Rick Homan’s recently proposed a plan to increase New Mexico’s severance taxes on oil and gas production in a special legislative session this coming September and then to make the increase retroactive to July 1st. A maneuver such as this may be appropriate in a third-world “banana republic”, but is not worthy of a great state like New Mexico. Mr. Homans’ plan, if implemented, would likely provide some short-term relief to the state’s budgetary woes. However, the cost of conducting business in such a manner could be disastrous for New Mexico’s long term fiscal health.
Raising taxes on the oil and gas industry may indeed bring a short-term windfall to the State of New Mexico’s revenues, possibly even postponing the difficult cost-cutting decisions that must be made to a state budget that is out of line with long-term revenue projections. However, the long term financial health of New Mexico is not best served by solving the current crisis by retroactively extracting more dollars from the oil and gas industry which already financed 30% of the state general fund budget in the 2010 fiscal year.
Despite the recent increases in revenues and profits by the oil and gas industry, the long-term revenues New Mexico will receive from the industry will be determined by how our state’s oil and gas resources compare with those in other states and even world wide. When deciding where to drill new wells, oil and gas companies take into account all potential risks and rewards, and it is here that New Mexico faces considerable challenges.
One such risk is the potential listing of the Dunes Sagebrush Lizard in southeast New Mexico as an endangered species. Such a development could dramatically increase the cost of existing production and serve as a open deterrent, if not an outright ban, for further wells in many parts of the Permian Basin.
An additional risk is large new domestic reserves of natural gas brought about by improved exploration, drilling and production technologies These additional gas reserves have had the effect of reducing the price of natural gas relative to oil. This means that when seeking to drill additional wells, companies currently have a huge preference for oil wells over gas wells.
The San Juan Basin’s reserves in northwest New Mexico contain relatively small amounts of oil and other liquid hydrocarbons compared to the Permian Basin. The compounding effect of lower relative gas prices, increased operating risk from environmental extremists, and the prospect of rising taxes, places New Mexico at considerable risk of reduced production in the future.
The two political factors that companies look for when deciding where to invest the huge dollars required to drill new wells are stable taxes and predictable regulations. How New Mexico addresses these factors will have much to do with whether the oil and gas industry grows or shrinks in coming years.
Passing a knee jerk, retro-active tax increase will not improve New Mexico’s already shaky reputation as a questionable place to make new oil and gas investments. In the past several years, New Mexico has placed expensive and in many cases unwarranted rules for drilling by the passage of the so called “pit rule.” The State also has unilaterally implemented severe green house gas regulations ahead of such regulations federally and even beyond those enacted in California.
In these trying economic times, New Mexico will need to improve, not damage, its reputation as a stable environment to make oil and gas investments. A reputation as a stable and predictable place to do business will ensure that large amounts of tax and royalty revenues that the industry provides to the State of New Mexico and local municipalities ($1.7 billion in in fiscal year 2010) will be both sustainable and robust.
The oil and gas industry, like Mr. Homans, wants adequate funding for the education of our children. We would like such funding to be based on well thought out and predictable taxation along with efficient and effective spending, not on a hastily contrived scheme. Because oil and gas is one of the worlds most capital intensive industries, New Mexico will benefit most in the long-term by heeding the words of Walter B. Wriston, “Capital goes where it’s welcome and stays where it’s well treated.”