U.S. fracking technology has improved dramatically over the past several years and frackers can remain profitable in the $35-a-barrel range -- Hobbs Mayor Sam Cobb
BY DENNIS DOMRZALSKI
What a difference a year makes.
In February 2015, the Hobbs Chamber of Commerce told anyone who would listen that Hobbs had surpassed Santa Fe as the state’s second-largest economy in terms of gross receipts taxes. At $9.9 million in GRT money, Hobbs was awash in cash, thanks to Lea County’s oil industry, which continued to boom despite the fact that oil prices had been falling since the summer of 2014.
But this month, the reality of what is now a year-and-a-half-long plunge in oil prices has hit Hobbs hard.
Hobbs’ GRT revenue in January was $3.9 million – down about $6 million from the city’s GRT revenue last February. Now Hobbs is barely ahead of Farmington as the state’s fourth-largest economy. Economic activity of all kinds – oil well drilling, well field services, restaurants, hotels and grocery stores and businesses that sell to oil industry workers – has fallen off sharply.
Oilfield service companies have laid off workers, equipment is idle and stacking up in marshaling yards. Truck drivers who once made $100,000 a year are adjusting to making $15 an hour in retail.
But Hobbs isn’t the only casualty of the oil price bust.
State government is reeling, and legislators in Santa Fe are in a near panic because state tax revenues from oil are quickly disappearing. The amount of “new money” available for next fiscal year’s budget has plummeted. In August, it was thought to be around $293 million. By December that had fallen to $232 million. Now, lawmakers fear it will be $100 million or less.
If the price of oil continues to fall – some predict it could drop to $20 a barrel or less – and it remains depressed, operations of state government could be in jeopardy. One third of the state’s general fund budget comes from oil and gas money.
“It’s serious and something the public does not keep up with, but we still have advocacy groups that would like to get rid of the extractive industries, but they deliver 32 percent of our general fund monies,” said Sen. John Arthur Smith, a Deming Democrat who chairs the Legislative Finance Committee during the interim and the Senate Finance Committee during the current 30-day session.
“The ripple effect on jobs and gross receipts taxes are always delayed, and we are pretty apprehensive about it,” Smith said. “We are very concerned.”
The people in Hobbs and Southeastern New Mexico are apprehensive about the global oil industry, too. But they’ve got one advantage over the folks now in charge in Santa Fe; they’ve been through the boom-and-bust cycle many times before.
Today’s economy in Hobbs and other oil-patch cities is more diversified than during previous busts. Even though companies have laid off workers and some have pulled out of the area entirely, there’s still a housing shortage in Hobbs. The city’s population is predicted to grow by 14 percent by 2020, according to the University of New Mexico’s Bureau of Business and Economic Research.
“It [the economy] has not imploded,” Hobbs Mayor Sam Cobb said during a recent interview when oil prices were still in the $40-a-barrel range.
“It has slowed down, but it has not imploded. All those wells drilled over the past seven or eight years, if they are still operating, they have to be serviced. Parts wear out. Water and oil have to be hauled and wells have to be metered.”
Grant Taylor, executive director of the Hobbs Chamber of Commerce, said people are stoic, even hopeful. “The overall mood is, ‘Wait and see.’ Most of the conversations I’ve had with people in the [oil] business are predicting a return to $50 a barrel this year,” Taylor said. “We’ve had so many families that are just bracing themselves, saying that they will get through this.”
Taylor said that the $3.9 million in GRT revenue Hobbs got in January was the lowest amount the city had seen in several years.
Sam Spencer, president and CEO of Lea County State Bank in Hobbs, said the area is starting to see the effects of more than 18 months of falling oil prices. “We’ve seen more layoffs, unemployment is up to 6 percent or so,” he said. He expects more layoffs and business failures. “Any time you’ve got this type of depressed price in a commodity, some of that goes on,” Spencer said.
Oil keeps flowing
Despite the plunge in oil prices – West Texas Intermediate was selling for $27.27 a barrel on Jan. 20 – oil production in New Mexico hit a new record. As of November, companies had pumped 134.7 million barrels, shattering the previous record set in 1970, according to the New Mexico Oil Conservation Division.
When December’s numbers are totaled, production will be around 146.7 million barrels, or more than double the 71.2 million barrels pumped just four years earlier. Yet no one, it seems, not U.S. producers, and not OPEC members, is cutting back on production, and with China’s economic growth slowing, the glut of oil on the world market continues to grow.
Taylor said the increased production in the Permian Basin was the result of U.S. shale producers and frackers refusing to be driven out of business by OPEC, which maintained production quotas in the hope that lower prices would drive smaller U.S. producers out of business.
But U.S. fracking technology has improved dramatically over the past several years and frackers can remain profitable in the $35-a-barrel range, Cobb said, because once a well is drilled, ongoing maintenance costs aren’t that high.
“I’m really glad that after Saudi Arabia went after shale producers, we haven’t blinked,” Taylor said.
New Mexico’s record production has softened the blow of low prices on the state’s budget, but that might not last. Production could fall off sometime this year, said Wally Drangmeister, vice president of the New Mexico Oil and Gas Association. New exploration activity has fallen dramatically in the state. As of Jan. 16, there were 32 drilling rigs operating in the state, most of them in New Mexico’s portion of the Permian Basin. That compares to 92 rigs in January 2015, according to Baker Hughes, a Houston-based oilfield-services company.
But, strangely, it’s possible that a further fall-off in production might not happen because producers will likely continue to pump more oil to offset the low prices – plus the Permian Basin happens to be a sweet spot in the U.S. with relatively easy-to-get oil.
“Even though the rig count is down, those rigs are going into very high production areas,” and away from low production areas, Drangmeister said. “If low prices continue and we continue to see the rig count go down, there will be a time when production goes down and levels off. But right now, production is extremely strong.”
View from the ground
Gregg Fulfer, a Lea County commissioner and owner of Fulfer Oil and Cattle Co., thinks the oil will keep flowing from the Permian Basin this year.
“Companies are closing down their rigs in other states and bringing that equipment into their core areas, and this is one of their core areas,” Fulfer said. “Most oil companies are looking at this area for the next 50 years to be highly productive. They’re bringing a healthy part of their budgets to Lea and Eddy counties, and that is real promising. Everybody has definitely slowed down, but we still continue to see drilling activity, although at a slower pace right now.”
Fulfer’s small company – it produced 19,000 barrels in 2014 – is an example of how some of the area’s firms manage to survive oil’s boom-and-bust cycles. They never grow too big and don’t over-leverage themselves. At the height of the boom when oil was going for $100 a barrel, Fulfer had 42 employees. Now he’s down to around 20.
“We are maintaining what we have and just trying to keep what we’ve got running,” Fulfer said. “We’re not doing any new activity.”
Larry Scott, owner of Lynx Petroleum Consultants, Inc., has been in the oil business since 1981 and is pessimistic in the short term. He said this is the second-worst oil bust he’s seen. He also believes that the current rate of production in the Permain Basin isn’t sustainable.
“The decline in prices is about as dramatic as it was in 1986, and we don’t know how long this is going to last,” Scott said. “The 1986 decline was probably close to five years before the prices recovered. I believe the projection for 2016 is an average of $43 a barrel, which would indicate some fairly significant improvement in the not too distant future. I’m of the opinion that we are where we are as long as the Saudis are committed to maintaining their market share, and that is anybody’s guess.”
Greg Lopez, owner of G&L Trucking LLC, is one of those business owners who resisted the temptation to take on new debt during the oil price run-up. His company hauls produced water from well sites with six trucks and eight people. The way he sees it, the area is still booming.
“They are building tons of pipelines and companies are flooding Southeastern New Mexico with drilling rigs,” Lopez said. “They just keep drilling them [oil wells] like crazy.”
Lopez’s trucks still run 12 hours a day, seven days a week, hauling water from wells. He credits his success to staying small. He, like Cobb, credits fracking technology for allowing producers to make a profit at much lower prices. “Everybody knows how to handle the busts better now,” Lopez said. “They pay the equipment off and save their money.”
Once, oil was all Southeastern New Mexico had, and when it went bust, so did everything else. Although oil is still king, over the past two decades, the area has diversified. Southeastern New Mexico calls itself the state’s “Energyplex” – with an economy centered on different types of energy, not just oil. Urenco USA operates a uranium enrichment plant outside of Eunice that employs hundreds. And local companies are beginning to produce biofuels.
But in the meantime, nearly everyone – from waiters to truck drivers to grocery clerks – keeps an eye on oil prices. “Every down cycle has hurt; some have hurt more and some have hurt less,” Scott said. “And I think this one has hurt pretty bad.”
Dennis Domrzalski is an associate editor at ABQ Free Press. Reach him at email@example.com.