N.M. oil selling at deep discount

Pipelines haven’t kept up with increased production; state misses out on revenue

New Mexico is producing record quantities of oil.

But where does all that crude go from here?

Industry analysts and legislative aides say construction of pipelines into the booming Permian Basin has not kept up with the increase, leaving producers with higher transportation costs to get their output to market. In turn, New Mexico oil is selling at steeper and steeper discounts.

While oil from New Mexico usually sells for a few dollars less per barrel than West Texas Intermediate — a benchmark for crude prices — the gap widened this summer. Now, New Mexico oil sells for $13 below that benchmark or even lower.

“Right now, we’ve been experiencing swings of 13, 14, 15 dollars a barrel,” Jon Clark, an economist for the Legislative Finance Committee, told lawmakers this week in Santa Fe.

Budget writers expect heavy price discounts on the state’s oil to continue into 2019.

Meanwhile, a race is on to build pipelines into southeastern New Mexico’s oil patch.

But the situation also is leading some companies to rethink their approach to the area and delay completing new wells.

“Given the industry pressures in the Permian, due to widening basin differentials and service cost inflation, we plan to moderate our activity in the Delaware Basin,” David Stover, chairman and CEO of Houston-based Noble Energy, told shareholders this summer. He was referring to the area of the Permian that stretches from Southeastern New Mexico south into a section of West Texas that has been a busy area for the oil industry.

Westwood Global Energy Group, which tracks the oil industry, announced last month that it expects a setback in the Permian’s growth over the coming months with 345 well completions likely to be deferred by the end of the year.

Analysts still expect the Permian to continue driving U.S. oil production

growth next year. The federal Energy Information Agency reported last week that many producers in the region claim they can operate profitably at prices as low as the mid-$50s.

The analysis firm IHS Markit said in June it expects the area to double production by 2023.

And an oil and gas lease sale in New Mexico’s portion of the Permian Basin earlier this month fetched nearly $1 billion, indicating plenty of interest in yet more production.

Meanwhile, money is pouring in to projects to build pipelines that can deliver Permian crude to Gulf Coast refineries.

Several different pipelines between Midland, Texas, and Colorado City, Texas, are in the works. While tariffs on imported steel have raised concerns about the costs of completing these projects, that does not appear to have derailed any yet.

“The pipelines will probably not come online until the second half of 2019,” said Jim Peach, a former professor at New Mexico State University. Until then, producers may have to rely more on trucks and railways.

For now, it is the price of New Mexican oil that matters for state government, which relies on the industry for much of its revenue.

Higher prices and booming production in the Permian have led to a windfall for state government.

State forecasters expect $1.2 billion in new money in the next fiscal year, which begins in July.

All of that comes with a big warning: A price dip or production slowdown in the Permian could — like oil and natural gas busts of the past — send the state right back to slashing budgets.