How much are New Mexico’s oil and gas resources worth?
A few candidates for commissioner of public lands argue the state is not getting a big enough cut from the natural resources behind a renewed boom in southeastern New Mexico.
The campaign talking point raises the question of whether a state that was strapped for cash just last year is making the most of higher oil prices and more drilling or whether it might be missing out on millions of dollars in revenue.
But critics of raising what is known as the royalty rate for oil and gas production on state trust land argue New Mexico’s rate is already on par if not higher than that of most of its neighbors. And raising the rate, they argue, might only put a damper on an industry that already props up the state financially.
Still, the issue is important in a state where the commissioner of public lands controls about 13 million mineral acres. It is the commissioner’s job to lease those lands and collect a royalty on the oil and gas produced.
That money primarily goes to the state’s public schools and universities.
In much of New Mexico, the state charges a royalty rate of 12.5 percent, which has been in place for decades and is the same rate as the federal government’s. But in areas that have proven successful for oil and gas development, the commissioner can charge up to 20 percent.
It would take action by the Legislature to raise rates any higher.
Garrett VeneKlasen, one of three candidates seeking the Democratic Party’s nomination for land commissioner, contends that if New Mexico had been charging the same maximum rate as neighboring Texas — 25 percent — the state would have raised an additional $185 million in 2016.
VeneKlasen conceded that is based on some very rough math and assumptions about the prevailing royalty rate at the time. And the state could not raise that kind of money tomorrow if it wanted to because it can only increase the royalty rate on future leases, not existing leases.
That means changing the rate today would have far less immediate impact.
A Senate bill VeneKlasen says he supported a few years ago might give a better sense of the short-term impact of such a move. The legislation would have raised the maximum rate to 25 percent, and legislative aides estimated it would have boosted the state’s revenues by about $2.5 million.
Higher rates could help guard against a downfall in revenue when oil prices fall, VeneKlasen argues.
One of his competitors, state Rep. Stephanie Garcia Richard, also says that pushing for a higher rate would be her No. 1 priority.
“I do not believe for 100 years the industry has paid its fair share to New Mexico,” she says.
Meanwhile, another Democrat running for the post, state Sen. George Muñoz, says he would back raising rates depending on the market and the particular area of the state.
With the Permian Basin in southeastern New Mexico booming, oil and gas producers have proven willing to pay a higher rate for the right to pump on state trust lands.
The current land commissioner, Aubrey Dunn Jr., raised royalty rates on new leases in the Permian Basin to the maximum of 20 percent.
Dunn, a Libertarian, said the area is so in demand that companies interested in leasing rights there are willing to pay the higher rate. It did not seem to scare anyone away.
“I’m a businessman,” he says with a laugh.
On the other end of the Permian Basin in Texas, the Lone Star State charges the higher royalty rate of 25 percent.
Does that mean New Mexico’s rate is too low?
“Possibly it’s too low, but not way too low,” Dunn says.
It costs more money to do business in New Mexico than Texas, he argues, adding New Mexico charges other taxes its neighbor does not.
“This idea we would just compare New Mexico’s royalty rate to Texas is really a foolish oversimplification,” says Robert McIntyre, a spokesman for the New Mexico Oil and Gas Association.
McIntyre contends the state is on par with Texas when you consider other taxes. He also cautions that if the goal of raising royalty rates is to increase revenue, the state could end up driving off bidders.
The lone Republican in the race for land commissioner, Pat Lyons, takes a similar view.
Lyons argues for taking what he describes as a business-friendly approach to royalties and encouraging more exploration for oil and gas.
“We want to be able to pass North Dakota in oil production because that is what will make more money for the schools,” Lyons says, referring to the state that now produces more oil than any other except Texas.
While the royalty rate in Texas is on the high end among Western states, some analysts have found such rates do not drive away oil and gas production. The U.S. Government Accountability Office found that raising rates had little impact on production, such as in Colorado, where the state raised rates in some areas around 2016.
In any event, observers have argued there are plenty of other ways to make more money from the state’s royalties than raising the rates.
New Mexico, for example, does not charge royalties on gas that is flared — or burned up when vented out of a well. Environmental groups have argued doing so would boost revenue and curb the practice of flaring, which they say increases air pollution.
Others have argued it is the federal government that is overdue to raise its rates.
New Mexico gets a cut of the royalties for oil and gas pumped out of federal land inside the state’s boundaries. But that rate sits at 12.5 percent.
The Center for Western Priorities calculated the state could have raised an extra quarter-billion dollars in revenue if the federal government had a rate of 18.75 percent on all its leases around the state in 2014.
The federal government is unlikely to raise rates, however.
And the political prospects for raising rates in New Mexico might not be much better.
State Sen. Howie Morales, D-Silver City, sponsored a bill in 2017 that would have boosted New Mexico’s maximum royalty rate to 25 percent.
It also would have imposed royalties on natural gas that is flared rather than captured and stored.
The bill did not go far at the Roundhouse.
Contact Andrew Oxford at 505-986-3093 or firstname.lastname@example.org. Follow him on Twitter @andrewboxford.