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Another New Mexico legislative session ends, and again — no new oil and gas reforms

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Another New Mexico legislative session ends, and again — no new oil and gas reforms

Feb 27, 2024 | 5:55 am ET
By Jerry Redfern, Capital & Main
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Another New Mexico legislative session ends, and again — no new oil and gas reforms
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The Seal of the State of New Mexico inside the Roundhouse on Jan. 10, 2024. (Photo by Anna Padilla for Source NM)

“It was a very good year!”

The message from the New Mexico Oil and Gas Association landed in inboxes the day before the New Mexico Legislature closed its session Feb. 15. The industry email touted the state’s tax bonanza, the result of another bumper crop year of oil and gas production.

The message also reflected how oil and gas producers were about to slide through another legislative session without a tax hike or any new or improved regulations requiring them to clean up their operations. One set of producers even got a new tax break. And there’s a lot to clean up in New Mexico.

Three bills that would have limited fresh water use, imposed fines for spills and created buffers around schools failed to pass the 30-day session’s “germaneity” test and weren’t even heard. Two memorials to study setback requirements for new wells near homes, schools and businesses never got out of committee hearings.

“The one word that describes the Legislature for me is ‘frustrating,’” said Rep. Matthew McQueen, a Democrat. He co-sponsored two of the few bills this session that would either regulate the state’s biggest and most-polluting industry or increase its taxes.

HB133 was intended as a collaborative project between industry, government and environmental groups to begin overhauling and updating the state’s foundational oil and gas law, which has seen no major updates in decades. The final bill, however, was stripped down to the point that it included only fee and fine increases and codification of the state’s 98% methane capture rule, which targets leaks in the production process.

“What was left in House Bill 133, by the time it comes to the House floor, wasn’t much, but it was still better than what we have,” McQueen said. HB133 passed out of its House committee hearings and spent two weeks without a hearing on the House floor docket, where it died.

HB48, which would have raised royalty payments on oil and gas produced by new wells on state land from 20% to 25%, did slightly better. The bill would put the rate in line with what is charged by private landowners and in neighboring Texas. The increase would apply to less than 1% of leasable land. But it’s a valuable 1%. A fiscal review showed the bill could result in $1.5 billion-$2.5 billion in new revenue by 2050, earmarked primarily for education.

McQueen said the bill was “just an absolute no-brainer. My Republican colleagues like to talk about free markets. And then they want to sell minerals [oil and gas] at below market value. It’s just … It’s nuts.”

Leading Republican Rep. James Townsend said that the money wasn’t an issue for him — he couldn’t support it because “the message that we’re sending to the industry that so mightily supports New Mexico is not a good one.” And in the end, the Legislature, dominated by Democrats, gave industry a good one.

The bill passed two House committee hearings and a House floor vote only to end up in limbo following a hearing in the Senate Finance Committee, where it was discussed briefly. Sunalei Stewart, deputy commissioner of operations at the State Land Office, echoed comments from many legislators and members of the public when he said, “There is no reason why we should be putting these tracts up at a rate that is below the market rate.”

At the end of the hearing, when asked by committee members if there would be a vote, George Muñoz, a Democrat and the committee chair, said, “I don’t know yet” and abruptly gavelled the meeting closed. Thirty-two hours later, the session ended.

“It’s hard to get everything in that 30 day [session], especially when it shows up at the last minute, Muñoz said later. He also said he “kind of never heard back” about questions he had on tax differences between New Mexico and Texas.

“There’s so much we’re leaving undone,” McQueen said later. “We have healthy majorities in both chambers, we have a Democratic governor. We should be getting things done faster than we are. Like oil and gas reform.”

Instead, he said, “We gave oil and gas a tax break. So there’s that.”

Revenues from oil and gas production comprise more than 40% of New Mexico’s $10.2 billion budget for the 2025 fiscal year and the Legislature spent much of its monthlong session allocating those billions to everything from education to health care to roads. The budget bill awaiting Gov. Michelle Lujan Grisham’s signature has very little of that money going to the agencies that regulate the state’s most lucrative and polluting industry.

New Mexico’s primary oilfield enforcement agency, the Oil Conservation Division, had requested 10 new full-time positions. Its proposed $58.3 million budget reflects a 4.8% jump over last year, less than the 6.5% year-on-year increase in the state’s total budget. “It will allow for adding six to seven positions,” for inspection and oversight, said Dylan Fuge, deputy cabinet secretary for Energy, Minerals and Natural Resources Department, the home of the Oil Conservation Division.

Matt Maez, director of communications at the New Mexico Environment Department, said the department received a $6.9 million budget increase, nearly all of which goes to pay salary increases to close discrepancies between positions. Muñoz said he voted for the increase because “you had new employees making more than employees with 20 years. The whole system was out of whack.”

For department leaders, that wasn’t enough. The agency has a smorgasbord of duties that include testing and monitoring everything from drugs in school sewage to water pollution to air pollution from oil and gas facilities. Maez says the Air Quality Bureau, which is the department’s primary eye on oil and gas operations (among other priorities), has just six inspectors and plans to raise air quality permit fees in the next two months to increase its staffing. That’s because the agency generally finds oilfield violations whenever it looks. “Our data suggests the compliance rate with state rules is about 50%,” he said, and the low compliance is the likely reason for rising air pollution in the Permian Basin despite the state’s recent adoption of stringent emissions rules.

For more than two years, the Environmental Protection Administration has threatened to declare New Mexico and Texas as being out of compliance with Clean Air Act regulations in the Permian Basin, the nation’s most productive oil and gas region. The declaration would require the states to dramatically step up air pollution enforcement. James Kenney, the New Mexico Environment Department secretary, said, “No one can feign they are shocked in New Mexico about nonattainment.” He said that 15% of the oil produced in the state comes from companies already operating under consent decrees, where companies were found to be violating environmental laws and are now cleaning up their operations under a judge’s order. “We know there are more out there,” he said.

“Anybody who offers some other explanation is not using science, data or even reality to understand the situation,” he said.

Meanwhile, the department has spent time and money fighting a lawsuit brought by the Independent Producers Association of New Mexico. The suit claims the department’s landmark ozone precursor rule (which strictly limits ozone-causing leaks from oil and gas production) are “devoid of reason or noble purpose” and could force “hundreds, if not thousands” of low-production wells to cease operation and be plugged. Maez says that the Environment Department is waiting for the New Mexico Court of Appeals to set a trial date or issue an opinion.

The Western Environmental Law Center helped create and lobbied for HB133 in the Legislature, even though it was slashed in scope following industry complaints. After the bill tanked and the session concluded, Erik Schlenker-Goodrich, the group’s executive director, said, “It says something about the Democratic-controlled Legislature that they let modest public interest oil and gas reforms vetted in the light of day die without a floor vote while providing giveaways to oil and gas in the form of tax exemptions that slip through the session’s shadows on greased wheels.”

An omnibus bill dedicated to tax reductions and rebates, HB252, began as a bipartisan, two-house attempt to avoid Gov. Lujan Grisham’s veto pen. Last year, she cut most of a $1 billion tax package assembled by the legislature. This year, legislators aimed for a $200 million package. The bill now awaits the governor’s signature.

At a Feb. 2 joint meeting of House and Senate tax committees to discuss the bill, House Taxation and Revenue Committee Chair Democrat Derrick Lente said, “Hopefully … we have exposed our cards and we can know what we are working with collectively so that there are no further secrets.”

One card not revealed at the meeting was SB64, which was later added to the tax package in a Senate committee hearing. The bill’s innocuous name — the Severance Tax Exemption for Certain Projects — hid a tax break for owners of low-producing “stripper” wells. Instead of paying state taxes on oil and gas from those wells, owners would use the money to pay for upgrades in equipment to meet the state’s ozone precursor rules — upgrades that other producers pay as part of the cost of doing business.

Stripper wells produce fewer than 10 barrels of oil or less than 60 thousand cubic feet (Mcf) of natural gas a day, and the tax break would be available only to companies producing less than the equivalent of 1,000 barrels of oil a day. Stripper wells account for more than 20% of the active wells in the state. But because of their low production, they accounted for less than 1.5% of oil production and less than 6% of natural gas production in 2021.

Camilla Feibelman, president of the Rio Grande chapter of the Sierra Club, said, “I actually complained to Legislative Council Services about the name.” She thinks that lack of clarity kept both politicians and the public from recognizing the bill’s intent.

Plus, she said, “The [Fiscal Impact Report] is pretty clear that it’s stupid.”

That report, produced by the nonpartisan economists on the Legislative Finance Committee, said the bill could cost the state at least $9.7 million a year in lost taxes, as well as $200,000 in annual operating costs for the Oil Conservation Division to monitor the program. It also said the bill didn’t clearly meet any of five taxation policy principles the committee uses to judge bills.

The stripper bill was heard in the middle of a three-and-a-half-hour hearing for two dozen bills proposed for the tax package, including tax breaks for green initiatives such as solar installations, geothermal energy, clean energy cars and energy storage projects — all of which eventually passed.

Jim Winchester, executive director of the Independent Producers Association of New Mexico — the group suing the state over the ozone precursor rule — spun the bill differently: “The environment wins as these newly refurbished, low-producing wells come in compliance,” he said.

In a Senate committee hearing on the overall tax bill five days later, Democratic majority floor leader Sen. Peter Wirth said, “There’s things in here we like and things we don’t like across the board.” He continued, “In my meditation practice, when everyone’s a little unhappy, I’ve probably done a good job.”

“We’ve done [omnibus tax bills] for years and years, and they just get messier and messier and messier,” Sen. Muñoz said after the session closed. “I think they ought to be all independent bills. That way they can be voted on individually.”

“We’re excited to see the climate part of the tax package,” Feibelman said.  “And even the part of the package that we’re less excited about, which is a tax giveaway to low-producing, high-polluting wells, is focused on keeping that methane from spilling into the atmosphere.

“It’s not like we didn’t get anything done. It’s just slower than the urgency of the moment demands,” she added.

The urgency comes from climate change, which is shifting snow and rain patterns while raising temperatures across New Mexico and around the world. Wittingly or not, the Legislature acknowledged that threat when it passed a bill to create a special license plate honoring Smokey Bear, who was found as a scorched cub in the ashes of a New Mexico forest fire in the 1940s. The fees from the plate will go to the Energy, Minerals and Natural Resources Department to fight forest fires, which are expected to increase in number and size in the coming years because of climate-change-driven aridification. It’s not only happening in New Mexico. Alberta, Canada, already declared an early start to its wildfire season, while a bushfire burns out of control in Australia and Tunisian farmers are changing the kind of wheat they grow after years of failed rains and heatwaves.