see who can last the longest and gain most market share amid low prices.

That, combined with a huge plunge in global fuel demand from travel restrictions and quarantines to contain the coronavirus, has rapidly cut prices with no bottom yet in sight.

With the expected April surge in world production looming, Exxon said on Monday that it’s reassessing its previously announced spending cuts.

“Based on this unprecedented environment, we are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term,” ExxonMobil chairman and CEO Darren Woods said in a statement. “We will outline plans when they are finalized.”

No fat to trim

In the 2014-2016 downturn, before OPEC and Russia agreed to cut production to stabilize prices, shale-oil producers in the Permian continued operating through innovation and cost efficiencies, plus massive capital backing from banks and private investors.

But this time, most private equity has dried up and few cost-cutting measures remain to sustain production, Fine said.

Most producers are now squeezed by the credit crunch, and new drilling and well completion could rapidly shut down.

“In the last downturn we saw about $250 billion in oil industry bankruptcies and consolidations,” Fine said. “This time could be much worse. Without private equity to sustain credit for New Mexico and Texas producers, the industry losses will easily exceed the 2014-2016 bust.”

Massive job losses

Despite the current coronavirus and price war, New Mexico reached a historic high of 117 operating rigs this week.

That reflects operator efforts to comply with current drilling and well-completion contracts. Many companies hedged those contracts at $55 to $60 a barrel, offering a short-term buffer against plummeting prices.

But Fine projects the rig count will drop to between 50 and 60 in the coming weeks. With up to 40 workers connected to each rig, that would represent between 2,300 and 2,700 lost jobs.

Some companies are already pulling back significantly. Apache Corp. said last week that it’s removing all its rigs from the Permian. And Pioneer Resources, which operates mostly in the Delaware, said it will cut its rigs from 22 to 11 and reduce well-completion crews from six now to two or three.

State Rep. Larry Scott, R-Hobbs, said the mood is dismal.

“Oil prices in the low $20s is a train wreck for Permian Basin producers,” Scott said. “There’s no other way to put it.”

As revenue declines, the state does have at least a short-term budget cushion, with more than $1.7 billion in reserves – or roughly 24.6% of state spending – – projected for when the current fiscal year ends June 30.

In addition, the governor used her line-item veto authority this month to ax about $150 million in proposed general fund spending on infrastructure projects statewide, which allows that money to be added to the state’s reserves.

However, the $7.6 billion budget for the fiscal year that starts July 1 includes a $536 million increase in year-over-year state spending, or about 7.5% above current spending levels. And most of the state’s reserves are in different funds that require legislative approval to be accessed and spent.

“We’re very concerned about the state budget,” Scott said. “It looks like some changes need to be made, and a lot sooner and more dramatically than many people may think.”

_Deck”>State revenue will be hit hard, making special session likely


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