Thanks to technologies like hydraulic fracturing and horizontal drilling, New Mexico is one of the top natural gas producers in the world – 27th according to the latest annual numbers from 2012 just released by the American Petroleum Institute. But there’s more to the economics of drilling than just counting rigs and tallying profits.
Heading into Farmington, New Mexico, the highway is packed with tanker trucks and muddy pickups with fluttery orange flags. It also offers a roadside lesson in the jobs oil and gas brings: Air and swabbing services, oil tools, and trucking and well service companies.
Then there are the indirect jobs.
For almost two decades, John Silva has owned Three Rivers Eatery and Brewhouse. With 65 employees, he’s downtown’s largest employer.
Farmington’s a blue collar town, Silva says. Mining and drilling are important.
“It's a love-hate thing,” he says “We want to help the environment, but it is also a major player in our economy.”
Earlier this year, companies were laying off workers because oil prices were half what they’d been a year before. “It's a trickle-down effect,” Silva says: “You lay off 200 people, well then, they’re not going to spend their money in the restaurants, they're not going to go shopping.”
But he’s not daunted: “If you know anything about Farmington, it’s got highs and lows.”
Originally a farming-town, by the 1950's, Farmington was a natural gas boom town.
In the 1980's, companies started gleaning natural gas from the area’s coal beds, too. Thanks to that new technology, by 2008 the San Juan Basin was producing more natural gas than anywhere in the U.S.
Then prices dropped. In 2010, the U.S. market was glutted. Fracking had allowed companies to extract more and more natural gas. And 5000 jobs disappeared from the basin in 18 months.
Technology came around again. This time, companies worked to figure out how to reach oil trapped within tight shale formations underground.
“As we have used up the conventional natural gas in the San Juan Basin, which was fairly easy to produce, fairly low cost to produce, what that means is we have gone to more extreme measures to find replacements in terms of coal bed methane, in terms perhaps of shale gas,” says Janie Chermak, an economist at the University of New Mexico. “What that means is those are more costly."
Economists like Chermak look at how to balance costs and plan for the future. Like, how to get the most oil or gas from a well, using the least amount of water and chemicals. Or studying how much energy costs—not just on the market, but in terms of public health or water use.
Drilling a well requires more than a million gallons of water, for example. As surface water supplies tighten in the Southwest, that’s an important consideration—especially because the climate is changing and the region is warming,
Forecasting is tricky, Chermak says. But people still need to think about the future.
“If we go forward 50 years—a lot of things change, so a lot of this is projection and forecasting with wide ranges of uncertainty around them—do we continue to find other resources that we will continue to produce?” asks Chermak. “Or do we think about diversifying or finding different energy sources?
Oil and gas are cheap right now. But Chermak says that won’t last forever.
And neither will the resources themselves.
“Renewable energy today is certainly not on level playing field in terms of cost with the traditional fossil fuels,” she says, “but at what point does one start to think about how do you either diversify your economy today or how do you change your energy mix in the future? Because at some point yes, it will run out.”
Ten years ago, a federal planning document estimated that reserves in the San Juan Basin were nearly gone. Wells in what’s called the “Mancos shale” and “Gallup sandstone” reservoirs were producing fewer than 30 barrels of oil each month.
Today, that updated plan estimates that development will boom again once prices rise. That’s because new technologies—like horizontal drilling and fracking—allow companies to tap resources that used to be out of reach.
Right now, there are only two active rigs, drilling brand-new wells, in the San Juan Basin.
But there’s the potential for more than 3,600 new wells. Those would be oil wells in the southern San Juan Basin and natural gas wells toward the Colorado border.
“Some people lament the fact that our fortunes in the state are so closely tied to the oil and gas industry,” says Steve Henke, president of the New Mexico Oil and Gas Association, “but imagine where we would be if we didn’t have that tremendous benefit.”
Henke also directed the U.S. Bureau of Land Management’s Farmington field office until 2010.
He says that each year the federal government collects about $1 billion in royalties from companies drilling for oil and gas on public lands in New Mexico. About half that money goes to the state’s general fund.
On top of that, 100 percent of the royalties from wells on state lands goes into a fund for New Mexico’s schools, hospitals. Counties benefit, too.
“When this industry is successful,” he says, “the state of New Mexico is successful.”
But communities heavily dependent on oil and gas also stumble when drilling slows.
Right now, San Juan County is bracing for 26 percent cut in revenue, due to a slump in oil and gas production in the coming year.
It’s another bump in the cycle of highs and lows. Or, it’s a chance to think about the future. And what technology can—and can’t—do.
Funding for KUNM’s Drilling Deep series comes from the New Venture Fund.