November 7, 2016

Land Commissioner says new oil rule aimed at helping state, not companies

Margaret Wright

Oil pump in southeast New Mexico.

A new rule for oil leases by the New Mexico Land Office is aimed at ensuring companies don’t abandon wells and the state doesn’t lose out on revenues.

Contrary to a previous news report—that the state was waiving land rentals for energy companies—the state land office said the new “shut-in” rule gives small oil companies a small amount of leeway in temporarily halting production instead of completely shutting down wells that are not currently economically viable. It does not, Land Commissioner Aubrey Dunn said, allow companies to stay on state land rent-free.

“The rule requires annual rental payment while the well is temporarily shut-in—but, ultimately, this rule seeks to benefit the long-term interests of the trust and will result in more royalty revenue down the line,” Dunn said in a statement to NM Political Report.

New Mexico has long depended on oil and gas revenues to help balance the state’s budget, but recent price drops have created hard times for the state financially.

Last week, Dunn’s office enacted the rule, allowing qualified companies to temporarily shut-in, or stop operations, while oil and gas prices are too low for viable production. Companies with shut-in wells, under the rule, are required to pay a shut-in royalty instead of rent. The royalty fee, however, amounts to double their agreed upon rent.

The idea is that when oil and gas prices rise, companies would resume operation and start paying their normal rent and royalty rate.

Western Environmental Law Center Executive Director Erik Schlenker-Goodrich said the new rule and the intervention by Dunn’s office shows reliance on oil and gas money hurts the state. Schlenker-Goodrich said oil and gas is a “boom or bust enterprise that provides boom or bust revenue.”

“We’re now in a bust and our schools are, as a result, stressed and suffering,” Schlenker-Goodrich told NM Political Report. “So we’re troubled that the State Land Office under Aubrey Dunn invests its limited resources in promulgating rules to prop up a failing oil and gas industry while opposing federal Bureau of Land Management efforts to prevent methane waste caused by sloppy oil and gas practices.”

Dunn strongly opposes the Bureau of Land Management’s proposed rule to limit the amount of flaring or burning off excess methane at oil wells.

Schlenker-Goodrich said the state could be collecting more royalties if companies harnessed the excess gas instead of burning it off.

“That’s real money literally wasted to the atmosphere that our schools could have used,” Schlenker-Goodrich said.

Nearly 30 years ago, New Mexico lawmakers gave the Commissioner of Public Lands the authority to allow oil and gas companies to temporarily shut-in wells when prices drop.

State law requires oil and gas producers to follow proper reclamation procedures when abandoning a well or mine.

Assistant Commissioner for Mineral Resources Patrick Padilla told NM Political Report there are times when oil and gas producers walk away from, or “orphan” a well, leaving the state on the hook for cleanup.

“The state becomes the proud owner of a bunch of wells that we don’t have the recourse to properly plug and abandon,” Padilla said.

Padilla said producers tend to file bankruptcy when they can’t afford to properly reclaim their wells, leaving the state responsible for both collecting money in court and properly shutting down the drill site.

“We’ve been seeing it happen more and more,” Padilla said, citing about two dozen orphaned wells in the past 18 months.

Gas and oil companies pay the state a rental fee on wells in addition to a royalty based on production. Dunn said lower production levels means smaller royalties and the possibility of companies leaving the state all together.

“Low oil prices are making the operation of low producing wells uneconomic and causing the well to be prematurely plugged and abandoned leaving oil reserves stranded and untapped,” Dunn wrote in his statement. “This means that the [land] trust receives no royalty from those reserves.”

New Mexico Commissioner of Public Lands Aubrey Dunn

New Mexico Commissioner of Public Lands Aubrey Dunn

The money the state land trust receives goes into the state’s general fund, which in turn goes to other state programs like K-12 and higher education. In October the land office generated almost $14 million from oil and gas lease sales. In August, the office collected more than $4 million in lease sales.

The shut-in rule comes just after the New Mexico Legislature battled for a week over measures to balance the budget amid falling oil prices.

Padilla told NM Political Report the new rule is an attempt to help the state and not oil companies.

“This is not relief  for the industry,” Padilla said.

New Mexico Senate Finance Committee Chair John Arthur Smith, D-Deming, told NM Political Report he doesn’t take exception to the rule given the price of oil.

“I really don’t have anything I object to,” Smith said of the rule.

Smith said the price of oil per barrel has “fallen off,” citing the current price of $45 per barrel.

“I’d rather collect royalties when it’s back in the 65 or 70 range,” Smith said.

The shut-in rule is set to expire in two years, but Dunn also has discretion to extend or shorten the time period if prices remain low or rise to a viable point.

Correction: This story originally reported oil leases in New Mexico generated more than $13,000. The leases actually generated almost $14 million. We regret the error.