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Price crash could end New Mexico’s oil boom

Copyright © 2014 Albuquerque Journal

The huge drop in crude oil prices since September is a double-edged sword for New Mexico that provides welcome relief at the pumps for consumers but puts the state’s seven-year production boom in jeopardy.

And any slowdown in New Mexico output will affect everybody, since nearly one-third of state revenue comes from the state’s oil and gas production.

For now, industry experts aren’t projecting a new bust cycle in the Permian Basin in southeastern New Mexico, but rather a marked reduction in growth. But if prices remain depressed, or decline further, it could begin to reverse one of the longest-running booms in the New Mexico Oil Patch since the 1970s.

“We’ve crossed the break-even point on prices for most New Mexico producers,” said Daniel Fine, associate director at the New Mexico Institute for Mining and Technology’s Center for Energy Policy. “Much of New Mexico’s small-cap and independent producers are at risk.”

Even if current production levels remain steady, dropping oil prices and slower growth will have a significant impact on New Mexico’s finances. In August, state officials projected $285 million in “new” money for the fiscal year that begins next July, mostly from oil and gas revenue.

“The state budget will take a big hit, because those projections were based on oil at $95 per barrel,” Fine said.

There is, of course, a thick silver lining for consumers. Average prices for unleaded gasoline fell on Thursday to $2.92 per gallon nationally and to $2.77 in New Mexico, according to AAA. If those prices hold, it would save U.S. consumers about $61 billion at the pumps next year.

map templateTipping point

Fine, who was recently appointed project leader for state energy policy, said the tipping point between profit and loss for newly drilled wells is $70 per barrel. Benchmark West Texas Intermediate is trading at about $77 per barrel, down from about $100 this summer.

But New Mexico producers receive up to $12 per barrel less for the Midland Sweet Sour that comes from the Oil Patch, largely because of higher costs from bottlenecks in transporting the crude to refineries.

“For small, undercapitalized – or low-cap – oil and gas producers in southeastern New Mexico, the price has crossed the tipping point,” Fine said.

Large companies also are directly impacted by price declines, but they have fewer cash-flow problems, giving them more ability to maneuver production plans to keep output up, such as concentrating on the most-promising wells and taking fewer risks on marginal wells.

But like the small independent producers, large companies likely will begin to curtail new drilling by spring 2015, because hedging contracts that currently protect them from dropping prices will expire, Fine said. Most are now selling output at pre-signed prices of about $95 per barrel, but future contracts will be much lower.

The first impact will be a decline in new drilling, rather than any slowdown in output at wells already producing, said Raye Miller, president of Regeneration Energy Corp. in Artesia, a small, independent company. That could begin by mid-2015.

“At this point, the level of activity hasn’t slowed down at all, because most companies already have their capital budgets set going into next year,” Miller said. “It usually takes six months to a year after prices stay down that the impacts on production set in.”

Still, small companies like Miller’s may be forced to curtail new drilling much sooner than that.

“We’ll carry through with plans already in our budget to drill two new wells late this year and in early 2015,” Miller said. “But I can’t see doing any additional drilling next year if prices stay as they are.”

In addition, if prices continue to drop, companies large and small could revise their current capital budgets, said New Mexico Oil & Gas Association spokesman Wally Drangmeister.

“If prices go lower, companies will absolutely start reworking investment plans,” Drangmeister said.

Prices, however, would need to go a lot lower for currently producing wells to start slowing down.

“Most producers wouldn’t start to actually ‘shut-in’ wells even if the price per barrel dropped by another $20,” Miller said.

Nevertheless, the projected slowdown in new exploration could end an unprecedented expansion streak that began in 2007, when modern techniques of hydraulic fracturing and horizontal drilling opened up hard-to-reach pools of hydrocarbons trapped in hard-rock shale, giving new life to the Permian and other U.S. basins.

New Mexico oil production reached 100.8 million barrels last year, up 70 percent from 2007 and the highest state output since 1973, according to statistics from the state Oil Conservation Division. And from January to August of 2014, production climbed another 17 percent, from 65.6 million barrels in the first eight months of last year to 76.9 million barrels this year.

That mirrors an historic national boom spurred on by unconventional shale-rock drilling. Domestic oil production nationwide reached 2.72 billion barrels in 2013, up nearly 50 percent from 1.83 billion barrels in 2008, according to the U.S. Energy Information Administration.

Oversupply, Saudi Arabia pull oil prices down

Domestic oil production in the U.S. has been on a seven-year upward streak that may finally level off in 2015 because of declining oil prices.

A range of factors is pushing prices lower, beginning with market oversupply, much of it fed by the boom in unconventional shale-rock oil and gas production. A still sluggish global economy, rising use of electric and natural-gas powered cars, and improvements in gas mileage for vehicles have also contributed to declining consumer demand for gasoline, putting further downward pressure on prices.

And last month, Saudi Arabia dropped another major wrench in the market by cutting prices for the crude it sells in the U.S. and Asia and rejecting pressure to reduce its production to help halt price declines.

Industry experts say the Saudis want to undermine booming shale-rock hydrocarbon production in the U.S. to retain its market share against increasing U.S. competition.

That Saudi policy, however, is opposed by some members of the Organization of Petroleum Exporting States, which could push the Saudis to soften their position at the next OPEC meeting on Nov. 27.

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