A tough year

New Mexico Business Journal, July-August, 1999 by Nancy Traver

Declining prices hurt a number of companies in the extractive industries last year, but it's not all gloom and doom

When you pulled up at the gas pumps last year, you found some good news: prices were at record lows. In fact, with regular unleaded gasoline as low as 89 cents a gallon, it almost felt like a return to 1970s' prices. But what's good news for the car owner in New Mexico is bad news for the oil producer. And it is also bad news for state government; lower prices mean cuts in production and that turns into less taxes paid to the state.

"It was a terrible year for oil, with prices falling to $8 a barrel," says Meredith Tinsley, an independent oil producer based in Albuquerque. "You can't drill for that amount and pay for the oil. Only the big companies can stay in business - they're the only ones with any holding power."

Ed Martin, spokesman for the state's Energy, Minerals and Natural Resources Department, attributed the price drop to decisions made by the OPEC nations. "We are unhappily wed to those nations," he says. "When they choose prices they can live with, they can also drive New Mexico producers right out of the business." Martin estimates the state lost 2,000 to 3,000 oil and gas industry jobs last year in Hobbs, Artesia and Carlsbad. Those areas also spin-off jobs in industries that provide services and products to the oil and gas workers.

Numbers from the state's Department of Taxation and Revenue are similarly bleak. The state recorded a 20 percent drop in the 1998 fiscal year to $279 mil lion in FY 1999. Also, the gross sales value for gas and oil plunged from $4.6 billion in FY 1998 to $3.7 billion in FY 1999, according to the state.

Tom Clifford, spokesman for the Taxation and Revenue Department, says that oil and gas are taxed at 13 percent, which is one of the highest tax rates of any industry in the state. The industry contributes 20 percent of New Mexico's general fund. "So when the industry is hurt, the state's budget takes a big hit," says Clifford.

There was more bad news from the copper industry. Copper was deeply affected by the economic crisis in Asia and oversupplies in South America, according to Richard Peterson, spokesman for Phelps Dodge Co., which operates near Silver City. The company laid off 335 workers over the past year and closed down its Cobre mine in October.

Copper now sells for 62 cents a pound - half of what it was two years ago. He calls the current price "the lowest we've seen, adjusted for inflation, of this century." Tax and Rev recorded a drop in income; production tax revenues from the copper industry fell from $8.9 million in FY 1996 to $4 million in FY 1998.

The uranium market is also taking a beating, says Terry Fletcher, general manager of Quivira Mining Co., the state's only remaining uranium operation. According to Fletcher, uranium prices fell over the past year to $10.65 per pound, which is 15 cents below last year's prices and "an all-time historic low." Says Fletcher: "We are well below break-even prices now. To be a viable operation, we need to get $16 per pound."

Fletcher attributes the continued slide in uranium to the cancellation of many nuclear power plant projects during the 1980s. But an even bigger factor, he says, is the large supply of weapons-grade uranium from the former Soviet Union, which has been required under arms control treaties to dismantle its nuclear-powered missiles.

But despite all the gloomy news surrounding oil, copper and uranium, there were some bright spots in the state's extractive industries over the past year. Potash production increased by 100,000 tons, according to Melinda Hood, spokesperson for Mississippi Chemical, with operations near Carlsbad.

"We're very bullish about potash," says Hood. "Prices are up, demand is stable and the markets are stable." With production in excess of one million tons annually, New Mexico is the biggest producer and has the largest potash reserves in the United States. Most of the company's customers are in agriculture and use potash in fertilizers.

Producers report that natural gas, coal, perlite and molybdenum also held their own during the past year. Burlington Resources has natural gas operations in the San Juan Basin by the Four Corners, which is the second-largest gas-producing basin in the lower 48 states. Mark Ellis, vice president of the company's San Juan division, reports that Burlington drilled 200 wells last year. "Prices for us were reasonable all year, strong early in the year and then falling a little in what we call our shoulder months, that is between winter and summer," says Ellis. "Coal producers also reported that production was stable, the utility market has been strong and prices have increased slightly. At the Pittsburg & Midway Coal Co. near Raton and Gallup, mine manager Michael Provenza says production increased from 1.3 million tons per year to 1.4 million tons.

With New Mexico ranking 13th in the nation in coal production, the question looming ahead for coal companies is what deregulation of the energy industry will bring. Says Provenza: "Power producers are trying to position themselves to get ready for deregulation. They're looking at what is the most economic product to get into now and that is causing some price pressure downward."