New Mexico eyes $500 million plan to transform brackish water for industrial use

New Mexico Gov. Michelle Lujan Grisham unveiled a $500 million public-private sector plan last week to build a strategic water supply to advance clean energy production and storage and protect dwindling freshwater in her arid state.

At the COP28 United Nations Climate Change Conference in Dubai, the Democratic governor said New Mexico would use the money, raised from short-term internal debt sales and paid off with oil and gas tax revenue, to spur businesses to build facilities to extract and cleanse the state’s plentiful supply of brackish salt water in aquifers and so-called produced water from fossil fuel extraction for industrial uses. 

The treated water, purchased in advance by the state through $500 million in long-term contracts, would be used to attract targeted industries such as green hydrogen creation, wind and solar energy storage, and the manufacturing of electric vehicles, microchips, solar panels, and wind turbines.  

Lujan Grisham said the plan harnesses the power of the private sector by offering companies fixed, long-term contracts so they can build the infrastructure to transform water currently considered to be waste into a new industrial water source. 

“This is innovation in my mind at its best,” she said at the conference. “It’s a recognition that our future growth and development is dependent on smart water ideas.”

The governor is aiming to ask the state legislature for $500 million in debt capacity split between the next two sessions.

The state is contemplating the use of senior severance tax notes backed by tax revenue generated mostly from oil and natural gas production, according to the New Mexico Department of Finance and Administration.

The tax money that flows into the bonding fund, which can only be used for debt service, is first earmarked for payments on severance tax bonds. Excess dollars in the fund are “sponged up” to pay off notes issued internally for additional capital spending. 

The overnight notes would be sold to the state treasurer’s office and the proceeds would flow to the capital project fund where it would be used to purchase the treated water.

Current debt capacity for severance tax bonds and notes is at 86.2% based on estimates for 10 years of revenue, 10 years of debt at current interest rates, and other factors. Last year, the state had about $1.24 billion of outstanding senior severance tax bonds rated Aa2 by Moody’s Investors Service and AA-minus by S&P Global Ratings. 

Given the volatility of the fossil fuel industry, New Mexico is capping the amount of oil and gas-related revenue flowing into its general fund starting in fiscal 2025.

Almost all of New Mexico is experiencing some level of drought with 43% of the state experiencing extreme or exceptionally dry conditions, according to the latest weekly data from the National Integrated Drought Information System.

New Mexico’s water originates from rain or snow, which either goes to groundwater, surface water, or returns to the atmosphere, according to a report developed by the state’s Bureau of Geology & Mineral Resources on climate change and water supply over the next 50 years. 

The climate will continue to warm over the next 50 years without a likely increase in precipitation, leading to greater statewide aridity, the report said. “Hydrological modeling indicates declines in both runoff and recharge going forward, amounting to 3% to 5% per decade for both quantities.”

An estimated 2 billion to 4 billion-acre-feet of brackish water may be underneath the state and a 25 million-gallon-per-day treatment plant could produce up to 27,900 acre feet of potable water annually, according to a statement from the governor’s office. 

In 2022, New Mexico was the second-largest oil producing state after Texas and ranked seventh for natural gas.

Most oil- and gas-bearing rocks also contain water. When the oil or gas is extracted from these rocks, the so-called “produced water” comes out too, according to the American Geosciences Institute.

Last year, the oil and gas industries generated more than 2 billion barrels of produced water in New Mexico with 1.2 barrels injected into deep disposal wells, the governor’s statement added.

The state expects to provide “a detailed roadmap” next year for companies interested in pursuing an advanced market commitment with the state.

The process of cleaning up the water, which would involve drilling deep wells, desalination and the disposal of its concentrated high-salt brine solution byproduct, along with the transport of treated water, “will be very expensive” and will involve some extraordinary engineering and hydrogeologic complications, according to Bruce Thomson, professor emeritus in the University of New Mexico’s department of civil, construction and environmental engineering. 

“This concept of desalinating deep brackish water does have some application under special circumstances, but as a way of solving the state’s general water shortage, I’m just very doubtful that it will ever be a significant contributor,” he said. 

Unlike sea water, elements besides sodium in brackish water make the treatment more complicated, while treating water produced as a byproduct of oil and gas extraction is even more complicated, Thomson said, noting that some industries such as hydrogen production require “a very, very high quality” of water. 

Environmental group Center for Biological Diversity expressed disappointment in the governor’s proposal to buy the oil and gas industry’s “toxic liquid waste.”

“Rather than phasing out fossil fuels and stewarding the state toward a just, renewable energy transition, the governor has presided over a massive expansion of oil and gas extraction,” Gail Evans, the center’s New Mexico-based attorney, said in a statement. “The idea that the industry’s toxic liquid waste can solve New Mexico’s water problems is preposterous. This will do nothing but harm our health and environment.”

The group earlier this year sued the federal government over its approval of nearly 6,000 acres of oil and gas leases in southeast New Mexico’s Permian Basin.

The case was effectively stayed after the U.S. Bureau of Land Management agreed to undertake a new environmental analysis, according to the center.

New Mexico is not alone among parched Southwest states in wanting to put money or debt financing behind their hunt for water. 

Arizona last year earmarked $1 billion over three years for a long-term water augmentation fund.

Chuck Podolak, director of the Arizona Water Infrastructure Finance Authority, has said bonds “are on the table” in conjunction with the fund and potential future public-private partnerships for water importation projects, which will be allocated  at least 75% of the money.

In September, his agency launched a request for information to identify and understand water augmentation opportunities. Responses, including one from an Israeli company that proposed a desalination project a year ago, will be made public this week, according to the authority’s spokeswoman.

IDE Technologies’ project involves WIFA placing a total of $750 million over three years in an escrow account for buying desalinated water produced by a yet-to-be-built plant in Puerto Penasco, Mexico, and delivered to Arizona via an approximately 200-mile pipeline.

IDE officials said the account would serve as a credit enhancement for the company’s private financing of the $5 billion project as purchase commitments are sought from water users in the state. 

“WIFA will continue to consider IDE’s proposal through the competitive process that we’ve set up for all other augmentation project ideas, including our (request for information) and eventual solicitation,” spokeswoman Chelsea McGuire said in an email.

In Texas, voters last month approved a constitutional amendment creating a $1 billion Texas Water Fund with a minimum 25% of the money allocated for new water supply.

Enabling legislation signed into law June 9 by Gov. Greg Abbott directs the state’s water development board to use the supply fund to finance projects that will lead to 7 million acre feet of new water supply by the end of 2033. Projects can include desalination, aquifer storage and recovery, and infrastructure to transport water and can involve public-private partnerships.