Roundhouse Wrapup: ‘New Mexico Must Embrace Its Strengths’ In Oil & Gas

Apr 03, 2019 2:31 PM

Michael Sandoval | Western Wire | March 21, 2019

Top New Mexico education officials and business experts observing the just-concluded legislative session in Santa Fe say that while the oil and gas industry is strong, it could face significant challenges in coming years that threaten the state’s budget and a boom in student education funding.

During the 60-day session, bills passed to transition the state to a low-carbon electricity future and empowering the state’s Conservation Division to punish operators. A proposed four-year moratorium on hydraulic fracturing failed to move out of the Senate Conservation Committee in late February.

But both educators and business leaders say issues raised during the session that could reappear in 2020 pose a substantial risk in upsetting the robust revenues they regard as instrumental in lifting the state’s education system and providing revenues for much-needed infrastructure investment. They caution against policymakers disrupting the booming oil and gas production on New Mexico’s side of the popular Permian Basin and driving investment and revenue across the border on to Texas’ side of the basin.

This is the first in a four-part Western Wire series.

Education Funding Okay . . . For Now

Peggy Muller-Aragón, an Albuquerque Public Schools (APS) board member and retired APS teacher, told Western Wire the tone of the session remained positive due to the impact of oil and gas revenues on education funding, and the failure of proposals that would have likely curtailed those funds.

“Funding for education will see an increase, oil and gas production continues to skyrocket with production of up to 300 billion barrels possible this coming year, and with this comes additional revenue, and the fracking ban and royalty hikes went nowhere,” said Muller-Aragón.

“Yes, we have had a boon in oil production—250 million barrels, which is 75 million more barrels produced this year than produced last year,” she added. And the forecast looks good too. “Quite honestly it looks as if this will continue for the foreseeable future. There doesn’t seem to be an end in sight for oil and gas demand, no matter whether the price is $30 a barrel or $60.”

New Mexico has surged to the top of the rankings in oil and natural gas production in recent years, currently sitting at 3rd among states in crude oil production and 9th in natural gas output, according to the Energy Information Administration. Those figures are through 2017.

Booming domestic production driven by out-of-state demand has yielded a bounty for education funding that has benefited New Mexico’s schools, including Muller-Aragón’s district.

“New Mexico is an energy export state, producing much more energy than it uses. As long as this is the case, revenues coming from the oil and gas industry should continue into the future. If this persists, education funding should not be in peril,” she pointed out, acknowledging the potential threat to the delicate balance between resource development and revenues for the state’s students.

In dollars and cents, Muller-Aragón said, the effect is potent.

“For FY18 education funding supported by oil and gas climbed to over $1 billion with $822,300,741 going to K-12 education and Albuquerque Public Schools receiving their share at about $241,657,789,” she said, or nearly 30 percent of the total.

But all of that funding, despite a quiet 2019 session, could be in at risk if the policy proposals like the fracking ban make a return in the future.

“The oil and gas industry was concerned about the fracking ban, but this ban went nowhere. If it does go forward in upcoming legislative sessions it would most definitely be an impediment to future growth in this industry. It could lead to a hold up in oil and gas projects, and this slow down would affect revenues going into the Permanent Fund,” she said.

New Mexico’s Legislative Finance Committee estimated the economic loss from the proposed four-year ban on fracking would have exceeded $3.5 billion.

“Policies have to help industries grow not jeopardize them. So this was a win for oil and gas this year, but don’t know what will happen next legislative session,” Muller-Aragón said.

She pointed to legislation like House Bill 398, that would have raised royalties and would have likely
driven businesses away and not attracted new oil and gas investment to New Mexico.

“This bill, had it passed, would push businesses to federal lands where they would only have to pay half the royalty rates and our state would only receive half of that which would have directly impacted our schools with less money going to education,” Muller-Aragón explained. “Our Land Commissioner is likely to resurrect this bill next session.”

New Mexico took two shots at the increased royalty rate measure after HB 398 was tabled. Senate Bill 500 was also unsuccessful, but the bill’s fiscal impact report confirmed Muller-Aragón’s assessment, arguing that, “because producers consider comparative royalty rates in the cost of doing business, overly burdensome rates could shift production activity to other areas.”

With a raise in royalty rates that would drive down investor interest, hurting jobs as well as endangering school resources off the table, she said, she remained concerned. “If New Mexico would raise royalty rates this would not bode well in attracting investors to New Mexico. Future investments help grow
our economy and in turn help our children. Growing the oil and gas industry, it begs to reason would lead to increased revenues which would then provide more jobs and more resources to our schools,” Muller-Aragón said.

It remains to be seen whether or not a bill passed to expand the Conservation Division Enforcement Authority to levy fines and fees for violating New Mexico’s Oil & Gas Act, or the Energy Transition Act will affect the state’s current energy production.

Muller-Aragón said the new enforcement authority could become politically-driven rather than based on real data.

“The last decade these decisions were in a judge’s hands based on facts and proof that there was a violation, now they will be in the hands of a bureaucrat, with a chance for political interference, and decisions possibly made based on political views, not facts,” she said.

As for the decades-long energy transition, costs and a lack of certainty on replacing revenues from natural resource development were particularly troubling.

“The cost of harnessing renewables and getting the energy on the grid is quite high. This high cost could ultimately lead to energy poverty with those from lower socioeconomic brackets finding the cost of energy prohibitive,” Muller-Aragón said. She also had many questions for the transition bill’s long-term effects.

“This bill doesn’t really show how this will save money. Can there be or will there be production or severance taxes on renewables? Will it be possible to replace oil and gas monies? Will you have to double the workforce to replace oil and gas revenues? So many questions not answered,” she added.

For Muller-Aragón, policy-makers shouldn’t ignore realities in favor of wishful thinking, which she said would harm the most vulnerable New Mexicans—the state’s children.

“Policies have to lead to industry growth. New Mexico must embrace its strengths, oil and gas being the leading one, and not embrace policies that are hurtful to our state, its businesses, and most importantly, its children,” she concluded.