Narrow, bipartisan vote advances fossil fuel tax incentive for gas capture in New Mexico

In a rare bipartisan moment in the New Mexico Legislature, a GOP-led measure to offer tax credits to oil and gas operators that install gas-capture devices advanced after being amended in its first State House committee.

House Bill 350 was sponsored by southeast New Mexico Republican Reps. Jim Townsend (R-54) of Artesia, Larry Scott (R-62) of Hobbs and Candy Spence Ezzell (R-58) of Roswell, hailing from the Permian Basin region where New Mexico’s fossil fuel industry is centered.

It would offer oil and gas operators a $12,000 tax credit per well where the devices are installed.

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HB 350 was first brought before the House Energy, Environment and Natural Resources Committee Feb. 14, but action was delayed until the committee’s Feb. 25 meeting where it was advanced on a 6-5 vote.

It was referred to the House Taxation and Revenue Committee for further consideration.

The version passed by the committee contained an added clause to end the tax credit in 2028, after facing stiff opposition from Democrats who argued during the hearings that the bill would reward the oil and gas industry for actions it should be required to take to protect the environment.

If the proposed tax credit was applied to all the about 110,000 wells in New Mexico, according to the Energy Information Administration, HB 350 could create an about $1.3 billion tax break to the industry.

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The devices, known as vapor reduction units (VRUs), can cost between $50,000 to $325,000 each to install, read an analysis from the Legislative Finance Committee, and an additional amendment capped the tax credits at $100 million in state funds.

Credits would also be limited to low-producing or “stripper wells” defined as producing a maximum of 10 barrels of oil per day and 60,000 cubic feet of natural gas per day.

The analysis noted the actual cost of the credit was “difficult to determine but likely significant,” and the LFC had “serious concerns” about its risk to state revenues and potential volatility HB 350 could create by reducing the state’s base revenue.

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The bill was likely a response to recent rules enacted in 2021 and 2022 by the Oil Conservation Division (OCD) and New Mexico Environment Department (NMED), respectively, that targeted reductions in emission from the oil and gas industry.

The OCD rules required operators capture 98 percent of produced gas by 2026 and cease routine flaring – the burning of excess gas.

NMED upped state leak detection and repair along with reporting requirements for operators on their emissions.

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The rules did not mandate VRUs be used to reduce air pollution but did recognize the technology could lead to reductions in venting and flaring, the LFC report read.

The LFC also asserted VRUs were used for “many years” without a tax credit and would grant operators additional financial benefits as the captured gas could then be sold.

“HB 350, thus, would provide a significant and flexible subsidy to oil and gas producers for installation of a technology that is already in producers’ commercial interest,” the analysis read. “By reducing qualifying producers’ tax liabilities, the bill would reduce New Mexico’s net tax revenue.”

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During the Feb. 25 hearing where HB 350 was passed, Townsend argued the bill was needed as the State of New Mexico worked to reduce emissions from oil and gas by keeping the industry viable as regulations tighten.

Oil and gas was credited for about third of New Mexico’s budget each year, with recent growth in the industry, mostly within the Permian Basin, propelling the state to become the second-largest producer of crude oil in the U.S.

“This seemed to me a reasonable way to incentivize small, stripper operators and owners to address emissions, to bring their operations up to current rules,” he said. “I think what this bill does is it takes an asset that we are deriving substantial income from in New Mexico, and it gives them longevity. It gives us a revenue base that is secure.”

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Committee Chair Matthew McQueen (D-50) of Santa Fe, who voted against the bill, questioned providing the incentive to operators for complying with an already-required state mandate.

He also contended that stripper wells already saw much lower income than others and challenged if they would truly bring a significant source of revenue to the state, especially when receiving the tax credit.

“It’s not that it reduces the emissions, it just helps them pay for it,” he said. “We’re paying $12,000 a well. Is the state going to get that money back?”

Townsend countered that a stripper well produces about $2,000 a month in state revenue at about $75 a barrel, meaning the incentive would “pay off” within six months.

Adrian Hedden can be reached at 575-628-5516, achedden@currentargus.com or @AdrianHedden on Twitter.

This article originally appeared on Carlsbad Current-Argus: Vote advances fossil fuel tax incentive for gas capture in New Mexico