Some state legislators are concerned about the possible revenue implications of a proposed rule aimed at reducing methane waste in oil and gas operations. The state’s Legislative Finance Committee, a committee made up of members of both the House and Senate that considers priorities for the state budget ahead of the January session, is gearing up for a tough year financially for the state after the COVID-19 pandemic and an unrelated but simultaneous bust in the oil market has ravished state coffers.
“The state is in, in my terms, dire financial straits, because of income,” said Sen. Bill Burt, R-Alamogordo. “We are in a time right now where income to the state is down, oil and gas revenues are down. The timing sometimes is not always the best and so I think hopefully that will come into consideration before we finally apply these rules.”
The state’s Energy, Minerals and Natural Resources Department (EMNRD) proposed methane rule would require all oil and gas operators in the state to reduce their methane waste by a fixed amount every single year, starting in 2022, to reach the 98 percent gas capture rate by the end of 2026.
EMNRD Secretary Sarah Cottrell Propst told lawmakers during a recent Legislative Finance Committee meeting that the department’s proposal “will yield an additional $10 billion a year in revenue to the state for wasted resources” that would otherwise be lost. Cottrell Propst called the $10 billion a “low-end estimate.”
But several lawmakers on the committee worried the new regulations would threaten some of the state’s oil and gas operators during the downturn. The majority of oil and gas wells in the state are low-producing marginal or “stripper” wells, which could become uneconomic to continue operating if oil and natural gas prices do not increase over the next two years.
“If we come along through this, and these rules and regulations are onerous enough to reduce some stuff and cause [stripper] wells to be plugged in…If those wells were to shut down, then 10 percent of New Mexico’s production goes away. And that’s problematic,” said state Sen. Ron Griggs, R-Alamogordo.
Griggs pointed to the fact that the rulemaking began when the state was “making money hand over fist.” But the COVID-19 pandemic and the oil market downturn has drastically altered the budget outlook.
“The timing of all of this stuff—while I understand when it began—where it is right now is, is going to be difficult for our state because we’re going to lose production,” Griggs said. “Whether we lose these wells or not, we’re still not producing heavily.”
Ben Shephard, president of the Permian Basin Petroleum Association, agreed that the new regulation would require upfront costs that may hurt some operators—or possibly even drive them to pack up business here and head for the Texas side of the Permian basin.
“Some of the requirements will have costs that, plain and simple, some operators, particularly the marginal well operators, won’t be able to bear,” Shepherd said. “And that will create massive economic challenges for them. It would create a disadvantage for the state of New Mexico in those instances, as opposed to those operators moving over to Texas and trying to operate there.”
Lawmakers were also skeptical EMNRD would be able to implement the proposed rule while likely facing more budget cuts for FY 2022. EMNRD’s current budget request includes a 5 percent cut over FY2021 levels. Cottrell Propst said the Oil Conservation Division, which would enforce the new regulations, would see an even bigger budget cut compared to the rest of the department under the budget proposal.
“This is kind of counter intuitive,” said state Rep. Patricia Lundstrom, D-Gallup. “Is that one of those situations where we’re compounding the problem? We’ve put together this major rule change, but yet we don’t have the manpower to do it, and we don’t have what I consider to be a clear understanding of where the money is going to come from. It seems to me that we need to have a very, very strong fiscal impact review.”