As the Energy Information Agency data shows in Chart 1 US exploration and production (E&P) companies started slashing the number of rigs deployed in the field beginning in the fourth quarter of 2014. Reduced rig counts have broadly impacted production in the US and New Mexico. Production levels and the global price of oil and natural gas determine important state tax revenues but also impacts overall economic activity. This blog explores related data and a handful of these themes.
As Chart 1 depicts, cuts in operating rigs have occurred in all major formations in the country. Charts 2 and 3 demonstrate that oil and gas production has caught up with rig reductions to varying degrees depending on the basin. Natural gas output in the Eagle Ford and the Niobrara started to decline in the spring of 2015 while the Bakken reversed course by the middle of the same year and Marcellus natural gas production rolled-over in the fourth quarter. As Chart 2 illustrates the Utica and the Permian, where all the rigs in New Mexico are located except for one, are the two basins that have continued to add production through February of this year. Importantly, the incremental month-over-month growth has narrowed quickly in recent periods.
The production trends for oil by basin are similar. Chart 3 shows that output is on the decline, albeit at varying rates, for the Eagle Ford, Bakken, Niobrara, the Haynesville, and the Marcellus. Oil output in the Utica and the Permian has been decelerating and may be approaching an inflection point.
Drilling down further into recent New Mexico specific data paints a particularly interesting, unfolding picture. While total output growth for the Permian has continued to be positive as recently as early 2016, Chart 4 shows that oil production growth in New Mexico appears to have rolled-over in May 2015. Chart 5 illustrates that the 10-year plus trend for natural gas in New Mexico has been down — this while the price of natural gas touched a 17-year low as of late. So what do the production cuts in these important US formations mean for the global over-supply condition? Everything else held constant, the obvious response is that lower production means higher prices, however, this data comes at a time when global growth concerns have heightened, including from the IMF and the OECD, which triggers revisions to demand assumptions and the overall supply-demand equation. Importantly, the EIA intelligence unit downgraded price forecasts yesterday to $34 a barrel for 2016 and $40 in 2017. Although some energy traders are quick to critique government as not being in touch with the real-time market fundamentals, it is worth noting that the NM state economists (aka CREG) arrived at a similar forecast even before the chief authority in the US government responsible for all energy intelligence and information did so. The future global price of oil aside, the impact of low energy prices combined with waning output is very real for many local economies at the county and state levels. This has already materialized in NM state Severance Tax and land lease and royalty revenues as well as the GRT. The added pressure of falling production in New Mexico will likely push important state tax revenues lower than already estimated, especially if the price of natural gas and oil remain at current levels. For a future discussion: a deep dive into the Gross Receipts Tax and employment trends in Eddy, Lea, and San Juan counties could be helpful in assessing the overall economic and fiscal health of the state and local economies.
(Chart 4) New Mexico Natural Gas Production
Sources: All data used for this blog was obtained from the EIA.