Copyright © 2020 Albuquerque Journal
New Mexico's oil boom could soon turn to bust after world prices for crude crashed on Monday.
The price for U.S. benchmark West Texas Intermediate bottomed out at $31.13 per barrel when trading closed Monday afternoon, down nearly 25% from $41.28 a barrel last Friday.
The coronavirus and the collapse of price-stabilization agreements among Russia and members of the Organization of Petroleum Exporting Countries are to blame. The contagion is cutting global demand for crude as countries scramble to contain the virus through quarantines and restricted travel, particularly in China, which is the world's largest oil-importing country and the epicenter of the coronavirus.
Last week, Saudi Arabia proposed a collective 1.5 million barrel-per-day cut in production to boost prices as the contagion spreads across the globe. But Russia rejected the proposal, causing a breakdown in negotiations even to extend previous agreements already in place since 2017 that have withheld 2.1 million barrels a day from the market.
The fallout led to an open price war Sunday, when Saudi Arabia said it would immediately slash prices for its own crude exports by up to $8 a barrel and begin increasing oil production once the 2017 agreement expires in late March.
State Rep. Larry Scott, R-Hobbs, called it a “perfect storm” that sent stock markets into turmoil Monday morning, slashing stock prices for oil companies and pushing crude prices into free fall.
“OPEC and Russia's inability to achieve production cuts has effectively led to a price war,” Scott said. “Couple that with reduced demand from the coronavirus, and it's creating a perfect storm of oversupply and under-demand.”
With Russia and Saudi Arabia now locked in battle over which country can sustain their economies the longest as prices plummet, the Permian Basin in West Texas and southeast New Mexico is caught directly in the crossfire. If the price war continues for an extended period, it could significantly impact New Mexico production.
“If these low prices persist, there's no doubt oil drilling here will be curtailed,” said Scott, a longtime oilman and owner of Lynx Petroleum in Hobbs. “The decline could be gradual, but it could still be fairly steep over time.”
Modern techniques of hydraulic fracturing and horizontal drilling have cracked open hard shale rock formations in southeastern New Mexico, opening up vast hydrocarbon reservoirs that produce lucrative gushers. That, in turn, has flooded the state with petro dollars, producing record budget surpluses in recent years.
The state budget, however, will be the first casualty of the new price war, since each dollar decline per barrel of oil over a year's time translates into about $22 million in lost annual state revenue. And if drilling in the Permian slows down, the budget crisis will be much worse as both the value and volume of oil decline.
Production from existing wells will continue despite plummeting prices, but it remains to be seen whether companies in the Permian will continue to drill new wells. Exxon Mobil announced last week that it will slow its activities in the Permian because of the impact of the coronavirus on world demand, cutting about 20% of the 24 oil rigs it currently operates in New Mexico.
With the new price war, the company may need to reassess how deeply it pulls back here, said long-time industry expert Daniel Fine, an energy researcher with New Mexico Tech in Socorro and an author for the Heritage Foundation.
“The outlook could change now for Exxon from its original statement last week,” Fine said. “They may have to take another look at their rig stack and well completion.”
Still, deep-pocketed companies such as Exxon and Chevron could keep producing, even at the current low prices, albeit at lower rates than before. But it remains to be seen whether smaller, independent producers can sustain operations unless prices rebound, since most need $50 per barrel or more to break even.
“Everybody is concerned about the impact, how long this situation will last and how severe it will get, but there's no crystal ball,” said Raye Miller, president of oil company Regeneration Energy Corp. in Artesia. “It's hard to predict.”
“At these prices, I just don't know,” he said. “At $60 per barrel, it makes sense. But I'm not sure there's any way we can justify it with prices in the low $30s.”
Fine projects prices declining to about $26 a barrel before bottoming out, which could substantially curtail new drilling and well completions in New Mexico. In fact, in good part, the price war appears directly aimed at slowing production in New Mexico, Texas and other shale-oil basins in the U.S., since booming domestic production from those reservoirs have made the U.S. the world's No. 1 oil producer, contributing to chronic global oversupply while taking market share away from Saudi Arabia and Russia, Fine said.
“The Permian Basin is directly related to the price war, because both Russia and Saudi Arabia want to curtail production here,” Fine said. “Russia has basically weaponized oil to destroy shale oil, particularly in New Mexico and Texas.”
To reverse the price drops, the production in the Permian would have to decline by between 600,000 and 700,000 barrels of oil per day, Fine said. Permian production currently stands at about 4 million barrels per day.
Saudi Arabia waged a similar war during the 2014-2016 downturn, when it refused to curtail its production to boost prices in the face of rising shale oil in the U.S. Domestic shale producers, however, were able to sustain production then through extensive cost-cutting and operational efficiencies, and through massive private investment that allowed them to grow operations.
But private equity has since dried up as investors have tired of funding constant expansion with little return on investment, making it more difficult for domestic producers to confront the new price war, Fine said.
Despite current challenges, the Permian Basin's long-term prospects remain strong, said New Mexico Oil and Gas Association Executive Director Ryan Flynn. Global demand will continue to rise once the coronavirus is contained, and the Permian is considered the most important reserve in the U.S.
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