From oil boom to oil bust in Southeast New Mexico

Just as rig activity in Oklahoma’s prolific STACK and SCOOP plays has dwindled, the number of rigs being put aside in the nation’s highest producing play, the Permian Basin is suffering too. The boom has gone bust.

In New Mexico’s southeast corner, the pain is evident as discovered in a recent report by the Santa Fe New Mexican newspaper.

The ax is falling throughout energy-rich southeastern New Mexico as crude prices have plummeted amid the COVID-19 pandemic. It’s a swift and stunning reversal for an area of the state that until last month had been riding high on the greatest oil boom in its history.

It wasn’t long ago that some of the largest oil companies in the world were flocking to Lea and Eddy counties to boost oil production, open regional offices and add high-paying jobs that attracted workers from across the country to cities like Carlsbad and Hobbs.

Within the span of just around a month, that boom has turned to a bust. Serious doubts have now been cast over the short- and even medium-term future of oil and gas production in the area, as producers shut down wells, idle drilling rigs and say goodbye to workers.

“We’re seeing layoffs, we’re seeing equipment stacked in yards and we are seeing primarily the lower-volume wells shut in,” said Rep. Larry Scott, who, in addition to representing Hobbs in the state House, is the owner of Lynx Petroleum.

Projections reflect that pessimism. Daniel Fine, an oil and gas researcher with New Mexico Tech, estimates oil output on New Mexico’s side of the Permian in the second quarter of this year will fall to less than half of what it was before the new coronavirus outbreak.

Fine, who was a research associate at MIT and a project leader in new energy policy for the state of New Mexico from 2013-16, said some 850,000 barrels a day of crude will no longer be needed from the Permian Basin, which straddles New Mexico and Texas. Output on the New Mexico side could fall by some 650,000 barrels a day, he added.

Enverus Market Intelligence, an energy industry data and software company, goes even further in its estimates for the entire basin, projecting production will drop 1.05 million barrels a day at the end of this year compared with the end of 2019.

Production figures are not yet available for the month of March, when U.S. states began implementing stay-at-home orders. But New Mexico’s active drilling rig count has fallen 28 percent, from 117 to 84, in a little over a month.

There’s also been a huge drop-off in flaring, the burning of excess methane into the atmosphere. Satellite data analyzed by Santa Fe-based Descartes Labs showed the average flaring radiance in the New Mexico portion of the Permian fell around 50 percent from February to March.

That’s an indication of a sharp decline in production, said Sarp Ozkan, director of energy analysis at Enverus. Operators are more likely to shut in wells where they flare gas because they’re more expensive to operate.

Before the pandemic began, there were 42,700 oil and gas jobs in New Mexico and as many as 134,000 when also counting jobs indirectly related to the industry, according to a recent study done by New Mexico Tech’s research institute for the New Mexico Oil and Gas Association.

The University of New Mexico’s Bureau of Business and Economic Research has smaller figures, however, using U.S. Department of Labor data to calculate 27,780 oil and gas jobs in the state and 48,615 direct and indirect jobs as of the end of 2019.

Jeffrey Mitchell, director of the Bureau of Business and Economic Research, estimated the number of direct jobs in the industry will fall by

30 percent by the end of this year and will bottom out at around 38 percent by the middle of 2021.

All of these numbers could mean a dire situation for a significant portion of the workforce on the ground in the state’s oil patch, as well as for the communities those workers live in.

“Folks have to feed their families,” said Scott, R-Hobbs. “If there’s not any work here, they’ll go where there is.”

Aldridge has worked in the oil field for 10 years, the majority of his adult life. Yet now he’s filed for unemployment and is working part time as a handyman.

He said he can’t take his skills to another oil company because the entire industry has been hit hard.

Like many people affected by the outbreak — whether it be small businesses forced to shut down or residents who test positive for the virus — oil workers like Aldridge are suffering. That was clear when Aldridge got the recent call from a recruiter at the contracting company that hired him to work on Occidental wells.

“He told me it wasn’t anything that I had done. It wasn’t for lack performance,” he said.

The downturn is evident in the Lea County towns and cities that, until recently, were epicenters of the boom. Oil-related pickup and semitrailer traffic that used to jam up the roads has lightened. At the same time, the trailer parks that house oil workers have thinned, Aldridge said.

“That’s a pretty good indicator that it’s slowing down significantly,” he said.

Oil-related activity in Carlsbad has fallen, too, although much of that change also is due to the public health orders issued by Gov. Michelle Lujan Grisham, said Robert Defer, chief executive officer of the Carlsbad Chamber of Commerce.

The retail stores, restaurants and motels that were once filled to the brim with oil workers are now closed or, in the case of lodging, operating at reduced capacity, he said.

“There has been a dramatic change,” Defer said.

Local oil companies in the area say the crisis is already worse than the oil price crash of 2015 and 2016.

The head of one independent producer in Eddy County said his company has implemented layoffs and pay cuts across the board, and it is looking to sell off real estate it owns. The company doesn’t expect to drill any more wells for the rest of the year.

“We are tightening our belts as best we can,” said the executive, who asked not to be identified. “What every company out here is doing is getting back down to bare-minimum basics.”

More broadly, the announcements of layoffs by oil companies in the region have come cascading in on a regular basis over the past month.

FTS International Services said last month it would lay off 85 workers in Hobbs, service company Step Energy Services said it planned to let go of 151 in Texas and services giant Halliburton implemented a mandatory furlough for 3,500 employees in Houston.

“We’ve been getting a lot of bounce backs from responses from folks saying they’re no longer at their companies,” Ozkan said. “There is definitely a workforce cut that’s happening across the board.”

Large producers have signaled plans to dramatically cut spending, too.

Occidental, the largest acreage holder in the Permian, announced a reduction in capital spending this year to between $2.7 billion and $2.9 billion from original plans of between $5.2 billion and $5.4 billion.

Exxon Mobil said earlier this month it will cut its 2020 capital spending by 30 percent, with the greatest portion of that reduction coming in the Permian Basin.

“Reduced activity will affect the pace of drilling and well completions until market conditions improve,” the company said in an April 7 statement, adding that it was “preserving value over the long term” in the Permian.

The news marked a striking contrast from the fall, when the president of Exxon Mobil subsidiary XTO told an energy summit in Carlsbad his company had “really big plans” to grow in the Permian.

The outlook for the industry doesn’t just look troublesome because U.S. crude prices have dropped to around $20 per barrel — less than one-third of what they were in January. The bigger issue is they’re likely to stay down for a long time.

First, that’s because there’s a huge glut of crude supply that doesn’t have anywhere to go because demand has fallen so much as people across the world have stopped traveling, Ozkan said.

Second, demand likely will take a long time to pick up again because it’s still unclear when and how governments will lift social-distancing measures, Fine said. Even when they

do, people may travel differently than they used to — by driving more than flying, for example, which would affect refineries that produce jet fuel, he added.

“Most of the world is still under some sort of lockdown,” said Robert McEntyre, spokesman for the New Mexico Oil and Gas Association. “Until we begin to move past these measures, we’re not going to see demand recover.”

Complicating matters further, last week’s deal by major oil-producing countries to cut production by nearly 10 million barrels a day didn’t help raise prices — in fact, U.S. crude fell below $18 per barrel Friday.

“Will it be a Y-shaped recovery? I have serious doubts that will take place,” Fine said, referring to the shape of oil prices plotted on a graph across time. “It will be more like an L shape that’s down and flat.”

Ozkan agreed, saying it could take until the end of 2021 before oil prices come back to the $50-per-barrel level.

Given all this, there could be a lot of pain for a long time in the New Mexico oil patch.

Will dismissed workers give up on oil and try to move on to other industries?

“I thought about it,” Aldridge said. “But, you know, the oil field is kind of home.”

Source: Santa Fe New Mexican