Henry Valdez of Scorpion Drilling said he pays 100 percent of the health insurance costs for his eight employees and compensates the lowest-paid one at $50,000 a year.

As a small drilling operation based in his hometown of Farmington, Valdez's business depends on oil and gas companies operating in the San Juan Basin.

A new state regulation on open waste pits will be bad for business, Valdez and other independent drilling company owners told the members of the Revenue Stabilization and Tax Policy Committee on Monday at the Roundhouse. "If this goes the way my customers are telling me it is, I'll be regulated right out of business," he said.

Industry representatives say the proposed pit rule could send operators scuttling across borders to less-regulated states and cost New Mexico up to a half-billion dollars in lost revenues.

But Mark Fesmire, a former oil industry engineer who now heads the Oil Conservation Division, told the committee that lax regulations will leave New Mexico taxpayers footing the bill for groundwater contaminated by leaking pits. "The cost to taxpayers of cleanup is in orders of magnitude greater than preventing the contamination," he said.

Open pits are used to store the wastewater pumped from deep underground to reach oil and gas. Until about 15 years ago, those pits were unlined. More than 2,000 old ones remain unlined, according to Fesmire, and another 55,000 lined pits are currently in use for oil and gas operations. Even lined pits can develop cracks and tears, allowing oily or brackish water to seep underground.

The new proposed rule requires companies to ship the waste to an approved landfill or store it on-site if it's more than 100 miles from an approved facility.

The bipartisan Revenue Stabilization Committee, charged with keeping the state's coffers financially healthy, grilled Fesmire about the rule's potential impact on one of the state's major moneymakers.

"You talk as though you are opposed to the industry. Everything in your shtick makes it sound like everyone in this industry is purposefully trying to destroy the environment," Rep. Keith Gardner, R-Roswell, said after Fesmire spoke to the committee.

In recent years, taxes and royalties from oil and gas have represented about 25 percent of the state's estimated $5.7 billion general fund. Last year, oil and gas revenues totaled more than $1.7 billion.

Fesmire told the committee he was limited in what he could say because the pit rule is still in a hearing before the Oil Conservation Commission, of which he is a member. The hearing entered its third week Monday and is expected to last into December, Fesmire said.

Bob Gallagher, president of the New Mexico Oil and Gas Association, said it will cost about $250,000 per well to meet the new pit rule. He said about 500 wells a year wouldn't be built under the rule, costing the state about $500 million in lost revenue.

Gallagher repeated what he has said numerous times in public: That in 90 years of doing business in the state, not one drop of water delivered to a consumer has been contaminated by oil and gas operations.

But Fesmire said since 1992, oil and gas companies have reported 4,552 incidences of oil spills. Of those, 400 were pit leaks that reached groundwater.

The city of Lovington, he said, has been dealing for years with contaminated groundwater from nearby oil and gas operations. The community of Flora Vista near Farmington also has contaminated drinking water from a nearby disposal pit, he said.

"I don't want to harm the oil and gas industry in any way, shape or form," Fesmire said. "But I want to make sure we produce oil and gas in a way that doesn't harm the water resources of the state. We are already short of water."

Committee member Sen. John Arthur Smith, D-Deming, echoed his colleagues about the potential economic impact versus the environmental benefits of the rule: "We can't afford to be wrong. We can't afford to play Russian roulette with this," Smith said.

Contact Staci Matlock at 470-9843 or smatlock@sfnewmexican.com.