Bill to increase royalty rates on future oil and gas leases passes House

After a lengthy debate on Saturday, the House of Representatives passed legislation that would result in higher royalty rates on premium oil and gas leases offered by the State Land Office on a 39-28 vote. Sponsor Rep. Matthew McQueen, D-Galisteo, said that New Mexico has the duty to maximize profits from oil and gas leases […]

Bill to increase royalty rates on future oil and gas leases passes House

After a lengthy debate on Saturday, the House of Representatives passed legislation that would result in higher royalty rates on premium oil and gas leases offered by the State Land Office on a 39-28 vote.

Sponsor Rep. Matthew McQueen, D-Galisteo, said that New Mexico has the duty to maximize profits from oil and gas leases for the benefit of schools. 

HB 48 would not impact existing leases, nor would it affect every lease in the future. While there are two oil and gas producing regions in the state, McQueen said it would mostly impact the Permian Basin in the southeast region of the state and not the San Juan Basin in the northwest. He explained that is because the premium leases are in the Permian Basin.

Under HB 48, the maximum royalty rate that the State Land Office could charge is 25 percent. The current cap is 20 percent. 

The royalty rates have not been changed since the 1970s.

During questioning, McQueen said that if no one bid on a parcel that was offered at 25 percent royalty rate, the State Land Office could repackage it and offer it for lease at a lower rate.

Concerns about canceled leases

Oil and gas companies have a certain time frame to put a lease into production. If the parcel is not put into production within that time frame, the State Land Office can choose to offer it up for bid once again. 

McQueen said that if an existing lease on a premium parcel is terminated for reasons like nonproduction or noncompliance with contract terms, the State Land Office could put it out to bid once again with the higher royalty rate. One example of noncompliance with contract terms is the company that owns the lease does not have adequate bonding.

One reason that bonds are important is that they ensure there is at least some money available to cover reclamation and plugging of the wells should the company go bankrupt.

Related: Analysis finds $8.1 billion gap in New Mexico bonding requirements, clean up costs for oil and gas

Some Republicans from oil and gas producing regions of New Mexico expressed concern that the increased maximum royalty rate could lead to the State Land Office trying to take back more leases for noncompliance with terms, though McQueen said the State Land Office has in the past worked with the operators to come into compliance with the contract terms.

Rep. Jared Hembree, R-Roswell, attempted to amend the bill on the House floor to prevent leases from being canceled for reasons other than nonproduction and being leased out at a higher royalty rate within a year of the lease being canceled. 

“This is just really to address the concerns of some of the smaller producers who are afraid that their leases will be canceled for reasons that may not be fully supported by statute,” Hembree said.

McQueen called Hembree’s proposed amendment a “solution in search of a problem.”

The House voted 38-24 to table the attempted amendment.

Rates compared to other states

Rep. Larry Scott, R-Hobbs, argued that the rate is higher than other oil producing states, with the exception of Texas, which also has oil and gas production in the Permian Basin.

McQueen said because the Permian is such a productive basin, it supports higher royalty rates.

“So if another state is charging less for royalties, there’s a reason for that,” he said. “But if New Mexico can charge more in the Permian on the minerals it owns, it should do that.”

There are various factors that go into operating costs of extracting oil and gas and McQueen said just because New Mexico’s royalty rates on state trust lands might be higher than other leases, for example federal leases, does not mean that the state is less competitive in the leasing.

In terms of federal leases, McQueen said companies face longer times before they can develop the lease and are subject to more requirements.

Private lands do not have restrictions on how much they can charge in royalty rates. McQueen said private landowners in the Permian Basin have been able to negotiate 25 percent royalty rates.

The additional revenue generated by the leases would go into the Land Grant Permanent Fund.  According to the fiscal impact report, HB 48 could grow the Land Grant Permanent Fund by $1.5 billion to $2.5 billion by 2050.

The Land Grant Permanent Fund provides money to schools, hospitals and universities.

Fossil fuels vs. renewables

Rep. James Townsend, R-Artesia, argued that the oil and gas industry is being targeted while the renewable energy industry is receiving incentives. 

He acknowledged that the increased royalty rates on some future leases will have a small impact on the industry, in part because the majority of the parcels in the Permian Basin have already been leased.

According to the fiscal impact report, less than one percent of the tracts in the high-production zone of the Permian Basin are available to lease at the potentially higher rates. 

“Going from 20 to 25 percent on the remaining one percent of the land is of really no consequence,” he said.

But he argued that renewable energy should not receive subsidies.

Fossil fuel extraction has been linked to climate change, which is having dire impacts on New Mexico including increasing drought and wildfires. Oil and gas extraction is also linked to various adverse health conditions in frontline communities. Additionally, injection wells related to the oil and gas industry are linked to increased seismicity and increased geohazards in southeast New Mexico.

Solar and wind energy, in contrast, has fewer environmental and health impacts. Because of this, there is a global push to transition away from oil and gas in favor of wind and solar. 

While New Mexico is a prime location for renewable energy production, wind and solar projects tend to result in an increase in short-term employment but limited long-term jobs. This can create challenges for regions that have historically relied on fossil fuels as an economic base.

McQueen said that oil and gas has a long history in New Mexico while renewables are newer. He further argued that HB 48 removes a subsidy for the oil and gas industry.

“We’re currently selling tracts below market value and that’s a subsidy to the gas industry and it’s been a subsidy for a long time,” he said.

The bill now heads to the Senate.

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