Rich In Oil And Gas But New Mexico Searching For A Safe Transition To Renewables.

Originally published on Forbes.com on February 4, 2021

A balanced editorial appeared in the Albuquerque Journal on Sunday, January 31. It acknowledged the immense wealth of New Mexico’s Delaware basin, part of the Permian.

But the article lamented the lack of attention given to these oil and gas riches during the State of the State address last week by Governor Michelle Lujan Grisham. Instead, the governor praised “the country’s toughest methane and air pollutant rules in the oil and gas industry…”

Here we look a little deeper into the wealth of this basin, what it has provided to New Mexico, and how oil and gas companies could work with the state and federal administration to meet their goals. 

Rankings Crude oil production in September 2020

SOURCE: EIA

Oil and gas riches.

In late 2018 the USGS (Unite States Geological Survey) did an assessment of the Delaware basin 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.)

This is 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.

The Delaware basin has around 45,000 oil and gas wells in the southeast part of New Mexico. The peak of production was 1.15 million bopd in early 2020. Then the OPEC vs Russia flareup occurred and the pandemic hit, and production dropped. But remarkably, by the end of 2020 the oil production was almost back up to its peak. That’s a testimony to how profitable these wells are, which makes for a low “breakeven” oil price as low as $40/barrel and perhaps even lower. That’s the good news.

The bad news is that about half of the oil and gas production is on federal land, and the Biden administration has just banned, for 60-days or up to a year, new drilling leases on federal land. This is not an unbearable loss because larger companies like Devon Energy, have stockpiled leases that will keep them busy drilling and fracking for another four years. Smaller companies are likely to be affected more. But most companies have a mix of federal and private leases, and some flexibility to move from one to the other.

So the leasing ban may have a slowing effect on oil and gas production, and may turn out to be part of the transition glide-path to renewables.

But a wider perspective shows that the companies and the state and the federal administration have all gained financial windfalls in the last few years from the Delaware. The market value of oil and gas wells in New Mexico is a massive $2 billion per month, and is dominated by the Delaware basin. This means $24 billion per year, which peaked in 2019, but is close to this value in 2020. 

During this time, New Mexico has had a financial boost from oil-and-gas royalties into the general revenue fund: $2.2 billion in FY2018, $3.1 billion in FY 2019, and $2.8 billion in FY 2020. The FY2018 number was the largest budget surplus ever, according to ex-governor Susana Martinez.

The climate dilemma.

Just when there are a lot of positives to smile about, the pandemic hits, the price of oil drops to zero, and the new President turns aggressive with a leasing ban, labeling climate change a crisis, and raising climate to an official national level in the cabinet. After the glorious successes of the shale revolution, the industry must feel like its getting its face slapped. 

But let’s look deeper into this. Since fossil fuels contribute about 75% of all greenhouse gases, the environmental finger is pointing straight at the oil and gas industry. In New Mexico, the oil and gas sector generated 60 million metric tons of greenhouse gas emissions in 2018 which is 53% of the state’s total and 1% of the US total emissions. Methane makes up 35% of New Mexico’s greenhouse gases (c.f. a figure of 10% nationally) and in this state most of it comes from the oil and gas sector.

The editorial showed concern about this dilemma. “The world is moving away from fossil fuels to renewable sources of energy. It’s past time, and the right thing to do…”

And, “There’s got to be middle ground in there…  Our national energy policy should not be an either-or choice between green or fossil, because both are going to be needed for the foreseeable future.”

What other states are doing.

Trying to honor the Paris Agreement in their own way, as of October 2019, nine states across the country have enlisted goals of 100 percent clean future by 2050 or earlier. There are two general approaches to a clean future: (1) carbon-free electricity (2) economy-wide GHG emission reduction.

For example, California passed legislation for 100 percent zero-carbon electricity by 2045 and an executive order for economy-wide carbon neutrality by 2045.

New Mexico, in its Energy Transition Act, legislated 100 percent carbon-free electricity by 2045.

The recent utility deal, where Avangrid, a world-class provider of windfarm electricity, would buy PNMR, parent company of PNM the largest electric utility in New Mexico for $4.3 billion, may take a year to conclude. The current plan is that New Mexico’s two coal-fired power plants will be shut down within one and ten years, but Avangrid would like to close the second one sooner. The deal is a big step to meet the challenging renewable electricity goals of the Energy Transition Act (carbon-free electricity by 2045). Avangrid also plans to sell extra power to states like California.

Noah Long, Director, Western Region, Climate & Clean Energy Program of the Natural Resources Defense Council, told me New Mexico has a bill, HB.9, backed by the leadership of the state senate and house, awaiting a vote by the legislature. The bill, called the Climate Solutions Act, would require, amongst other items, the development of a statewide framework to address climate change and develop a sustainable, inclusive, economy, set limits for greenhouse gas emissions across the state and require implementation to prioritize benefits in most impacted communities.

Long said the bill would: First, reduce economy-wide greenhouse gas emissions by 50% below 2005 levels by 2030, and net-zero emissions by 2050. Second, the oil and gas sector will reduce by 60% emissions of methane, carbon dioxide, and VOCs (volatile organic compounds) below 2005 levels by 2030.  

After a four-year period when climate action was swept under the rug, the initiatives taken by those nine individual states appear to have been justified by the Biden administration’s goals of carbon-free electricity by 2035 and net-zero greenhouse gas emissions by 2050. Presumably most of the delaying states would sign on too.

Biden has in fact doubled down by announcing the following additional objectives: Doubling wind capacity by 2030, reducing fossil fuel subsidies, building new energy-efficient homes, and reinstating regulations on vehicle exhausts, power plants, methane emissions.

Where does all this leave the oil and gas companies of New Mexico?  

Fossil energy companies are looking on with responses that vary between gentle rebuff and serious criticism, including the more than 50 companies involved in the Delaware and San Juan basins of New Mexico. They would be aware of New Mexico’s exit from coal-burning power stations, which was hastened by the Energy Transition Act of 2019, and possibly accelerated by the recent takeover of PNMR by Avangrid.

Demand will gradually slow for products of the oil and gas industry — thus the reference to a “glide-path” for the industry, using the words of Senator Heinrich of New Mexico.

Before suggesting a glide-path, it would be well to consider five “landing” rules:

  1. Burning fossil fuels cause 75% of greenhouse gas emissions.
  2. Oil and gas will still be significant by 2050 – perhaps 30-50% of energy consumption.
  3. The most practical timescale for the transition is a goal of net-zero greenhouse gas emissions by 2050. Not actual zero, but net zero.
  4. Workers in the transition need to be retrained or their jobs otherwise preserved.
  5. One-third of New Mexico’s state revenue (currently provided by oil and gas) needs to be sustained in some way.

Steering a glide-path.

  • Go to green power for all oil and gas operations. For example, drilling or frac pumping.
  • Reduce to near zero flaring of gas and leaking of methane from wells, pipelines, and facilities.
  • Deploy workers to plug abandoned oil and gas wells that are leaking methane. But note: just how significant is the amount of leakage is controversial.
  • Develop and implement carbon capture and storage in old oil and gas fields. This will be needed to contribute to the net-zero goal and it will preserve jobs. Occidental is leading this effort, even capturing CO2 from the air and injecting it underground.
  • Redirect some investments from new oil and gas drilling to renewable energies. BP will be invested 40% in renewables by 2030; Total are investing $2.5 billion in Adani Green Energy, a company out of India, and will own 50% of their solar electricity.
  • The ban on new leasing and drilling on federal lands and waters is not unbearable. This will gradually lower production of oil and gas in New Mexico. Across the US, 22% of oil and 12% of gas is produced on federal land, but companies have stockpiled well leases that will last four years. Take this opportunity to redirect the investment into renewables.

It will be important for New Mexico gatekeepers to map out and report progress year-by-year to measure how much greenhouse gas emissions are being reduced, how many new jobs are taken up by green projects, and incoming state revenue to replace any decreases from the oil and gas industry glide-path.

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