Oil and gas leases blocked on Permian Basin state land most likely to produce fossil fuel

Officials blocked oil and gas operations on southeast New Mexico lands within the Permian Basin as the State Land Office tangled with lawmakers on raising the amount companies pay to drill for fossil fuels in those areas.

The New Mexico State Land Office on Thursday announced to industry leaders it was suspending leases of State Trust land in certain “premium” tracts in southern Eddy and Lea counties within the Delaware sub-basin on the western edge of the Permian along New Mexico’s border with West Texas.

New Mexico State Land Commissioner Stephanie Garcia Richard said this “pause” would remain in effect until a cap on the royalty rate operators pay to the state on the value of oil and gas extracted was increased from 20 percent to 25 percent.

The move will affect five to seven tracts as the office typically offers 10 to 12 tracts for lease at its monthly auctions but only offered five in March in response to the recent decision, said State Land Office spokesman Joey Keefe.

The office's notice for the March 19 sale showed all five of the offered tracts were in Lea County, and Keefe said the tracts withheld from future sales were all within the oilfield between Carlsbad and Hobbs.

Parcels of land are evaluated by Land Office on a case-by-case basis to determine the proper royalty rate, Keefe said, meaning tracts would then be held from lease sales individually, not by region.

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Raising the rate and making the lands available again would take an act of the New Mexico Legislature, and Garcia Richard pushed bills to do so during the annual lawmaking sessions every year since she first took office in 2019, but so far failed to see a bill passed. This year, House Bill 48 and Senate Bill 24 both would have raised the rate but stalled in the Senate Finance Committee.

The State Land Office indicated it would try again to promote such a bill in the 2025 Legislative Session starting next January.

In the meantime, Garcia Richard said the move would ensure the land is not leased to oil companies “under market rate.” She said operators are paying the higher rate already to lease lands for drilling owned by other landowners in the area, and over the border in Texas.

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Other tracts in the Permian Basin the State Land Office deems can fairly be leased for the current rate of 18.75 to 20 percent will continue to go for that rate, Garcia Richard said.

“For the premium tracts, the best of the best, these should be going for 25 percent,” she said. “We’re not going to lease them under market rate.”

Missi Currier, president of the New Mexico Oil and Gas Association, voiced displeasure with the Land Office decision, arguing the industry was unfairly being penalized for a disagreement between the agency and lawmakers.

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She said the industry was chiefly responsible for a record $2.75 billion in revenue for the Land Office in Fiscal Year 2023 and disputed the halt on leases as stymying a crucial part of New Mexico’s economy. The royalty rate and overall expense of operating in New Mexico, Currier said, was already comparable with other states.

“The New Mexico Oil and Gas Association is incredibly disappointed that our members and those who benefit from State Land Office revenue, like public schools, hospitals, and higher education institutions, are being penalized because of a disagreement between the State Land Office and the Legislature over statutory leases,” Currier said in a statement.

Each time bills to raise the rate were introduced in the Legislature, they faced strong opposition from the oil and gas industry and its supporters. Garcia Richard said companies should be able to afford the additional expense, especially while oil and gas production is growing in the Permian Basin and leading to higher company profits.

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Oil and gas production was expected to rise this month by 14,000 barrels per day and 24.8 billion cubic feet per day, respectively, according to the Energy Information Administration (EIA). That means the Permian was the highest, oil-producing shale region, and the second-highest natural gas producer in the U.S., the EIA reported.

New Mexico was second in the nation in oil production, records show, and fifth in the U.S. for natural gas production at the end of 2023, according to EIA data.

“We are in this boomtime," Garcia Richard said. "The fact that companies can’t afford an additional 5 percent…They’re getting 75 percent. I take my fiduciary responsibility seriously.”

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The higher rate would generate an additional $1.5 billion to $2.5 billion by 2050 in market value for the Land Grant Permanent Fund, where the Land Office sends lease revenue and pays out to beneficiaries, according to a report from the Legislative Finance Committee on HB 48. The money would largely go to public schools and other beneficiaries of the Land Office, Garcia Richard said.

The current 20 percent rate was last updated in the 1970s, the LFC report noted, and was higher than most other states but lower than Texas. Even if New Mexico’s rate was raised to 25 percent, the Land Office contended its leases would still be more “industry friendly” than Texas’ because of longer terms and available deductions.

New Mexico also does not charge royalties on wasted oil and gas unlike Texas and other states, the report read.

“This is a fair market situation,” Garcia Richard said. “We don’t think the school kids of New Mexico should be subsidizing these tracts.”

New Mexico Sen. Steven McCutcheon (R-42) chided the Land Office for restricting the tracts from lease. He said the repeated failure of bills to raise the royalty rate were a sign that lawmakers did not agree with Garcia Richard's agenda.

"There is a reason why this proposal has failed to gain traction over the past five legislative sessions," McCutcheon said. "With skyrocketing inflation, high prices at the gas pump, and a rather stagnant local economy, the oil and gas boom is one of the few bright spots in New Mexico. I urge the Commissioner to abandon this irresponsible decision and get back to doing what is best for New Mexico."

Jim Winchester, president of the Independent Petroleum Association of New Mexico (IPANM) also condemned the decision, arguing it would cause damage to the state's economy by limiting the ability of operators to access public land.

"The State Land Office has unilaterally decided to cut off future revenues to state beneficiaries and the general fund by suspending new leasing of premium tracts," he said. "IPANM strongly opposes this action especially considering the decision was abruptly announced without any consideration of the economic impact to all New Mexicans."

Adrian Hedden can be reached at 575-628-5516, achedden@currentargus.com or @AdrianHedden on the social media platform X.

This article originally appeared on Carlsbad Current-Argus: Oil, gas leases blocked on land in southeast New Mexico Permian Basin