What Makes The Permian Basin’s New Mexico Portion Such A Success?
Originally published on Forbes.com on January 27, 2021
AFP VIA GETTY IMAGES
A pump jack operates on April 23, 2020 Eddy County, New Mexico. – Permian Basin Crude oil extraction
Looking at a windfall.
New Mexicans are proud of their Land of Enchantment, because of the climate, the culture, outdoor activities, mountains views, white sand deserts, and the ubiquitous arts and crafts.
One other aspect that many people, but not all, are proud of is the Delaware basin – another way of spelling oil and gas. We will look into this. Why are some people proud? Why are some people not? By presenting facts in a balanced way the hope is that people on different sides of the oil and gas industry have a basis for at least talking with each other.
Let’s follow the money first. The Delaware basin has around 45,000 oil and gas wells down in the southeast part of New Mexico – near the towns called Carlsbad and Artesia and not far from Carlsbad Caverns. A map of oil and gas wells drilled and fracked in the past few years makes an impressive sight.
ENERGY, MINERALS & NATURAL RESOURCES DEPARTMENT, EMNRD, OF NEW MEXICO
2019 market value of oil and gas produced in New Mexico was $2 billion/ month or $24 billion/ year.
The header figure reveals that in 2019 and early 2020 the combined market value of oil and gas produced in New Mexico was about $2 billion per month before the pandemic hit. This converts to an astonishing value of $24 billion per year.
Susan Torres of EMNRD provided the data of the header figure and Figure 1. The oil production is from both Delaware and San Juan basins but the exponential rise in Figure 1 that began in 2011 is from the Delaware basin.
According to EMNRD, 24 wells in the Delaware produced more than 500,000 barrels of oil equivalent (boe) in 2020. This converts to 1,370 boe/day. Since this is an average over a full year, it means the peak well rate at early times would have been much higher.
The peak of production in Figure 1 was 1.15 million bopd in early 2020. Then the OPEC vs Russia flareup occurred and the pandemic hit. Remarkably, by the end of 2020 the oil production was almost back up to its peak.
Royalties and taxes on these wells provide revenue to the state and it’s been a windfall in recent years. Revenue to the NM general fund was $2.2 billion in FY 2018, $3.1 billion in FY 2019, and $2.8 billion in FY 2020.
EIA VIA ENERGY, MINERALS & NATURAL RESOURCES DEPARTMENT, EMNRD, OF NEW MEXICO.
Figure 1. Oil production in New Mexico through end of 2020.
For FY 2020, the $2.8 billion revenue was over a third of the state budget, with $1.4 billion going to education and over $0.6 billion to health services.
This was a surprise because from March through September of 2020 oil prices were pummeled by the coronavirus and by Saudi Arabia – Russia squabbles, and the price even slammed down to zero for a while (yes, the selling price for a barrel of oil did in fact fall to $0.)
The price of oil rebounded to above $40/bbl later in 2020, and the production uptick of Figure 1 suggests breakeven cost to produce a barrel of oil must be less than $40/bbl in parts of the Delaware basin.
An ocean of oil.
The exponential rise in Figure 1 was spectacular and the simple reason is the Delaware basin contains an ocean of oil. In late 2018 the USGS (United States Geological Survey) did an assessment and came up with 46 billion barrels of recoverable oil, plus 281 trillion cubic feet of natural gas, and twenty billion barrels of NGLs. NGLs are liquid compounds more complex than methane, such as ethane and pentane.
The immense quantities of oil and gas in the Delaware basin make up the largest deposit of oil and gas ever documented by the USGS in the USA. Quite simply, it is the nation’s premier energy play with some of the largest recoverable reserves in the world.
Many of New Mexico’s oil and gas companies – there are over 50 of them – pump altogether about a million barrels of oil per day from the Delaware basin (Figure 2.) “Tight oil” is an alternative name for low permeability formations that require shale-type wells to make a profit.
Figure 2. The Wolfcamp and Bone Spring layers contain the oil and gas in the Delaware basin
Who are the big operators in the Delaware basin?
About 18,000 direct jobs are part of the oil and gas scene in New Mexico. But the New Mexico Oil and Gas Association (NMOGA) says that 100,000 New Mexico jobs are supported by the oil and gas industry.
What are the money-making layers of oil and gas?
What are the layers (strata) that contain the oil that is responsible for the oil boom in the Delaware basin of New Mexico? If we could slice the earth vertically, like slicing a layer cake, we would see a cross-section of all the layers—including the ones with the oil. Figure 3 is such a cross-section obtained by patching together data from four separate wells.
SOURCE: ENVERUS/DEVON ENERGY
Figure 3. A vertical slice of the earth, from west to east, at depths around ten thousand feet.
In the figure, yellow represents sandstone, green is shale. and brown is mixed. The following are the key intervals within the Delaware basin, as defined by geologists or their kinfolk:
- Avalon (oil shale): Thin layer at the top, often not produced.
- Bone Spring (mix of sandstone and shale): Three separate (stacked) intervals – each suitable for drilling horizontal wells.
- Wolfcamp (more shale than sandstone): 1,100 feet of productive interval (payzone). Five stacked intervals suitable for horizontal wells. This formation was already a big oil producer in the Midland basin of Texas.
The trick is the technology.
The new technology of drilling a horizontal well 1-2 miles long and fracking at many points along the well has made oil production in the Delaware basin highly successful. But the results are compounded in a stacked play, which refers to drilling, from the same well pad, horizontal wells in several different layers of Figure 3. For example, one well in the Wolfcamp, and maybe three wells in the Bone Spring layers.
The growth in the Delaware basin has been astronomical, with a few hundred drilling rigs grinding away at the earth in late 2018. Right now, in recovery after the fallout of 2020, there are about 60 rigs.
According to the EIA, New Mexico’s boom has helped drive production in the state to a record 250 million barrels in 2018. The oil boom in Southeast New Mexico generated $1.2 billion in state budget surplus from taxes on new production from the oil and gas companies in the Delaware. Former New Mexico governor Martinez described the revenue boom as the “largest budget surplus in New Mexico history.”
Historically, about a third of the state’s income has been derived from oil and gas, but this percentage went up in 2018 and 2019. The year 2020 was an aberrant year of course due to the pandemic and OPEC fighting with Russia about oil production levels.
New Mexico’s revenue would likely benefit from high levels of oil production and budget surpluses for years to come, but this could be curtailed by federal action if the current 60-day ban on leasing of federal lands were made permanent.
The state government also committed in 2019 to a transition to energy renewables. On top of all this, sadly, is the fact that New Mexico does not rank well by comparison with other states – the overall ranking is number forty-six out of fifty states.
The picture is one of a juggling act, with the Governor of New Mexico trying to create a balance between a very profitable oil and gas enterprise, a climate-motivated transition from fossil energy to renewables, and a state that needs improvement in quality of living.
Why are some New Mexican people not so proud of the Delaware basin?
Enormous success in the Delaware basin has thrust New Mexico into number three ranking of oil production in the USA. Texas, of course, is far ahead of any other state, and now New Mexico only trails North Dakota, where the Bakken shines brightly.
Despite this success, there are three things regarding the Delaware that bother people: water, flaring, and methane emissions. They are legitimate concerns. Water refers to how much water is used to drill and frac a new-technology well (hint: its more water than you could imagine). This is a problem in New Mexico right now because half of the state is classified as in an exceptional drought.
The second is flaring. Flaring refers to natural gas that has no pipeline to be put into, and so the gas is released to the atmosphere because then the operator can make better money by continuing to pump up and sell the oil that comes up the well along with the gas.
The natural gas that is flared is wasted gas, and one estimate is the US loses more than $2 million every day in this manner. The other aspect that is distressing, if you believe global warming is caused mostly by fossil fuels, is the wasted gas that is released to the atmosphere and adds to the greenhouse gas problem.
The third bothersome thing is methane emissions. To keep this separate from its flaring compatriot, we focus on methane emissions due to leaks in wellheads, pipelines, and facilities such as gas processing plants. The numbers vary from less than 0.5% to 5% when expressed as a percentage of the gas that passes through the pipe. At the high end, a methane loss of 5% is very serious.
Each of these three issues will be explored in more depth in subsequent articles with application to the Delaware basin in New Mexico.
The goal of this series is to balance the pros and cons of the mighty Delaware basin. The resources are huge and therefore the perceived problems tend to be huge. But if our words are based on reliable information, we can try to talk respectfully with other people about these issues, and perhaps even reach for compromises.