Economic analysts are warning that New Mexico could be unable to rely on its oil and gas industry as the market continues to struggle amid the COVID-19 pandemic.
Lease fees, royalty payment and taxes from oil and gas operations accounted for about 30% of the state’s budget in recent years, according to a study from the Institute for Energy Economics and Financial Analysis. The research also found that the industry provided a quarter of the state’s operations budget last year.
But with the price per barrel of oil declining, the study suggests the financial support the industry offers New Mexico could be weakening.
Earlier this year, lawmakers faced a $400 million shortfall in the state’s budget that many attributed to declines in the oil and gas markets.
As of Wednesday, domestic crude oil was trading at about $41 per barrel, after a historic plummet in April – when the pandemic took hold in the U.S. – pushed the price to less than $0 per barrel for the first time in history.
Before the pandemic, oil was priced at about $55 to $60 per barrel, with the study reporting an average of about $48 per barrel between 2015 and 2019. Between 2010 and 2014, the average price of oil was about $86 per barrel.
That has meant shrinking operations in New Mexico, where oil and gas development is centered around the Permian Basin. Baker Hughes reported an average of 45 active rigs in October, marking a 60% decrease since October 2019.
Most of those rigs were lost in recent months as the health crisis grew. The year had started strong at an average of 106 rigs in January and steadily declined through the spring and summer.
Tom Sanzillo, co-author of the report, said estimates show the average price of oil will remain as low as $43 per barrel through 2022.
“It’s an improvement over the historic lows hit in April 2020, but still far below what’s needed to return New Mexico to robust fiscal health,” he said. “The situation is unlikely to improve anytime soon.”
While prices have recovered some, they would need to stay at an average of $80 per barrel for several years, the study read.
Oil and gas reserves would need to rise quickly, while companies must be able to pay off debt. At the same time, fuel demand would have to increase significantly after plummeting because of the pandemic and travel restrictions.
“These features need to be in alignment, a scenario that is highly unlikely,” the study said.
Also blocking the industry’s path to recovery are high infrastructure costs, oversupply and increasing competition from the renewable sector.
“Consequently, the industry’s future is likely to be one of long-term decline,” the study said.
Sanzillo said New Mexico should diversify its economy to survive the inevitable busts of oil and gas.
“New Mexico can no longer expect oil and gas revenues to bounce back. But the negative outlook for the oil and gas industry does not have to be a negative outlook for New Mexico,” he said.
A Sept. 30 presentation from the Legislative Finance Committee warned that the reduction in drilling activity led to less revenue through gross receipts tax, especially in Eddy and Lea counties, from April to July.
Production in the 2021 fiscal year was expected to continue its decline between 13% and 30%, the LFC reported.
New Mexico produced about 368 million barrels of oil in the last fiscal year, and the LFC predicted production would drop to 260 million to 320 million barrels this fiscal year.
Production of natural gas was also expected to decline by 7% to 10%.
James Jimenez, executive director of child advocacy group New Mexico Voices for Children, said the state’s reliance on the industry led to drops in funding for education and other social services.
“For too long, New Mexico has been whipsawed by volatile oil and natural gas markets that our policymakers have no power to control,” Jimenez said in a statement. “ We need bold and innovative solutions from our policymakers to accelerate the diversification of our state’s economy, create a more equitable and transparent tax system, and strategically invest in proven programs that deliver better outcomes for our children.”