Copyright © 2016 Albuquerque Journal
The massive bleeding in New Mexico’s oil and gas industry has subsided, thanks to
modest recovery in prices, but producers don’t expect a major comeback anytime soon.
“Overall, the view is still pessimistic, at best,” said Gregg Fulfer, Lea County Commission chair and owner of Fulfer Oil and Cattle Co. in Jal. “People have cut back, and there are no plans that I can see to gear back up yet.”
That’s bad news, not just for business and government in southeast New Mexico, but for the state as a whole.
While the decline in oil prices may have reached bottom, the state’s tax income continues to plummet. The state may be looking at a deficit of $150 million to $175 million for the new fiscal year that began Friday. That follows on the heels of spending cuts in February as part of the fiscal 2017 budget.
“That will be tough to deal with,” said Sen. John Arthur Smith, D-Deming, who chairs the Legislative Finance Committee. “Our … reserves are now in the 3 percent range. They had typically been in the 10 percent range.”
A deficit of that magnitude could force officials to consider a special session of the Legislature, Smith said.
Oil prices have rebounded from a 12-year low of $27 a barrel in late January to about $46 today. But most producers in New Mexico’s oil patch in Lea, Eddy and Chaves counties say they need about $65 a barrel for robust drilling to begin again. And with prices expected to remain significantly below that mark until at least 2017, few oil and gas companies and the service industries that support them are expected to hire back many of the thousands of workers who lost their jobs in the bust.
“Most producers like me are just holding on now and hoping to get through this,” Fulfer said. “Everyone seems to be in a holding pattern. It’s wait-and-see right now.”
Start of crisis
The crisis exploded in mid-2014, when prices began to plummet after nearly a six-year run-up that had kept oil above $100 a barrel. Global oversupply driven by a surge in U.S. production, declining demand in a still-sluggish world economy, and aggressive oil pumping by the Organization of Petroleum Exporting Countries despite oversupply produced a perfect storm that steadily pushed prices down.
Prices have rebounded somewhat since April, thanks to better-than-anticipated demand in China and India, as well as production disruptions in Nigeria and Canada. In addition, U.S. production, which remained resilient through the end of 2015, has finally begun to taper off.
U.S. output reached a record 9.4 million barrels per day last year, driven by modern drilling techniques that helped slice open massive, hard-to-reach oil and natural gas deposits in hard shale rock. But as of March, domestic oil production had fallen to 9 million barrels a day, and the U.S. Energy Information Administration now projects a fairly steady drop to about 8 million a day by 2017.
For producers, it will remain a tough slog through next year because oil prices remain highly volatile. For one thing, the world remains flooded with crude, said Daniel Fine, associate director of the New Mexico Center for Energy Policy at the New Mexico Institute of Mining and Technology. The U.S. currently has an inventory of about 525 million barrels of oil “That’s an historic high, and it must first be physically sold and (consumed) before inventories return to normal levels,” Fine said. “As a result, any change in the balance of supply and demand and an upward trend in prices will remain slow or static until that excess inventory is completely liquidated.”
OPEC nations, and in particular Saudi Arabia, are pulling the strings of world supply to push prices up or down as they wrest market share from U.S. competitors, Fine said. While oversupply and sluggish economies laid the foundation for the oil bust, it was OPEC’s mid-2014 decision to lift caps on its own production that pushed the market into freefall. That was the start of a historic “price war” aimed at undercutting U.S. shale producers who had cut into OPEC’s traditional market hegemony.
OPEC has won that war, said Fine, a former research associate at the Massachusetts Institute of Technology who participated in MIT’s World Oil Forum.
U.S. drilling for new oil and gas is at a near-halt, with the national rig count down from about 1,900 drilling rigs in early 2014 to just 424 operating as of mid-June, according to the oil-field service company Baker Hughes. In New Mexico, the rig count fell from just over 100 to 20 in the same period.
About $1 trillion in previously planned capital investment has fled from U.S. oil fields, and nearly 160 oil companies have gone bankrupt.
“The price war has resulted in an OPEC-Saudi Arabia victory without question,” Fine said. “Southwest U.S. production has hit bottom.”
Now, OPEC has moved to control volatility somewhat by setting a new price range of between $39 and $59 per barrel, at least for the next six months, Fine said.
“They’ve moved from a ‘hot’ price war to a ‘cold war’ to retain market share,” Fine said. “Saudi Arabia retains spare capacity to supply at will 2 to 3 million barrels per day on the market, allowing it to control volume and prices to keep U.S. production in check.”
Good for big firms
In the Permian Basin in New Mexico and West Texas, the climb back from $27 per barrel in late January has brought some relief, particularly for big, deep-pocketed producers like Chevron and Concho Resources, which can rapidly complete new oil wells they’ve already drilled to take advantage of slightly higher prices.
But for hundreds of small and mid-sized independent producers in the Permian, recovery won’t kick in until prices climb into the $60- or $65-per-barrel range and remain there.
“I believe we hit bottom between $26 and $28 a barrel in January and February, but even with oil between $45 and $50 a barrel as it is now, I don’t anticipate any significant improvement in activity levels,” said state Rep. Larry Scott, R-Hobbs, who heads Lynx Petroleum Consultants in Lea County. “I don’t think folks will go back to drilling in any substantial manner until they see sustained prices at $60 or above.”
With prices hitting bottom and bouncing back a bit since January, the sharp slide downward in investment and employment levels in New Mexico has at least slowed, if not stopped. But things remain pretty depressed in the oil patch.
At least 6,000 people lost their jobs in the downturn – a number that goes as high as between 12,000 and 18,000 if direct and indirect jobs are included. Indirect jobs include areas like well servicing, equipment suppliers and people working in local hospitality and retail.
In Lea County, the unemployment rate climbed from 5.9 percent in May 2015 to 8.7 percent this May, according to the state Department of Workforce Solutions.
And, with few or no new wells being drilled or coming online, state officials are bracing for a drop in production as productivity at current wells tapers off.
So far, that hasn’t happened. New Mexico’s oil output for the first four months of this year reached 47.1 million barrels, down by about 565,000 barrels, or a little over 1 percent, from the same period in 2015.
When and if production does fall, the impact on state finances could be offset somewhat by the modest increase in prices, said Sen. John Arthur Smith.
For each $1 drop or increase in the price of oil, New Mexico loses or gains between $7 and $10 million in revenue.
But the bust in industry activity has also impacted state collection of other taxes. As of April, revenue from corporate income taxes was down by between 45 percent and 50 percent for the previous 12 months, and gross receipts taxes were down by between 8 and 10 percent, Smith said.
That could drive the state’s revenue shortfall for the new fiscal year that began Friday to as high as $175 million, he said.
If accurate, new, more-controversial measures may be needed, such as tapping into the state’s Tobacco Settlement Money, which holds about $230 million to $240 million in reserve, he said. But approval for that or other measures could require a special legislative session.
“We’ve never tapped into the tobacco reserve money before,” Smith said. “It would be the first time.”