Bill to raise state’s fossil fuel royalty rates moves ahead

Jan. 29—New Mexico’s fossil fuel industry is enjoying a record boom in the Permian Basin, and state officials want the education system to benefit even more than it has from the oil-rich region by making companies pay more to drill on state lands there.

The House Commerce and Economic Development Committee voted 6-5 Monday, mostly along party lines, in favor of House Bill 48, which would raise the maximum royalty rates on state lands to 25% from the current 20% — the first such increase since the 1970s.

The bill’s next stop is the House floor for a vote.

The higher royalty rate will mainly be levied on drillers extracting fossil fuel on premium state tracts in the Permian, and would funnel an estimated $50 million into the Land Grant Permanent Fund in 2027 and up to $75 million in 2028, a State Land Office representative told the committee.

Making a long overdue rate increase will put New Mexico in line with what Texas charges operators to drill on high-end lands on its portion of the Permian, giving New Mexico taxpayers more of the windfall they deserve, said Sunalei Stewart, state lands deputy commissioner of operations.

“It’s simply allowing us to charge the market rate,” Stewart said.

Stewart noted New Mexico is near the bottom for royalty rates among oil-producing states because it has stuck with the same rate for well over 40 years.

It will take a few years for the leases to get going under the higher rate ceiling and pump more money into the land grant fund, which now provides more than $1 billion yearly to public schools, universities, hospitals and other beneficiaries, according to a legislative fiscal report.

“That’s a billion dollars that taxpayers through the Legislature don’t have to come up to fund all these services,” Stewart said.

Republicans on the committee voted against the bill, arguing it would make New Mexico more expensive for operators than in Texas because they already pay other taxes their counterparts in the Lone Star State do not.

“This state, and especially this body, needs to really protect that industry, since it provides us so much money,” said Rep. Alan Martinez, R-Bernalillo.

An industry advocate said large companies can absorb the higher royalty rate, but it would slam smaller operators who work on thinner profit margins.

“This raise does disproportionately hurt them,” said Jim Winchester, executive director of the Independent Petroleum Association of New Mexico. “While in Texas, operators do pay a royalty rate of 25%, it is not an apples to apples comparison when you put in all the expenses here in New Mexico.”

Those include severance and ad valorem taxes, Winchester added.

Rep. Patty Lundstrom, D-Gallup, the lone Democrat to vote against the bill, said the same day the committee voted to reduce New Mexico’s personal income tax rate, which could decrease money for schools, it’s also looking at a bill to charge the fossil fuel industry more with the aim of boosting school funds.

Lundstrom agreed with Winchester that Texas is not similar enough to follow its lead.

“Just because another state has something doesn’t mean it’s necessarily the best … for us,” she said.

Environmental and youth activist groups expressed spirited support for the bill.

“The impact on the oil and gas industry from this bill is negligible,” Earthworks Executive Director Charles Goodmacher said. “But the impact of the future of New Mexico students and our schools will be enormously positive.”

Although industry representatives claim the cost of doing business here is greater than in other states, the costs are comparatively low and the industry is flourishing here — enough to afford an increase in the top royalty rate, Goodmacher said.

Andrea Avalos, advocacy organizer for the Semilla Project, said increasing the royalty rates is much-needed.

“The current 20% royalty rate is not enough to address the environmental effects of oil and gas extraction,” Avalos said. “By raising the royalty rate, we can hold industry accountable for the environmental costs of their operations.”

One Republican lawmaker said the proposed top rate would be substantially higher than what the federal government charges for drilling on its lands.

Under the Inflation Reduction Act, the federal royalty rate for onshore work was bumped to 16.67% from 12.5%, the first increase in the rate in a century.

Stewart said on lower-grade lands, the state would charge less than 25%. Busy areas where multiple companies are competing would draw a lower fee, as would lands where it would cost more to set up an operation, he said.

Most of the state’s lands are already leased, but a relatively small percentage is still available, and a good portion is premium land in the Permian, Stewart said, which the state will have no trouble leasing with a 25% royalty rate.

The Permian is one of the best oil-producing basins in the world, and on the New Mexico side, the current royalty cap is low enough for operators to make a profit if oil prices were under $30 a barrel, Stewart said, adding the prices are well above $70.

“Essentially, we are subsidizing with this cap,” he said.

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