Analysis: Gov. Martinez’s energy regime in review

George Sharpe
George Sharpe, Merrion Oil and Gas investment manager

As Governor Martinez and her Energy appointees term out, it is worth reflecting on their tenure over the last eight years.  Ken McQueen, the outgoing Secretary for the Energy, Minerals, and Natural Resources Department (EMNRD), and Heather Riley, the Director of the Oil Conservation Division (NMOCD), took a lot of criticism from the cheap seats because of their historic ties to the Oil and Gas Industry. 

The implication was that they were puppets of the industry and that they were weakening the regulations and softening the enforcement thereof.  

It should be pointed out that the function of the EMNRD is to oversee the development of our State’s ample energy resources... not just oil and gas, but also coal, geothermal, wind, and solar. Their job is not to obstruct the development of any of these resources, but to assist the various industries in doing so in a manner that a) protects human health and the environment, and b) maximizes the taxes and royalties and other benefits received by the State, including jobs and economic development. Here are the facts… you decide for yourself.

1. State Budget Surplus – The resurgence of the Permian Basin has resulted in record New Mexico oil production and a projected budget surplus exceeding $1 billion for the next fiscal year. While the EMNRD can’t take all the credit, at least they didn’t throw up road blocks and keep the development from happening  Industry critics claim that oil and gas companies need to “pay their fair share” to the State.  If the projected 40% of the state budget is not a fair share, then what exactly IS fair?

2. 2015 Energy Plan – The EMNRD completed the first comprehensive update of New Mexico’s energy policy in 25 years.  The plan calls for an “all of the above” approach to energy development from ALL sources.

3. Dramatic Growth in Renewables –  The Martinez regime didn’t just focus on oil and gas development, but pursuant to the revised energy plan, made a significant effort to promote renewables.  In fact, New Mexico added more wind capacity in 2017 than ANY state in the nation. Further, the geothermal rules were rewritten to encourage the development of that resource.  As a result, during Martinez’s tenure, electricity generated from renewables grew from less than 7% of New Mexico’s total in 2010 to an estimated 25% in 2018, while coal power has dropped from 71% to 37%.   

New Mexico Electrical Generation

4. Environmental Protections –  The EMNRD signed a Memorandum of Understanding with the EPA, State Engineer, and the Environment Department to facilitate and promote the reuse and recycling of produced water, a precious commodity in the arid southwest. They also worked with operators in the Gas Capture Workgroup to develop a voluntary gas capture program. As a result, the EPA reported that methane emissions have dropped in New Mexico, even as oil and gas production has skyrocketed. 

5. Financial Assurance – The NMOCD increased the bonding requirements to operate wells in New Mexico for the first time in more than 25 years. This will help protect New Mexico’s citizens from the potential liability of orphaned wells, being wells not properly abandoned by an operator who may have gone bankrupt.  

New Mexico crude production

6. Crackdown on Non-performing Operators – The NMOCD sent notices to over 100 operators to address their large shut-in well inventory. Plugging Orders were issued to 14 operators requiring the plugging of 495 wells. One operator who failed to comply with their settlement agreement was fined over $2 million and was ordered to clean up their sites and cease operating in the State. 

7. Pursuing Asian Markets – Governor Martinez has aggressively pursued the development of business relationships with Taiwan and Japan on a number of fronts.  Regarding energy, they initiated conversations with Taiwan’s government owned energy company, CPC Corp, to discuss potential investments in San Juan Basin gas opportunities and ultimately, to try to get that gas to a pending LNG facility in Senora, Mexico, where it could then be shipped to Taiwan. While the LNG side of it is a long shot in the long term, conversations regarding investments in San Juan Basin gas resources are ongoing.

8. Hilcorp Well Density Application – The NMOCD approved an application by Hilcorp Energy Co. to double the well density in the Blanco Mesaverde Pool. Critics have spread the fear that the rule will mean 8,000 new wells in the Basin. That’s not going to happen because new Mesaverde wells are NOT economic to drill.  What the rule will do (would have done) is help facilitate the potential recompletion of thousands of deeper Dakota wells, helping to recover billions of dollars’ worth of New Mexico’s gas resources that would otherwise be left undeveloped. 

And with recompletions, there are no new surface disturbance or long-term emission sources at all. The new administration has withdrawn the Order and has scheduled a rehearing for May. Hopefully they will approve some form of the rule that will help keep a few workover rigs active in the area.  

In closing, the criticism that Ken McQueen and Heather Riley were easy on the Industry is unfounded and unfair. In fact, it was their knowledge of the Industry that helped them recognize the need to increase bonding requirements, and the need to crack down on operators with too many shut-in wells. They toughened the rules that needed upgrading, and then enforced those rules with certainty.  

The main criticism from the Obstructionists boils down to the fact that McQueen and Riley didn’t obstruct. Instead, to the benefit of our citizens, they helped facilitate the responsible development of ALL of New Mexico’s energy resources in a manner that protects human health and the environment. 

As a result, New Mexico has dramatically increased the portion of electricity coming from renewables, has reduced air emissions through voluntary action, and is as financially strong as it has been in decades. McQueen and Riley certainly don’t deserve the hate they are getting. They deserve our thanks.   

George Sharpe is an investment manager for Merrion Oil & Gas of Farmington.