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Oil production expected to continue to plummet into the fall

Copyright © 2020 Albuquerque Journal

The crash in oil prices is finally catching up with production as operators across the U.S. scramble to cease output from thousands of wells.

State-level production estimates won’t be available, even for March, until at least next month. But industry leaders and analysts expect New Mexico and other oil-producing states to report a sharp drop in output from April-June, with production declines likely continuing into the fall.

“We can only guess right now on what New Mexico production looks like,” said New Mexico Oil and Gas Association spokesman Robert McEntyre. “We expect to see a spike in oil-well shut-ins and a decline in production, for sure. It’s the extent and volume of the decline that we’re waiting to see.”

Oil-well “shut-ins” are a temporary measure to cease output now and then restart wells when prices rebound. But alongside the shut-ins, all new drilling activity has screeched to a near halt, causing more production declines as output from existing wells that aren’t shut in decreases and no new wells come online to replace them.

Slowing production, combined with the crash in prices since early March, represent a double whammy for New Mexico, where nearly 40% of the state budget comes from royalties and taxes on oil and gas operations. Every $1 drop in prices amounts to about $22 million in lost state revenue over a year, and the price for U.S. benchmark West Texas Intermediate has plummeted from about $60 a barrel in early January to the low $20s now.

A pumpjack in the oil fields east of Artesia. (Greg Sorber/Albuquerque Journal)

A new report from government economists, issued this week, estimates the state will lose between $1.8 billion and $2.4 billion in revenue in the new fiscal year that starts July 1, thanks to the oil industry collapse and the general economic downturn triggered by the coronavirus.

Oil losses account for the lion’s share of plummeting revenue, with low crude prices and declining production both impacting the budget, said Sen. John Arthur Smith, a Deming Democrat and chairman of the Senate Finance Committee. Production declines account for about 40% of lost oil-related revenue.

New Mexico’s oil rig count plummeted from a record high of 117 in mid-March to 66 as of May 1, according to oil field service company Baker Hughes.

“It’s fallen nearly 50% in less than two months,” Smith said. “I wouldn’t be surprised to see oil production overall fall by 40% this year.”

Between 35 and 40 jobs are directly connected to every rig, meaning between 1,785 and 2,040 employees have lost their jobs just from the drop in active rigs. But the ripple effect is much larger, with some 18,000 people employed directly in oil industry jobs or support services. Thousands more indirectly depend on the industry to keep the economy moving.

The crash is being felt throughout the U.S. oil and gas industry. As of May 1, Baker Hughes reported 408 active rigs nationwide, down from 990 a year ago.

“That’s the sharpest decline ever in the U.S.,” said Alexandre Ramos, senior analyst with global consulting firm Rystad Energy. “It’s unprecedented.”

Drilling and hydraulic fracturing across the country has virtually shut down.

“Fracking is collapsing,” Ramos told the Journal. “It’s come almost to a standstill.”

Rystad estimates that, in April, operators shut in enough wells across the U.S. to reduce output by about 187,000 barrels of oil per day. It projects 616,000 barrels per day of shut-ins in May and 655,000 barrels per day in June.

Overall, U.S. output has dropped from a record high of nearly 13 million barrels a day in March to about 11.9 million per day by May 1, according to the Energy Information Administration.

Ramos projected it will fall to 11 million a day by June and keep declining through September or October.

“We expect it to bottom out at about 10.5 million barrels a day before a slow recovery begins,” Ramos said. “… Shut-ins are happening everywhere, including New Mexico.”

The problem is a severe market glut. Producers continued flooding the market even as the pandemic spread across the globe, and when countries went into lockdown, demand crashed as people stopped driving, planes stopped flying and many industries slowed or halted operations.

Global demand fell to about 70 million barrels a day, down from about 100 million barrels in normal times. Storage facilities rapidly filled up, leaving no place for producers to put their oil.

U.S. commercial reserves reached 532.2 million barrels as of May 1, just shy of the nation’s all-time record of 535.5 million barrels in March 2017.

Oversupply is now declining, thanks to U.S. production dropping and an agreement by the Organization of Petroleum Exporting Countries and other nations to collectively cut output by nearly 10 million barrels per day starting May 1. In addition, the U.S. and other nations are beginning to reopen their economies, pushing oil demand up for the first time since the coronavirus lockdown.

That, in turn, has helped raise prices for benchmark WTI from about $12 a barrel two weeks ago to nearly $24 on Friday. But it will take time to balance supply and demand, said Raoul LeBlanc, vice president for nonconventional oil and gas at international consulting firm IHS Markit.

“It seems demand has bottomed out and is slowly coming back, and production is now really falling in earnest,” LeBlanc told the Journal. “The situation has stopped getting worse and is starting to get better.”

But most analysts don’t expect prices to climb back above $40 a barrel at least until next year and many companies are expected to go bankrupt going forward. Even when production begins climbing again, the industry is unlikely to return to the record pre-coronavirus production levels that made the U.S. the world’s No. 1 producer and New Mexico the nation’s third-largest producing state.

“We’ll never get back to that historic boom,” Ramos said. “Oil prices will recover in the next couple of years, but production will be much more concentrated among very large companies, with many smaller operators across the U.S. marginalized or wiped away.”

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