State lawmakers saw billions of dollars flowing into the New Mexico coffers from oil and gas operations but were cautioned during a recent interim committee meeting that peak fossil fuel demand could come by the end of the decade.
That could mean reductions in production of oil and natural gas, and industry that provides up to half of New Mexico’s incoming revenue, according to recent financial analysis, as soon as 2028 or 2033.
This potential was discussed during a July 18 meeting of the Legislative Finance Committee held in Farmington, amid the San Juan Basin natural gas fields.
But New Mexico’s industry is led chiefly by the Permian Basin to the southeast, a region spreading into West Texas and credited with producing about 5.7 million barrels of oil per day (bopd), nearing half of the U.S.’ total 12 million bopd output.
That was translating to growing revenue to the State’s General Fund, with a July 21 report from the Legislative Finance Committee showing revenue at $8.99 billion through March for Fiscal Year 2023, running from July 1, 2022 to June 30, 2023.
That’s up $1.9 billion of 27 percent from the same time last year, the report read, with most of the growth credited to oil and gas.
“The state’s revenue strength is due to many factors, including persistently high inflation, a tight labor market, though most revenue strength appears attributable to oil and gas as production has continued to soar and investment income as general fund balances swell,” read the report.
Analysts predict peak oil demand followed by declining production
A presentation on oil and gas and New Mexico’s economy given during the LFC meeting by the State’s Chief Economist Leo Delgado showed national forecasters IHS Markit and Moody’s Investors Service predicted peak oil demand in 2028 and 2033, respectively.
This could mean the start of a decline in New Mexico’s now-booming oil and gas production, dropping from a forecast 2 million bopd in 2030 to as low as about 500,000 bopd by 2050, according to the presentation.
“You can see New Mexico is currently on the upslope of that oil production trendline with production expected to increase in the next couple of years,” Delgado said. “You see that it’s on the upslope, but it does start to plateau in the early 2030s before it starts to gradually decline.”
For the time being, Delgado said New Mexico was likely to see continued growth in oil production but analysts predicted the state could maintain that level of production for about 13 more years.
He said New Mexico’s wells are “highly-productive” in the first few months of operations, but taper off quicky, meaning more wells must be drilled and put into service.
“New Mexico has some very productive wells, very high-yield wells, very conducive well economics, low break-even points,” Delgado said. “In order to maintain those levels of production, that activity must continue.”
As the most cost-effective acreage, known as “Tier 1” is used up, operators will move to Tier 2 and 3 lands, which are not as profitable, Delgado said.
“It’s much more investment to move down the tiers,” he said. “The expectation is production will slow. It will be at a much slower pace and that’s where we start to see New Mexico production still at elevated levels but at a declining rate year over year when we look at the long-term.”
He said the decline in oil demand was led by New Mexico’s and the nation’s planned transition away from fossil fuel, toward non-gas-powered vehicles.
The DFA’s report, using data from global energy analytics firm Rystad Energy, identified passenger vehicles, commercial transportation and petrochemicals as driving oil demand in the foreseeable future, contending the trend toward more electric vehicles (EVs) and less fossil fuel.
“You see the composition changing overtime as electrification continues to move forward,” Delgado said. “You can see the effect is there on the trend line for oil demand as electrification and EVs become a greater share of the global fleet.”
Passenger vehicles accounted for 30 percent of global oil demand, the report showed, followed by commercial transportation at 17 percent and petrochemicals at 15 percent.
The study forecast passenger vehicles would transition away from fossil fuels faster as electric vehicles (EVs) were adopted in New Mexico and across the world.
“This is a big part of the foundation of our long-term outlook,” Delgado said.
Lucinda Sydow, chief economist at the Taxation and Revenue Department said New Mexico’s present economic growth was led by oil and natural gas, but that peak oil could be followed by dropping production and thus revenue for the state.
She said the Department’s forecast, based on New Mexico’s near-term oil and gas outlook, showed the state’s General Fund would likely grow more than 3 percent each year until about 2035 when it would begin to dip along with oil production.
“As we have the downturn in oil and gas production and prices, we have this lag in revenues that can no longer keep up with the trend that we’re seeing,” she said. “You see that downturn tied to oil and gas production.”
New Mexico on track to recover from COVID-19
The report did forecast economic growth in the state through about 2053 as New Mexico recovered, along with the U.S., from the COVID-19 pandemic.
It showed New Mexico’s gross state product (GSP) would largely grow along with the U.S. GDP in the next two decades, assuming no future financial recessions, Delgado said, showing “moderate growth” for the state.
He said New Mexico’s economy recently grew faster than peer states like Utah and Colorado and was “about on par” with Arizona, as its employment returned to pre-pandemic levels.
The state’s GSP was predicted to grow by about 1.9 percent per quarter in the coming years.
New Mexico’s unemployment was at 3.5 percent in June, Delgado said, slightly lower than the U.S. rate of 3.7 percent.
“It’s been a tight labor market as the labor data has come in and exceeded expectations,” Delgado said. “New Mexico has recovered back to pre-pandemic employment levels.”
This article originally appeared on Carlsbad Current-Argus: Oil demand to peak by 2033, followed by New Mexico production drop