As oil prices have plummeted to levels never before seen, a rift has opened among the companies that extract crude.
Some of them say state regulators should force producers to pump less in the hopes such regulation will raise prices.
Others say no, just let the market do its job.
While Texas, an oil-producing behemoth, is weighing the controversial idea of imposing limits, New Mexico, now an oil powerhouse in its own right, has largely stayed out of that debate.
Depending where oil prices go and what other states decide to do, there may come a point when the state needs to take a position. But key state officials disagree on where New Mexico should go.
The issue has come to the fore as the COVID-19 crisis — paired with an international price war between Saudi Arabia and Russia — triggered a precipitous decline. Stay-at-home orders that keep Americans from traveling have drained demand for products like gasoline and jet fuel.
Yet oil producers continued to pump through the spring, leading to a massive oversupply — and an unprecedented crash. Early last week, that glut of crude caused oil futures to fall into negative territory for the first time ever, and despite somewhat of a recovery since then, prices remain far below profitable levels for U.S. companies.
The decline also means New Mexico oil revenue has become peanuts compared to the hefty sums the state was taking in during the boom. One key legislator has projected oil and tax revenue will fall short of projections by as much as $2 billion for next fiscal year.
Though global oil producers agreed to a historic production cut earlier this month, the question emerged whether oil-producing states in the U.S. should also mandate cuts to drive prices higher.
So far, the State Land Office has issued an emergency rule allowing oil and gas companies to voluntarily shut in, or close, their wells without penalty, and regulators said many companies are doing so because they can’t ship their oil anywhere.
Yet Land Commissioner Stephanie Garcia Richard suggested the state should go even further.
“If there was a way for the state to have more flexibility in terms of authorizing production cuts, that would benefit us,” Garcia Richard said.
Her views go hand in hand with the purpose of her office, which is to use state trust land to raise revenue for schools, hospitals and other institutions. With oil prices so low, its ability to do that is clearly impaired.
“For us, we don’t want to be pulling resources out of the ground because it’s a finite resource,” Garcia Richard said. “We want it to have some value, and right now it has no value.”
But the State Land Office doesn’t have the authority to mandate any kind of production cuts. That power resides with the state Oil Conservation Division, a part of the Energy, Minerals and Natural Resources Department, which says it hasn’t made a decision on the matter. It suggested oil companies may reduce production enough on their own without the state needing to impose cuts.
“It’s just not profitable to produce oil at negative prices or even at $15 or $20 [per barrel], and so a lot of this is happening naturally,” said Adrienne Sandoval, director for the agency that regulates oil and gas activity in the state. “We have to take all of these pieces of information into account before we decide on what sort of path forward.”
Officials also pointed out that unlike in Texas and Oklahoma, where companies have made formal appeals, no oil producers have actually asked New Mexico to impose production curbs.
“We’re obviously watching what Texas is doing very closely,” said Sarah Cottrell Propst, secretary of the Energy, Minerals and Natural Resources Department. “But we have no requests to take a look at this.”
There’s another piece to the puzzle, too. It turns out the Oil Conservation Division made a little-known rule change two years ago that actually bars the state from limiting production at the majority of its wells.
To understand that change, a little history is in order.
Laws governing oil production in New Mexico stem from the Oil and Gas Act of 1935, which, among many other things, suggests the state can impose statewide caps on oil production, as well as more explicitly allowing it to cap output at specific reservoirs or “pools” of oil to “prevent waste.”
New Mexico did, in fact, institute a statewide order limiting production in the 1930s, when the region was dealing with an oversupply of oil, according to the state energy department. The state capped production at 58,000 barrels a day in June 1935 and by 1940 had decided to meet every month to determine production limits. Officials eventually stopped setting production levels.
Yet the 1935 law was enacted at a time when oil wells were drilled vertically. By 2018, the Permian Basin was booming with a new type of well — horizontal drilling using hydraulic fracturing in deep shale layers.
During the administration of former Gov. Susana Martinez, the state saw a need to modernize a wide array of its oil rules, including those governing production limits, to account for the shift in the industry.
Because horizontal drilling doesn’t access “pools” of oil like vertical drilling does, the agency decided to modify its rules to discard any limitations on those wells, said Bill Brancard, general counsel at the energy department.
State officials familiar with the rule overhaul said there was plenty of public notice, and oil companies were heavily involved in the process. Yet others who follow the industry said they didn’t even know production cuts had been prohibited.
Garcia Richard, for instance, said she just found out about the change. Daniel Fine, a longtime energy analyst who was involved in state energy projects from 2013-16, also said he hadn’t known about it until recently.
“That was a very significant change,” Fine said. “I can’t remember whether there was any hearing or discussion about it.”
Brancard, who was involved in the 2018 process, said there was consensus.
“That was a very small part of the rule-making, and it wasn’t really controversial at that time,” he said.
Yet fast-forward to 2020 — when oil prices are under $20 per barrel and storage facilities are full — and the change becomes much more relevant.
If prices fall below $10 per barrel again, and if Texas regulators decide to impose production caps, pressure could be placed on Gov. Michelle Lujan Grisham to take a public position on whether the state might follow suit, said Fine, an oil and gas researcher with New Mexico Tech.
New Mexico also could feel pressure to join, he said, because it shares the oil-rich Delaware Basin with Texas, and many oil producers operate in both states.
“If we keep moving in this direction, there’s going to be an inquiry,” Fine said. “Sooner or later, someone is going to call and say it’s a question of policy for New Mexico. What is your policy?”
State regulators said it would be possible to change the 2018 rule without needing legislative approval, but it wouldn’t be easy.
The process could take months,
and it would include a public hearing and likely a consultation with state Attorney General Hector Balderas, Propst said.
Meanwhile, the Texas Railroad
Commission, which regulates the oil and gas industry in that state, has yet to make a decision. It delayed a vote on the matter until May, with the body’s chairman saying legal questions needed to be answered before a vote could take place.
There has been some communication between the two states. Texas Railroad Commissioner Ryan Sitton, who has said his state should consider “prorating” production, reached out to Propst to let her know his body was going to have a hearing. He didn’t ask her about New Mexico’s position on the issue, Propst said.
The three Texas commissioners did not respond to interview requests.
Oil companies and analysts have assumed any mandatory cut in Texas “would encourage other major producing states to follow suit, and that could include New Mexico,” said Bernadette Johnson, vice president of strategic analytics for Enverus Market Intelligence, an energy industry data and software company.
Still, she said, the market could resolve the problem on its own, as low prices have caused oil companies to shut in wells of their own volition.
While the oil world has differing views on the issue, one thing everyone agrees on is how utterly surprising it is this debate is taking place at all.
New Mexico was enjoying the biggest oil bonanza in its history until just a couple of months ago, and now its rig count has dropped from a high of 117 to 70 in just a few weeks.
Might the architects of the 2018 rule changes have approached that job differently had they thought a huge oil price crash was coming?
“I have no idea,” Brancard said. “I mean, people would be more optimistic back in 2018 that this was going to go on forever.”