January 13, 2016

Low oil prices prompt bills to reduce some industry taxes

Margaret Wright

Oil pump in southeast New Mexico.

As energy prices remain low, a handful of New Mexico lawmakers will attempt to lower taxes on some oil and gas production this upcoming legislative session.

Oil rig in southeast New Mexico. Photo by Margaret Wright

Margaret Wright

Oil rig in southeast New Mexico. Photo by Margaret Wright

Two bills, one in each chamber, target tax relief for specific types of oil and gas extraction. In the state House of Representatives, James Strickler, R-Farmington, pre-filed a bill to increase the threshold of oil prices to qualify for an existing state tax incentive. In the Senate, Gay Kernan, R-Hobbs, has a bill to reduce the severance tax rate on oil extraction.

Both lawmakers say they filed their bills in response to stubbornly low oil prices that they say have hurt the state’s oil and gas industry.

“I’m in the business and it’s killing us,” Strickler, a petroleum landman, said. “We’ve had a price collapse and the industry needs some relief.”

Both bills would apply to oil and gas extracted from stripper wells. In those cases, carbon dioxide is injected to old wells that have seen a lot of action over the years. Kernan said this type of extraction happens often in the Permian Basin in Eastern New Mexico because many of the wells there date back to the 1930s.

“The cost to develop that is quite expensive,” Kernan said. “When the price of oil drops it is very difficult to make it worth your while.”

Strickler’s bill would, among other things, reduce the tax rate on oil extracted from stripper mines by roughly one percentage point provided that the average cost per barrel is $60 or less. The current threshold for the tax break is at $15 per barrel.

“The thresholds need to be updated,” Strickler said.

Oil prices currently sit around $30 per barrel.

Neither Kernan or Strickler know yet what type of impact their bill would have on state coffers.

The Legislative Finance Committee, which provides fiscal impact analyses for each bill filed during the legislative session, is also in the early stages of analysing both bills. LFC Deputy Director David Lucero told NM Political Report that he expects fiscal impact reports for both bills to be complete next week, when the legislative session begins.

But Strickler emphasized that wells could close down if nothing is done.

“If we plug the well, there’s no taxes,” he said. “It’s gone.”

Dire as he argues the situation may be, from the looks of things oil and gas issues may not dominate the upcoming session. So far, the two bills are the only filed that address this part of the energy industry.