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(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates/Conflicts with/Companion to/Relates to

SOURCES OF INFORMATION

State Land Office (SLO)

SUMMARY

Synopsis of Bill

HB 653 amends Section 19-10-1 NMSA 1978 which established a SLO program for approval of lower royalty rates for wells producing minimal volumes of oil from state leases, communitizations or units.

According to the SLO, the bill accomplishes several objectives:

• •applies the current production limits for oil to a well producing from formations less than five thousand feet;



• •raises production limits for oil produced from deeper formations;

• •requires an affidavit that the well is incapable of greater sustained production over the specified production limit; and



• •extends the term of approval for the reduced royalty rate.

The bill also deletes the requirement for information from the applicant that may be expensive to obtain, but can be calculated by SLO engineers, and eliminates another payment of an application fee for renewal of the reduced royalty term.

Significant Issues

The SLO reported several significant issues regarding HB 653:

• •the bill will increase the number of potential wells qualifying for the 5 percent

royalty rate for oil production under certain conditions;

• •the current 2 year term for approval of the lower royalty rate may be extended to 3 years without any detrimental effect to the beneficiaries provided the applicant certifies the well is incapable of sustained production over the specified production limits; and

• •the term of the reduced rate may be extended upon request without the payment of an additional filing fee, which further reduces cost to the producer.

FISCAL IMPLICATIONS

There is no appropriation attached to this bill. In terms of revenue, the exact amount is undetermined at this time; however, a projection is given in the next section.

OTHER SUBSTANTIVE ISSUES

The current law is used primarily for wells producing from shallower zones. The amendment will enable deeper producers to take advantage of the decrease in royalty rate, and keep wells in production. The SLO indicated that only 115 of the 3,500 wells on state lands that average 3 barrels or less of oil per day, are currently approved for a 5 percent royalty rate. Of these 115 wells, 85 percent will produce from formations less than 5,000 feet. Also, the agency noted an additional 1,800 wells on state land produce more than 3 but less than 15 barrels of oil per day. If similar ratios hold, some 60 additional wells would qualify for the 5 percent royalty rate.

Recently, the SLO submitted a cost-benefit analysis of the Royalty Reduction Program. Of the 115 marginal wells that qualified for the reduced royalty rate, the 2 year reduced royalty rate on 63 of these wells had expired as of December 1, 1998, leaving 52 wells currently in the program. The SLO reported a net revenue of $11.9 for the past calendar year based upon oil production from the remaining wells.

As noted by the SLO, if current trends continue, some 60 additional wells would qualify for the 5 percent royalty, bringing the total to 112. Based upon this new figure, the projected net revenue for the current calendar year would be $25.8.

CONSEQUENCES OF NOT ENACTING THIS BILL

Due to depressed prices for oil, the wells that would be approved for a royalty reduction are in very real danger of being shut in, with production lost to the state.

RWP/gm