Oil Shock Upends Shale's Newest Powerhouse

Oil Shock Upends Shale's Newest Powerhouse
New Mexico is exhibit A of this boom-to-bust dynamic, with the state's revenue forecasts plunging and over 4,600 workers in mining.

(Bloomberg) -- As Covid-19 shock waves reverberate across U.S. oil towns, perhaps nowhere is their speed and severity more apparent than in America’s newest shale powerhouse.

Just months ago, New Mexico, the third-biggest producer of U.S. oil, approved the state’s largest budget ever, paid for by an oil boom that made up 40% of the state’s revenues in 2019. Now that plan has been slashed by more than $600 million, affecting everything from pay raises for state workers to a program designed to provide free community college to state residents.

Oil-producing states across the U.S. are facing a double whammy with both drilling and overall consumer spending cut back by the pandemic. New Mexico, meanwhile, stands as exhibit A of this boom-to-bust dynamic, with the state’s revenue forecasts plunging and more than 4,600 workers in mining, most of which is oil and gas-related, claiming unemployment insurance in the week ended June 13.

“We were just starting to stand on two legs,” said Reilly White, a finance professor at the University of New Mexico. “All of that stuff that passed, and that we were expecting this year, oil was a big part of that. The rug has just been swept out from under us.”

An oil pump jack operates near U.S. Route 285 outside Loving, New Mexico, U.S., on Tuesday, Aug. 6, 2019. New Mexico's Governor Michelle Lujan Grisham is balancing her concern over the catastrophic effects of climate change with the state's extraordinary dependence on oil and gas.

When New Mexico’s legislature initially passed its budget in February, it assumed an average oil price of $50, and continued growth in the state’s part of the Permian Basin. But in the months since, with U.S. lockdowns underway, crude futures fell as low as negative $40 a barrel.

Companies with operations in New Mexico, including Concho Resources Inc., Occidental Petroleum Corp. and Matador Resources Co., have all decreased the number of rigs they plan to run in the state this year. And many producers have also taken the unprecedented step of curtailing significant portions of their existing output.

Prices have returned to the $30 a barrel range since, and that rebound has helped some. But crude and natural gas producers in the state have yet to reboot their output to previous levels, and New Mexico’s Land Office now expects its monthly royalty revenue from the oilfields to drop by half.

On Saturday, the legislature -- meeting in a special session -- reacted by sending a new pared-down budget plan for Governor Michelle Lujan Grisham to sign.

In the early 2000s, New Mexico’s oil revenue “for the whole year was like $500 million,” said Stephanie Garcia Richard, New Mexico’s land commissioner. This year, though, the Land Office was bringing in about $100 million a month from royalty payments alone. Then the coronavirus hit.

On top of the drop in oil revenue, the state is also contending with a decline in sales tax-receipt revenue as consumers largely stay home amid the shutdowns. But there is a bright side: The past few years of high oil revenue have left New Mexico with a sizable rainy-day fund.

Steady Increase

Oilfield activity in New Mexico’s southeastern corner has been steadily increasing for four years. As shale producers drilled through legacy acreage in the Permian’s Midland sub-basin, they moved further west into New Mexico’s Eddy and Lea counties.

Unlike Texas, 90% of production on the New Mexico side of the Permian has taken place on lands owned by the state or federal government. That lets New Mexico’s government collect significant royalties, severance tax and disbursements from drilling. And business was booming.

The regulatory hoops that come with drilling on public lands were a nuisance, but this particular area -- known as the Delaware Basin -- was hot. And unlike in the last boom, workers were starting to make New Mexico their home base.


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