If Merrion and key industry analysts are correct, there might be a silver lining in the oil crash caused by the coronavirus pandemic — it could end up helping northwestern New Mexico natural gas producers and even give a lift to state revenue in a time of crisis.
“There is a lot less associated gas coming on the market, and we anticipate that it will have a positive impact on natural gas prices going forward,” said Merrion, president of independent producer Merrion Oil and Gas Corp., based in Farmington. “That absolutely would impact us in a positive way.”
It might seem a strange time to signal potential good news for any part of the energy industry right now, given the recent unprecedented declines in oil prices caused by the novel coronavirus pandemic.
As the COVID-19 outbreak dried up demand for oil and helped send crude prices tumbling, producers in the Permian Basin have shut in thousands of wells and laid down dozens of drilling rigs. Many of those wells produce natural gas along with oil, so output of this “associated gas” has taken a dive as well.
The potential upside: The drop in natural gas production is bound to reduce the global supply of gas and it could lead to shortages, which would drive up prices and allow companies in the San Juan Basin to increase their production, said Daniel Fine, a longtime energy analyst and oil and gas researcher with New Mexico Tech.
That could help revitalize a part of the state that has been devastated by persistently low gas prices, the shuttering of power plants and now the COVID-19 outbreak.
It also could help boost state revenue, Fine said. A resurgence of gas activity would contribute much less to state coffers than oil-related revenue, but it still would be helpful at a time when revenues have taken a beating from low oil prices and a huge drop in tax revenue caused by the pandemic.
“It would be a revenue revival of gas receipts and royalty to the state,” said Fine, who was a research associate at MIT and a project leader in new energy policy for the state of New Mexico from 2013-16.
Already this year, there has been an increase in natural gas activity in the San Juan Basin. In the first three months of 2020, production there averaged just under 202,000 mcf, or thousand cubic feet, per month. That’s up from an average of around 166,000 mcf per month in 2019, according to the Energy, Minerals and Natural Resource Department.
Other analysts agree there could be a gas recovery coming.