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F I S C A L I M P A C T R E P O R T

SPONSOR Jennings

DATE TYPED 03/09/05 HB

SHORT TITLE Tax Credit Definition of Produced Water

SB 706

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

Insignificant Insignificant

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Environment, Minerals & Natural Resources (EMNRD)

New Mexico Environment Department (NMED)

Taxation and Revenue Department (TRD)

The Office of the State Engineer (OSE)

SUMMARY

Synopsis of Bill

Senate Bill 706 makes a minor technical correction to existing statutes related to the provision of

tax credits for produced water. The bill adds one word to the definition of “produced water”,

which does not change the meaning, but merely corrects the grammar of the definition. Cur-

rently, there is an allowed tax credit (either for income tax or corporate income tax) equal to

$1,000 per acre-foot of produced water not to exceed four hundred thousand dollars if certain

conditions are met. The bill defines “produced water” to mean water produced from oil or gas

drilling and production from a depth of two thousand five hundred feet or more below the sur-

face or from refining crude oil or processing natural gas, adding the word “from” in front of the

word “refining” in the last sentence.

The bill would also extend the date of a delayed repeal from January 1, 2006 to January 1, 2009.

Senate Bill 706 -- Page 2

Significant Issues

The OSE has indicated that, in its opinion, amending the existing statute to insert the word

“from” at page 2, line 25, and page 4, line 13, would allow the statute to be interpreted to allow

water diverted and used pursuant to a State Engineer permit to qualify for the tax credit. Under

the existing statute, the OSE contends that water diverted pursuant to a State Engineer permit

cannot qualify for the credit. Unlike the TRD, the OSE is of the opinion that without the

amendment, the definition only includes water extracted from the ground and then separated

from the hydrocarbons during refining or processing. OSE cautions that adding the term "from"

could potentially create an ambiguity with respect to whether "makeup water" would be eligible

for the credit. Makeup water is water used in the subsequent refining or processing that origi-

nates from another source, typically a water well licensed or permitted by the State Engineer for

beneficial use.

If this amendment did indeed expand eligibility, as described above, it could potentially increase

the tax credits claimed. TRD, believes that if this were the case, the tax credits may go up mar-

ginally, but did not provide a specific fiscal estimate for this scenario.

PERFORMANCE IMPLICATIONS

NMED notes that produced water is high in total dissolved solids and often contains other con-

taminants that could be detrimental to the state’s aquatic ecosystems. They note that delivery of

produced water to perennial rivers in New Mexico requires a federal Clean Water Act NPDES

permit which includes New Mexico Environment Department certification that the discharge will

not cause impairment to the state’s water quality.

FISCAL IMPLICATIONS

TRD has reportedly approved a total of $300.00 in claims for the credits since the credits were

allowed by statute in 2002. According to TRD, extending the delayed repeal provisions as pro-

posed would also be expected to produce insignificant fiscal impacts.

OPJ/yr:rs