Oil-Rising Permian Spurs Revenue And Climate Dilemma For New Mexico

Originally published on Forbes.com on June 17, 2024

How does a record $15.2 billion revenue from oil and gas sound for a state with only 2.1 million people? But how does it sound to those worried about climate change?

Year after year, Permian basin profits soar and so do oil and gas revenues for New Mexico, the second highest oil-producing state in the U.S. That’s a cause to celebrate, right? But wait a minute, this same blue state has a strong commitment to address climate change. The state has mandated 80% of electricity to be provided by renewables by 2040, and greenhouse gas (GHG) emissions to be reduced by 45-50% based on 2005 levels.

In New Mexico, if anything like 50% of GHG emissions are caused by oil and gas, the world-wide average, the state would have a conflict of interest. And it does—the state is projected to reduce emissions by only 13% by 2030, according to 2023 measurements by EDF (Environmental Defense Fund). This would reach less than a third of the 2030 commitments made by Governor Lujan Grisham.

Figure 1. Crude oil production from Permian basin and other sources in the U.S. Source: EIA.
Figure 1. Crude oil production from Permian basin and other sources in the U.S. Source: EIA.

The Permian Basin Boom

The Permian is the king of crude in the U.S. (Figure 1). It is one of the premier oil basins in the world. The basin is currently producing over 6 MMbpd (million barrels per day). The Delaware basin, the western portion of the Permian located in New Mexico and West Texas, pulls up crude oil worth at the wellhead over $2 billion per month for New Mexico operators.

The latest projection is that crude oil from the Permian will increase 8% this year, 2024. It’s a juggernaut leading to record levels of oil production in the U.S. that will approach 14 MMbpd by 2025 according to EIA—the highest oil production in the world.

The oil and gas revenue is determined by oil production level and the price of a barrel of oil. In New Mexico, oil production rose from 817,000 bpd in FY19 to an estimated 1,876,000 bpd in FY24. A $1 increase in the price of a barrel over the course of a year implies an uplift of about $60 million in revenue.

Revenue For New Mexico

The oil and gas industry provides about a third of the state revenue in New Mexico. New Mexico now has the 33rd largest sovereign wealth fund in the world, just ahead of the Hong Kong Future Fund and the Azerbaijan Investment Holding. Among states, only Alaska and Texas have larger total investment funds than New Mexico. 

In its most recent report, the Legislative Finance Committee (LFC) recorded a revenue of $15.2 billion from the oil and gas industry to New Mexico in fiscal year 2023. Th revenue has more than quadrupled in the past five years.

The largest slices of the breakdown reported are:

  • General Fund: $2.9 b, 115% more than FY18.
  • Early Childhood Trust Fund: $3.3B, did not exist in FY18.
  • Severance Tax Bonding/Permanent Fund: $2.5B, 404% more than FY18.
  • Land Grant Permanent Fund: $2.6B, 283% more than FY18.

Oil and gas supplies about 30% of the total General Fund which is close to $10b for FY24. This is earmarked for K-12 education (44%), health and human services (24%), higher education (13%), and public safety (9%).

Perhaps optimistically, the LFC predicts peak oil production in the 2030s, meaning New Mexico’s revenue could benefit for another decade from Permian’s oil and gas production.

What Energy Transition?

The general idea is that fossil energies would decline as renewable energies would increase. That hasn’t happened in New Mexico, where renewable energies (solar, wind and nuclear) were only 2.4% of total energies produced in the state, as of July 2023. But renewable electricity generation, which was excluded in this number, is more than 65% of total electricity and has had much better success.

As EDF has pointed out, the state is projected to reduce GHG emissions by only 13% by 2030 while the goal set by the state was 45-50%. EDF over the last few years has been reliable in its measurements of GHG emissions by ground level detectors and by aircraft flyovers and satellites. They are the gold standard for assessing how states with prominent oil and gas operations, like Texas and New Mexico, are addressing their climate emissions.

However, one major factor is likely to disrupt the balance of emissions. This is the conversion of cars and trucks from oil-based gasoline or diesel engines to electric vehicles (EVs). This conversion has begun slowly in the U.S. compared with other countries like Norway and China. But worldwide, EVs are increasing exponentially.  

BP has built this conversion into their future scenarios which show worldwide fossil energy consumption falling steadily from 80% now to 28-55% by 2050. Coal will fall the most, oil will fall, and natural gas may or may not fall. The 55% endpoint assumes business as usual while the 28% endpoint assumes renewables will increase rapidly to shore up energy insecurity connected to the Russian war on Ukraine.

President Biden’s goal is that in the U.S. new sales of EVs will be 50% of all sales by 2030. A rough zero-sum calculation implies a 17% decline in consumption of oil in the U.S. by 2030. If supply follows demand, then a 17% decline in crude oil production would mean almost a fifth of oil production declining by 2030. This would be a sizable hit to oil production in the U.S.

But there is a postscript. The EPA has a new rule, as of March 2024, that lowers tailpipe emissions, and it means that new sales of EVs will be 67% of all sales by 2032. This new rule will accelerate the changeover from traditional engines to EVs and means the decline in crude oil production would be significantly more than 17% by 2032.

In China, oil energy is projected in Table 1 to be 21% in 2030 but only 13% in 2050, according to DNV. The drop is attributed to conversion of cars and trucks to EVs and to removal of oil burners. In contrast, coal will fall from 50% to 18% while natural gas stays about the same. In the same time period solar and wind renewables will jump from 7% to 41% while fossil energies will drop from 83% to 44%.

Two additional predictions: First, in 2023, China emitted a third of global emissions but this will be reduced by 70% by 2050. Second, China won’t be able to offset U.S. crude oil decline coming from growth of electric vehicles in the U.S. because China will be reducing its oil usage as well.

Table 1. Progress in China’s energy transition, as predicted by DNV. Source DNV (Ref. 1) and Palmer.
Table 1. Progress in China’s energy transition, as predicted by DNV. Source DNV (Ref. 1) and Palmer.

Takeaways

New Mexico is a land of climate contrasts, because renewable electricity generation has met with good success, but the state’s score on emissions reduction is poor—the state is projected to reduce GHG emissions by only 13% by 2030 while the goal set by the state was 45-50%.

EDF argued that New Mexico’s policies are not lowering emissions in a persistent manner. The state needs to take advantage of two recent U.S. congressional laws to accelerate adoption of clean green technologies. The state needs to act quickly on four separate actions to get New Mexico back on track.

The most likely scenario for New Mexico appears to be a peak in oil production by 2030, followed by a slow decline. Apart from electricity, the energy transition will be a slow-moving train in New Mexico.

References

  1. DNV: ENERGY TRANSITION OUTLOOK CHINA 2024.
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