Selling your product at a loss is a poor way to do business.
Oilfield experts applauded New Mexico State Land Commissioner Stephanie Garcia Richard for proposing a rule change to temporarily allow operators to turn off the pump where they choose.
Citing the current oil price crash, Garcia Richard announced the State Land Office would initiate emergency rulemaking processes to allow companies with oil leases on state land to temporarily stop producing without penalty for at least 30 days, with a possible extension up to 120 days.
Normally, a company failing to produce on leased land risks relinquishing the lease to the state, which can then sell the lease to another buyer, according to state Rep. Larry Scott, R-Hobbs, co-owner of Lynx Petroleum LLC.
The State Land Office rule change would temporarily suspend the penalty.
“It’s an option to shut those wells in that are uneconomic with current pricing. I think the state land office is doing a good thing there,” Scott told the News-Sun. “It’s positive for the small producers in southeast New Mexico. If they want to shut in a well that is uneconomic under the current conditions, that’s a good option to have.”
Scott explained to “shut in” a well is the same as turning off the pump.
The land commissioner said in her release, “The COVID-19 pandemic brought home, almost overnight, the risks of our dependence on oil and gas. This was compounded by Russia and Saudi Arabia’s relentless price war intended to bankrupt American producers.
“Here in New Mexico, the ripples of this situation hit hard, not only when thinking about the state budget, but within communities where people rely on the boom for jobs to support their families,” Garcia Richard said.
“Due to these factors, I’ve determined that it is in the best interest of the beneficiaries of state trust land – our public schools, hospitals, and universities – as well as the employees dependent on this industry, that we allow companies to apply for these temporary shut-ins until we can better predict the future of the Permian Basin,” Garcia Richard concluded.
The overproduction of oil in the world market has not only drastically reduced the price of oil, but it has also created a situation where some U.S. companies are being forced to scale back production because pipelines and storage facilities are at holding capacity.
Robert McEntyre, spokesman for the New Mexico Oil and Gas Association, agreed with Scott about Garcia Richard’s move for a temporary rule change.
“We believe this is a sensible temporary measure that will help ensure reasonable long term returns for both producers and for the state land office and their beneficiaries as we navigate through the challenges of the current market dynamics,” McEntyre said.
He noted the flexibility of shutting in an uneconomic well without penalties helped some oil producers in during the previous oilfield slump in 2015-2016.
“It is a measure that we support,” the NMOGA spokesman said. “This will only allow producers to determine which wells they want to shut in. We know a number of operators right now are looking at their portfolios to determine what’s economic and what’s uneconomic. This just seems to be a sensible tool that will help producers navigate through this challenging time period.”
Ben Shepperd, Permian Basin Petroleum Association president, addressed the overproduction issues and troubles in the oil industry in an opinion column published Sunday.
Citing previous price wars with foreign governments, Shepperd called to mind the 1970s, the 1980s and 2014-2015.
“We won, but as with any war, there was destruction,” Shepperd said.
The current challenge, however, differs from previous oilfield struggles.
“What makes this one different is that we are also fighting an invisible enemy, the coronavirus,” Shepperd said. “It has shut down economies and destroyed the demand for oil. The impact on Permian Basin and nationwide employment will be devastating.”
Shepperd called on the federal government to take definitive action, including:
• Demanding the Russians and Saudis stop “their flood of cheap, government-subsidized oil into the world markets.”
• Filling the Strategic Petroleum Reserve with domestically produced oil.
• Removing tariffs on steel used to produce domestic oil.
“A 25 percent tariff on the steel we use is a cost now and especially when we begin to come out of this war,” Shepperd said. “We received partial relief here last week when President Trump lifted all tariffs for three months.”
In his interview with the News-Sun, Scott also addressed the ultimate winning of the price war.
“The winner of this battle will be the country or organizations with the lowest lifting cost (cost of production),” Scott said. “The lifting cost associated with North American production, particularly the shale production (in the Permian Basin), is higher than what’s experienced in Saudi Arabia or Russia. So, we would come to that battle not well armed from an economic standpoint.”
Helping smaller companies reduce costs by allowing temporary shut-ins of uneconomical wells, Scott said, eases the struggle.
“I’ve hammered the State Land Office for some of their policies with respect to the industry in recent times,” Scott concluded, “but in this circumstance, they did the industry a service.”
McEntyre pointed out the practice of shutting in a well is only temporary, not a permanent solution, but nobody knows how long it will last.
“At this point, the market challenges we’re experiencing are closely aligned with the timeline of the pandemic. It seems the further we move ahead, the more uncertainty we have around the timeline,” McEntyre said.
“I don’t think anyone can pinpoint a date or time that we’re going to return to normal. Undoubtedly, the pandemic is having an effect over the demand for oil and gas products, not just here in New Mexico or in the United States, but around the world,” McEntyre concluded. “That’s having an effect on what’s happening in our own back yard.”
The State Land Office release encouraged public comment, which will be accepted until April 17 when a tele-hearing to discuss the rule will be held at 1 p.m.
Curtis C. Wynne may be contacted at reporter3@hobbsnews.com.
