Please, don't call it a boom - New Mexico's oil and gas production

The state's oil and gas industry is experiencing one of its better years, which means citizens are also benefiting

New Mexico's oil and gas producers won't go so far as to call it a "boom." That might be bad luck. They're leery of using the term because that often carries with it the potential for a big negative: bust. But oil and gas exploration and production, or E&P, in the Land of Enchantment is far from depressed.

Based on prevailing prices - especially for oil - producing oil and gas in New Mexico is currently allowing companies to make money and reinvest discretionary capital in new projects with some expectation of making more money, not just trying to survive. And with every barrel of oil and every cubic foot of natural gas sold, state coffers grow commensurately.

"Things are really cooking like they haven't since the boom in the early 1980s," says Ronald F. Broadhead, senior petroleum geologist with the New Mexico Bureau of Mines and Mineral Resources, Socorro, a division of New Mexico Tech. While New Mexico's crude oil prices, now averaging about $20 per barrel, are faring better than natural gas at about $1.50 per thousand cubic feet, oil and gas leasing, drilling and producing activity is, nevertheless, robust:

* The state had a record $1.47 million land sale June 17 - its highest in terms of bonuses paid by companies since 1990 to lease state-owned mineral lands. Of significance, income from oil and gas royalties on state-owned lands this fiscal year is at its highest level in 5 years, say New Mexico State Land Office officials.

Thus far, oil and gas royalties have generated $131.5 million in royalties through the first 11 months of the state's current fiscal year, representing an increase of $46 million over the $85.5 million that was in the fund at the same time in 1996.

* At mid-June, about 50 drilling figs were working in New Mexico, according to the latest Baker Hughes Inc. fig count, an indicator of the health of U.S. oil and gas activity - or the lack of it. That compares with about 40 figs at work in the state at roughly the same time a year ago.

* Statewide annual production of oil and gas is holding steady at about 1.5 trillion cubic feet of gas and about 70 million barrels of oil, meaning that companies continue to find new reserves to replace what they're depleting.

* Oil and gas companies are benefiting from state laws that provide incentives for various drilling/producing operations. Major incentives cover maintenance work to stimulate production in what are called workovers; operations to re-drill and re-complete wells in previously untapped subsurface producing zones; and higher cost programs to stimulate additional production, generally referred to as tertiary "enhanced oil recovery (EOR)" projects and secondary recovery projects, commonly known as waterfloods.

In oil and gas parlance, wells can produce using primary, secondary, or tertiary means. In the first instance, a well on primary recovery produces on its own, using subsurface pressure known as natural drive. Also, oil and gas can be brought to the surface by pump.

When a well needs extra help to produce, operators initiate secondary and tertiary projects, in that order, to extract additional oil and gas. But because they cost more than merely producing a well and watching the generation of cash flow, such projects most often need to be aided by state-approved incentives.

New Mexico's so-called EOR tax credit provides a 50 percent tax credit on all oil and gas produced in qualified tertiary and secondary projects for the life of the project, once certain commercial production levels are attained after production begins. EOR projects generally use carbon dioxide or special chemicals, known as surfactants, to increase production by "sweeping" oil from hard-to-produce zones thousands of feet below ground. Waterfloods, while similar in method, use what the term connotes - water - injected at high pressures to coax oil to the surface where it can be produced and ultimately sold.

The state's EOR tax credit allows wells to produce longer, and the state continues to receive revenue in lieu of shutting in wells that can no longer produce and losing state severance tax revenue and royalties for both the state and individuals.

All of these factors translate into higher state revenues, which are generated by an industry that is New Mexico's major revenue source and provides direct employment for more than 10,300 residents, representing about 2 percent of total state employment.

The two major government beneficiaries of revenue generated by oil and gas operations are the state's Severance Tax Trust Fund and the Land Grant Permanent Fund. Taxes on oil and gas production, royalties and investment earnings have provided about $736 million to New Mexico, notes Frank D. Gorham III, incoming president of the New Mexico Independent Producers Association. Gorham is one of five brothers who comprise the Cinco General Partnership, Albuquerque, an oil and gas exploration and production company. "We (the oil and gas industry in New Mexico) are, I'd say, the No. 1 contributor to the general revenue fund," Gorham says.

Oil and gas royalties and production taxes have contributed 28 percent of the $2.75 billion New Mexico General Fund - used to fund schools, higher education and the operation of state government - as well as 90 percent of the $6.5 billion in the state's two permanent funds.

Bill LeMay, director of the New Mexico Oil Conservation Division, says oil and gas prices could be higher, but "they're good enough to stimulate some drilling." Statistics bear him out.

In 1996, oil and gas companies completed 1,308 wells in New Mexico vs. 1,261 the prior year, according to data compiled by the Bureau of Mines and Mineral Resources. The state's primary drilling and producing areas, the San Juan Basin in northern New Mexico and the Permian Basin in southeastern New Mexico, command the most attention by the oil and gas industry. In the Permian Basin, oil and gas companies completed 999 wells in 1996, of which 773 wells found oil and 149 found gas. Another 77 were drilled and abandoned. In the San Juan Basin, drilling is primarily for gas. Industry completed 424 wells, including 381 gas wells and 22 oil wells. Another 21 were drilled and abandoned.

Smaller independent operators, historically, have constituted the bedrock of the industry, including such firms as Roswell's Strata Production, Heyco Petroleum Producers and Yates Energy Corp., Artesia's Yates Petroleum Corp., Albuquerque's Ibis Petroleum and others, all actively involved in leasing, drilling and producing. Larger companies are also active. Amoco Corp. has been a major player in the state, but recently disclosed plans to sell large chunks of properties in an asset rationalization and re-focusing of operations; operators say it's likely independents will be able to have an opportunity to gain attractive Amoco properties - deemed marginal by Amoco - and further exploit their potential.

Another player, Houston's Burlington Resources Oil & Gas Inc., is actively conducting closely watched exploration drilling in the Rio Arriba-San Juan county area, pursuing targets that are deeper than what has been found previously. If Burlington is successful, says Cinco's Gorham, "It would prove up a whole new producing region."

And that would translate to even more money for New Mexico.

Richard Wheatley is associate managing editor-news of the Oil & Gas Journal in Houston. He wrote this article for the New Mexico Business Journal.

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