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

SPONSOR Grubesic

ORIGINAL DATE

LAST UPDATED

2/5/06

2/6/06 HB

SHORT TITLE Oil & Gas Severance Surtax & Fund

SB 468

ANALYST Francis

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

155,500.0

Recurring

Severance Tax

Permanent Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

155,500.0

$303,700.0 Recurring Severance Tax

Permanent Fund

155,500.0

303,700.0 Recurring

Community

Energy Security

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Consensus Revenue Group

Responses Received From

Higher Education Department (HED)

Energy Minerals and Natural Resources (EMNRD)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 468 creates a new fund called the “Community Energy Security Fund,” imposes a

surtax on oil and gas severance receipts, and distributes the proceeds of the surtax to the created

fund.

Senate Bill 468 – Page

2

The community energy security fund will be used first for making grants to municipalities, coun-

ties and public institutions of higher education to conduct studies on the economic impact of high

energy costs. For municipalities and counties, the study will include how many households in

the government’s boundaries have heating cost in excess of 6 percent of that household’s in-

come, which locally owned businesses are most vulnerable to high energy costs with an estimate

of energy cost burdens for a sample of businesses, and the municipality or county’s energy costs.

For a higher education institution, the study will assess the institution’s total energy costs.

An eligible entity who has conducted the study can apply for a grant to implement energy cost

saving measures. In the case of municipalities or counties, the types of projects should be aimed

at assisting those households and businesses identified as vulnerable and the government’s own

energy costs. For a higher education institution, the purpose will be for installing and utilizing

energy conservation measures.

The fund will receive revenues from the oil and gas severance tax surtax. This surtax is pegged

to the taxable value price of natural gas and oil in the previous year:

Surtax

Imposed

More Than But Less Than More Than But Less Than

-

$

22.00

$

-

$

2.70

$

0%

22.00

27.00

2.70

4.20

1%

27.00

32.00

4.20

5.70

2%

32.00

37.00

5.70

7.20

3%

37.00

42.00

7.20

8.70

4%

42.00

47.00

8.70

10.20

5%

47.00

52.00

10.20

11.70

6%

52.00

11.70

7%

Price of Oil

per Barrel

Price of Natural Gas per

Thousand Cubic Feet

* Price is the effective price based on taxable value

The effective date is February 1, 2007.

FISCAL IMPLICATIONS

The effective date of SB468 is February 1, 2007, so only five months of oil and gas activity is

included in the estimate. For FY07, the consensus revenue group has forecast the prices of oil

and gas as $55/barrel and $6.10 per thousand cubic feet (MCF) respectively. For FY08, those

prices are $53/barrel and $5.80/MCF. With deductions from taxable value (historically 9 percent

of value for oil and 17 percent of value for natural gas), the taxable value prices which are used

to establish the surtax are shown in table one.

In FY07, the surtax is estimated to increase severance tax revenues by $155.5 million and in

FY08 the increased revenue is $303.7 million.

The appropriation to the community energy security fund of $155.5 million in FY07 and $307.3

million in FY08 contained in this bill is a recurring expense to the severance tax permanent fund.

Any unexpended or unencumbered balance remaining at the end of each fiscal year shall not re-

vert.

Senate Bill 468 – Page

3

Consensus Forecast

Oil

Price*

Volume

Value**

($M)

Taxable

Value Price

Surtax

Imposed

Surtax

($M)

FY07***

54.00

$

25.67

1,258.49

49.03

7% 88.09

FY08

51.00

59.50

2,755.33

46.31

6% 165.32

Natural Gas

FY07***

6.50

$

626.67

3,368.65

5.38

2% 67.37

FY08

5.65

1,481.00

6,920.05

4.67

2% 138.40

* Calendar year price is average of consensus group fiscal year prices.

** Typical deductions have been accounted for.

*** Effective date of February 1, 2007 means only five months are included in FY07.

This bill creates a new fund and provides for continuing appropriations. The LFC has concerns

with including continuing appropriation language in the statutory provisions for newly created

funds, as earmarking reduces the ability of the legislature to establish spending priorities.

SIGNIFICANT ISSUES

This is a major tax increase on the oil and gas industry. Even though it may be designed for

windfall profits due to recent high prices, the current forecast for oil and gas prices mean that the

surtax will likely stay above 4 percent for oil and 2 percent for natural gas. The surtax may add

to the volatility of production in New Mexico as exploration and drilling will contract when

prices are lower than they have been.

TECHNICAL ISSUES

EMNRD:

The project qualifications criteria in the bill are complex and do not necessarily result in

selection of a cost effective project. A good return on investment on specific projects should

be a major part of the selection criteria. A return on investment greater than what the state

gets on its overall investments would be a good measure.

It is difficult to obtain new or current energy consumption data from the utility on household

energy consumption. The information may not be available because the utility companies

consider it private information. A county with households that spend more than 6% on their

utility bill would be eligible. Census data or other typical sources of general information

would not be useful because they do not consider the increase in energy costs that occurred in

the last 12 months.

There are two definitions of “Department”. In the tax section, the bill refers to the Taxation

and Revenue Department. In the new material section, it refers to the Department of Finance

and Administration. The definitions should clarify this issue.

Amendment: Add “biobased energy related systems and equipment” under energy conserva-

tion measures. HB995 – Biomass-Related Equipment tax Deduction passed by the 2005

Legislative session has specific definitions.

Senate Bill 468 – Page

4

ALTERNATIVES

EMNRD proposes the following amendment:

Section 6. E. (2) (k) Remove: or

Section 6. E. (2) (l) Add: or

Section 6. E. (2) “ (m)

biomass-related equipment used to produce energy from biobased

products, biofuels and biomass materials that is useful to operate facilities, motor vehicles or

equipment.”

The following are specific definitions in the law that could be included.

(1) "biobased products" means products created from plant- or crop-based resources

such as agricultural crops and crop residues, forestry, pastures and rangelands that are nor-

mally made from petroleum;

(2) "biofuels" means biomass converted to liquid or gaseous fuels such as ethanol,

methanol, methane and hydrogen;

(3) "biomass material" means organic material that is available on a renewable or

recurring basis, including:

(a) forest-related materials, including mill residues, logging residues, forest

thinnings, slash, brush, low commercial value materials or undesirable species, salt cedar and

other phreatophyte or woody vegetation removed from river basins or watersheds and woody

material harvested for the purpose of forest fire fuel reduction or forest health and watershed

improvement;

(b) agricultural-related materials, including orchard trees, vineyard, grain or

crop residues, including straws and stover, aquatic plants and agricultural processed co-

products and waste products, including fats, oils, greases, whey and lactose;

(c) animal waste, including manure and slaughterhouse and other processing

waste;

(d) solid woody waste materials, including landscape or right-of-way tree trim-

mings, range land maintenance residues, waste pallets, crates and manufacturing, construc-

tion and demolition wood wastes, excluding pressure-treated, chemically treated or painted

wood wastes and wood contaminated with plastic;

(e) crops and trees planted for the purpose of being used to produce energy;

(f) landfill gas, wastewater treatment gas and biosolids, including organic waste

byproducts generated during the wastewater treatment process; and

(g) segregated municipal solid waste, excluding tires and medical and hazardous

waste; and

(4) "biopower" means biomass converted to produce electrical and thermal en-

ergy."

POSSIBLE QUESTIONS

1. There will be hundreds of millions of dollars going into this fund over the next several years at

forecast oil and gas prices. How much does it typically cost to weatherize a house.

NF/yr