Whether they like it or not, the various states which possess rich oil and gas minerals deposits beneath their soil are in a constant competition with one another to attract capital dollars across their borders. The thousands of companies that drill all the wells in the United States allocate their annual drilling budgets across a variety of potential drilling projects, and prioritize them based on a variety of factors.
In almost every company, the key overriding factor in this process is each project’s anticipated rate of return on the capital dollars invested. Much has been written and said in recent years about the need for most shale producers to borrow money from lenders in order to finance their drilling projects. For more than 200 of these companies, excessive borrowing led their declaring bankruptcy during the depth of the recent bust in crude oil prices.
This process of servicing debt only serves to pressure companies to allocate an even higher weight to each project’s anticipated rate of return. Given that a high percentage of these companies own leases in multiple states, in the offshore and in multiple countries, this means these states must strive to remain competitive in their ability to attract these multi-million dollar investments.
New Mexico is one such state that has long been blessed with an abundance of such mineral resources. While it has in the past derived most of its oil and gas-related income from natural gas production from the San Juan Basin in the Northwest corner of the state, focus has turned in recent years to the more oily extent of the vast Permian Basin that lies underneath Lea and Eddy counties in the southeast, along the border with Texas. This part of the state poured half a billion dollars into the state’s coffers from a single federal lease sale last September.
Colorado, home to the prolific DJ Basin, is another state where the state and local governments have in recent years taken billions of oil and gas dollars that go to funding education, healthcare and infrastructure. Like New Mexico, Colorado is also home to vast wilderness areas and incredibly beautiful landscapes of which their citizens are rightly proud and want to protect.
The state governments in both states this year feature new incoming Democratic governors and legislatures featuring Democrat majorities in both chambers. Both new governors – Michelle Lujan Grisham in New Mexico and Jared Polis in Colorado – promised during their campaigns to increase regulation on the oil and gas industry, as did many of the newly-elected members of the legislature.
Already, legislation to dramatically change the nature of regulation of the industry has come up in both states. A bill under consideration in New Mexico would allow the state’s Oil Conservation Division (OCD) to directly impose penalties and fines on operators that it deems to have violated the state’s environmental regulations. Currently, the OCD proposes fines and penalties that are then pursed in court by the Attorney General’s office. Other proposals currently under consideration in the legislature would impose new rules related to methane emissions and raise the royalty rate on state leases from 20% to 25%.
In Colorado, meanwhile, proposals are being floated for legislation that would force the Colorado Oil and Gas Conservation Commission (COGCC) to regulate the industry based mainly on public health concerns. A recent decision by the state’s Supreme Court in the case of COGCC v. Martinez considered this very question, which had been brought by the plaintiffs, and rejected it based on current state law that requires the COGCC to prioritize the development of the state’s oil and gas resources over other considerations.
While every individual will have their own opinions regarding how these various proposals should play out, the policymakers themselves have a duty to weigh the consequences of increasingly regulating an industry that funds such significant portions of their state budgets. Every one of the proposals under consideration would increase the cost of doing business in either state, and higher costs translate into lower anticipated rates of return on investment. That lower return on investment will inevitably result in fewer wells being drilled in the state, with the likely outcome of even more drilling rigs moving to other, less costly states like Texas and Kansas.
This is the perennial balancing act of which state policymakers must always remain cognizant: Is the cost worth the benefit? Is the foregone revenue that they would otherwise be able to allocate to education, public health and infrastructure improvements worth the perceived benefits these various proposals are designed to bring about?
Tough call. It’s going to be an interesting year from a public policy standpoint.