June 26, 2021

Revenue diversification needed as NM looks to transition away from fossil fuels

As New Mexico looks at an inevitable end to oil and gas extraction, some environmental advocates say no new leases should be issued and the United States should work to phase out fossil fuels.

This would not have a huge immediate impact on the state, but could result in less revenue and fewer jobs in the future, experts say.

President Joe Biden and Secretary of the Interior Deb Haaland, a former congresswoman from New Mexico, issued orders in January pausing both leasing and permitting to enable a robust review of the federal processes. The pause in permitting ended after 60 days, but the leasing pause continued until a federal judge issued a temporary injunction earlier this month.

The vast majority of federal land available for leasing in New Mexico is already leased for oil and gas production, which limited the impact that the leasing moratorium had on the state. 

“It’s not as if the bottom is going to fall out because of the moratorium,” Kayley Shoup of Citizens Caring for the Future said in a Zoom call hosted by the Sierra Club’s Rio Grande Chapter this week.

At the same time, Shoup said ending new leases on federal land would help both the environment and the health of frontline communities that are exposed to emissions from oil and gas.

But New Mexico Oil and Gas Association spokesman Robert McEntyre said oil and natural gas are an important part of the New Mexico economy and leasing bans hurt both the economy and the environment, as extraction would move to areas with less stringent environmental regulations.

“Oil and natural gas development on federal lands is a critical part of New Mexico’s economic and fiscal health, providing $1.5 billion in revenue for our state budget, public schools, and first responders,” he said in an email to NM Political Report. “Leasing bans and other hurdles to oil and natural gas production in New Mexico only serve to weaken energy security, increase costs for consumers, and reward other parts of the world who do not share our strict environmental safeguards or our commitment to fight climate change. The growing demand for energy across our country and the world can and should be met by safe, responsible oil and natural gas production in New Mexico, and we should not be misguided by the false and irrational choices activist groups seek to force upon on us.”

Climate change as an emergency

Rio Grande Chapter President Camilla Feibelman said, with the current number of wells and the amount of extraction occurring in New Mexico, it will be a long time before New Mexico stops receiving revenue from oil and gas.

“There are thousands of undrilled leases and permits to drill,” she said in a text message.

Feibelman pointed to legislation proposed by U.S. Senator Martin Heinrich, U.S. Senator Ben Ray Luján and U.S. Rep. Teresa Leger Fernández that would decouple state income from oil and gas extraction. Feibelman said that is a good start.

“But we need to make sure to levelize and ramp down that income to really achieve a transition,” she said.

She also mentioned SB 112, the Sustainable Economy Task Force which passed during this year’s state legislative session, and aims to develop a just transition to a sustainable economy. The bill created a task force to look into ways to accomplish that goal. Feibelman said various state agencies are currently appointing members to the task force.

“We have to take the time to look and study and get ahead of the transition rather than just living the consequences of it,” she said. “But maybe the most important point is that we have not taken the time as a state to calculate the cost and impact of global climate change on our communities. We are experiencing extreme heat and drought not to mention forest fires that impact our lands and tourism. We have to treat this moment as the emergency it is and take action now.”

Lease moratorium had minimal impacts

Despite the moratorium on new leases, oil and gas production increased and revenue from extraction in New Mexico is higher this year than previously projected.

But the moratoriums on leasing and permitting did have some impacts on the state and, should they continue, Garrett Golding, business economist at the Federal Reserve Bank of Dallas, told the LFC that the state would need 4,780 to 6,800 fewer rig frac crews. That impact does not consider the service sector jobs that would be lost.

New Mexico Oil Conservation Division Director Adrienne Sandoval said, in the first couple of weeks after the moratoriums went into effect, New Mexico dropped eight rigs.

And, if the federal leasing program were to end now, it could lead to a shift in operations from the New Mexico portion of the Permian Basin to the Texas portion, where there are fewer federal lands. Golding said that could lead to higher emissions because Texas does not have the stringent methane waste rules that New Mexico is implementing.

Additionally, it would lead to job losses in New Mexican communities that rely heavily on extractive industries. The oil and gas sector is labor intensive and each three-well pad in the Permian Basin is tied to hundreds of jobs, according to information Golding provided the LFC.

At the same time, the world is moving away from fossil fuels and many countries, including the United States, have set a goal of net zero emissions by 2050, Dawn Iglesias, chief economist for the LFC, said during the panel presentation on Wednesday. 

Economist says tax changes needed 

Iglesias cautioned the LFC that a transition away from fossil fuels is inevitable and that the state will not always have the oil and gas sector to depend on for revenue.

The more the state relies on oil and gas, the harder it will be to adapt to market shifts, she said.

Economist Kelly O’Donnell, who is the principal of O’Donnell Economics and research professor at the University of New Mexico School of Public Administration, agreed with that statement when reached by phone and said diversifying the state’s revenue sources will require tax reform.

“New Mexico has for many, many years sort of kicked the can down the road and said, ‘bleh, we need to diversify our revenue, but wait, there’s another oil boom, maybe we can wait on that for a little longer,’” O’Donnell said.

States generally rely on three types of revenue: sales tax, property tax and income tax. In New Mexico, the state has a gross receipts tax instead of a sales tax.

States like New Mexico that can receive a large amount of revenue through extractive industries often use it to fund schools and allow for less burdensome taxes on everyday people. 

“I think that returning to a more traditional, stable revenue structure is probably how to (diversify state revenue),” she said, adding that there is not a magic bullet.

O’Donnell said New Mexico underutilizes property tax as a source of revenue, highlighting that New Mexico’s property taxes are lower than most other states. She said increasing property taxes on second homes should be considered as one of the ways to provide state revenue.

“There are a bunch of solutions,” she said, but she added that the problem of lost oil and gas revenue cannot be solved without tapping into all of the possible solutions.

O’Donnell said the state needs to invest in areas like education that are proven to attract new businesses rather than “bribing” businesses to come to the state through tax breaks.

“We have, as a state, tried to take a shortcut for a long time,” she said about the incentives and tax breaks.

At the same time, she said the state has not been willing to make the baseline investments that would actually attract the businesses to the area, such as improving child wellbeing.

While not leasing any new minerals to oil and gas extraction would have a minimal financial impact on the state due to the fact that the majority of available land is already leased, O’Donnell said it could have a huge environmental benefit.

O’Donnell said she has heard the moratorium on new federal leases described as the beginning of a glide path toward a real reduction in fossil fuel production and consumption.

“I like that analogy,” she said.