Statewide production fell by about four million barrels from January to July, dropping from about 86 million barrels in the first seven months of 2015 to about 82 million for the same period this year, according to the latest statistics from the New Mexico Oil Conservation Division.
It’s the first significant drop in state production since crude prices crashed in mid-2014. And with prices unlikely to rise significantly until next year, steeper production declines are likely.
About 28 drilling rigs are now operating in the Permian Basin in southeastern New Mexico, up from about 20 last spring, but that’s still less than a third of the number of rigs working there before prices plummeted two years ago. And most operators that are drilling new wells aren’t completing them because they want to wait until prices improve before actually extracting new oil from the ground.
“There are a few more rigs up and running, although several folks are just operating a single rig,” said long-time oilman Raye Miller, president of Regeneration Energy Corp. in Artesia. “I don’t know how long even that will last. Some companies say they have wells that are still economic even at $40 per barrel but, for a small independent company like mine, it’s not really economical until the price reaches about $60 per barrel.”
Prices for U.S. benchmark West Texas Intermediate remain at about $44 per barrel, down from above $100 per barrel two years ago. The current price is up from earlier this year when prices bottomed out at about $26 per barrel. But most industry analysts don’t expect the price to climb above $50 per barrel until some time in 2017 because domestic and world markets remain flooded with oversupply.
“Based on trends at the world level, current prices are likely to continue through the end of 2016,” said Daniel Fine, associate director at the New Mexico Center for Energy Policy at the New Mexico Institute of Mining and Technology. “They could rise to between $50 and $54 in 2017, but they’d likely remain at those levels most of the year.”
That’s bad news for New Mexico, which is facing a $589 million budget deficit, largely because of low oil prices, plus drops in income and gross receipts taxes in the state’s oil-producing regions. About 6,000 people have lost their jobs from the bust in New Mexico – between 12,000 and 18,000 if direct and indirect jobs are included.
Gov. Susana Martinez is expected to call a special legislative session to deal with the budget deficit, possibly by next week, and policy-makers could face an additional challenge to state finances if production continues to drop – with loss of income, not just from low prices, but also from less oil being pulled from the ground.
Until now, New Mexico production had remained resilient. The state’s annual output reached 145 million barrels in 2015 – an 18 percent jump over 2014 and the highest level in state history.
That trend continued in the first quarter of this year, when output climbed by another one million barrels compared with first-quarter 2015, from about 35 million to 36 million barrels.
But that changed starting in April. Production dropped by 7 percent in the second quarter compared with 2015. And the decline continued in July, with output falling by 17 percent year over year.
Producers in most of the country’s shale-oil basins have significantly reduced drilling costs and are focusing only on the most promising well zones. As a result, so far in 2016, new well-oil production per rig has gushed at more than twice the levels recorded in 2013 in the principal U.S. shale-rock basins, according to the U.S. Energy Information Administration.
“Producers are being efficient and effective in bringing on new production, even in this low-price environment,” said New Mexico Oil and Gas Association Vice President Wally Drangmeister.
But that’s a double-edged sword in terms of prices, because oversupply must fall significantly before prices rebound. As of early September, U.S. crude oil stocks remained at a record 511 million barrels, according to the EIA.
In addition, with oil companies drilling, but not completing, many wells, producers are poised to immediately crank production back up as soon as prices begin to rise, which could keep prices in check for a long time.
“The number of drilling rigs operating nationally has increased in the last few months, but over two-thirds of them are not completing the wells they drill,” Fine said.
Aggravating the situation, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries continue to produce at record levels as part of a strategy begun in 2014 to flood world markets with excess crude to lower prices and drive weaker competitors in the U.S. out of business. As soon as U.S. producers start completing wells and domestic production begins to rise, OPEC would likely retaliate by increasing its output again, Fine said.
To confront that challenge, about 600 independent producers in the Permian Basin are now calling for the federal government to impose import quotas against OPEC to protect domestic industry. The newly formed Panhandle Import Reduction Initiative will hold a public rally in Carlsbad on Tuesday to outline those proposals.
In the meantime, the situation remains grave in New Mexico’s oil-producing zones.
“Conditions are still pretty grim here,” said Republican state Rep. Larry Scott, a career oilman who heads Lynx Petroleum Consultants in Hobbs. “Unemployment is high and there’s a lot of idled equipment that’s waiting on markets to improve before going back to work.”