Some states have hit the jackpot with massive hydrocarbon deposits. Independent oil and gas companies have turned fossil fuels in Texas, North Dakota and Pennsylvania into economic development powerhouses. These states are among the fastest growing in the country due to more job opportunities and rapidly increasing gross domestic product.

However, there’s a lesser-known state carving out its own share of the fossil fuel pie.

New Mexico Oil Production at 40-Year High

The New Mexico Oil Conservation Division (NMOCD) directly credits the use of horizontal drilling to its production rise in a June 2014 presentation. Production steeply declined from its peak era in the 1970s – volume rates in 2005 were less than half the rates from 1970, which was the first year the NMOCD reported such results. The use of horizontal drilling began to show its benefits in 2010, leading to four consecutive years of growth. The state cracked the 100 MMBO mark in 2013, representing a 54% climb from 2010’s numbers.

The well count sharply increased in 2013 compared to the year prior, with oil wells accounting to almost all of the additions. The NMOCD reported 1,891 wells were completed in 2013 – a 37% rise year-over-year. The number of completed oil wells per year has doubled since 2009 as the majority of E&Ps have realigned their focus on liquids opportunities.

Quietly One of the Country’s Hydrocarbon Leaders

New Mexico ranks sixth in the country in terms of crude oil production, ahead of Colorado and its growing Wattenberg Field. Total crude production increased 19% and 17% in 2012 and 2013 on a year-over-year basis, respectively. The Center for Energy Policy (CEP) at the New Mexico Institute for Mining and Technology expects a similar increase in 2014. Based on volumes through July of each year, 2014 numbers are on pace to increase by another 19% on volumes from the prior year. The CEP expects the climb to continue its pace and ultimately eclipse the state’s peak oil production year of 129 MMBO in 1969.

New Mexico’s Opportunities

The Delaware Basin, located in the southeastern part of the state, provides the majority of oil production. The Delaware is basically an extension of the Permian Basin, the largest producing shale in the United States, and has stacked oil formations. Roughly one-third of all Permian production comes from the Delaware, and a Platts report showed New Mexico is currently producing 292 MBOPD from the Basin, which would equate to 88% of the state’s production in July 2014. The number is expected to jump to 410 MBOPD by year-end 2019. If achieved, 2019 year-end totals represent a 40% increase compared to current volumes and equal 150 MMBO for the fiscal year. That’s 50% higher than current oil production in the entire state.

Another region drawing interest is the San Juan Basin in the northwest section. Companies like Encana Corporation (ticker: ECA), Energen (ticker: EGN) and WPX Energy (ticker: WPX) have all referred to the San Juan as an emerging play. Encana believes the San Juan holds 50 MBOEPD potential and the company is in the early stages of production. WPX said the region is generating rate of returns of 60% to 70% and production has increased by 40% due to modified drilling techniques.

Familiar Refrain: Need for Greater Takeaway Capacity

New Mexico experiences the same problems as Texas in regard to infrastructure constraints in the Permian. A report by Daniel Fine, Managing Director for CEP, says current infrastructure carrying capacity is 60% deficient. The San Juan Basin is also at risk for being “stranded” due to insufficient takeaway, including rail and roads. The need for buildout is key, considering the anticipated rise in the next few years.

Enterprise Products Partners (ticker: EPD) announced plans in September to add 155 miles of pipeline to its existing 1,500 mile network spanning the Delaware Basin, including a new processing plant in New Mexico. In the press release, EPD said volumes into its existing facilities has doubled since 2012 and is now operating at capacity. Management said multiple production zones and a climbing rig count influenced its decision for the new project.

The existence of the oil and gas industry is paramount for a state that has traditionally languished in the lower half of the nationwide list for gross domestic product. Revenues from the industry provided New Mexico with more than $1.5 billion in state general funds in 2012, accounting for 30% of all revenue. In 2011, the industry supported more than 100,000 jobs and contributed a total of $11.2 billion to the gross state product (14.2% overall).

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