Ian M. Stevenson | EENews.net | Falling royalty rates for oil and gas production are poised to strike one state more than any other: New Mexico.
Congress this year cut federal oil and gas royalty rates by 25 percent, reducing the income that states earn for leased mineral rights on public lands in their territory.
New Mexico is the second-largest oil-producing state in the country and the largest federal mineral lease earner. But it’s expected to get billions of dollars less in income in the coming decades as a result of the cuts. A Democratic lawmaker on the state’s finance committee and the state’s land office said the changes could jeopardize New Mexico’s ability to provide education and health care services to its population.
“It’s an outrage,” said Greg Bloom, assistant commissioner of mineral resources at the New Mexico State Land Office, which is run by elected Democrat Stephanie Garcia Richard. “The Trump administration is picking the pocket of New Mexicans and other states and giving away a valuable resource to the oil and gas industry.”
The Inflation Reduction Act, which President Joe Biden signed in 2022, raised federal onshore royalty rates to 16.67 percent. The megalaw, which President Donald Trump signed in July, dropped them back down to 12.5 percent.
In recent years, the rates on private and state lands have diverged markedly from what federal authorities charge. While some new leases on state lands in New Mexico are sold with a 25 percent royalty charge, the federal rate since 1920 had been 12.5 percent before it changed under Biden.
As a blue state that is heavily reliant on the oil industry, New Mexico is poised to take a financial hit from the administration’s changes, according to economic estimates. But the White House and Republicans reject such projections, arguing that Trump’s fossil fuel push could boost revenue.
Following an oil and gas production boom in New Mexico’s portion of the Permian Basin over the last decade, around 35 percent of the state’s budget is related to oil and gas, according to state figures. Oil production in the state leapt by 441 percent from January 2017 to January 2025. And more than half of the oil production growth in the U.S. since 2020 has come from two counties in New Mexico, according to data from the U.S. Energy Information Administration.
Reaping hundreds of millions of dollars in profits from lease sales, New Mexico lawmakers have invested excess revenue into trust funds aimed at funding education, Medicaid and other programs that now collectively hold more than $50 billion.
New Mexico’s state budget for the current fiscal year is $10.8 billion.
Those state coffers stand to miss out on about $1.7 billion over the next 10 years as a result of the royalty rate cuts, which were changed in the megalaw passed this summer. Through 2050, the state could go without up to $5.1 billion, according to an analysis by Brian Prest, an economist at the nonprofit Resources for the Future.
A spokesperson for New Mexico Gov. Michelle Lujan Grisham (D) referred questions about the royalty rates to the New Mexico Department of Finance and Administration, which agreed with Prest’s figures.
‘Not necessarily’
When oil developers lease land for production, they generally pay the landowners a royalty rate, which is a percentage of the revenue from the extracted oil. That money goes directly to state or private coffers if the oil is drilled from state or private lands. On federal lands, royalty income is split evenly between the federal government and the state where the extraction occurs.
Though it shares the Permian with neighboring Texas, New Mexico’s portion is composed mostly of federal lands, while Texas has much more private holdings.
White House spokesperson Taylor Rogers said by email that the Trump administration’s pro-fossil-fuel agenda “will ultimately incentivize more energy production — which will grow New Mexico’s energy tax base and revenue.”
“Instead of missing the forest for the trees, New Mexico Democrats should embrace President Trump’s agenda of energy dominance and ‘drill, baby, drill,’” she added.
In a statement, Interior spokesperson Elizabeth Peace said the royalty rate changes “balance responsible development with economic opportunity.”
The changes “[ensure] federal lands remain competitive for investment, encouraging production that supports state and local revenues, jobs and community programs,” Peace said by email. “For a state like New Mexico, which leads the nation in federal oil and gas royalties, sustained development will continue to generate billions in funding for schools, health care and infrastructure.”
Photo by Jamie Rood
In May, the Congressional Budget Office estimated that lowered royalty rates will spur investment from energy developers and make up for the rate cuts with more overall drilling activity.
The oil industry makes a similar argument.
Mallori Miller, the Independent Petroleum Association of America’s vice president of government relations, raised doubts about a major financial hole materializing from the royalty cuts.
“That assumption is not necessarily the case,” she said by email, noting that federal lands with similar royalty rates as state lands are already less attractive to drillers because they have longer permitting timelines.
Prest, the economist, said his calculations show increased drilling activity on federal lands would have to be “absurdly large” to counteract the 25 percent cuts. A number of other analysts and environmentalists agree.
While New Mexico is expected to miss out on the biggest slice of funding, other oil-producing states could still see the effects. Wyoming and North Dakota could each go without $200 million over 10 years, while Colorado and Texas could both go without $100 million over the same period, according to Prest.
Funding ‘slashed’
Less money from oil lease sales has state officials worried about support for health and education programs for New Mexicans.
Garcia Richard, the public lands commissioner, said in a letter to Rep. Teresa Leger Fernández (D-N.M.) that the royalty cuts “will hit New Mexico’s working families at a time when other federal funding for essential services is being slashed by the Trump Administration.”
In a statement, Leger Fernández called the cuts a “giveaway to Trump’s campaign donors,” noting that she introduced in committee a failed amendment that would have stopped the royalty rate cuts from taking effect if they would reduce mineral leasing revenue to states.
New Mexico has one of the highest poverty rates in the country, while close to 42 percent of residents are on Medicaid or the Children’s Health Insurance Program, according to federal data from 2023. Bloom of the New Mexico State Land Office said the royalty rate reductions are compounded by other federal cuts to Medicaid enacted in the megalaw that could lead some residents to lose their health insurance.
“We’re a very poor state,” he said, noting that the new wells leased at a 12.5 percent rate could be in operation for decades, with the royalty rate in effect at the time of the lease then locked in for the life of the well.
On Thursday, Lujan Grisham called lawmakers back for a special session to start Oct. 1 to address federal cuts to health care and food aid.
“These royalty rates have, in a sense, further impoverished” New Mexicans, Bloom said. “Now we’ll be getting tens of millions of dollars less every time there’s a lease sale.”
In its projections, the state Legislature’s finance committee never incorporated the higher royalty rates established during the Biden administration, “due to limited lease issuance during the higher-rate period and uncertainty about production timing,” according to a recent forecast.
For state Republicans, that means the cuts will not affect the budget math.
“It’s not needed to realize our current budget,” said state Rep. Rebecca Dow, a Republican member of the House Appropriations and Finance Committee.
While noting the “vital role” oil and gas revenues play in state funding, she said that “the lower federal royalty rate passed in the new federal reconciliation bill will have little or no effect on New Mexico’s future state budgets because the state never assumed any higher revenue from that higher federal royalty rate.”
But Democrats see an overall picture that translates into less money for the state’s priorities.
Nathan Small, a Democratic state lawmaker who chairs New Mexico’s House Appropriations and Finance Committee, said the first state trust fund likely to be affected is one that brings in money for a universal childhood education program, which was created in recent years after voters passed a constitutional amendment in 2022.
“It will have negative impacts there,” Small said by phone. “Right now, we’re in a scenario like so many other states, where the federal reductions and cuts through the reconciliation bill are forcing very challenging conversations.”
Story Credit: Ian M. Stevenson | EENews.net |
