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Drilling Bans Coming to a State Near You?

Environmental pressures continue to mount on the oil and gas industry in North America. In the last week, two states and Congress proposed new regulations on hydraulic fracking to limit future oil and gas development. The Oregon legislature has proposed a moratorium on fracking until 2030 and, in the House, a bipartisan group of lawmakers proposed a bill banning development in Alaska’s Arctic National Wildlife Refuge. Finally, in New Mexico, SB 459 would place a four-year moratorium on oil and gas development. The new proposals are in addition to repeated attempts to halt development in Colorado with the most recent, Colorado Prop 112, failing to pass in November 2018. However, drilling and/or hydraulic fracking bans already exist in several states. Vermont and Maryland passed mostly symbolic bans on oil and gas development in 2012 and 2017, respectively. Early in the development of the Marcellus shale, New York state passed a moratorium on fracking and in 2014 banned the practice outright. While a moratorium in Oregon would mostly be symbolic, a four-year moratorium in New Mexico could be extremely costly to both producers and the state.

Oil and gas development in the Permian basin resulted in New Mexico becoming the 4th largest producer of oil in the US. In addition, New Mexico became the 7th largest producer of natural gas in 2018.  The below chart highlights the growth in volumes from 2014 to 2018.

New Mexico Oil and Gas Production

Total combined output of oil and natural gas from New Mexico has nearly doubled over the last 6 years. New Mexico’s oil output now exceeds 800,000 barrels daily. As a comparison, the UK and India both produce approximately the same amount of oil.

The proposed moratorium in New Mexico would impact new permits issued by the state and last four years. To begin to understand the potential implications on oil and gas development, BTU Analytics developed the below scenario. The scenario likely represents the most draconian impact on oil and gas production from the moratorium on permitting. BTU Analytics utilized its proprietary PDP calculation tool that estimates declines for wells in the US and Canada. Assuming the rule went into effect on January 1, 2019 and that no existing permits could be turned to sales, BTU Analytics estimated the potential declines in oil and gas production for the state of New Mexico as highlighted below.

Impacts to Oil & Gas Production from New Mexico Moratorium

In the most extreme case, a moratorium in the state of New Mexico would result in production declining rapidly. Volumes would fall from 1.5 Mboe/d currently to just over 0.6 Mboe/d by the end of 2022. A 60% reduction in oil and gas volumes in just 4 short years.

Instituting a moratorium would have far reaching impacts on employment and tax revenue in New Mexico. The chart below highlights just one potential impact to severance tax revenue in New Mexico. Normalizing pricing to $50/b for crude and $3/mcf for natural gas indicates that severance tax revenue would follow a similar path to production.

New Mexico Moratorium Impacts to Severance Taxes

In addition to severance taxes, New Mexico collects an emergency school tax, ad valorem taxes, and royalties on state lands from oil and gas activity. Quantifying the impacts to all these items is out of the scope of this energy market commentary. However, a moratorium could have significant implications to activity, volumes, and tax revenue for the state of New Mexico. To keep track of BTU Analytics’ latest thoughts on Upstream development and risks to the outlook, subscribe to our Monthly Upstream Outlook service.

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Anthony (Tony) Scott has built an in-depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex for over 15 years. Mr. Scott cofounded BTU Analytics in 2014 as a boutique consulting firm focused on North American Energy markets. BTU Analytics grew into providing premier research and data services for the energy market and was acquired by FactSet Research Systems in July 2021. Mr. Scott currently is the VP of Energy Analysis for FactSet focused on developing their deep sector product offerings in Energy markets.

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