New Mexico to revisit bonds for oil and gas development


ALBUQUERQUE, N.M. (AP) — It was the 1970s when New Mexico last increased the amount of bond money that oil and gas companies are required to put up before drilling. As development continues at a record pace, State Land Commissioner Stephanie Garcia Richard says it’s time to take another look.

Legislation that called for a study of the issue stalled during the recent session, but Garcia Richard announced just a day after lawmakers adjourned that she’s moving forward with the effort. She said her office has the funding to begin the work.

The review could take months. Given all the infrastructure and development on state trust lands, officials said the amount of bonding needed to ensure taxpayers aren’t left paying for any clean-up and restoration after oil, gas or other minerals are extracted is currently unknown.

Garcia Richard described it as an urgent issue that could leave “taxpayers and our state trust land beneficiaries on the hook for potentially millions of dollars.”

Concerns about the inadequacy of bonds goes beyond New Mexico. A report released last fall by the U.S. Government Accountability Office (GAO) highlighted bonding shortfalls on federal lands and found that oil and gas bond amounts largely have not been updated in 40 years or more and fail to serve their intended purpose.

Abandoned wells have been a major issue across much of the West and some officials are concerned the problem could grow given the exponential increase in development in places such as the Permian Basin, a booming area that straddles the Texas-New Mexico border.

Once the New Mexico study is complete, the State Land Office could propose raising bond requirements through a rule-making process. That would involve a series of public meetings.

The agency manages millions of acres of surface land and mineral estate throughout New Mexico. That includes more than 30,000 active leases and rights of way for everything from agriculture to oil and gas development, renewable energy projects and mining.

State officials are most concerned about unplugged and abandoned wells. According to the State Land Office, the average cost of plugging a well is more than $28,000 and the cost to remediate contamination associated with a single lease can range from $5,000 to millions of dollars depending on the extent of contamination.

The New Mexico Oil Conservation Division tallies the number of orphaned and abandoned wells throughout the state at 711, of which only 6% have been plugged. While the state has a restoration program funded by a tax on oil and gas operators, officials say its $5 million budget would be drained quickly considering the number of wells needing to be plugged and remediated.

The State Land Office pointed to a case of contamination in Lea County that occurred five years ago. The bond covered only $10,000, but the current estimated cost of cleaning up the spilled produced water is over $600,000.

Aside from well sites, the study will require the State Land Office to review over 10,000 miles (16,000 kilometers) of oil and gas-related pipelines in rights of way throughout the state. Officials say the existing exposure for decommissioning pipelines and remediating rights of way on state lands alone is hundreds of millions of dollars.

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The permit application is the point at which to institute a fee increase.  Length of well life and profitability are unknowns.  The best rule of thumb, IMO, is the lowest rate spread over the maximum payees and the permit to drill process meets that standard.  The problem with the severance tax is twofold:  most new wells are exempt from the tax during their most productive period, first 18 to 24 months, and the severance tax, especially on oil, is too high - 12.5.%.  The exemption period should be eliminated.  The severance tax should be drastically reduced.  The permit to drill fee should go up to cover realistic P&A costs.  And the state should reform the tax structure to increase revenue from industries that see windfall profits from depressed hydrocarbon prices.  Doing so meets the lowest rate/most payees test with the added advantage that most of the payees are not Louisiana citizens.  They are the global customers of the refining and chemical industries.


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