Oil and gas had little to fear during legislative session

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Stepping to the microphone at a press conference wrapping up this year's legislative session, House Speaker Brian Egolf, D-Santa Fe, hammered the podium to the drum beat for Queen's "We Will Rock You" before declaring it the "best, most productive" legislative session in state history. He proclaimed major achievements in education funding, criminal justice reform, a path for carbon-free electricity — and a bill that would save 100,000 acre feet of water each year from use in oil fields.

"The produced water bill, I think, is going to go down as one of the greatest environmental accomplishments to come out of the state legislature of New Mexico," Egolf said. "Just the quantity of fresh, potable water that's going to be saved for agricultural and municipal use is breathtaking."

The bill Egolf held up in victory paves the way for recycling wastewater from oil and gas production for reuse by the industry, reducing the need for freshwater in the production process.

It had the support of the New Mexico Oil and Gas Association but was controversial among environmental groups because it sets the stage for such water to see other, non-industrial uses in the future. In the final days of the session it was amended to allow the Oil Conservation Division to issue fines and penalties for permit violations, a measure championed by environmentalists.

The pairing of the two measures in one bill, which Gov. Michelle Lujan Grisham signed into law Wednesday, provides a glimpse into the Democratic legislative majority's complicated dance with New Mexico's largest industry at a pivotal moment: A new Democratic governor signaling her willingness to support long-sought regulation of the oil and gas industry that in the past year has gifted New Mexico with a historic financial boost to the state's chronically cash-strapped budget.

The episode also demonstrates one of the ways the oil and gas industry held its ground during the session, despite a political climate some might have forecast as unfriendly.

Regulating oil and gas, but only with their blessing

For the last eight years, the oil and gas industry enjoyed a close ally in the governor's office in former Gov. Susana Martinez. When Gov. Michelle Lujan Grisham started talking about regulating methane during her campaign — and certainly when freshman Sen. Antoinette Sedillo Lopez, D-Albuquerque, introduced a bill to put a four-year moratorium on hydraulic fracturing in the state — spasms of concern rattled the industry.

But Egolf has sought to assure the industry that it has nothing to worry about.

"We started off with a lot of rhetoric from the other side that there's a war on oil and gas, and I said early on that the war on oil and gas is a figment of the imagination of the other party," Egolf said. "I still believe that to be true."

Democrats would have been cautious about waging any such war with an industry that provides nearly one-third of New Mexico's general fund revenue, supporting more than 100,000 jobs and 13 percent of the state economy, according to the New Mexico Oil and Gas Association (NMOGA). When presenting the state budget bill for a vote, Sen. John Arthur Smith, D-Deming, declared, "Drill, baby, drill."

NMOGA made revenue a dominant theme during the session. Robert McEntyre, spokesperson for the association, pointed to the $1 billion surplus that enabled lawmakers to pass a $7 billion budget as testament of the industry's contribution to the health of the state's coffers. "It's been giving legislators a windfall to work with."

Despite the dollar signs, there were efforts to rein in the industry, such as the proposed moratorium on hydraulic fracturing, SB 459, which would have stopped oil and gas development its tracks and cost the state $3.2 billion over four years. Additionally, HB 206, colloquially called the "state-level NEPA," would have required state environmental reviews for new wells and potentially slowed down development.

Neither made it far.

What did pass — such as a bill adding application fees for drilling permits as a revenue stream for updating their online systems — did so with the New Mexico Oil and Gas Association's blessing.

"We want to make sure that EMNRD is running as smoothly as it can," McEntyre said. "Right now it's not surprising that they're … a little understaffed and bogged down."

But in a sign that the industry isn't as monolithic as some people think, Rep. Rod Montoya, R-Farmington, who represents a part of the state with more low-producing wells, said by looking so much to NMOGA, lawmakers ignored the independents and smaller producers like those in the San Juan Basin in the northwest. He thought the added costs and penalties would present a problem for some oil and gas producers.

The different reactions to legislation that garnered support of the big guns but not small producers, who were worried it might put them out of business, exposed a fissure in the industry.

Democrats, too, wrestled among themselves over legislation affecting the oil and gas industry. Some anticipated a hard line after the 2018 election gave Democrats control of the executive and legislative branches for the first time since 2010 — and a more progressive House of Representatives, with an ambitious freshman class and the largest Democratic majority in at least 15 years. But those people didn't account for moderate and conservative Democrats, particularly in the Senate, who are able to control the destiny of legislation in key committee rooms.

The produced water bill: Demonstrating a legislative balancing act

Massive consumption of fresh water in an arid state ranks high among areas of concern with a booming oil and gas industry. Operators mix water with a blend of chemicals to help open, or "frack," a pathway for oil and gas to flow to the surface. There's also water lingering deep underground that emerges with oil and gas. All of it is laced with fracking chemicals, as well as chemicals and metals freed with the fossil fuels, including naturally occurring radioactivity.

The water is considered industrial waste and disposed of in deep injection wells.

In 2018, the industry had to handle more than 40 billion gallons of it — more than the amount of water used annually by the city of Albuquerque.

Operators have been encouraged to recycle water, but the regulatory framework around how they do that has been unclear, leaving companies uncertain who can sell the waste water, and to whom. That means it's also unclear whether there's enough money to be made reselling the produced water to justify investing in an expensive treatment system.

HB 546 addresses those ambiguities and paves the way for companies to recycle and resell the water for use in drilling and fracking other wells. The idea is that there will be an equal exchange: Every gallon of water recycled and reused in the oil field will equate to a gallon of freshwater that doesn't have to be permanently contaminated.

Current rules expressly ban releases of produced water where it might reach freshwater. But this bill opens the possibility that the state could draft regulations for treating and using this former industrial waste outside the oil field, including on farms and perhaps even in drinking water supplies.

Some view that prospect as promising.

"Freshwater is cherished in New Mexico," said House Minority Leader Rep. James Townsend, R-Artesia, whose district is in the middle of New Mexico's southeastern oil-producing region. "There's 100,000 acre feet of produced water that's handled in southeast New Mexico. Can you imagine if, in that arid climate, you could take 100,000 acre feet of water and figure out how to put it into agricultural use? I mean, it would be a boom bigger than the oil industry. It would be absolutely amazing."

The bill authorizes the Water Quality Control Commission to adopt rules, to be administered by the Environment Department, around how produced water is used outside the oil field, creating the possibility for new and different applications.

"There's an opportunity to catch up on produced water and potentially open doors to reuse that water for other purposes, or to save or recycle that water for additional production purposes, and that could be a huge opportunity for oil and gas," NMOGA's McEntyre said.

Does the technology exist to clean up that water sufficiently that it could be used in other places? Innovation to do that will flow from these regulations, said McEntyre, Townsend, and others.

"The best way to incite technology is with a financial incentive," Townsend said. "Look what they did with hydraulic fracturing. Five years ago, if you told somebody they could drill a well 3 miles horizontally and then frack it in five to seven stages and then produce it, they would have told you you're crazy, but what are they doing now? They're doing it."

Its sponsor, Rep. Nathan Small, D-Las Cruces, says the bill was the result of a collaborative effort by Energy, Minerals and Natural Resources Department, the Environment Department, the Oil Conservation Division, and partners in the industry as well as environmental groups. Supporters included Marathon Oil, ConocoPhillips, XTO Energy, New Mexico Oil and Gas Association, the New Mexico Business Coalition, Environmental Defense Fund, and the Environment Department secretary.

At the moment, the Oil Conservation Division, under the Energy, Minerals, and Natural Resources Department, handles most of the rulemaking around produced water. The Oil Conservation Division's primary objective is to advance oil and gas extraction. HB 546 would shift authority for uses of produced water outside the oil field to the Environment Department, giving the reins to the state agency tasked with protecting public health and the environment, and specifically to the Water Quality Division, the state experts on freshwater resources.

Environmentalists on board with the bill are measured about whether produced water should be used for other purposes. But providing regulatory authority to the Environment Department over uses of the water outside oil and gas production is seen as a win.

"We think there needs to be more science and a really careful approach before anything like that were to happen," said Jon Goldstein, the Environmental Defense Fund's director of regulatory and legislative affairs for energy issues and a former secretary of the Energy, Minerals and Natural Resources Department under former Gov. Bill Richardson. "This bill helps in that regard, by putting the regulatory authority clearly in the Environment Department."

He also contends that the bill tightens rules around who regulates produced water if and when companies start looking at ways to use it outside the oil field. Combine that with ensuring the Oil Conservation Division can fine companies for breaking the law, he said and "We ended up with a bill that is quite strong and that marks the first really major legislative reform for the oil and gas industry in over a decade."

Pushback from enviros

But other environmental groups have less confidence in those departments, particularly after the record set in the last eight years. They're concerned about whether the wastewater can be effectively cleaned of chemical and radioactive contaminants, and say that should be demonstrated before any state agency is allowed to make rules that would return it to the state water supply.

"This bill, what it does is, it opens up the door for produced water to find its way off the oil field, potentially into our agricultural fields and our streams and our drinking water," said Eleanor Bravo, with Food and Water Watch. The group petitioned the governor to veto the bill. "It empowers two state agencies that have been lax and failed multiple times in the past on oversight, over this water."

In November, the state of New Mexico and the U.S. Environmental Protection Agency released a draft white paper that looked at some of the pending technology for recycling produced water. While there's "promise in turning this wastewater into future water resource," the paper reads, "there remain important scientific questions related to the human health and environmental implications of using treated produced water for applications outside the oil and natural gas industry." It cautions, "treated produced water could contain chemical constituents that may harm human health, but that are not regulated by the National Primary Drinking Water Regulations."

As of that draft's release, NMED had no mechanism to require testing for those contaminants.

The paper also mentions "data gaps" on the chemicals in produced water. The industry has long shielded exactly what mix of chemicals goes into fracking fluid as a trade secret.

If the state aims to use this oil and gas byproduct as potable water, the report advised, it should clarify its authority to oversee the treatment of that water and the responsibility and control for that water. Supporters said HB 546 achieves that by empowering the Environment Department with writing rules for how produced water can be used.

Opponents of the bill say it makes the state a testing ground for figuring out how to treat and recycle the wastewater, for a profit.

"This bill is the first of its kind in the nation in opening the door for the oil and gas industry to commodify their radioactive waste, and under the guise of conservation, sell their waste back to New Mexicans as water," Rebecca Sobel, with WildEarth Guardians, said via email. "There are some good things in this bill, but the bill overall insinuates that there's a future for using produced water for non-fracking purposes, which is beyond premature at this point."

New Mexico Environment Department Secretary James Kenney declined an interview for this story. But his press staff wrote in an email that "NMED will continue to be protective of surface water and groundwater quality standards in the development of sampling and analytical methods."

Even those who haven't been so alarmed have been cautious in their support.

Liliana Castillo, Conservation Voters New Mexico communications director, said enabling the OCD to levy fines and penalties, which were inserted into the bill late in the legislative session, was a clear win for the environment. However, they're holding off making any statement on the produced water components, pending more research and more community consultation.

"There are definite, significant wins in there for the environment and public health, but as far as the whole bill, it's just a challenge," Castillo said.

A merger of ideas

For years, New Mexico's Oil Conservation Division hasn't been able to fine oil and gas companies for permit violations due to a court ruling in 2009. Support for empowering the agency to once again issue fines and penalty assessments was widespread among environmental groups, and even the oil and gas industry wasn't unilaterally opposed.

But a bill containing those provisions, SB 186, failed to make the agenda in Senate Finance, chaired by Senator John Arthur Smith, after passing two senate committees. So, its sponsor, Sen. Richard Martinez, D-Española, added those provisions as an amendment to the produced water bill, HB 546, in the committee he chairs, Senate Judiciary.

When the penalties were added, Montoya, the Republican lawmaker from Farmington and one of three sponsors of HB 546 with Small and Egolf, said he considered pulling his name off the bill.

"As far as the produced water, that was an industry bill — that was not a government suggestion. That was an industry suggestion," Montoya said. But he decided against withdrawing his name from HB 546 so he could help handle a question of jurisdiction around those penalties when they top $200,000, triggering a judicial review.

"I was very disappointed that that got put into that bill," Montoya said of the penalties amendment. "But the produced water portion of that, that was good."

Merging HB 546 and SB 186 is "sort of a great illustration of the legislative sausage-making process," said Eric Jantz, an attorney with the New Mexico Environmental Law Center.

Jantz speculated that, behind the scenes, someone saw the pragmatic wisdom of winning support from the industry and environmental groups by giving something each wanted.

"This constant attempt to balance oil and gas industry needs with community, public health and environmental needs, I think, is in some ways fundamentally misguided," he said. "I understand why it happens and I understand the reality of the situation, but if legislators really wanted to try to deal with this issue — the issue of gas pollution — in a meaningful way, the first thing they would do would be to diversify New Mexico's economy such that it wasn't so dependent on oil and gas, because when you get an industry that contributes so much money to the state's budget, obviously, they're going to have an outsized amount of power."

This story was published by New Mexico In Depth.