As the price of oil and NM’s revenue plummet, economists suggest that the fracking and the carbon industry may go bankrupt, with a global depression possible. Instead of a just transition, we may face a cruel one.
Dakota Access Pipeline Permit Revoked. Full Environmental Impact Study Required. Click here to review the full article and much praise and respect to the indigenous leadership and their attorneys who persisted to achieve this win.
PRC Approves PNM proposal to close San Juan Generating Station. As predicted by New Energy Economy, WildEarth Guardians, Retake and many grassroots indigenous groups, the PRC Hearing Examiner stated that–because of the ETA—the PRC had no authority to adjust or reject PNM’s cost claims. Thanks to the ETA, the PRC had no choice but to reward PNM for its greed. From NEE, the ETA: “gave the PRC no choice but to vote 5-0 to approve the securitization of $361 million in Energy Transition Bonds. PNM was granted their proposal in full despite the objections of many parties. The provisions in the ETA that erode PRC oversight ensured that PNM was awarded 100% of their requested cost recovery.” Despite this legislative betrayal of ratepayers, the dirtiest coal plant in the US will close in 2021 and we should toast this and hope that remediation of the plant will bring a cleaner environment and better health to the surrounding community. At last.
The End of Oil? And What That Means for NM
Retake and its allies have long advocated for the closing of the San Juan Generating Station and for NM to develop a “just transition” plan. There simply has not been political traction for anything that threatens or even annoys the New Mexico Oil & Gas Association or PNM. But economics has driven the move to shut San Juan, and now it just may be what forces a hasty transition from reliance on fracking-generated revenue. Today, we explore what is unfolding and what is at stake as the price of oil plummets.
Dahr Jamail is an internationally respected climate crisis author. His most recent book, The End of Ice, has been named one of the Ten Best Science Books of 2019 by Smithsonian and is a finalist for the 2020 Pen/E.O. Wilson Literary Science Writing Award for exemplifying literary excellence. And so today we turn to Jamail to assess the looming collapse of oil prices and, indeed, the possibility of the collapse of the entire carbon energy industry. This is the subject of Jamail’s most recent Truthout article, “Could COVID-19 Spell the End of the Fracking Industry?” This obviously has implications for NM, and Jamail engages economist Greg Rogers in analysis that focuses directly on NM, so read on!
To catch up, in January when the Roundhouse was in session and passing its budget for FY 2020-21, oil prices were hovering around $60/barrel. As of Wednesday the price had fallen to $20/barrel. In addition, just last week the Permian Basis “well count” had fallen by 23 wells, and 13 wells shutting down the week prior. There were nearly 500 active wells in the Permian in September 2018 and only 405 active wells were reported last week. So even prior to the recent oil price collapse, fracking operations in the Permian had dropped by almost 20% since Sept 2018. Why? And what is the economic impact of this contraction?
Jamail spoke with Fred Nathan, Executive Director of Think New Mexico, a 501-c-4 advocacy organization. Nathan said that the contraction of the oil and gas industry in New Mexico is a “cause for deep concern” for the state budget, because every time the price of a barrel of oil drops $1, the state’s general fund takes a $22 million hit. So according to Nathan’s calculations, the drop from $60/barrel to $20/barrel reduces state revenue by $880M a year, and that is before you consider the contraction of extraction activity.
Retake, New Energy Economy, WildEarth Guardians, Earth Care, Youth United for Climate Crisis Action, and other advocacy groups lobbied at the legislature in 2020, seeking legislation to fund a study to outline how the state could implement a “just transition,” and while some helpful bills were passed to advance readiness for such a transition, nothing like what is needed was even introduced as a bill. In a conversation with Senator John Arthur Smith in May 2019, Roxanne and I were told: “We need a transition plan, but it won’t have traction while times are good.” Well, guess what, while times were good in January, they are very bad right now, and so the planning for a just transition is likely to be much more actively considered by legislators and the Governor. We have no choice, and the Governor and Senator Smith both anticipate a special session of the legislature, likely in June.
Jamail also spoke with attorney, author, and CPA Greg Rogers who wrote the seminal book, Financial Reporting of Environmental Liabilities and Risks. He is also a fellow and adviser to the Master of Accounting Program at the University of Cambridge in the U.K. When asked whether and how oil-dependent states should prepare for exiting the oil market, Rogers noted that:
“If the golden goose is going to die, it’s really important that you know that so you can anticipate it,” Rogers warned. “When do you get out of that game? You’d better be close to the exit door.”Truthout: “Could COVID-19 Spell the End of the Fracking Industry as We Know It?” by Dahr Jamail.
NM is nowhere near that exit door and yet according to Jamail, NM’s exit could be both inevitable and imminent. He also asserts that not only may NM be without the gas and oil revenue, it could suffer a double blow. Oil companies owe billions of dollars in asset retirement obligations (AROs) to the state. AROs are the oil and gas companies’ financial obligations to clean up and close their wells when shutting down operations. But if fracking operators just walk away from the wells and declare bankruptcy, NM would face hundreds of millions and perhaps billions of dollars in costs to plug these wells. Making this situation even worse, Rogers points out that states may find it difficult to employ legal strategies to force payment:
“But if the state does that, it might hasten the death of the oil industry in their state,” Rogers explained. “And there will be political consequences for that, and eventually the state is going to have to hand a big bill for the cleanup to its taxpayers.””Truthout: “Could COVID-19 Spell the End of the Fracking Industry as We Know It?” by Dahr Jamail.
So, Governor Lujan Grisham is now faced with a significant challenge: work with the federal government to prop up the fracking industry or preserve our resources to help pay for the inevitable transition. I do not want to oversimplify that choice, as anywhere from 25-40% of our state budget depends upon gas and oil revenue, and so offering supports to that industry could make financial sense. But “propping up” could be beyond NM’s resources due to two factors:
- Fracking operates on a very slim margin, requiring at least $50 a barrel to be profitable; and
- Fracking also requires significant up-front investment, and oil companies have borrowed heavily in the Permian and elsewhere, betting that prices would remain north of $50/barrel and perhaps return to prices from 2014 when oil was selling at over $100/barrel. Essentially, they borrow heavily, betting that their future fracking profits pay off the loans.
Unfortunately, due to the coronavirus, demand for oil is plummeting as economic activity and all forms of transportation drop precipitously. At the same time, the Russians and Saudi’s are involved in a dual of wills to drive the price of oil down. In short, we are many many months away from a return to $50/barrel and will likely never see $100/barrel again. And with oil companies that are invested in fracking exposed to high levels of debt and the pressure of dropping costs of renewable energy, there may be no recovery ahead for these fracking companies. For fracking operations to “recover” will require more investment from Wall St. And Rogers points out that there is no guarantee that such a fragile industry will be able to secure those loans.
“Say you are JP Morgan and lend oil and gas a lot of cash, and you figure out this is a permanent decline in the industry, and there is $400 billion of ARO debt out there, and most of that is positioned ahead of you to pay states before you get paid,” Rogers said. “Do you want to keep loaning money? Not likely. I think that is what is going to happen here.”Truthout: “Could COVID-19 Spell the End of the Fracking Industry as We Know It?” by Dahr Jamail.
Rogers asserted that NM and other states should have beefed up regulations requiring more substantial bonding to cover ARO costs, something many environmental advocates sought in the 2019 legislative session, but New Mexico Oil & Gas Association lobbyists were everywhere, squashing any and all such legislation. Anything threatening the New Mexico Gas & Oil industry was off the table in 2020, including an effort by the Land Commissioner to address the inadequacy of the bonding system. In this context, NM’s future budget woes look daunting. Fred Nathan indicated we could expect a $1.5 billion decline in the state budget in 2021-22, and he went on to note where that impact would be felt most.
“That will impact every New Mexican, and it will be virtually impossible for that to not impact public schools, along with higher education, as those two right now are about three-fifths of the budget,” Nathan said.Truthout: “Could COVID-19 Spell the End of the Fracking Industry as We Know It?” by Dahr Jamail.
While NM is among the most vulnerable states in the country to a bankrupt fracking industry, there is more bad economic news possible. The Financial Times suggests that while the entire collapse of the hydrocarbon industry is not imminent, it could be inevitable.
“The end of hydrocarbons as a lucrative industry is a distinct possibility. We are seeing that in dramatic form in the current oil price crash. But this collapse is merely a message from the future.”“Financial Times: “Oil crash only a foretaste of what awaits energy industry.”
Needless to say, if the entire gas and oil industry collapsed, this would catapult the nation and the world into a full economic depression, something no one would welcome. However, if the coronavirus has taught us nothing else, it is that neoliberal systems do not instantly respond to long-term investments. Neoliberals allowed our public health care system to starve for decades and we are paying that deadly price right now. Neoliberals are not simply going to let the gas and oil industry die and will seek strategies to prop it up, especially with the current president.
However, let’s consider this. With a climate crisis looming and an utterly inadequate response to that challenge thus far, we are faced with what is the increasing likelihood of collapse of all our economic and political structures. Is it possible that the collapse of the gas and oil industry and an economic depression could cause us to demand the kind of systemic changes and personal sacrifices that are utterly necessary to achieving economic and climate justice?
Mother Earth has demonstrated that it can send painful signals that we need to change our ways. We can make those changes now, painful though they may be, or we can make them later when the earth says “enough” and our children and grandchildren pay the price for our being unwilling to give up our privilege and comforts to save the earth. This is a tale that is yet to unfold, but may well do so far sooner than we expected.
Paul & Roxanne
A very undeveloped thought off the top of my head. To replace (some of) the lost state revenue from carbon extraction royalties, how about a significant increase in state gasoline taxes. Yes, it’s broadly regressive, but: 1) a much higher tax would hardly be felt right now with gas under two bucks a gallon and most people not having to travel much; 2) in the long run, it might promote the buying of more efficient vehicles; and 3) it’s a hell of a lot better than severe cuts to social programs.
There will be some sort of special session within the next few months. Can we get one or a coalition of reps/senators to sponsor a gas tax bill?
The frequency of oil price booms and busts is so well known and documented that it seems almost criminally irresponsible to put together state budgets that heavily rely on oil prices being at some arbitrary level. Effectively, it’s like planning on paying your rent from your winnings at the roulette table.
Although the coronavirus epidemic has certainly contributed to the collapse in oil prices, it appears that most people have forgotten that the initial price collapse (due to the Russia/Saudi dispute) started before the epidemic had widespread impact outside of China and would still be happening even without the epidemic.
There is actually a very simple method to stabilize such a highly volatile revenue stream and it is one that New Mexico actually already has in place for a portion of its oil and gas revenues:
-Put these revenues into a permanent fund and only use a fixed percentage of the money that is in that fund for current spending.
There are actually four types of revenues from the oil and gas industry. Two of these streams already go into permanent funds, specifically royalties and leasing fees from oil and gas projects done on state lands. The other two streams are excise taxes (a type of sales tax) on oil and gas production and ad valorum taxes (a couple of different types of property taxes) on oil and gas production properties. These go directly to both state and local governments and it is the excise taxes that cause all the wild revenue fluctuations.
Putting all these revenues into a permanent fund (instead of just part of them) would immediately stabilize expected revenues and if the spending from the permanent fund is done responsibly so that it isn’t depleted faster than it is refilled with either investment returns or further oil and gas revenues, then those revenues will still be there when all oil and gas production stops. (That’s why its called a “permanent fund”). This is exactly what Norway does with all of its oil and gas revenues.
Two comments: The closure of San Juan Generating Plant, via the ETA passed in 2018 does not contain sufficient funds to clean up the contamination around that facility. The cost will be born by future generations and will remain a Dead Zone for decades.
Yesterday, Whitmer Shale, a fracking drill company that operates in several states including N.M. announced its bankruptcy. The day prior to this announcement, the board of Whitmer voted to give top executives a $14.6 “bonus” for their leadership. I doubt any monies were saved to help the oil drillers working on the lines get home to their communities, nor was sufficient funds saved to cover the unemployment of these workers, as most line workers are considered independent contractors, with no FISA, no savings, and no unemployment benefits.
Chickens are roosting.
The name of the company is actually Whiting Petroleum and bankruptcy doesn’t immediately mean that all the employees are laid off, it just means that, at least in the short run, it will get protection from creditors such as banks and bond holders.
The company has also said that “it would continue to operate without material disruption to vendors, partners or employees”. As such, at least for the time being the only people suffering from this bankruptcy are banks and investors.
Yeah, Cristy sent me the corrected info. Thanks, William.
Good reporting. Very concerning. Even before this happened, our family had written to Senator Wirth – who responded twice to our concerns and expressed a desire to move the NM economy to other, more sustainable industries. We also wrote to Speaker Egolf, but he has not yet provided a response. They both received the same email from us.
Basically, as relative newcomers to NM, we have always thought it was insane to tie such a large percentage of the NM state budget to oil & gas. One could go on for hours re: the whys and wherefores of how we got there. But it never has made sense for New Mexicans, and now we could face serious financial consequences if these industries pull out of the state.
What I’d like to point out is that the American economy is based on there being nothing but an upside and no downside. This is not true in life, and it is not true in patterns of growth and contraction. What we do observe is that, when things are good, industries make huge profits; when they aren’t, taxpayers get to pick up the bill every time. This is a form of economic injustice that is unacceptable. I find it hard to understand why taxpayers allow this to continue.
COVID-19 has exposed all of the things that are wrong with American life and the US/world economy. Yet we’ve accepted and lived with all of these things for decades and nothing has been done about it. If this doesn’t bring the needed change, then I fear we can expect things to get much worse for us all.
As with the Senate’s failure to remove the president from office, our collective failure to act powerfully enough to force change could come at a huge cost. I agree with what Paul said a while ago: the time for polite objections is pretty much over. It’s going to take all of us being willing to act if change is going to happen.