Report: Fracking ban could cost New Mexico billions, cut oil and gas production
A senate bill introduced during New Mexico’s ongoing 60-day legislative session in Santa Fe to ban hydraulic fracturing was met with scorn from the oil and gas industry and local boomtowns, and a recent report from the State said it could cost New Mexico billions in lost revenue.
Senate Bill 459 called for a four-year halt on hydraulic fracturing, while lawmakers study the practice’s impact on the environment.
The bill was scheduled for discussion and a vote on Thursday in the Senate Conservation Committee, but was rescheduled with no date set for the hearing as of Friday.
A fiscal impact report released Thursday by the Legislative Finance Committee reported that it could cost the state about $3.5 billion in lost revenue from oil and gas extraction, while costing local governments $327.5 million.
The report was prepared using responses from the New Mexico State Land Office, New Mexico Department of Health, the New Mexico Attorney General and The Energy, Minerals and Natural Resources Department (EMNRD).
Direct revenues from the oil and gas industry – including severance and production taxes, along with bonuses and royalty payments on state and federal lands, and gross receipts taxes make up about 35 percent of New Mexico’s general fund revenue estimate, read the report.
The report said that without replacing such revenue, SB 459 would have a “negative” impact on the State’s finances.
“Substantial changes to how this industry operates in New Mexico – such as a temporary ban on hydraulic fracturing – would cause severe revenue losses,” read the report. “Without a source of revenues to replace these losses, this bill would have a substantial negative budgetary impact.”
What does the bill call for?
The bill would amend the Oil and Gas Act by defining hydraulic fracturing and placing a moratorium on any new permits issued by EMNRD that would allow the practice.
Hydraulic fracturing involves pumping water, sand or a chemical mixture underground to break up large rock formations or shale deposits so crude oil and natural gas can be extracted.
Many industry leaders credited the process – along with horizontal drilling – as causing New Mexico’s recent oil boom and leading to an about $2 billion budget surplus.
“The bill would be devastating to New Mexico’s economy,” said Robert McEntyre, spokesman for the New Mexico Oil and Gas Association. “It would destroy the economy for places like Carlsbad and Hobbs. “Fracking is what New Mexico oil and gas looks like in 2019.
“(Hydraulic fracturing) gives incredible opportunities to invest. It’s a vital part of the process. It is an essential component of oil and gas in New Mexico.”
SB 459 also added language to require additional reporting on the number of active permits and applications received related to oil and gas developments involving hydraulic fracturing, along with trends regarding methane emissions and the release of other greenhouse gases.
Which State funds would be affected?
The General Fund would take the biggest hit, per the report, with losses increasing by about $100 million each fiscal year of the four-year moratorium.
In fiscal year 2020, the report estimated the ban would cost the General Fund about $215.6 million, then about $328.4 million in FY 2021, $435.6 million in FY 2022 and $547.3 million in FY 2023 – the last year of the ban.
Over the four-year halt on fracturing as prescribed in the bill, the Land Grant Permanent Fund would lose about $862.8 million, read the report.
The State’s Tax Stabilization Reserve would lose about $321 million, per the report, during the four years, and the Severance Tax Bonding Fund would see a loss of about $491 million.
Local governments would also see increasing annual revenue losses throughout the ban, losing $34.8 million in FY 2020, $72.5 million in FY 2021 and $97.7 million and $122.5 million FY 2022 and 2023, respectively.
How would it impact the industry?
The report cited a response from EMNRD that the “overwhelming majority” of new oil and gas wells involve hydraulic fracturing, and the moratorium would cause the drilling of new wells to “largely come to a halt.”
Although ongoing wells could continue to produce, the report said such production would decline over time, and the fiscal impact report assumed the halt on fracturing would mean no growth in oil and gas production starting in FY 2020.
Producers looking to re-stimulate a well by re-fracturing it would also be denied a permit if the bill became law, read the report.
This means the financial losses could be worse than projected.
“Notably, this estimate should be considered a minimum impact, as it assumes current oil and gas production remains constant,” read the report. “However, as stated above, production from existing wells will decline over time, with the largest percentage declines occurring after the first year of production.”
What’s the current law?
As it reads today, the Oil and Gas Act does not require applicants who apply for a drilling permit with the Oil Conservation Division (OCD) – an arm of EMNRD – to specify if hydraulic fracturing would be used.
This means permits could be issued by the State without knowing if fracturing is to occur.
After a fracturing is completed, the operator submits a “frac disclosure” form, specifying the chemicals and volumes used during the process.
“To implement a ban on fracking, OCD would need to amend its permitting process,” read the report.
The State Land Office also lacks authority to regulate hydraulic fracturing, read the report, but “is taking steps to hold companies accountable if they act in an irresponsible manner.”
To that end, Land Office is working to limit the use of freshwater, encourage the re-use of produced water, and making sensitive areas “off-limits” to future developments.
If the bill is not enacted, the Committee reported that OCD could continue issuing new drilling permits, but would also be ignorant of whether or not fracturing was used, and its health impacts on people and the environment.
Upon the bill's introduction, sponsoring State Sen. Benny Shendo (D-22), said the bill was was not "against oil and gas" but meant as a measure for New Mexicans and state lawmakers to learn more about the process and its potential impacts on the environment.
"I know fracking has been going on here for years," he said. "People are concerned about the issue. Now, you're talking about something that has the potential for contamination of our drinking water and our aquifers."
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Adrian Hedden can be reached at 575-628-5516, email@example.com or @AdrianHedden on Twitter.