NOTE: As provided in LFC policy, this report is
intended only for use by the standing finance committees of the
legislature. The Legislative Finance Committee does not assume
responsibility for the accuracy of the information in this report when used for
other purposes.
The most recent FIR
version (in HTML & Adobe PDF formats) is available on the Legislative
Website. The Adobe PDF version includes
all attachments, whereas the HTML version does not. Previously issued FIRs and attachments may be
obtained from the LFC in
|
SPONSOR: |
Whitaker |
DATE TYPED: |
|
HB |
661/aHAFC/aSFC |
||
|
SHORT TITLE: |
New Oil and Gas Wells Tax Credit |
SB |
|
||||
|
|
ANALYST: |
Neel |
|||||
APPROPRIATION
|
Appropriation
Contained |
Subsequent
Year Fiscal Impact (Currently Unknown) |
Recurring or
Non-Rec |
Fund Affected |
||
|
FY03 |
FY04 |
|
|
|
|
|
|
|
|
See
narrative |
|
General
Fund (Operating Reserve) |
|
|
|
|
See
narrative |
|
Oil
and Gas Tax Credit Fund |
|
|
|
|
|
|
|
LFC files
Responses
Received From
Energy,
Mineral and Natural Resources Department (EMNRD)
State
Land Office (SLO)
Taxation and Revenue Department
(TRD)
SUMMARY
Synopsis
of SFC Amendment
The proposed amendment strikes HAFC Amendment 7,
and replaces the emergency clause with a contingent effective date based on the
price of oil and gas. The new effective
date is triggered when the monthly value of either oil or gas for four
consecutive months is $19.00/barrel or less for oil or $2.25/mcf or less for
natural gas.
Upon the effective date, $12.0 million is
transferred from the General Fund’s Operating Reserve to the Oil and Gas Tax
Credit Fund for the tax credits associated in HB661. Provisions of HB 661
expire
It should be noted that the last time natural
gas or oil were at the “triggering” level was November 2001 through February
2002 when the average price of oil fluctuated $17.66 and $18.70 a barrel. Prior to this time frame, the last time the
“triggering level was reached was August and July of 1999 for oil and gas,
respectively. Based on the current futures markets for natural gas and oil it
does not appear that the “triggering” price levels will be met within the next
18 month revenue horizon. However, the triggering price levels will almost
certainly be met within the next five years, which is the life span for the
bill.
Synopsis
of HAFC Amendment
The House Appropriations and Finance Committee
amendments make minor changes to House Bill 661 (HB661) to correct some technical
deficiencies and to change the source of the funds used to pay the tax
credits.
The title of the bill is corrected so that it
summarizes all of the bills' objectives, including the objective of promoting
drilling from a single well pad, reducing the surface impact of oil and gas
operations and enhancing state revenues.
The amendment also makes minor typographical corrections throughout.
An important amendment is contained in Subsection D of the bill. The amendment substitutes a new Subsection D. That subsection clarifies that the tax credit authorized by the bill is to be disbursed as a refund. New Subsection D states that a request for a refund is to be processed by the Taxation and Revenue Department, and a refund will be issued to the operator by warrant. A refund request will be processed only after the Oil Conservation Division (OCD) certifies that the well upon which the tax credit is claimed meets the requirements of the bill. Finally, new Subsection D clarifies that upon receipt of the refund, the operator is to allocate the refund among the working interest owners.
The amendment defines "operator" as
that person shown on the records of the OCD as the operator of the well.
Finally, the amendment provides funding for the
tax credits authorized in the bill from the operating reserve rather than the
general fund (see note under technical issues).
Synopsis
of Original Bill
House Bill 661 amends
statute to provide
for a tax credit against the Oil and Gas Emergency School Tax for each new oil
and gas well drilled between
Significant
Issues
Prices for natural gas and crude oil have
trended somewhat higher over the past year, after a period of low prices (see
attachment 1 & 2). According to a
recent article in the Wall Street Journal Larry Nichols chairman of Devon
Energy Corp. stated “we’ve permanently moved into a new era of gas prices” and
natural-gas prices in the $2 and $3 per million BTUs range could be a thing of
the past.
Not only does the bill encourage new drilling,
it also encourages operators to minimize surface disturbance and impact by
providing a larger credit for drilling multiple wells on a single location or
pad, drilling horizontal wells and completion of wells into multiple strata
from a single well-bore. Approximately
1,416 new wells were drilled in 2001, while according to EMNRD’s web site
approximately 1465 APD were issued for new wells in 2002. EMNRD notes that 35 wells were directionally
or horizontally drilled and none were drilled from the same location as another
well. Another 217 wells drilled in 2001
were completed into multiple strata. If
enacted, the bill may increase the number of wells drilled on the same pad or
multiply completed well, thus reducing overall surface impact without reducing
production.
The appropriation of
$12,000 contained in this bill is a non-recurring expense to the General Fund’s
Operating Reserve. Any unexpended or unencumbered balance remaining at the end
of FY05 shall revert to the General Fund.
Section 6-4-2.1 NMSA 1978 stipulates that amounts in the
General Fund Operating Reserve may be expended only upon specific authorization
by the legislature” and only in the event general fund revenues and balances,
including all other transfers to the general fund authorized by law, are
insufficient to meet the level of appropriations authorized.”
POSSIBLE QUESTIONS
Should a triggering
mechanism be included in HB 661 that would allow tax credits for oil and gas
wells if the price of
Should the tax credit
be allowed retroactively?
SN/njw