New Mexico’s Energy Future
October 31, 2018
In October 2018, the CSIS Energy and National Security Program and Sandia National Laboratories cohosted a workshop in Albuquerque, New Mexico with government, industry, and local leaders to explore the state of play and outlook for New Mexico’s energy landscape. The workshop addressed several key issues concerning the opportunities and challenges that New Mexico faces in the development of its oil, gas, and renewable energy resources, along with its electric power grid, and possible strategies to make the most of the state’s energy potential.
- New Mexico has a massive amount of energy development potential, especially for oil and gas and renewables. The state has realized much of this potential over the past decade, with its oil output increasing by threefold and its combined wind and solar capacity increasing by five-fold. New Mexico also has experienced a resurgence in its natural gas output, which combined with the rapid growth in wind and solar in the electric power sector, has resulted in a steep decline in energy-related emissions and has helped offset electricity price increases as a result of several coal-fired generation facility retirements.
- In addition to the developments in energy extraction and production, New Mexico has made significant contributions to energy innovation in advanced solar, unconventional gas, next-generation nuclear energy technologies, and grid research, through the two National Laboratories and several world-class, energy-related research universities that call the state home.
- The energy industry plays a critical role in New Mexico’s economy, making essential contributions to GDP and tax revenue and providing high-paying jobs. Although New Mexico has made much progress in realizing its energy potential, careful planning and policymaking and an ongoing commitment to energy technology innovation are necessary for the state to be a national leader in energy development and innovation.
- The Permian Basin in New Mexico will be the primary driver of oil and gas production growth in the state and a key factor in the United States’ transition to a net oil and gas exporter, as the basin accounts for much of the unprecedented growth in U.S. oil production and its impact on global oil markets. However, the tremendous rise in oil and gas production in the area has created challenges for operators in delivering the increased output to market. New pipelines have been built, others expanded, and some reversed, while demand for other means of transportation has increased. The lack of adequate infrastructure to offtake oil and natural gas may inhibit the rate of growth. The boom in production also is straining other sectors of the economy, including roads that lack the capacity to deal with the surge in trucking. Addressing these constraints will require longer-term planning and a coordinated strategy with input from all stakeholders on how best to develop the New Mexican part of the basin.
- There is tremendous potential in New Mexico for wind and solar development. The state has some of the highest rates of solar irradiance and best wind conditions in the United States. The planned retirement of existing coal power generation units and increased Californian demand for clean energy imports creates additional opportunities. Once again, the main challenge for the state in taking full advantage of its renewable energy resources is infrastructure. New Mexico has a relatively low rate of electricity demand and much of the best renewable energy resources are located in isolated areas that require the construction of large transmission projects to get the clean energy to markets. There is an opportunity for all stakeholders in these projects to expand dialogue and planning to better understand each other’s concerns and objectives so that contentious permitting issues can be resolved early in the process.
- New Mexico, through the growth of its portfolio of renewables and the local expertise of its engineering and science public universities and the labs, also has the capacity to become a national leader in energy innovation and a center for next-generation electrical system technologies and grid modernization efforts. Energy storage is one prospect, with several pilot projects already running in the state through the labs. New Mexico has the opportunity to lead the development, integration, and growth of this energy technology by creating a robust, in-state energy storage industry and incorporating its use into legislation.
- As part of the major global energy system changes currently underway, New Mexico has the potential to be at the fore and benefit from driving systemic change. In particular, the drive by countries such as China to position itself as a global leader in wind, solar, nuclear energy, and electric vehicle technology development and deployment, creates opportunities and challenges for the United States and for states such as New Mexico that are leading energy innovation through the national labs. The work of the national labs, including Sandia and Los Alamos, to keep the United States and its energy industry at the cutting edge of innovation is more important than ever for U.S. energy industry competitiveness.
- To conclude, there are common challenges in New Mexico in oil and gas and renewables development. The New Mexico workshop identified opportunities to improve infrastructure, market access, economic competitiveness, and workforce development in the state. These themes were cited by both oil and gas and renewable energy industry representatives, as well as government employees, signifying shared market and policy challenges. Participants were interested in pragmatic solutions to these challenges. In that regard, there appears to be ample opportunity for “win-win” energy policy in the state, given that oil and gas and renewables largely operate in different markets rather than compete for the same market share. That is, the increase in oil and gas production is predominantly going to export markets, whereas growing renewable energy is primarily meeting intrastate electricity demand.
Energy in New Mexico
New Mexico has considerable oil, natural gas, coal, and renewable energy resources. Producing significant quantities of petroleum and natural gas, the state is the seventh- largest net supplier of energy in the nation. It is home to two of the nation's leading laboratories and several world-class, energy-related research universities, making important contributions to energy innovation. Energy development plays a critical role in New Mexico’s economy, making important contributions to state GDP and state tax revenue. It provides high-paying jobs while benefiting other sectors of the economy through its end uses, such as those in industry.
According to Bureau of Economic Analysis data, oil and gas extraction in New Mexico accounted for 7 percent of GDP in 2017, its contribution to the economy increasing for the first time since the oil price downturn of 2014. Much of the recent economic growth is a result of a rebound in oil and gas revenues, primarily because of an increase in oil prices but also thanks to the rapid pace of oil production growth. The growth in oil and gas production has been a boon for other industries in New Mexico, including chemicals, plastics, and rubber manufacturing, as well as oil industry support activities such as trucking and water transportation. The solar and wind power industries in New Mexico are also having a significant positive effect on the economy, attracting more than $4.5 billion dollars of investment over the last decade and now accounting for more than 5,000 jobs statewide.
New Mexico’s Energy, Minerals and Natural Resources Department (EMNRD) reinvigorated the energy policy discussion in New Mexico through the release of a state energy policy and implementation plan in 2015. ”Seizing our Energy Potential: Creating a More Diverse Economy in New Mexico” was the state’s first energy policy plan in nearly 25 years. The State Energy Roadmap project subsequently was initiated to determine the potential scenarios of the state’s energy landscape and to develop goals and strategies for the government and the private sector to strengthen and diversify New Mexico’s energy economy to build greater resiliency. The report outlines 15 goals and accompanying strategies that touch on all energy sectors in the state, grouped under five main topics: Energy Economy Diversification, Moving Energy, Transportation, Energy Efficiency, and Workforce and Education.
New Mexico’s Energy Profile
Energy production in New Mexico has grown over the past decade, largely because of the shale revolution, but also because of the growth of renewable energy production such as wind. Total annual energy production stood at approximately 2.6 quadrillion British thermal units in 2016, close to the record set in 2005. The last significant period of growth in energy production was from 1985 to 1995 because of a boom in natural gas production, which caused overall energy production to grow by more than 60 percent. Afterwards production leveled out and subsequently declined from its 2005 peak to 2010, until it was revived by the massive surge in oil production and a rebound in natural gas production.
Meanwhile, energy consumption in New Mexico has remained relatively flat since the turn of the century, peaking at 716 trillion British thermal units in 2007. This is because of slowing population growth and increases in energy efficiency, which have improved in line with the national average. National fuel economy and appliance standards largely account for these efficiency gains, along with the New Mexico Efficient Use of Energy Act. Transportation (40 percent of statewide energy consumption) and industry (35 percent) account for most energy consumption, while residential and commercial use each account for approximately 12 percent.
On average in 2016, New Mexicans paid $0.93 (or about 6 percent) more per million British thermal unit (mmbtu) of energy consumed than the national average of $15.92 per mmbtu. Annual energy expenditure per person in the state stood at $3,088 for the same period, $123 below the national average. However, because New Mexico ranks forty-eighth nationally for per capita personal income, energy expenditure as a percentage of personal income is higher than the national average, standing at 8 percent in 2016. This is 35 percent lower than 2013 and the lowest since at least 1970, which is predominately the result of low oil prices and in part because of increased competition among fuel sources in the utility sector, which has marginally driven down electricity prices since 2013.
Oil and Gas Development
A high-price environment for oil and natural gas from the mid -2000s coupled with low interest rates incentivized the industry in New Mexico (and nationally) to explore untapped shale gas and tight oil resources. Through technological innovation and the combination of horizontal drilling and hydraulic fracturing, these previously inaccessible oil and gas resources were unlocked. These techniques, particularly in low-permeability formations in the southeastern part of the state including the Permian Basin, along with the San Juan Basin in the northwest, tremendously increased the volumes of oil, natural gas, and natural gas liquids produced in the state. The Permian Basin, which stretches across West Texas and into southeast New Mexico, has become the most prolific petroleum producing area in the United States and possibly the world today. Close to 50 percent of the entire U.S. rig fleet operates in the Permian Basin and approximately 25 percent of the basin falls within New Mexico’s borders.
In 2017, 56 percent of oil production and 62 percent of natural gas production came from federal land. (Approximately a third of the land in New Mexico is owned by the Federal government, a tenth belongs to Native Americans, and the remainder is privately or state held.) The vast majority of oil production is now concentrated in Eddy County and Lea County in the southeastern region of the state where the Permian Basin is located. Natural gas production is split between the southeast and northwest, with large amounts coming from the San Juan Basin in Rio Arriba and San Juan counties in addition to the Permian Basin. However, similar to oil, most of the growth in natural gas production in recent years has come from the Permian Basin.
New Mexico’s rate of production has grown rapidly since 2017 because of large fixed investment and declining breakeven costs, particularly in the Permian Basin. New Mexico is now the third-largest producer of crude oil and ranks among the top 10 producers of natural gas in the United States. New Mexico’s oil and gas industry has benefited tremendously from the tight oil and shale gas boom over the course of the past decade. Its oil production has increased threefold since 2009, surpassing 650 thousand barrels per day (b/d) of production towards the end of the first half of 2018. While New Mexico’s production of natural gas stands at the same level as 10 years ago, at approximately 4 billion cubic feet per day (bcf/d) (as of June 2018), shale gas production has more than quadrupled since 2010.
The growth of shale gas and associated gas, the latter a result of the oil production boom, has offset major declines from coalbed and conventional gas wells in New Mexico and led to a recovery in natural gas production, which had previously fallen below 3.5 bcf/d. Today, New Mexico accounts for more than 5 percent of the nation’s combined output of oil and natural gas.
New Mexico has two oil refineries with a combined crude oil refining capacity of 137,000 b/d. The Navajo refinery in Artesia mainly refines Permian Basin oil. The smaller of the two refineries is located in Gallup in the Four Corners area and processes oil from the San Juan Basin. Refinery capacity has grown marginally in New Mexico as oil production has boomed and the state has remained a net importer of petroleum products. Getting crude oil to export markets has become increasingly important as production growth far outpaces refining capacity additions in New Mexico.
The tremendous increase in oil production and a revival in natural gas output in New Mexico has meant that operators have faced challenges in delivering this increased output to market. Most of the vastly expanded crude oil production has had to be exported to refineries outside the state, and with net oil exports exceeding 500 thousand barrels per day in June 2018, this has become an increasingly formidable challenge. Pipelines have been built, others expanded, and some reversed, while railroad transportation of crude oil has increased. The lack of adequate infrastructure to offtake oil and natural gas is a potential inhibitor on the rate of growth and it also creates waste, leading to venting and flaring of methane. In addition to improving infrastructure, there are other opportunities to cut down on methane emissions for both commercial and environmental reasons in New Mexico and reducing methane emissions is a priority for the state government and many oil and gas industry operators in the region.
Electricity and Renewables Development
New Mexico has a net summer capacity of 8.5 gigawatts, producing 33.5 terawatt hours of electricity in 2017. Retail sales of electricity in New Mexico have remained flat since 2010, much like overall energy consumption. Although New Mexico remains an important supplier of electricity to many neighboring states, its electricity exports have declined markedly since 2009.
Retail prices for electricity have increased over the past decade, averaging 9.6 cents per kilowatt-hour in 2017. With retail sales remaining flat, the increase in revenues from sales of electricity can be explained by the increase in retail prices.
The increase in retail prices in New Mexico came about as a result of its previously high reliance on coal as a source of fuel for electricity generation, with the average price of electricity increasing because of more stringent environmental regulations on coal usage. However, rising natural gas production has cut gas prices even as its market share of electricity production has increased, helping to reduce prices for consumers.
Until recently, coal-fired generation was the dominant source for electricity production in New Mexico, accounting for more than 60 percent of supply in 2016 according to EIA data. As recently as 2004, coal accounted for 89 percent of total generation, but its dominant position has rapidly eroded because of higher air quality standards, along with the fall in natural gas prices and the rapid increase in renewables deployment.
Two of the four electricity generation units at the San Juan coal-fired power plant shut down in late 2017 and three of five units were shut down at the Four Corners coal fired power plant in 2013, the two main coal plants in New Mexico. The Escalante coal plant in McKinley is the only other remaining operable facility in the state. PNM (Public Service Company of New Mexico) will close the two remaining units at the San Juan generating station by 2022 and plans to be coal free by 2031. As of this writing, all of New Mexico’s planned new electricity-generating capacity additions will come from renewables or natural gas.
Renewable energy production in New Mexico has more than doubled over the past decade. Wind energy in particular has grown rapidly, with the high plains in the eastern half of the state providing some of the best conditions in the United States for wind production. Wind energy now accounts for more than half of total renewable energy production in the state and accounted for 14 percent of statewide electricity generation in 2017. The state has an installed electricity-generating capacity of 1,678 megawatts from its more than 1,000 wind turbines. It experienced the fastest pace of wind production growth in 2017 and is expected to make several large capacity additions over the coming years.
Solar energy production has experienced rapid growth since 2010. As of 2017, New Mexico had a total installed solar capacity of 750 megawatts, powering more than 180,000 homes. Although solar energy accounts for about 4 percent of electricity generation in the state, the number of utility-scale solar PV facilities is rising rapidly because of the state’s abundant sunshine and falling costs for solar PV modules. Distributed solar generation is also growing, with state regulatory policies and incentives encouraging the use of distributed solar technologies.
With these developments New Mexico is well on track towards achieving its Renewable Portfolio Standard, which requires investor-owned electric utilities to obtain 20 percent of the electricity that they sell in-state from renewable energy sources by 2020. Of this 20 percent, at least half must be generated from wind or solar. Rural electric cooperatives must obtain 10 percent of their electricity sales from renewable sources by 2020. New Mexico has additional regulatory policies that encourage renewable generation, such as net metering, solar easements, and interconnection standards.
New Mexico has demonstrated interest in increasing its electricity sales to other states, particularly energy generated from renewable resources, given its policies and responses to those in export markets. For example, California, an important market for New Mexican electricity exports, decided in 2014 to stop purchasing electricity generated from coal. The Renewable Energy Transmission Authority (RETA) was established in 2007 to encourage the development of the state’s renewable energy resources. RETA’s goal is to enable New Mexico to export 5,200 megawatts of renewable energy to other states. Several new transmission projects will carry electricity generated from renewable sources to export markets. These include the Lucky Corridor, the Western Spirit Clean Line, and the Centennial West Clean Line.
Because of the change that has occurred in the electric power sector, New Mexico’s emissions have significantly declined over the past ten years. New Mexico’s CO2 emissions from fossil fuel consumption have fallen by 20 percent since 2006, which is predominately because of the decline in coal consumption in the electric power sector. CO2 emissions in the electric power sector have moved in lockstep with coal’s decline, falling by 45 percent during the decade to 2016. Emissions of nitrogen oxides and sulfur dioxides have fallen significantly during this period because of coal’s decline and more stringent air quality standards.
New Mexico’s Energy Opportunities and Challenges in a Global Energy Context
In the broader context of major global energy system changes now underway, New Mexico has the potential to be at the fore and benefit from driving changes to this system, to which it has already contributed. In particular, New Mexico may directly and indirectly play a major role in all four energy system upheavals identified by the International Energy Agency in their 2017 World Energy Outlook. The first upheaval relates to the transformation of oil and gas production in the United States and its ascendancy to become the undisputed leading producer in the world of both commodities. The second upheaval relates to the massive cost declines for renewables, in particular for solar PV and wind and the increased competitiveness of these sources for energy generation, competing not only with new builds but in some cases with existing energy generation units. The third upheaval relates to the electrification of the energy system because of an increasingly digitized global economy. The final factor relates to the economic and energy policy changes underway in China, including its objectives to clean up its air and to become the vendor of next-generation energy technologies.I. New Mexico’s Oil and Gas Revival
The IEA projects that by the mid-2020s the United States will become the world’s largest LNG exporter and a net oil exporter by the end of the decade. New Mexico already has played and will continue to play a critical role in helping the nation in reaching these milestones, thanks to the boom in oil and gas production in the Permian Basin. Permian crude oil production is expected to average 3.3 million b/d in 2018 and 3.9 million b/d in 2019, accounting for more than half of total U.S. production growth to 2019. The basin will continue to drive growth to the mid-2020s, when overall production is projected to level out. This energy transformation in the United States has had great knock-on effects not only for the economy but also geopolitically as the U.S. oil supply situation has shifted from scarcity to abundance.
Thanks to the attractive geology and the combination of technological and operational improvements, the Permian Basin in New Mexico has become the most prolific production region in the United States. However, growth faces some possible constraints — primarily infrastructure needs— that require attention. Pipeline capacity constraints already have materialized in 2018 with an evident dampening on wellhead prices for the region’s oil producers, as midstream capacity additions struggle to keep abreast with production growth. The same goes for natural gas, with the large production gains in the Permian and some of the existing supplies in the San Juan Basin struggling to find markets.
Additionally, the boom in production is straining local infrastructure, including roads that lack the capacity to deal with the surge in trucking. Furthermore, the local labor market and health care sector also are strained because of the large influx of workers and the energy industry’s demand for highly skilled employees. These are manageable constraints and the industry is keen to work with local government to overcome them. That requires, however, longer-term planning and a coordinated strategy with input from all stakeholders on how best to develop the New Mexican part of the basin.II. New Mexico’s Renewables Revolution
The IEA projects that over the next 25 years the world’s growing energy needs will be first met by renewables, as rapidly declining costs particularly for solar power make renewable energy the cheapest source of electricity generation. There is great potential for solar and wind development in New Mexico, particularly as existing coal power generation units come up for retirement and as surrounding markets such as California increase their demand for clean energy imports. Most importantly the potential of the resource for both wind and solar in New Mexico is tremendous, with the state experiencing some of the highest rates of solar irradiance (particularly on its southern border) and some of the best wind conditions (concentrated over the eastern plains) in the United States. As such, thanks to continuous technological improvements and declining costs, renewables in New Mexico are now cost competitive with traditional energy sources.
The trend is already apparent in New Mexico, with the majority of planned energy generating capacity additions coming in the form of wind and solar. The growth of wind energy in New Mexico has been particularly impressive and the outlook appears to be much the same. For example, Xcel Energy will add 522-megawatts of capacity through the Sagamore project in Roosevelt County. In addition, Pattern Energy in October received approval from the New Mexico Public regulation Commission (PRC) for its Corona Wind Project. This project will add a massive 2.2 GW of capacity from an estimated 950 wind turbines and will become the largest wind farm in the Western Hemisphere upon its expected completion in 2020. The project will be built in Lincoln County and is expected to generate an estimated $3.8bn in economic impact for the region.
Once again, the main challenge for the state in taking full advantage of its renewable energy resources is infrastructure. New Mexico has a relatively low rate of electricity demand and much of the best renewable energy resources are located in isolated areas, requiring the construction of large transmission projects to get the clean energy to markets. For example, the Corona project is relying on the construction of the long-contested SunZia Southwest Transmission Project but its application was rejected by the PRC in September for being incomplete. Pattern Energy has stated that it is working with SunZia to resubmit the application. However, at a broader level it appears that there is opportunity once again for stakeholders involved in these projects, the local government, and those parties that object to these projects to engage in greater levels of dialogue and planning to better understand each other’s concerns and objectives so that contentious permitting issues can be resolved early in the process.
III. New Mexico and Next Generation Energy Technologies
The third upheaval relates to the electrification of the energy system because of innovation and an increasingly digitized global economy. This will create opportunities and challenges for New Mexico and highlights the importance of the national labs in keeping the United States at the fore in the development of next-generation energy technologies that will be pivotal to creating opportunities from the upheaval in the energy system.
New Mexico, through the growth of its portfolio of renewables and the local expertise of its engineering and science public universities and the labs, has the potential to become a center of next- generation electrical system technologies and grid modernization efforts. For example, energy storage is a rapidly growing industry that will be crucial to the electrification of the energy system. The PNM Prosperity Energy Storage Project in New Mexico was the nation’s first energy storage facility that was fully integrated into a utility power grid. In addition, the labs are leading several pilot projects in the state. New Mexico has the potential to lead the way in the development, integration, and growth of new energy technology to create a robust, in-state energy storage industry by incorporating its use into legislation.IV. New Mexico’s Role in U.S. Energy Competitiveness
The final upheaval identified in the IEA’s World Energy Outlook relates to the changes underway in China and its turn toward cleaner energy sources and technologies to address poor air quality. This dynamic is not only altering global energy demand but is also creating competition in the sale of new clean energy technologies, with China attempting to position itself as a global leader in wind, solar, nuclear energy, and electric vehicle technology development and deployment. This will create opportunities and challenges for the United States and in particular for states such as New Mexico that are leading energy innovation through the national labs. With China’s aspirations to use new energy technologies not only to clean its air but also to become a dominant force in their sale, the work of the national labs, including Sandia and Los Alamos, to keep the United States’ energy industry at the cutting edge of innovation is more important than ever.
New Mexico has massive potential in oil and gas production and renewables development. The state has realized much of this potential over the last decade. During that time, New Mexico’s oil output rose by more than 300 percent, to become the third-largest producer in the country. The state has also seen a resurgence in its natural gas output, helping to retain its position as a top 10 producer. New Mexico has experienced rapid growth in wind and solar deployment, which combined with the growth of natural gas in the electric power sector has resulted in a steep decline in energy-related emissions. In addition to the developments in energy extraction and production, New Mexico has contributed to energy innovation in advanced solar, unconventional gas, next-generation nuclear energy technologies, and grid research, through the two National Laboratories and several world-class, energy-related research universities that call the state home.
Today, New Mexico is the seventh-largest net supplier of energy in the nation. The energy industry is critical to New Mexico’s economy, making essential contributions to GDP and tax revenue while providing high-paying jobs. Although New Mexico has made much progress in realizing its energy potential, further expansion faces challenges. Effective planning and policymaking, along with a commitment to energy technology innovation, can further unleash New Mexico’s potential to be a national leader in solving complex economic, energy, and environmental challenges, in the state and beyond.
Andrew Stanley is an associate fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C. Sarah Ladislaw is a senior vice president and director of the CSIS Energy and National Security Program. Lisa Hyland is associate director for energy education and public programming with the CSIS Energy and National Security Program.
This report is made possible by the generous support of Chevron.
CSIS Briefs are produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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