Future Petroleum Provinces in New Mexico - Discovering New Reserves

By: Philip R. Grant, Jr. and Roy W. Foster, 1989

Atlas format, 94 pages.

Prepared for the New Mexico Research and Development Institute by the New Mexico Bureau of Mines and Mineral Resources

New Mexico was relatively late in joining the ranks of major oil-producing states. Oil seeps in the northwest were known and described in the 1800's. Water wells drilled in 1909 at the small farming community of Dayton, in Eddy County six miles south of Artesia, produced several barrels of oil a day from a horizon encountered at 911 feet, but this created little excitement. A rancher drilling a water well at Seven Lakes in north-central McKinley County started a short-lived stir in 1911 when his drill found oil and gas in noncommercial quantities. As late as 1920, only 50 oil tests had been drilled in the state (Ellis, 1920).

Serious efforts to discover commercial production were rewarded in 1922 when drillers encountered oil in the Cretaceous Dakota Sandstone at about 700 feet in a small, faulted anticline at the Hogback field in northwestern San Juan County. This was followed by the discovery of Permian oil in the Artesia field in Eddy County in 1923.

New Mexico was firmly established as a major oil producer in 1930 following the discovery of Permian San Andres production in the giant (250 million barrels) Hobbs field of Lea County on the Central Basin platform. By the end of that year 130 wells in this field had a combined rated capacity of one million barrels a day, and the state was producing 10.377 million barrels of oil annually. Since then the oil and gas industry has become New Mexico's greatest single source of wealth and tax revenues.

Through 1986 5.19 billion barrels of crude oil and liquids valued at $24.8 billion and 36.9 trillion cubic feet of gas worth $22.85 billion have been removed from beneath the surface of lands in the state. New Mexico ranks fourth in delivery of natural gas and natural gas liquids and seventh in crude oil production. Estimated reserves at the beginning of 1985 were 660 million barrels of crude oil, 511 million barrels of natural gas liquids, and 12.03 trillion cubic feet of natural gas (Petroleum Independent, September 1986; records of the New Mexico Oil Conservation Division and Oil and Gas Accounting Division; and the New Mexico Oil and Gas Association).

The State of New Mexico is by far the largest owner of these reserves because 49.7 percent of all New Mexico's oil and 22.5 percent of its gas is produced from state-owned lands (New Mexico State Land Office, Annual Report, 1984). It is, therefore, a major beneficiary of this largess. Since the late 1970's, when rapidly escalating prices for oil and gas began, New Mexico's general operating fund revenues have been intimately tied to the fortune and success of the industry. Of general fund budgeted expenditures of $1.37 billion in fiscal year 1984-85, income generated by New Mexico's oil and gas producers from direct taxes, interest from permanent funds accumulated from oil and gas revenues, and the state's share of royalties collected from production on federal lands came to approximately $603.9 million or 44.2 percent of the total spent. When indirect business taxes, royalties, and revenues earmarked for permanent funds and other purposes are included, total funds received by the state from the production of oil and gas were $1.02 billion in 1984. Since 1972 the proportion of taxes and revenues contributed by the industry to operate state government grew from 16.2 percent to 1984's 44.2 percent. The dramatic turnabout in the petroleum industry's fortunes, which began in 1982 and culminated in 1986 with the collapse of oil and gas prices and restructuring of natural gas markets, had far-reaching effects in New Mexico. Employment, which reached more than 24,000 in the early 1980's, was just 9,000 by the end of 1986. Crude oil production dropped only 4 percent from 78.5 million barrels in 1985 to 75.4 million barrels in 1986, but revenues plummeted more than 46 percent from $2.10 billion to $1.12 billion. Natural gas production, which was 893.3 million MCF (thousand cubic feet) in 1985, fell 23 percent to 687.8 million MCF in 1986 while receipts tumbled 47 percent from $2.30 billion to $1.22 billion. Revenues to operate state government also fell dramatically in 1986 forcing the Legislature to raise taxes in other areas to cover deficiencies in oil and gas production taxes. Maximum oil production of 129.2 million barrels was achieved in 1969, then declined 45 percent to 71 million barrels by 1982. This decrease was attributed to draining existing fields. Oil production increased in 1983 and 1984 to 75.2 and 79.3 million barrels because large-scale secondary recovery procedures were initiated in older giant fields. Expansion of these programs to other fields and initiation of tertiary recovery methods would tend to stabilize oil production. Otherwise, the overall trend would be downward if no major new fields were discovered. In 1986 gas production was 687.8 million MCF, down 44 percent from a 1974 high of 1,229.7 million MCF. The slump in gas production was caused by shifts to supplies from other areas and to alternate fuels in California, which has traditionally purchased about 85 percent of the state's production. Gas production will depend on the ability of suppliers to adjust to a price-sensitive California market and to develop new markets.