By Mitch Borden
Some oil companies are pleading with the Texas Railroad Commission to do something unthinkable in recent memory — restrict pumping crude. Limiting the amount of oil companies can pump is something that hasn't been done in nearly 50 years, but some say it could be the lifeline they need, as global demand for oil continues to bottom out in response to the coronavirus pandemic and a price war between foreign competitors.
Even though OPEC +, a group including OPEC members and non-members like Russia and Mexico, recently made history by agreeing to cut their daily production by nearly 10 million barrels to stabilize oil markets — but that’s not enough according to some in the oil industry.
So, for 10 hours, the three commissioners on the Texas Railroad Commission, or RRC, weighed their options as they listened testimony calling for limitations on oil production.
Over 50 representatives — ranging from some of the state’s biggest oil companies to environmental groups — made their arguments as to why Texas should or shouldn’t limit oil production amid an unprecedented crash in prices.
Commissioners didn't reach a decision on Tuesday, but one could come in the next week.
As parties argued their points, one thing became clear: If Texas did decide to temporarily curtail oil companies’ output — it would be a difficult process
“We don’t know how to do it,” said Railroad Commissioner Christie Craddick during the marathon hearing.
The commission hasn’t capped pumping since the early 1970s. But the practice was common, beginning the late 1920s and continuing for over 40 years, the oil and gas regulator controlled the quantity of crude oil companies in the state produced. The RRC's role in the state's oil and gas industry eventually served as the blueprint for Saudi Arabia and other oil-producing companies to create OPEC.
But after decades of letting the oil market dictate demand, the commission may not have the specific know-how to create the policies needed to curtail production during this unparalleled moment in the oil industry’s history. And for oil companies, landowners, and industry analysts, there’s still a debate over whether any restrictions would even help companies — from industry giants to smaller, independent operations — survive an oil bust some believe could rival the cataclysmic downturn of the 1980s.
Pioneer And Parsley
During the hearing, Pioneer Resources and Parsley Energy came together to call on the Texas Railroad Commission, or RRC, to curtail the number of barrels oil companies are drilling in Texas. Their main argument: there’s too much oil being produced. That isn’t just driving down the price of oil right now, they argued, it’s also wasteful. That’s why the two companies called on the RRC to look into prorating oil to help stabilize the falling oil markets.
When Pioneer CEO Scott Sheffield addressed the commission, he started by comparing the current situation to the bust in 1986. But after reflecting for a moment Sheffield took that back.
“This is probably going to be worse than 1986,” said Sheffield. “Demand is not going to be coming roaring back.”
Sheffield says many producers can’t survive with oil prices below $30 and something has to be done before all of America’s storage capacity is filled, which some say could happen as soon as mid-May.
Right now, according to Sheffield, in West Texas some oil producers are looking at prices for a barrel of oil as low as $3. He said, prices need to increase quickly.
At $30 dollars “we’re crippled, but at least the industry will survive.”
Smaller producers like Latigo Petroleum’s Kirk Edwards said he wants to "spread the pain" among companies, and he believes limiting the amount of oil companies pump would do just that.
Edwards told the commissioners if they opted to do nothing then “you’ll be personally responsible for the demise of the Texas independent producer this year.”
There are reports that small producer’s contracts with oil buyers are already being reduced or canceled altogether.
The Market Is The Answer
Those arguments though didn't persuade the representatives who turned out for the Tuesday meeting to urge the RRC to stay out of the situation. For the opponents of prorating, the market is already adjusting to the global economy coming to a halt.
Todd Staples, the president of the Texas Oil and Gas Association, said his group is overwhelmingly against restrictions.
“Should the government really be in the position to pick winners and losers?” asked Staples.
His answer — no it shouldn’t.
Staples also expressed his doubts that any temporary production limits would help stabilize the oil market.
“Proration will not guarantee that a company will not go out of business or that one person will not lose a job,” he said.
The commissioners did question how cutting oil production would affect the millions of barrels of oil that saturate the global market. The main proposal put before the commission is to cut daily production by about one million barrels of oil in May, which is around 20% of the state’s production.
The commissioners also expressed some concern that limiting Texas producers, could give other oil-producing states in the United States, like New Mexico and Colorado, an advantage over the Lone Star State.
Some companies like West Texas’s Diamondback Energy didn’t mince words when they told the commission what the consequences would be if the Texas RRC tried to limit production.
“If we are forced to prorate, we will cease all activate right away,” said Kaes Van’t Hof, Diamondback Energy’s chief financial officer.
He said stopping their operations would result in the loss of 3,000 oil service industry jobs, many across the Permian Basin.
Next Steps
The three commissioners didn’t reach a decision during the hearing, but could likely meet in the next week to vote on restrictions. All three commissioners voiced concerns and real questions on how curtailing oil production would actually be implemented — and if it would even help stabilize oil markets.
RRC Chairman Wayne Christian said that he and his fellow commissioners have a big decision to make, one that he will "turn to a higher power" for guidance.
The soonest the commission can make a decision on this issue is at their next meeting on April 21.
