Change to oil leases could raise more for schools

State Land Office now setting minimum bids based on value rather than acreage

Public schools in New Mexico could see an increase in annual funding from a multibillion-dollar state land endowment following changes to the way oil and gas drilling leases are bid.

For years, the New Mexico State Land Office offered state trust land production leases on a royalty rate based on a set minimum bid — as little as $31.25 per acre for a 640-acre tract, for example. The minimum bid often had little correlation with the actual value of the land being bid for extraction, according to a new report released Thursday, and tracts “frequently sold for the amount of the minimum bid.”

Under new terms that took affect earlier this year, land tract minimum-bid rates will be based on an analysis of the property’s value.

Most of the money raised from extraction leases on state land goes into the now $18.7 billion Land Grant Permanent Fund, which provides hundreds of millions of dollars every year to public schools, colleges and other beneficiaries.

Those beneficiaries likely will see an increase in the funding stream.

“We made this change to make sure our school kids get appropriate value for the land we lease,” Sunalei Stewart, deputy commissioner of operations for the State Land Office, said in a phone interview Thursday after presenting a report on the issue to the Legislative Water and Natural Resources Committee in Ruidoso.

In the past, Stewart said, minimum-bid rates were “arbitrary” and based on the amount of acreage involved in a lease sale. “It did not reflect whether that acreage was good oil-and-gas land or poor oil-and-gas land.”

The State Land Office began implementing the new minimumbid rates in May and already has sent more money into the Land Grant Permanent Fund.

According to the report, an 80-tract bid was listed in February at $37.50 per acre. In May, when the land was reappraised, the minimum bid was raised to $625 per acre. The tract ultimately sold for $4,450 per acre — 57 times the amount of the original offer, netting $356,000.

The lease could have brought in just $6,350 under the old system.

Royalty rates, set by statute, remain in place for the life of the lease. Stewart said some active leases date back to the 1920s. The new minimum-bid rates will not affect any leases already in place, he said.

Stewart said the State Land Office probably will conduct an evaluation of the new lease system’s impact in May 2020.

Robert McEntyre, a spokesman for the New Mexico Oil and Gas Association, said in an email Thursday, “It’s unclear what impacts this decision could have, but the vast majority of leases are drawing bids well over the minimum at this point as interest and investments in the Permian continue to grow.”

Last year, over $900 million of the $1.1 billion the State Land Office raised from oil and gas production went into the Land Grant Permanent Fund, according to the new report.

Sen. Peter Wirth, D-Santa Fe, a long-standing member of the Water and Natural Resources Committee, said after Thursday’s hearing that “it makes total sense for the land commissioner to set rates based on a parcel-by-parcel analysis instead of a flat rate.”

As a result, Wirth said, the money “will go into the land grant fund and then into our public schools.”