NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

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(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

This bill would distribute certain royalty prepayments to the Common School Permanent Fund. The federal Royalty Simplification and Fairness Act (RSFA) allows marginal oil and gas wells located on federal land to prepay federal and state royalties that would occur over the life of the well.

A marginal well is a well that produces less than fifteen barrels of oil per day, or a natural gas well that produces less than ninety thousand cubic feet per day.

The prepayment of royalties into the common school permanent fund would allow those funds to earn interest that would be used to supplement the public school fund in the future.

FISCAL IMPLICATIONS

The Department of Finance and Administration estimates the prepayment on the marginal wells may cause a one-time increase in royalties payable in the future to the RSFA $200 million.

The actual prepayment amount is uncertain as producers will need an incentive to prepay. The logical incentive would be a cost savings offered by the state for prepayment. The estimated future production of marginal wells will be an exercise in forecasting and will be highly speculative.

Differences between state and producers' estimated production of marginal wells and the resulting royalty revenue is likely.

The Taxation and Revenue Department (TRD) reports that royalties from marginal oil and gas wells total approximately $24 million annually. This represents approximately sixteen percent of total production occurring on federal lands.

ADMINISTRATIVE IMPLICATIONS

None.

SUBSTANTIVE ISSUES

The market prices for oil and gas have fallen recently. Many producers in New Mexico have been hit hard. As a result, many producers have reduced their workforces and have stopped production on many of the marginal wells as they are not as profitable as non-marginal wells.

While the intent of this legislation is progressive, the current market conditions do not favor the states' bargaining position with producers as it relates to prepayment amounts.

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