$26M dip in gas royalties likely

New Mexico is bracing for the loss of $26 million in oil and gas royalties from the federal government this year, a cut one key state senator called the “tip of the iceberg” in federal budget sequestration impacts.

The Department of Interior announced this week it would withhold a portion of the energy and minerals royalties it collects from producers using federal land. The withholding would be part of the federal government’s compliance with the across-the-board federal cuts that took effect earlier this month.

Some top New Mexico leaders, including Sen. Tom Udall, D-N.M., and Attorney General Gary King, said they are checking to see if there are ways the royalty cut can be averted.

In the short term, Sen. John Arthur Smith, D-Deming, chairman of the Senate Finance Committee, said the state will be able to offset the federal cut with $570 million in reserves set aside this year.

But Smith added: “We’re always concerned about it being the tip of the iceberg.”

The state’s 10 percent budget reserves were kept high in part to insulate the state and its annual budget from looming federal sequestration cuts and volatile energy industry royalties, Smith said.

“Obviously we can make the adjustment for that $26 million this year, but we don’t know what else is going to unfold,” Smith said.

Wyoming is the only state facing a royalties loss larger than New Mexico, one of the nation’s largest onshore oil and gas producers. Wyoming is facing a $53 million cut.

“The Budget Control Act of 2011, passed by Congress, mandates across-the-board, automatic 5.1 percent sequester reductions,” said Patrick Etchart, spokesman for the federal Office of Natural Resources Revenue. “By law, revenue payments to states are not exempt from the sequester. Cumulatively, approximately $110 million will be withheld from states and counties where energy production occurs on federal lands during the remainder of the current fiscal year,” he said.

The federal government previously paid state governments about 50 percent of energy and minerals royalties collected on federal lands within the state. New Mexico in 2012 received about $488 million in those royalties, money that went toward the state’s General Fund.

The proposed $26 million royalty cut for New Mexico represents less than 0.5 percent of the state’s $5.9 billion General Fund budget.

But the lost energy and mineral royalties are a particular concern because the cutback takes from revenues rather than federal appropriations, said David Abbey, director of the Legislative Finance Committee.

Governor’s spokesman Enrique Knell reiterated that concern, saying that Gov. Susana Martinez is conferring with other state leaders about the cuts.

“They don’t represent the traditional type of programmatic cuts that the sequester was seemingly designed to enforce,” Knell said.

King said his Attorney General’s Office is reviewing the federal plan to withhold New Mexico royalties to determine whether the federal cuts can be appealed.

“It’s a little bit early for me to know what we can do, but I certainly have reviewed the issues with my litigation group,” King said.

Udall was critical of the royalty cuts.

“We are looking into this decision by the Department of the Interior and exploring options to see if it can be reversed, but the larger issue is the need to replace the draconian spending cuts of sequestration with a balanced approach to reducing the debt and deficit,” Udall said.

Rep. Ben Ray Luján, D-N.M., said the royalties to be withheld by the Department of Interior represent just some of what are expected to be federal cuts hitting New Mexico.

“It’s because of the impact these cuts will have — as well as the impact of cuts to other programs vital to New Mexico — that I have opposed the sequester every step of the way,” Lujan said. “It is a failed experiment that is going to have real consequences for the people of New Mexico.”

Rep. Steve Pearce, R-N.M., criticized the federal government for failing to tighten its own belt.

“The federal government is trying to bow out of their commitments to states after failing to cut wasteful spending within the government,” Pearce said.
— This article appeared on page A1 of the Albuquerque Journal