A legislative initiative could raise the royalty rate for oil and gas produced on state lands from the current 20% to 25%, potentially generating up to $84 million in new annual revenue.
The Senate Conservation Committee approved the proposal, Senate Bill 164, in a party-line 6-2 vote last week. It’s co-sponsored by three Albuquerque Democrats, Sens. Bill Tallman and Harold Pope, and Rep. Debbie Sariñana.
Increasing the royalty rate, which hasn’t changed since the 1970s, would put New Mexico on a par with Texas, which charges 25%, Tallman told committee members in the Feb. 7 hearing.
“Our royalty rate was last updated 50 years ago, but Texas has been at 25% since the 1990s,” Tallman said. “ … It doesn’t make sense to prohibit the state from charging market rates on our resources.”
The State Land Office is backing the bill, which would raise the rate only for leases on “premium” land offered in competitive bidding. That refers to the most productive tracts with the highest oil-and-gas reservoirs in terms of volume and value, or the “best of the best,” said Land Office Deputy Commissioner of Operations Sunalei Stewart.
“Regular,” or less productive tracts, would remain at 20%, and only new premium leases would be affected, not existing ones.
All additional revenue would flow into the state’s Land Grant Permanent Fund, which provides the lion’s share of trust-based funding for New Mexico’s public schools.
“Companies would get to keep 75% of the resources produced,” Stewart told committee members. “We want school kids to get 25%.”
The bill is now in the Senate Tax and Revenue Committee. But it will likely be tabled there temporarily for later review alongside other bills to consider their collective fiscal impact before sending them to a floor vote, Tallman told the Journal.
If approved, the bill could generate between $50 million and $84 million in new revenue annually, starting in fiscal year 2025, according to the Legislative Finance Committee’s fiscal impact report.
And, apart from raising the current royalty rate, it would also impose royalties for the first time on natural gas wasted through venting, flaring or leaking. But revenue projections on that provision are unavailable because a new state law prohibits venting and flaring going forward in order to reduce methane emissions to just 2% by 2025.
If the bill advances out of Tax and Revenue, it’s bound to face stiff opposition from industry and from Republican lawmakers.
Independent Petroleum Association of New Mexico Executive Director Jim Winchester warned that higher royalty rates would particularly impact small, independent producers that are already taxed heavily and face tight margins.
“New Mexico has one of the highest overall tax burdens on oil and gas compared with other states,” Winchester told Conservation Committee members. “Royalties disproportionately impact smaller producers and independents, who maybe drill just one or two wells every one or two years.”
Greater Albuquerque Chamber of Commerce Vice President of Policy Research Sara Fitzgerald said raising rates is unnecessary because state revenue from oil and gas is already at an all-time high and additional industry burdens could dampen future prospects.
“Projections show the boom could go on for another 10 years if conditions are right,” Fitzgerald told the committee. “But it must be profitable for the oil and gas industry, too. Jumping the royalty rate to 25% increases costs for producers significantly.”
Raising rates on state lands mirrors similar federal initiatives under the Inflation Reduction Act approved last year, which increased royalties charged for oil and gas production on federal lands for the first time in 100 years — from 12.5% previously to 16.77% going forward.
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