As production of oil and gas in New Mexico reached record highs in 2018 and the state’s administration changed hands, energy executives were concerned that regulations would be tightened on natural gas flaring, permitting and methane gas emissions.

New Mexico’s Gov. Michelle Lujan Grisham and state land commissioner Stephanie Garcia Richard, both Democrats, were elected in November 2018.

The transition to a Democratic administration from a Republican one has not affected oil and gas drilling, said Ryan Flynn, executive director of the New Mexico Oil & Gas Association (NMOGA), a trade association group that represents nearly 1,000 upstream, midstream and downstream operators, in a conference call hosted by SunTrust Robinson Humphrey on July 24.

Lujan Grisham is a career politician who is a native of New Mexico and understands the importance of the energy industry to the state’s economy, he said. She previously served as the representative for the state’s first congressional district from 2013 to 2018. From 2004 to 2007, Lujan Grisham served as secretary of health of New Mexico and as a Bernalillo County Commissioner from 2010 to 2012.

“She (Lujan Grisham) has been really good to work with,” he said. “She has no personal opposition or and strong feelings for or against the industry. She has seen the state prosper as a result of the industry and suffer when prices were down.”

Oil production in New Mexico boomed in 2018 and rose by 46% from 2017, reaching 249 million barrels, said the U.S. Energy Information Administration (EIA).

Natural gas production followed suit and reached a 10-year record of 1,488,471 million cubic feet for 2018 marketed production.

The record production rates resulted in the energy industry contributing $2.2 billion to state coffers, including $822 million in funding for public schools and nearly $241 million for the state’s universities, colleges and other higher education institutions in fiscal year 2018.

The massive increases in oil and natural gas taxes and revenue are benefitting the state’s lower and higher education entities. The surge in production resulted in an additional $1.2 billion in revenue for the budget year that began in July.

New Mexico has become “increasingly dependent” on the energy industry and the revenue that it generates, Flynn said. The state faces pressure from environmental organizations and special interest groups who are active in New Mexico and are pouring money into the state to fund efforts to limit production.

“We are clear-eyed about the political dynamics,” he said.

Since New Mexico lacks a diversified economy, the state has “doubled down on the industry,” Flynn said.

While there are state legislators who make negative comments about the industry, he characterized them as outliers.

“We have strong relationships across the board (with legislators),” he said.

One issue that has cropped up is Garcia Richard’s proposal to raise the state’s royalty rate from 18.5% to 25% to be equivalent to the rate in  Texas. The proposal did not make it out of committee but Flynn said the land commissioner will likely keep pushing for the increase.

There is not currently a strong appetite from the governor or legislature to pursue an increase “since there is so much revenue being generated from the industry,” he said.

“Things are going well and there is no appetite for a tax or royalty increase,” Flynn said.

The issue will get more attention in the future and will be an issue that NMOGA will have to engage in for the long-term, he said.

Comparing the state’s royalty rate to Texas is an oversimplification, he said, because the Lone Star State does not contain any federal land and does not have to deal with the federal Bureau of Land Management, which administers public land.

The issue is nuanced because it is easier to work on oil and gas projects in Texas than in New Mexico.

“We want to keep our royalty rate to be competitive and we don’t want to drive business from the New Mexico side to Texas,” Flynn said.

While the industry was nervous about Garcia Richard serving as land commissioner, the “operations  have remained stable” since she took office, he said. The state will see action on royalty rates but no changes are expected in the next year or two, Flynn said.

Gas flaring remains the largest issue from a regulatory perspective. NMOGA’s methane group is working closely with Lujan Grisham’s office. The goal is to decrease emissions, but choose an approach that does not curb production, he said.

This issue will be a priority for the next year as environmental groups “become political proxies with lots of fighting,” Flynn said.

 The state is seeking operational flexibility while innovating and plans to avoid the mistakes that were made in Colorado where reductions were achieved that were “harmful” to the industry, he said.

“This will be the hot topic for the next 12 months,” Flynn said. “I don't see this as an issue is going to be detrimental to us.”

New Mexico has made advances in lowering methane emissions. From 2011 to 2017,  methane emissions from oil and natural gas production fell by 51% while oil and natural gas production rose by 31% during the same period. The largest decline occurred in the  San Juan Basin with a 55% drop while oil and natural gas production fell 24%. In the Permian Basin where there has been a massive production boon of 101%, methane emissions dipped by 35%.

The length of time for operators to receive state permits for drilling and rights-of-way is only two weeks, compared to a year from the BLM.

“The state continues to be more efficient than the feds,” he said. “We have worked to close that gap.”

While water scarcity remains a major concern for the state, energy companies have transitioned more frequently from using fresh water wells as a source and instead relies more on produced water. The long-term goal is to find more opportunities for companies to use produced water, Flynn added.

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