NM oil patch outlook - Albuquerque Journal

NM oil patch outlook

New Mexico could be poised for a new upturn in oil production but, after nearly three years of bust, most local producers remain wary about the prospects for open recovery in the state’s oil patch.

A recent agreement by the Organization of Petroleum Exporting Countries and other foreign producers to cut world production about 2 percent, or nearly 2 million barrels per day, has pushed prices above $50 per barrel since November, their highest levels in more than a year. That, in turn, is spurring renewed activity in the Permian Basin in southeastern New Mexico and West Texas, where some of the bigger players are drilling again and rehiring workers.

But OPEC and other foreign producers, led by Russia, only initiated output cutbacks this month, with full reduction scheduled to phase in over the next six months. Until those countries prove they intend to abide by their commitments, prices are unlikely to climb much more.

Gregg Fulfer
Gregg Fulfer

In New Mexico, that means stunted recovery, at least for now, because most small producers need at least $60 per barrel or more to be profitable, said Gregg Fulfer, former Lea County commissioner and owner of the Fulfer Oil and Cattle Co. in Jal.

“We’ve gotten some breathing room with prices up a bit,” Fulfer said. “Activity by the bigger producers is picking up and the service companies are hiring people back. But small companies like mine really need about $65 a barrel to make a profit and reinvest back into production, otherwise we’re still just treading water.”

If foreign producers do comply with cutbacks, oil prices could climb above $60 quite rapidly, potentially fueling a new boom in the Permian Basin, where some of the nation’s best producing wells are located, said Daniel Fine, associate director of the New Mexico Center for Energy Policy at New Mexico Tech in Socorro. In fact, full industry recovery could propel southeast New Mexico and West Texas into the nation’s premier oil-producing zone, since the industry is only just beginning to crack open the vast production potential of shale rock formations there.

Daniel Fine
Daniel Fine

“The Permian is so geologically rich for future production that it could become what Alaska was in the 1970s,” Fine said. “Today, the largest investment flows are going into the Permian, not to other basins like the Bakken in the Dakotas or the Eagle Ford in Texas. With full recovery, I believe the Permian will become the key basin supporting the country.”

Commitment to cuts

For now, however, all eyes are on OPEC, Russia and other nations that agreed to cut production to diminish oversupply on the world market, which pulled prices down from about $100 per barrel in 2014 to a low of about $27 early last year before rebounding some.

The price crash hit New Mexico particularly hard. About 6,000 people lost their jobs – between 12,000 and 18,000 if direct and indirect jobs are included.

And the state is in the midst of a budget crisis because about one third of government revenue comes from the oil and gas industry. That includes a $69 million shortfall for the current fiscal year that the state Legislature will need to fill when the next session begins this week, plus $300 million less in “new money” available for FY 2018, which begins in July.

Even with the recent rise in prices, the state remains in the red, because current revenue projections are based on oil prices of between $50 and $60 a barrel, said Sen. John Arthur Smith, D-Deming, who chairs the Legislative Finance Committee.

“I believe the price needs to be in the $65 to $70 range to make a real dent in the deficit,” Smith said.

Sidelined by diminished oil production, trucks and equipment sit in a lot near Hobbs in June 2016. Oil-field activity has picked up since then.
Sidelined by diminished oil production, trucks and equipment sit in a lot near Hobbs in June 2016. Oil-field activity has picked up since then.

At that price, government finances would improve, but state revenue would still be much lower than before 2014, since oil prices would remain about $30 per barrel less than before the bust began. For each $1 drop or increase in the price of oil, New Mexico loses or gains between $7 and $10 million in revenue.

In any case, climbing above $60 a barrel will be a challenging, even with OPEC cutbacks, because current global inventories must still decline to balance supply and demand, and U.S. producers are poised to spring back into production as prices climb, offsetting efforts to reach market equilibrium.

But compliance by OPEC and others will revive market confidence, driving prices up if agreement monitors confirm reductions are on track, Fine said. The first report is due later this month.

“The key number is 350,000 barrels by the end of January,” Fine said. “That’s the amount needed to offset an expected increase in American production following the recent rise in prices. If the monitors certify that, then the price could rapidly move to about $60.”

If foreign producers continue cutting as scheduled through mid-2017, global supply and demand could begin to balance out for the first time since the crash began in 2014, depending on how fast U.S. production comes back online, Fine said.

Recovery prospects

Assuming those milestones are reached, New Mexico could be looking at significant recovery later this year and into 2018.

“I believe 2017 could be another record-breaking year in oil production, with new rigs and well drilling and completion on the New Mexico side of the Permian Basin,” Fine said. “I see state production increasing by about 10 percent over 2016.”

New Mexico output already achieved record levels in 2015, despite the price bust. Production hit an all-time high of 147 million barrels that year, up from 124 million barrels in 2014. Production did decline last year, with output down by about 3.4 percent in the first 10 months of 2016, according to the most recent statistics from the state Oil Conservation Division.

But now, with prices climbing since the fall, many big companies are ramping up again, with 37 rigs active in New Mexico as of early January, up from a low of 15 last June, according to the oil field service company Baker Hughes. That’s still less than half the number of rigs operating in New Mexico before the bust in 2014. But many people are finding jobs again, since each rig typically employs about 50 people directly, plus 50 to 70 more in support jobs.

Unemployment in Lea County dropped from a high of 9.4 percent in October to 8.8 percent in November, according to the December report from state Department of Workforce Solutions.

Expanding investments

Some big companies are investing heavily in the Delaware Basin, an oval-shaped shale-rock formation that protrudes from southwest Texas northward into Lea and Eddy counties. Concho Resources, for example, paid $430 million in November for access to about 24,000 acres in Lea County sections of the Delaware. It expects to grow production there by 20 percent this year.

Devon Energy of Oklahoma expects to increase its operations on the New Mexico side of the Delaware from three rigs last fall to up to 10 by year-end 2017. Devon executives say exceptional well productivity there, combined with company efforts to lower operating costs and improve efficiency, make Delaware investments profitable even at current prices.

“The cost-per-barrel of oil produced there is extraordinary compared with other places,” Fine said. “That’s why so much investment flow is going into the Permian rather than elsewhere.”

Still, with so much depending on OPEC and other producing nations, locals remain skeptical.

“My little company is not drilling at this point because we need at least $60 to get back out there and be active,” said Raye Miller, president of Regeneration Energy Corp. in Artesia. “It’s all dictated by price. If it falls, activity will shrink right back down again.”

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