An unprecedented wave of oil and gas revenue is flooding into state coffers, but a new report by a Washington, D.C.-based advocacy group argues that the U.S. Bureau of Land Management should raise its royalty rate for production of federal lands to allow New Mexico to earn a lot more.
The report, prepared by Taxpayers for Common Sense, contends the BLM’s 12.5 percent royalty rate is too low and has cost taxpayers at least $5 billion in forgone federal revenue over the past decade. The federal government shares half that revenue with the states where production is based, meaning New Mexico could have earned $2.5 billion more than it received from federal oil and gas leases between fiscal years 2009 and 2018 had the BLM raised its rates to match what industry currently pays for offshore activities, or for production on state lands.
The BLM’s century-old onshore rate hasn’t changed since the federal Mineral Leasing Act was approved in 1920. It’s one-third lower than the 18.75 percent rate the federal government charges for offshore production, and nearly 40 percent less than the 20 percent rate New Mexico applies to leases on state lands.
Industry representatives say the lower rates are needed to offset higher regulatory costs for producing on BLM lands, and raising rates could stunt investment that’s currently running at record levels in the Permian Basin in southeastern New Mexico.
But Taxpayers for Common Sense President Ryan Alexander said New Mexico is losing far more than other states from BLM’s low royalty rate because it has the highest amount of federally leased land in the nation for oil and gas.
“The story is slightly different for each state, but New Mexico is losing the most money,” Alexander told the Journal. “This is the first of a series of state-level reports that we’re doing on federal oil and gas leasing. We started with New Mexico because production on federal lands is so high here, and it shows just how much taxpayers are losing.”
The report coincides with the introduction of legislation in the U.S. House of Representatives, HR 3225, which, among other things, would raise the BLM’s onshore royalty rate to 18.5 percent. The Subcommittee on Energy, Minerals and Natural Resources held a first hearing last week on the bill, co-sponsored by Rep. Mike Levin, D-Ca., and Rep. Raul Grijalva, D-Ariz.
“There’s a real need for Congress to look at the whole picture of fiscal management,” Alexander said. “It’s not serving taxpayers nor the state well. Oil and gas areas should be developed, but we need to make sure taxpayers are getting paid appropriately.”
Industry representatives say that state coffers already are overflowing with revenue from the current oil and gas boom and that it makes little sense to throw another regulatory wrench into the works. The industry generated more than a $1 billion surplus for the state fiscal year that begins next Monday, and a similar surplus is likely next year, said New Mexico Oil and Gas Executive Director Ryan Flynn.
“To continually change the regulatory framework and introduce economic uncertainty in the midst of an unprecedented surge is incredibly shortsighted,” Flynn said. “It lacks common sense.”
The BLM’s onshore rates are lower than offshore and state rates to compensate for additional regulatory hurdles that producers must navigate to produce on federal lands, Flynn said.
In Texas, where nearly all activity is on private and state lands, producers can earn a return on investment in four to six months, Flynn said. On federal lands in New Mexico, it takes 12 to 18 months.
“A lower rate offers a competitive advantage for managing federal lands to try to induce more investment,” Flynn told the Journal. “It helps make production here more attractive than it would otherwise be.”
Producers also pay huge bonuses upfront in lease auctions for federal lands, Flynn added. That includes an all-time record lease sale of nearly $1 billion last September, which generated nearly $500 million for New Mexico.
“If you increase the royalty rates, those bonus payments would go down, because producers would be less willing to pay so much upfront,” Flynn said.
Apart from the $5 billion-plus in forgone revenue from royalties, the report says, New Mexico lost nearly $40 million over the past decade from the BLM’s low annual rental rates for lessees – which haven’t been raised since 1987 – and from lost royalties on natural gas wasted from venting, flaring and leaking during production, gathering and transporting product.
About 87 billion cubic feet of natural gas produced on federal lands in New Mexico was wasted from 2008 to 2017 – the most in the nation, according to the report. It was worth about $320 million, but the federal government received only about $20 million in royalties, on half of the waste, leaving potentially $20 million more on the table.
Sen. Tom Udall, D-NM, said New Mexico’s losses show the need for federal action.
“This report makes clear that our completely antiquated leasing system hits states like New Mexico the hardest,” Udall said in an email to the Journal. “… Millions of dollars of royalties are being lost every year that could have gone toward public education and other essential services. These royalties belong to the people of New Mexico – and we deserve a fair return on our publicly-owned resources.”