Revenue or Political View: How New Mexico is Navigating the Federal Moratorium


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Abstract


President Joe Biden’s executive order halting all leasing of Federal land for oil and gas activities indefinitely will be felt nationwide but nowhere else more so than New Mexico. Since energy production is the backbone of New Mexico’s economy, much of which sits on Federal land, no bigger impact of halting Federal oil and gas leasing would be felt than in New Mexico. The state has worked to reduce greenhouse gas emissions in the sector long before Biden took office and now only time will tell the full impact of Joe Biden’s Federal lease ban and temporary drilling moratorium.


Key Points

  • New Mexico is the 3rd largest oil-producing state in the U.S. and has over half of its oil production on Federal lands. Oil and gas activity supports over 134,000 jobs, provides $16.6 billion in annual economic activity, and accounts for 33% of total state spending. 

  • New Mexico had 3 Federal lease sales planned for 2021 which previously were expected to earn up to $4 million in state revenue. Biden’s executive order still does not apply to previously approved leases and drilling permits, which include 6,089 approved drilling applications. The long-term concern is lost revenue to schools and state budgets as production rates on existing wells decline without new reserves replacement.

  • New Mexico U.S. Representative Yvette Herrell has introduced a bill which would exempt the state from Biden’s moratorium on new Federal oil and gas leasing. The bill is titled “Protecting New Mexico’s Jobs and Public Education System Act,” but if it passes through Congress other oil and gas producing states will likely want similar exemptions.

  • A new proposal for statewide emissions mandates has been released by the New Mexico Energy Minerals and Natural Resources Department. The mandate would regulate methane emissions by requiring operators and midstream companies to capture 98% of produced natural gas by 2026. The state began hearings on January 4th, 2021 to codify the regulation.

  • In 2019, New Mexico’s governor created a state Climate Change Task Force and aligned the state with requirements in the Paris Climate Accord. The 2019 New Mexico Energy Transition Act also requires utilities in the state to reach 100% carbon-free energy by 2045.  Baselines for methane emission reduction targets will be determined through 2021, and annual increases will be implemented to reach 98% gas capture by 2026.

  • New Mexico Senate Bill 149 has also passed the Senate Conservation Committee with a 5-4 vote and will be sent to the Senate Judiciary Committee. This bill will place a 4-year moratorium on hydraulic fracturing until environmental officials and lawmakers can study its environmental impact.  

  • Enverus estimates if no wells were drilled on Federal land in New Mexico during the 60-day moratorium by the Department of the Interior, production in the state would decline 15% for oil and 7% for natural gas. The result of an indefinite moratorium will eventually pass costs along to consumers through higher heating, electricity, and gasoline costs while reducing revenue for state operations.

Introduction 

President Joe Biden’s executive orders halting all new drilling permits on Federal lands for 60 days and all leasing of Federal land indefinitely will hurt the economies of a number of U.S. states, but one of the biggest impacts will be on the state of New Mexico. As discussed in the previous RP News piece, Oklahoma’s Battle For Federal Lands, Presidential Executive Order 13990 is adverse to energy producers throughout the United States but New Mexico would be hit hardest due to their concentration of energy production on Federal land. Currently, New Mexico lawmakers are studying the impact these executive actions by the Biden Administration could have in curtailing oil and gas production on Federal land and the implications for the state’s finances. New Mexico realizes the shift to new sources of energy is inevitable, but Biden’s sweeping executive orders could prove too rapid of a shift for the state’s fossil-fuel-dependent economy. Since energy production is the backbone of New Mexico’s economy, much of which sits on Federal land, no bigger impact of halting Federal oil and gas leasing would be felt than in New Mexico. 


Effect on New Mexico 

After Texas and North Dakota, New Mexico is the third-largest oil-producing state in the U.S. but is the state with the nation’s most oil production on Federal lands [1]. The oil and gas industry is the greatest economic contributor to the state, supporting more than 134,000 jobs and $16.6 billion in annual economic activity including $2.8 billion in fiscal year 2020, accounting for 33.5% of total state spending [2]. According to the Institute for Energy Research, 34.7% of the land in New Mexico is federal, but more than half of oil and gas production in New Mexico occurs on Federal land [1,3]. Opponents of Biden’s order, which is intended to allow the administration to study the environmental impact of fossil fuel development toward its goal of mitigating pollution and climate change, argued it would cripple New Mexico’s economy and force operators to move to other areas like Texas where most oil production is on private land, unencumbered by federal policy.

The central role of energy in the state is unmistakable. That is why Ryan Flynn, president of the New Mexico Oil and Gas Association, argued the industry in New Mexico needs Federal land to continue to support the state’s economy and fund public education. “Restricting oil and gas development on Federal lands will rob New Mexico of opportunities for economic growth and hollow our schools of critical resources that put teachers in classrooms and help our young children learn,” Flynn said [3]. Looking ahead, New Mexico had three federal lease sales planned for 2021 in April, July, and October, said Dawn Iglesias, an economist with the state’s Legislative Finance Committee, which were expected to earn up to $4 million each for the State of New Mexico – revenue that could be blocked by the halt on new leases [4].  Luckily, the short-term impact of the orders could be minimal as they do not apply to previously approved leases and activities. According to Director of New Mexico Oil Conservation Division, Adrienne Sandoval, 6,089 applications to permit drilling (APDs) are approved in New Mexico and could save production for the next 8-12 months [4]. But wells in the Permian Basin in southeast New Mexico – the state’s most active oil play – oil production declines rapidly and constant new drilling is necessary to maintain production levels and ensure reserves replacement. In addition, Sandoval noted “New Mexico can be a very complex state for developers to operate in. There is an intertwined matrix of Federal land, state land, and private land; ensuring higher initial capital and operating costs are to be expected for operators in this state” [4]. Therefore, the lack of key infrastructure and a confusing permitting process due to Federal land distribution may discourage operators from further development in the state.  

Figure 1: Map of Federal Lands in New Mexico [17]

But for New Mexico, many state leaders worry most about a loss in state revenue intended to support public education and other services if production is stymied. As budgets have already taken a hit from falling crude prices as the coronavirus pandemic sapped global fuel demand, the struggling school system is on the brink. “While you appreciate the green policies for environmental issues, you can’t strangulate the revenue streams in New Mexico,” said Stan Rounds, executive director of the New Mexico Coalition of Educational Leaders. “So we’re very concerned” [7]. New Mexico’s money troubles reflect the dangers facing oil-dependent economies around the globe at a time when volatile prices and rising concern about climate change pushes governments to transition to cleaner energy sources. In the United States, it has aroused a clashing of ideals: supporting Biden’s plan to fight global warming could damage the fossil-fuel economy that has been a huge source of revenue for many government programs. Most concerning is the fact that schools would suffer most in New Mexico [7]. Economists for New Mexico’s Legislative Finance Committee, which draws up revenue projections for lawmakers, said the state could lose $12 million from canceled federal lease sales this year alone, which is a big problem for New Mexico’s public schools, which receive about 45% of state appropriations [7]. New Mexico has been concerned about its dependence on oil revenue since its share of the Permian Basin started to boom several years ago and the state has since been attempting reforms to diversify its economy and public revenue base. Unfortunately, the ideas put forward are not big enough or fast enough to fully replace what oil and gas provides for the state’s budget. According to New Mexico’s public lands commissioner, Garcia Richard. “Even our rosiest projections are not easily going to make up for the loss of oil and gas revenue” [7]. For now, only time will tell the full impact of Joe Biden’s federal lease ban and temporary drilling moratorium. 


Actions Against Biden 

Clearly Biden’s executive order has the potential to be devastating for the state, so what is New Mexico doing about it? To answer that question, it is time to get to know U.S. Representative, Yvette Herrell. Stella Yvette Herrell is an American politician, businesswoman, and real estate agent serving the Republican Party as a U.S. Representative for New Mexico’s 2nd congressional district [5]. In addition, she has initiated a battle to fight President Joe Biden’s halt on new federal oil and gas land leases by introducing a bill that would exempt New Mexico from the moratorium enacted via his executive order. More specifically, Herrell’s H.R.757 Bill titled “Protecting New Mexico’s Jobs and Public Education System Act” is set to “exempt the State of New Mexico from certain provisions of certain orders related to oil and gas drilling” [6]. Unfortunately, there are already complications stemming from these actions. First and foremost, an executive order is a “signed, written, and published directive from the President of the United States that manages operations of the Federal Government” [8]. While both executive orders and proclamations have the force of law, an executive order is not legislation [9]. Orders require no approval from Congress, and Congress cannot simply overturn them. Congress may pass legislation that might make it difficult, or even impossible, to carry out the order such as removing funding, but only a sitting U.S. President may overturn an existing executive order by issuing another executive order to that effect [9]. Luckily, Herrell’s bill is not trying to overturn the order per se, but to be granted an exception. But the problem becomes, if New Mexico is granted an exemption, where would the precedent stop for other states. 


Actions Taken For Climate Change 

This is where new statewide emissions mandates might come into play. The state Energy Minerals and Natural Resources Department (EMNRD) in New Mexico has released a final proposed rule to reduce natural gas waste and methane emissions in producing oil and natural gas fields. Following up on the New Mexico Energy Transition Act which was signed into law in 2019 requiring utilities to reach 100% carbon-free energy and ensuring support for workers and coal communities experiencing the ongoing energy transition, New Mexico regulators are developing what could become the strictest standards in the nation to regulate the volumes of methane released into the environment by oil and gas operators [10]. Under the rule, operators would be required to capture 98% of gas by the end of 2026 [10]. The agency estimates that the rule will reduce volatile organic compounds by 77,000 tons and nitrogen oxides (NOx) by 21,000 tons [11]. New Mexico began hearings on January 4th to codify the methane and natural gas regulation set forth by the EMNRD and its Oil Conservation Division (OCD) – EMNRD’s primary compliance arm, but the hearings are ongoing. 

Figure 2: U.S. vs New Mexico Methane Emissions Led to Methane Strategy [16] 

The regulatory push comes as emission levels have risen sharply in the state, driven in large part by increased oil and gas production. According to a 2019 climate change task force report, the oil and gas sector accounted for 62% of the states methane emissions [11]. As a result, in January 2019 the newly-elected governor signed an executive order calling on state agencies to find ways to reduce their impact on climate change while creating New Mexico’s Climate Change Task Force and aligning the state with the Paris Climate Accord. This spells good news for New Mexico because it is in line with President Biden’s push for economy wide net zero by 2050 as well as having the United States rejoin the Paris Climate Accord. The EMNRD rules are set to be implemented in two main phases. In the first phase scheduled to take place through the end of 2021, the agency will collect data related to each operator’s current emissions in order to set baseline emission reduction targets [12]. Then, at the end of next year or into early 2022, those baseline targets will be set annually for the next five years to get to 98% by the end of 2026 [12]. However, a unique aspect of New Mexico’s proposed rules is that it also includes the midstream industry segment, as opposed to rules in other states which only include the upstream part of the business [10]. While these rules are expected to be enacted in early 2021, there is a possibility they will be refined to further support Biden’s goals in an attempt to save their energy industry. 

In addition to new methane emission regulations, another bill just passed its first committee and is on its way to becoming a law. Senate Bill 149 would place a four-year moratorium on new permits for hydraulic fracturing and passed the Senate Conservation Committee on a 5-4 vote and was sent to the Senate Judiciary Committee for further discussion and a second vote [13]. Sponsored by Senator Antoinette Sedillo Lopez, the bill was intended to halt new fracking operations until June 1, 2025 to allow environmental officials and lawmakers to study its environmental impact [13]. If passed, SB 149 would also create additional annual reporting requirements for the use of fracking and its effects from multiple state departments. Halted operations and required reporting to the Department of Energy, Minerals and Natural Resources, Agriculture, Environment, Health, Transportation, and Indian Affairs were championed by environmental groups but ridiculed by the oil and gas industry as it disrupts an industry that provides over a third of New Mexico’s budget [13]. Although the bill would not affect current fracking permits, the long term fallout would be catastrophic for the industry. Interestingly enough, Biden has proclaimed he is not planning on banning hydraulic fracturing, even though past campaign statements beg to differ, but is certainly a move in line with his environmental goals. Even more so, the move potentially has the power to sway some D.C. lawmakers and might even have enough push to grant the state a pardon. 


Conclusion 

While the issues facing New Mexico (and the rest of the United States) are not short term issues but long term, action needs to be taken now to avoid catastrophe in the future. Action to ensure additional future oil and gas development on Federal lands but also action towards climate change. Sarp Ozkan with Enverus said with no new wells drilled in New Mexico on Federal land for the 60 days prescribed in the Department of the Interior moratorium alone, New Mexico would see a 15% decline in oil production and a 7% decline in the production of natural gas [14]. The unknown future of all federal development spells even worse of a disaster. This could lead to higher prices as supplies dwindle and ultimately translate to consumers. Higher heating bills, electricity bills, and paying for more at the pump should be expected if producers are forced to move operations to places less economical than New Mexico’s Permian Basin. New Mexico Oil and Gas Association Spokesperson Robert McEntyre said in an email to local news station KOAT: “States like New Mexico depend on oil and gas as a critical part of our economy and state budget. A moratorium on federal leasing disproportionately disrupts economies like ours. We are eager and ready to work with the administration to address climate change as we work toward a future with lower emissions and cleaner energy” [15]. The loss of jobs and the loss of funding for critical aspects of life such as public education would be absolutely devastating. That is why the energy transition needs to be a transition, not the flip of a switch. 

President Biden’s plan for the future of energy in America has begun to set the country down a new path – one aimed at transition and lasting change – that will have reaching implications both domestically and abroad. But this new path cannot leave others behind. New Mexico’s economic future is certainly at stake, but so is the recovery of our nation’s virus-stricken economy. Rather than instituting a blanket ban on new production of oil and gas on Federal lands, a better approach would be to recognize its benefits and work to make sure that any production is handled responsibly and safely. The American energy sector has already delivered wins to the environment, consumers, and state economies but needs support into the future until clean energy can support domestic economic and energy needs. The thing is, the world needs petroleum and creating a ban on oil and gas activity on Federal lands does not change the demand for that oil, it just changes who supplies it and who gets paid for it. 


References

[1] https://www.nationalreview.com/2020/12/biden-energy-policies-will-make-blue-new-mexico-see-red/

[2] https://www.krwg.org/post/oil-and-natural-gas-contributed-28-billion-new-mexico-budget-fy-2020 

[3] https://www.currentargus.com/story/news/local/2021/02/04/yvette-herrell-spare-new-mexico-biden-oil-gas-ban/4386954001/ 

[4] https://www.currentargus.com/story/news/local/2021/02/02/new-mexico-lawmakers-warned-impacts-oil-and-gas-leasing-ban/4358422001/ 

[5] https://herrell.house.gov/  

[6] https://www.congress.gov/bill/117th-congress/house-bill/757/text?q=%7B%22search%22%3A%5B%22Yvette+Herrell%22%5D%7D&r=7&s=3  

[7] https://www.reuters.com/article/us-usa-biden-drilling-newmexico-insight/biden-drilling-ban-forces-democratic-led-new-mexico-to-reckon-with-oil-dependence-idUSKBN2A91JD

[8] https://www.americanbar.org/groups/public_education/publications/teaching-legal-docs/what-is-an-executive-order-/ 

[9] https://www.federalregister.gov/presidential-documents/executive-orders/joe-biden/2021 

[10] https://www.abqjournal.com/1508526/state-releases-final-rule-to-reduce-methane-emissions-flaring.html

[11] http://www.emnrd.state.nm.us/OCD/documents/NaturalGasWasteDraftRules-July202020.pdf

[12] https://www.forbes.com/sites/jimmagill/2020/10/22/as-feds-step-back-new-mexico-steps-up-with-tough-methane-rule/?sh=80a07815dcf7

[13] https://www.currentargus.com/story/news/local/2021/02/16/new-mexico-oil-gas-moratorium-bill-advances-amid-protest/6725420002/ 

[14] https://www.currentargus.com/story/news/local/2021/02/02/new-mexico-lawmakers-warned-impacts-oil-and-gas-leasing-ban/4358422001/  

[15] https://www.koat.com/article/watch-groundskeepers-quick-actions-save-boys-who-fell-through-ice-at-golf-clubs-pond/35614962 

[16] https://www.nmlegis.gov/handouts/WNR%20090519%20Item%203%20NMED%20and%20EMNRD%20Methane%20Strategy.pdf 

[17] https://www.worldofmaps.net/en/north-america/new-mexico-usa/map-federal-lands-indian-reservations-new-mexico.htm

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