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Hitting the brakes

Copyright © 2020 Albuquerque Journal

A pump jack east of Carlsbad in Lea County. (Eddie Moore/Albuquerque Journal)

New Mexico’s oil and gas industry is teetering on a near-shutdown, slammed by plunging demand for oil and an unprecedented global market glut that’s slashed prices to 20-year lows.

New drilling in the Permian Basin in southeastern New Mexico is screeching to a halt, and many producers are starting to shut in existing wells to await better times. That, in turn, foreshadows a double whammy on the state budget, as government revenue tumbles from plummeting oil prices and forthcoming production declines.

“It’s not pretty down here,” said Raye Miller, president of oil company Regeneration Energy Corp. in Artesia. “Probably the most activity we’re seeing now is from folks moving rigs out of the oil fields and into storage yards.”

Although unemployment data is not yet available, State Rep. Larry Scott, R-Hobbs, said companies are slashing their payrolls.

“We’re seeing layoffs, salary reductions and equipment moving back to storage yards,” said Scott, a longtime oilman and owner of Lynx Petroleum in Hobbs. “I know of several companies that have announced substantial layoffs of 80 to 100 workers.”

One industry expert predicts a loss of more than 60% of New Mexico’s active oil rigs, which would translate to more than 2,000 layoffs.

Oil producers in New Mexico and elsewhere are hoping for some relief this week, because the Organization of Petroleum Exporting Countries, Russia and other oil-producing nations plan to meet Thursday to discuss potential, collective cutbacks in output to reduce world oversupply and lift prices.

The collapse of previous supply-control agreements pushed prices into free fall in mid-March, because the participating countries immediately announced plans to ramp up production just as the coronavirus was slicing demand across the globe. The price for U.S. benchmark West Texas Intermediate fell to $20.06 a barrel by March 18, its lowest level since 1998 and just one-third the early January price of $60 a barrel.

Most companies in the Permian and other shale-oil producing basins need $50 per barrel to break even, forcing nearly all companies to announce immediate, double-digit cutbacks on planned investments in new drilling and ongoing operations.

Hope or false hope?

The prospect of a new supply-management agreement rallied prices somewhat last week, with WTI climbing briefly to $28.56 a barrel Friday, before settling back down to $26.08 by Monday afternoon. That spike came largely from tweets by President Donald Trump claiming an imminent OPEC-Russia deal could reduce global output by 10 million barrels per day, and possibly up to 15 million.

But longtime industry expert Daniel Fine, an energy researcher with New Mexico Tech in Socorro and an author with the Heritage Foundation, says the coming OPEC-Russia meeting is creating false hope among producers.

For one thing, the producing countries will likely approve far lower cuts in output than suggested, probably between 3 million and 4 million barrels at best, if they manage to reach an agreement at all. The previous accord that ended in March reduced collective production by about 2 million barrels per day, and that deal, in effect since 2017, fell apart when the participants failed to increase the cutbacks by 1.5 million more barrels a day.

Now, Saudi Arabia and Russia are seeking U.S. commitments to also cut domestic production as part of any new agreement, something extremely difficult to enforce given antitrust laws in the U.S. and opposition to any managed-market controls by major producers such as ExxonMobil and Chevron, said Fine, who discussed the current situation with industry representatives in an online conference last week hosted by Four Corners Economic Development in Farmington.

In addition, Saudi Arabia is hedging its bets against major cutbacks by seeking buyers now to unload 3 million barrels of crude on the market in May, Fine said.

“If that happens, oil would likely fall to just $15 a barrel,” Fine said.

Demand wrecked

Even if OPEC and Russia agreed to cut 10 million barrels per day, it would still have little impact on prices, because the coronavirus is pushing demand back to levels not seen since the early 1970s. With economies across the globe virtually shutting down to contain the coronavirus, Goldman Sachs projects world oil demand will drop by 26 million barrels a day between April and June, or one-quarter of global demand.

In the U.S. alone, international consultant IHS Markit projects total domestic demand for gasoline to fall by 50%.

Weekly gasoline consumption in April will reach levels not seen since President Richard Nixon was in office, said Tom Kloza, global head of energy analysis for the Maryland-based Oil Price Information Service.

“It’s ‘demand destruction’ from the coronavirus, and it’s likely to get worse as the pandemic spreads,” Kloza told the Journal.

That, in turn, is building up world crude stocks beyond storage capacity, leaving producers with no place to put their oil.

“With all that excess oil flowing in, there is no more land-based storage for Permian producers now,” Fine said.

Production slows

As a result, producers in New Mexico and elsewhere are starting to shut in wells. Shutting in a well is a temporary measure that would allow producers to restart production at some point, as opposed to the more permanent step of plugging up wells.

“With so much oil in production, storage is filled up, leading to requirements to reduce deliveries in April,” said Miller of Regeneration Energy in Artesia. “Producers are shutting in their newer, better wells in hopes of better prices in the future. Two-thirds of our production is shut in at this point.”

More producers will likely shut in wells the longer the pandemic goes on, said Robert McEntyre, spokesman for the New Mexico Oil and Gas Association.

“We can expect a decline in production in the near term as we continue to navigate the coronavirus pandemic,” McEntyre told the Journal.

The number of active drilling rigs in New Mexico fell from a record 117 in mid-March to 100 by April 3, according to oil field service company Baker Hughes. And Fine predicts the total will fall to about 40 as the crisis worsens.

ExxonMobil on Tuesday announced it will cut its 2020 spending worldwide by 30% to $23 billion, with the largest cuts targeted at the Permian Basin in West Texas and southeastern New Mexico.

The production decline could affect thousands of workers. Fine’s projection of nearly 70 rigs idled would, by itself, represent between 2,450 and 2,800 layoffs, since 35 to 40 workers are generally connected to each rig.

The crisis also foreshadows a huge impact on the state budget, since every $1 dollar decline in the value of oil translates into about $22 million in lost state revenue over a year’s time. And as production declines, the losses increase, causing a budget crunch that the state Legislature will likely need to confront in a special session in the coming months.

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