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New Mexico Lawmakers Look at Tax Break to Salvage Oil Production

With state revenues rocked hard by low energy commodity prices, New Mexico state legislators are pushing a tax break for small oil-producing wells to keep them from being shut down.

Applying to an estimated 17,000 stripper wells, each producing less than 10 b/d, a bill in the lower state legislative House (HB 107) would lower the severance tax on each barrel produced until oil prices reached a threshold still to be determined. Ultimately, the tax break could amount to nearly $60 million for producers in 2020 if commodity prices stay down.

HB 107 narrowly passed out of the House Energy, Environment and Natural Resources Committee on a 6-5 vote last Wednesday with opponents saying the measure would foster continued oversupplies in what is already a poor market for oil and natural gas.

Both the New Mexico Oil and Gas Association (NMOGA) and the Independent Petroleum Association of New Mexico are supporting the legislation. "We're asking the state to share in the pain [of current low oil/gas prices] to get rewards longer term when things turn around," said Mike D'Antonio, NMOGA government affairs director.

HB 107 backer Rep. James Strickler, the Republican chair of the natural resources committee and a producer from Farmington, NM, said low prices are putting the stripper wells out of business. "This bill saves the wells," Strickler told local news media.

Because the state is so dependent on oil/gas revenues, D'Antonio said the tax break may be a tough sell. And the Democratic minority in the House already has declared that the state's struggling budget can't afford the lost revenue. The severance tax involved has been unchanged for 25 years, according to NMOGA, staying at nearly 4% on each barrel of oil produced, while HB 107 proposes to drop that to as low as 1.8 % as long as the price of oil is under a breakeven of $60-65/bbl.

D'Antonio said that NMOGA expects that threshold amount to be lowered in the legislative process to perhaps $50/bbl. At that level, that would mean more than $100 million for the state, according to the association's estimates.

Before the price crash last year, New Mexico was expecting a surplus of $230 million in revenues from the oil/gas sector for this fiscal year, but instead the additional revenue turned out to be close to zero, according to D'Antonio.

Now it is up to the state legislature to act on Strickler's proposal during a 30-day session that ends Feb. 18. HB 107 next goes to the House Ways and Means Committee for consideration.

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