Workers extracting oil from oil wells in the Permian Basin in Midland, Texas.
The fabulous Delaware basin.
The Delaware basin is the premier oil and gas basin in the USA. The value of oil and gas at the wellhead was $24 billion/yr in 2019 — a staggering amount of money.
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.
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.
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.
NM crude oil production through 2021 - most from Delaware basin.
The exponential rise of the last five years was spectacular (Figure 1) 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.
It seems like it’s all happy news for New Mexico. But let’s dig a little deeper.
First, oil and gas jobs haven’t recovered fully after the pandemic, even though oil production has. The rig count is still lower than at the peak, because operations have improved efficiency even more, and the emphasis is on limiting capex with a goal of, not rapid expansion of wells, but maximizing profits with the wells you have.
Second, there looms a shadow over the whole oil and gas industry for one particular reason: climate change. The transition from fossil energies to renewables like wind and solar is real, its accelerating, and it has serious implications for lowering oil and gas demand. As demand falls, so will supply. Before digging into this, let’s look at a glowing new assessment from New Mexico.
Economy and jobs.
A new report published by NMOGA (New Mexico Oil and Gas Association) has evaluated the influence of the oil and gas industry on the state’s economy and jobs.
New Mexico ranked near the top of US states where oil and gas contributed to the state economy. In 2019, the industry:
- Contributed $18.8 billion to New Mexico’s gross domestic product, accounting for almost 18% of the state’s total.
- Supported more than 46,000 direct jobs (employment is defined as the number of payroll and self-employed jobs, including part-time jobs.)
- Created elsewhere in New Mexico’s economy an additional 1.5 jobs for each direct job in the state’s oil and natural gas industry - amounting to an extra 69,000 jobs.
The climate dilemma.
Now let’s step over the fence and see what’s on the other side. In New Mexico, the oil and gas sector generated 60 million metric tons of greenhouse gas (GHG) 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.
Governor Lujan Grisham has set a goal to reduce by 45% methane emissions between 2005 and 2030. New rules have been established by New Mexico in 2021 to reduce methane leaks and gas flaring, and these are now some of the strongest state rules in the country.
The state government also committed in 2019 to transition to energy renewables by reducing GHG emissions to net-zero over the whole economy by 2050. This has two consequences:
· The goal for the state is for electricity to be carbon-free by 2040. This means no more coal or gas-fired power plants. This would reduce demand for natural gas. For the whole US, it’s been estimated gas demand would fall by 32% by 2035.
· Cars and trucks will change over to electric vehicles on the way to net-zero GHG emissions by 2050. This will reduce demand for gasoline and therefore oil. For the whole US, oil demand would fall by 24% by 2040.
The picture is one of a juggling act, with lawmakers of New Mexico trying to create a balance between a very profitable oil and gas enterprise and a climate-motivated transition from fossil energy to renewables.
The “hand” that is juggling the two balls has to be strong and flexible to keep New Mexico solvent, maintain sufficient jobs, and improve the quality of living in a state that has been rated low in comparison with other US states.
How long will the value of oil and gas last?
This is important, not just to the lawmakers of New Mexico, but to the folks who live there. The boom profits will decline and jobs will decrease, at least for the oil and gas industry, and those many jobs indirectly connected to the industry. Two things are sure: change is coming, and right alongside it is uncertainty.
The transition from fossil energies to renewables will be a glide path rather than a crash landing, due to a gradual slowing of demand and supply for oil and gas products. The current altitude is that burning fossil fuels causes 75% of greenhouse gas emissions. The landing strip is the common goal of net-zero GHG emissions by the year 2050, when oil and gas will be smaller but still a significant 30-50% of energy consumption.
For the oil and gas industry, a glide path transition will have to entail indirect maneuvers that include switching operations to green power, cleaning up gas flaring and methane leaks, and investing in carbon capture and storage (a safety hatch to get rid of leftover GHG.)
Direct actions have lagged in the US, meaning companies will have to diversify and redirect some oil and gas investments to renewable energies. The ban on new well leasing is an opportunity for New Mexico companies in the Delaware basin desert to expand into solar and wind farms with big-battery storage of electricity.
The only alternative is for scientists to come up with new technology to vacuum GHG out of the air. Trees can do it, but the forests would take up too much area. Direct-air-capture works but hasn’t been proven on a scale large enough to satisfy the amounts the world puts up there: 45 Gt every year. Mangroves and sea grasses absorb CO2 but its not up to scale. Basaltic lava bonds with CO2 chemically, but has the same problem with scale.
Then there are possibly dangerous ideas like covering the sky with ash or clouds that absorb more sunlight and allow less to get through to earth’s surface. This will lower the earth’s temperature, as the dinosaurs found out 65 million years ago.
Bigger than New Mexico.
The falling demand for oil and gas is bigger than New Mexico. Climate targets the world over will force lower demand for oil and gas products. Carbon Tracker warns that as demand falls, oil prices will be down below what the industry projects.
This is another wake-up call. The report says some countries could lose 40% of their government revenue from oil and gas. But instead, governments have mistakenly planned on the basis that oil will increase through 2040.
Across the US, oil and gas demand could fall by ~about 30% by 2035-2040. It would be worse in New Mexico, because the state is much more dependent on the oil and gas economy.
