ISSUES FOR HEARING Oil and Gas Market and Revenue Outlook Prepared by the Legislative Finance Committee Dawn Iglesias, Economist

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1 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 Apr-18 ISSUES FOR HEARING Oil and Gas Market and Revenue Outlk Prepared by the Legislative Finance Cmmittee Dawn Iglesias, Ecnmist June 4, 2018 U.S. Market Outlk The Energy Infrmatin Administratin (EIA) estimates U.S. crude il prductin averaged 10.5 millin barrels per day (bpd) in April 2018, and EIA s Shrt-Term Energy Outlk prjects U.S. il prductin t average 11.9 millin bpd in EIA expects West Texas Intermediate (WTI) price f crude il t average $65.58 per barrel in 2018 and $60.86 in EIA frecasts U.S. dry natural gas prductin will establish a new recrd fr 2018, reaching 80.5 billin cubic feet per day (Bcf/d). EIA expects U.S. natural gas prductin t increase t 83.3 Bcf/d in EIA expects Henry Hub natural gas spt prices t average $3.12 per thusand cubic feet in 2018 and $3.23 in The BP Energy Outlk prjects an increase in glbal energy demand ver the next 25 years, althugh the extent f this grwth is ffset by increased energy efficiency. Demand fr il and ther liquid fuels is expected t grw ver much f the utlk, but gradually slw and plateau in later years. Natural gas demand is expected t surpass il demand in the mid-2020s, and renewables are prjected t surpass cal in the late 2020s. The United States is expected t remain the largest prducer f liquid fuels and natural gas. New Mexic Market Outlk There are currently abut 90 active drilling rigs in New Mexic, accrding t Baker Hughes. Over 90 percent are drilling hrizntal wells, cmpared with 45 percent in New Mexic Active Rig Cunts New Mexic il prductin grew 23 percent frm July 2017 t March 2018, with the state n track t prduce ver 190 millin barrels f il in FY New Mexic natural gas prductin fr FY18 thrugh March is up 4 percent frm the same perid a year ag. Natural gas prductin increases are driven almst entirely by grwth in sutheast prductin, which has steadily increased since 2014 alng with il prductin. Nrthwest prductin has steadily declined since New Mexic il prices track abut $4 abve the cnsensus frecast fr FY18 at abut $55 per barrel. The average price differential between New Mexic il prices and WTI prices fr July 2017 thrugh February 2018 is -$3.13/bbl; hwever, beginning in April 2018, reprts indicate prices paid fr Permian Basin il fell t abut $8 belw WTI and then 0 Surce: Baker-Hughes 1

2 Jul-16 Aug-16 Sep-16 Oct-16 Nv-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nv-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nv-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 $/bbl $/mcf Jul Aug Sep Oct Nv Dec Jan Feb Mar Apr May Jun Jan-94 Aug-95 Mar-97 Oct-98 May-00 Dec-01 Jul-03 Feb-05 Sep-06 Apr-08 Nv-09 Jun-11 Jan-13 Aug-14 Mar-16 Oct-17 millin barrels billin cubic feet fell again t as much as $15 less as backlgs due t pipeline capacity issues created higher transprtatin csts. These much higher price differentials are likely t appear in New Mexic price levels nce April thrugh June data is available. 17 New Mexic Mnthly Oil Prductin New Mexic Natural Gas Prductin FY16 FY17 FY18 Surce: EMNRD Gas - SE Wells Gas - NW Wells Surce: EMNRD Current New Mexic Oil and Natural Gas Prices $70 $14 $60 $12 $50 $40 $45.00 $51 est. $52 est. $10 $8 $30 $6 $20 $4 $10 $3.26 $3.25 est. $3.25 est. $2 $- $- GenTax Oil Weighted WTI (w/diff) CREG Dec 17 Oil GenTax Gas Weighted HH (w/diff) CREG Dec 17 Gas Surce: Weighted il and gas prices derived frm EIA, GI and NYMEX Frecasts; Updated 05/24/2018 New Mexic Revenue Tracking and Outlk New Mexic s general fund revenue grwth stems almst entirely frm the il and gas industry, and the state is increasingly reliant n this vlatile industry. Mineral prductin taxes frm the il and gas industry are up $57.8 millin, r 26 percent, in FY18 thrugh February frm the same time last year. Rents and ryalties frm the il and gas industry are up $126.3 millin, r 45 percent, abve last year. Cmbined, these energy revenue surces are up ver $184 millin fiscal year-t-date, r 36.7 percent. 2

3 Grss receipts tax (GRT) revenues in FY18 thrugh February are up 17.3 percent, r $227.6 millin, with nearly three-quarters f the grwth driven by the mining, cnstructin, retail, and whlesale trade industries. The vast majrity f this grwth is related directly and indirectly t the il and gas industry. Nearly half ($2.5 billin) f the $5.2 billin grwth in matched taxable grss receipts thrugh March f this fiscal year was generated in Eddy and Lea cunties alne, and abut 25 percent was generated frm ut-f-state (which primarily supprts the il and gas industry). The il, gas, and mining industry was nearly 11 percent f New Mexic s grss dmestic prduct (GDP) in the furth quarter f 2017, and this is expected t rise significantly in 2018 due t surging il prices and prductin. The il and gas impact n state GDP is nearly six times the impact n natinal GDP, and this is the greatest difference in state and natinal GDP impacts n recrd. The nly tw larger industries, gvernment and real estate, are almst entirely ut f the GRT base, and the furth largest is health care, which is als largely ut f the state s GRT base. The nly industry f the largest fur that generates state GRT revenue is this highly vlatile surce frm il and gas, and apart frm these fur industries, nly tw thers, prfessinal services and retail, are mre than 4 percent f the state s GDP. The data abve and graphs belw illustrate the grwing need fr revenue diversificatin and a brader, mre stable GRT base. In additin, while a prtin f New Mexic s il and gas emergency schl tax revenues in excess f histrical averages will be transferred in future fiscal years t the tax stabilizatin reserve (the state s rainy day fund), this transfer des nt ccur fr rents and ryalties. This wuld be a gd ptin t cnsider in the next legislative sessin t shift a greater prtin f the current il and gas revenue windfall int building critical rainy day fund reserves. 3

4 Eddy YOY % YOY Amunt % Of Ttal Grwth Mining 142.8% $588,826, % Real estate 78.6% $53,940, % Cnstructin 73.8% $234,666, % Retail 37.8% $132,853, % Trans./Warehuse 100.0% $63,084, % Whlesale Trade 97.5% $130,988, % Accmm. & Fd Serv. 36.6% $40,636, % All Industries 60.4% $1,366,693, % Lea YOY % YOY Amunt % Of Ttal Grwth Mining 80.6% $543,731, % Real estate 89.5% $51,491, % Cnstructin 10.4% $38,367, % Retail 37.5% $144,963, % Trans./Warehuse 44.2% $32,508, % Whlesale Trade 45.4% $78,938, % Accmm. & Fd Serv. 31.2% $27,187, % All Industries 43.5% $1,095,062, % 4

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