Energize Weekly, March 10, 2021
The Biden administration’s moratorium on federal lands oil and gas leasing and its review of future leasing could lead to a stark shift in activity to Texas from New Mexico in the Permian Basin, according to a Federal Reserve Bank of Dallas analysis.
Half of New Mexico’s Permian Basin production comes from federal land, while all the basin acreage on the Texas side is in private or state hands.
“Possible changes to oil leasing and permitting requirements governing federal lands could shift oil production, prompting a realignment of Permian Basin activity between Texas and New Mexico,” the analysis said.
“Production and employment across the basin will gradually shift from federal lands in New Mexico to private and state lands in New Mexico and Texas, with wide-ranging economic implications for the region,” the analysis said.
The Dallas Federal Reserve estimated that depending on the scale of restrictions on federal land drilling, basin production could drop between 230,000 barrels and 490,000 barrels a day by 2025.
The Permian Basin – the world’s largest shale oil field – straddles Texas and New Mexico, with the bulk of the basin in Texas.
The Texas portion produced 3.3 million barrels a day in 2020, while the New Mexico side generated 1 million barrels a day.
The Federal Reserve analysis looked at three scenarios: a reference case assuming little change; a hybrid case that assumes no new leases but existing leaseholders continue to drill; and a restrictive case where no new federal permits or exemptions are issued.
The study assumed a price for West Texas Intermediate (WTI) crude oil of $50 a barrel. The spot price for WTI closed March 5 at $66.28 a barrel. So, the production and financial impact estimates in the study could be conservative.
The business-as-usual case projects a 23 percent increase in basin production to 5.3 million barrels a day by 2025, with 50 percent increase in New Mexico output to 1.5 million barrels a day.
In the hybrid scenario, with no new leasing but drilling permits for existing leases granted under a more rigorous approval process, basin-wide production increases to 5.1 million barrels a day and New Mexico production rises to just 1.1 million barrels a day.
In the restrictive case, when no new permits or extensions are granted starting in 2023, Permian production increases 12 percent and production in New Mexico drops 12.5 percent to 700,000 barrels a day.
“We expect production from other basins to decline against business-as-usual forecasts as well, especially in the Gulf of Mexico, where the federal government manages nearly all oil and gas activity,” the study said.
Operators received leases for an average of 10 years and then applied for federal permits to drill wells. Drilling permits are good for two years; with the option of a two-year extension.
Estimating that a three-well pad on average employs 240 workers, in the hybrid case between 3,500 and 6,600 fewer drilling and completion workers will be needed in New Mexico from now through the end of 2025.
At the same time, Texas will need between 5,400 and 7,400 more workers. “The ramifications of the shift extend to support and corporate jobs, with secondary effects on local retail and hospitality sectors,” the analysis said.
There will also be a significant impact on state revenues. New Mexico pulled in $2.6 billion in taxes, royalties and fees from the oil and gas industry in fiscal 2020, with nearly a third coming from the state’s share of federal land mineral revenues.
The total oil and gas revenues were equal to a third of the state’s general fund.
“The slowdown in activity and production levels in the restrictive case puts a large and growing portion of state revenue at risk after this year,” the Federal Reserve report said.
