New Mexico's State Land Office has announced that it will be withholding lease sales indefinitely on its most promising tracts for oil and natural gas development in the Permian Basin. This decision comes as the office seeks approval from the state Legislature to increase the top-tier royalty rates. The proposed increase would raise New Mexico's top royalty rate for oil and gas development from 20% to 25%, aligning it with neighboring Texas.
Royalty payments from oil and gas development in New Mexico are crucial as they are deposited into a multibillion-dollar investment trust that benefits public schools, universities, and hospitals. The Land Commissioner emphasized the importance of maximizing revenue for the state's public beneficiaries, stating that leasing tracts below market rate would mean that school children are subsidizing oil and gas activities.
The disagreement between the Legislature and the State Land Office has raised concerns within the petroleum industry. The New Mexico Oil and Gas Association CEO highlighted that the current combined royalties and taxes in the state are comparable to surrounding states. However, the potential loss of billions of dollars in income and investment returns over the lifetime of future leases is a significant consideration.
The accountability and budget office of the Legislature estimates that a 25% royalty rate cap could increase annual revenues by $50 million to $75 million. As a result of the lease sales suspension, up to six leases will be excluded from the upcoming monthly bidding in March. The next regular session of the Legislature is scheduled for January 2025.
Despite acknowledging that the state will miss out on immediate bonus payments during the suspension of some lease sales, the Land Commissioner emphasized the long-term benefits of the decision. She likened the situation to a homeowner delaying the sale of property during a market downturn, emphasizing the greater value in the long run.
