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NM oil production still high but headed for crash

ALBUQUERQUE, N.M. — It’s been a wild ride for oil producers since crude prices began a prolonged crash in mid-2014, but despite the roller coaster, oil production in southeastern New Mexico remains at record levels.

Last year, New Mexico’s annual output reached 145.5 million barrels — the highest level in state history. That’s up nearly 18 percent from 2014, when the state produced about 124 million barrels, and it’s the most yearly output in New Mexico since 1970, when production reached a record peak of 128 million barrels.

But with new drilling activity now sputtering to a near standstill, oil producers expect output to decline fairly rapidly in the next six months, as few or no new wells come online and as productivity at existing wells begins to fall, said state Rep. Larry Scott, R—Hobbs.

“I suspect a precipitous drop in production is almost inevitable given the decline in drilling activity,” said Scott, a career oilman who heads Lnyx Petroleum Consultants in Hobbs. “You need continuous drilling and completion of new wells to bring more production online. Without that, over the next six months, we’ll see a fairly substantial drop in production.”


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The drop may have finally begun in December, when monthly output fell to 10.28 million barrels, according to the state Oil Conservation Division. That’s down from 12.16 million barrels in November, and it’s 13 percent lower than in December 2014.

It’s still unclear, however, if the monthly drop reflects slowing production in general, or if a winter snow storm that blasted New Mexico’s eastern plains in December contributed to the decline. When wells fill up, they automatically shut down until the oil is siphoned off for shipping, and during the storm, many trucks couldn’t get to the wells, said Wally Drangmeister vice president for the New Mexico Oil and Gas Association.

“A significant numbers of wells weren’t producing for a few hours to a few days,” Drangmeister said. “We’ll have to see new production numbers since December to know how much was weather or if producers are shutting in wells, but for now, we still only have partial numbers for January.”

Meanwhile, drilling activity is generally screeching to a halt. As of March 16, Baker Hughes reported only 15 active drilling rigs in New Mexico. That’s down from 58 a year ago, and 41 just last October. Before the price crash in 2014, about 100 rigs were active in New Mexico.

The pull-back in drilling has accelerated since the fall, because oil prices entered a new downward spiral starting in September. By late January, prices had dipped to just $27 per barrel, their lowest level since 2004. And, although it’s since rebounded to about $40 a barrel, most producers need between $50 and $60 per barrel to make new drilling profitable, said Raye Miller, president of Regeneration Energy Corp. in Artesia.

“The activity level continues to slack off,” Miller said. “Companies that still had several rigs running are now decreasing the numbers even more, and new capital investments continue to decline.”

Drilling and production continued in 2015 because producers improved efficiency and cut costs, allowing them to earn profits even as prices fell. In addition, wells in the Permian Basin are extremely productive, allowing operators to sidestep marginal ones that require higher prices to operate and focus instead on the most oil-prolific areas, said Daniel Fine, associate director of the New Mexico Center for Energy Policy at the New Mexico Institute of Mining and Technology.

“The geology there has boosted producer resilience,” Fine said.

But until the world oil glut begins to ease, the outlook will remain depressed in New Mexico’s Oil Patch.

“It’s grim down here,” Scott said. “There’s equipment stacked up everywhere that used to be out in the field operating and paying taxes and payroll. Now, it’s just sitting around here waiting for times to get better.”