New Mexico’s oil and gas industry would take a major hit — and so would the economy — under a rule the state Environment Department is proposing to reduce ozone pollution, according to an economic analysis that has leading lawmakers worried about the impact on the state budget.
The proposed ozone rule, which would set new standards on the petroleum industry and require monitoring of certain production facilities, would cost operators as much as $3.2 billion in the first year and $3.8 billion over five years in order to be in compliance, the analysis found.
“The increased costs would force operators to shut down marginal wells and forfeit the development of new [drilling] in the state,” according to the analysis, which was commissioned by the New Mexico Oil and Gas Association. “This could lead to a loss of as many as 3,217 jobs in the petroleum production industry in New Mexico and cost the state’s economy $674.2 million annually.”
In a letter to state Environment Secretary James Kenney, Legislative Finance Committee Chairwoman Patty Lundstrom, a Gallup Democrat, and other committee members expressed concerns about the “potential substantial impact of the proposed rule to state revenues” and the state budget.
The oil and gas industry generates huge sums of cash for the state. Although the figure fluctuates, 25 percent to 30 percent of total general fund revenue comes from oil and gas.
“New Mexico typically receives over $2 billion in direct revenue from oil and gas production through severance and property taxes and royalty and rental income,” according to a May report from legislative staffers. “Additional indirect income comes from sales and income taxes on oil and gas drilling and service, which generate about $500 million.”
The economic analysis of the proposed rule, conducted by John Dunham and Associates, a Florida-based economic research firm, estimates a 12.9 percent drop in oil production and a 22.8 percent reduction in natural gas production if the rule is enacted.
“As this impact passes through the economic system in New Mexico, it will surely lead to reductions in jobs,” the report states.
Environment Department spokeswoman Maddy Hayden wrote in an email the agency estimated the cost to the oil and gas sector would be $467 million annually if the proposed rule was adopted without any modifications.
“When compared to the publicly available revenue data for New Mexico’s oil and gas operators of $2.3 trillion, the cost of compliance is about 0.02%,” she wrote. “However, the cost of compliance with the final rule is contingent on any changes to the proposed rule ultimately adopted by the Board and the compliance options selected by industry once the rule takes effect.”
In response to the letter from lawmakers, Kenney wrote Wednesday the New Mexico Air Quality Control Act requires the state Environmental Improvement Board to take action to address rising ozone levels in New Mexico, which are partly due to oil and gas operations.
“This is a non-discretionary duty,” he wrote. “As the agency tasked with implementing ozone regulations for purposes of compliance with the health-based federal National Ambient Air Quality Standards, the Department has the role of proposing a plan, including regulations, for the Board’s consideration to meet the statutory requirements.”
Kenney also outlined the process that still must occur before a rule is enacted, which includes collecting submissions of written rebuttal testimony by Tuesday, Sept. 7.
“As part of its rebuttal filings,” Kenney wrote, “the Department will present detailed expert testimony on the methods, data, and findings” of the economic analysis. He added that “further elaboration on the economic and environmental dimensions of the proposed rule will occur” at a board hearing.
“Given the process and considerations outlined above,” Kenney wrote, “the Board will not rely on a single, deeply flawed economic study conducted and paid for by the regulated community, and I ask that Legislative Finance Committee not do so either.”
The rule would reduce volatile organic compounds by about 106,420 tons and oxides of nitrogen by about 23,148 tons, equivalent to taking 8 million passenger vehicles off the road every year, according to the state.
Dunham, who authored the economic analysis, declined to comment. In a brief telephone interview, he said he would be “happy” to discuss his report but would need his client’s permission first.
Robert McEntyre, a spokesman for the New Mexico Oil and Gas Association, wrote in an email, “New Mexico oil and natural gas producers are committed to reducing methane emissions, and our comments underscore our ongoing dedication to help regulators craft rules that will achieve ambitious environmental goals while preserving the foundation of New Mexico’s economy.
“As the process moves forward, we will continue to share the industry’s scientific and technical expertise to assist the department in ensuring these rules benefit all New Mexicans,” he continued.
In his letter to lawmakers, Kenney wrote it’s a fact ozone levels in New Mexico are rising.
“Several monitors, including in Eddy County, are registering concentrations far in excess of the federal standard,” he wrote.
The Environment Department and the U.S. Environmental Protection Agency have identified widespread violations of air quality requirements in the San Juan and Permian Basins, Kenney added, “which further aggravates our rising ozone concentrations. If the State does not take mandatory steps under the [Air Quality Control Act] to address this situation, the U.S. EPA will ultimately force New Mexico to do so under the federal Clean Air Act.”
Kenney also noted economists are projecting a nearly $1.4 billion windfall in the next budget year.
With the expected revenue increase, “New Mexicans can continue to enjoy a strong economy and public health protections,” he wrote. “Our economy and the environment are not mutually exclusive outcomes.”