Texas Oil Regulators Delay Vote on Production Cuts

A day after crude oil prices entered into negative territory, regulators in Texas expressed concern about facing legal action if they acted too quickly to slow production.

Oil tank train cars sit idle Tuesday in East Chicago, Ind. (AP Photo/Charles Rex Arbogast)

(CN) — Texas regulators on Tuesday declined to vote on the prospect of forcing oil companies in the state to cut production levels, pushing back a decision on a move that some within the industry have argued is needed to help stabilize decimated oil prices.

The delay came the morning after an unprecedented and chaotic day in oil markets, when the U.S. benchmark price for a barrel of crude oil settled in negative territory for the first time in history.

The below-zero price reflected a dramatic drop in global demand from the coronavirus pandemic and a situation where oil continues to flood markets and fill storage tanks to the brim.

Tuesday’s delay came despite the efforts of one Texas regulator who pushed for an immediate vote, saying urgent action was needed to help an industry reeling from a historic bust.

“We are seeing a level of demand destruction, and a level of oil industry downturn, that in the past happened over a course of years now happening over a course of days,” Texas Railroad Commissioner Ryan Sitton said during a virtual meeting Tuesday. “I don’t believe that inaction on our part is acceptable.”

Despite its name, the commission oversees the state’s oil and gas industry and has nothing to do with railroads.

Sitton unsuccessfully urged the commission’s other two members to vote on his proposal for a statewide, temporary 20% production cut that would be contingent on other oil-producing states and countries enacting their own cuts.

The other regulators pushed back, voicing concerns about being sued if they acted too fast.

“I may be the only lawyer in the group, but I’m telling you, this is going to the courthouse,” said Commissioner Christi Craddick.

Still, both Craddick and Wayne Christian, the commission’s chair, appeared more open than they have been before to some form of production cuts.

Christian said he wanted to avoid the possibility of lengthy court battles by first consulting with Texas Attorney General Ken Paxton about whether mandating production cuts would be legal.

“We need to make darn sure when we make the motion, that it fits legal requirements not to get stuck in court,” Christian said, though he indicated the regulators would move forward on the idea at some point.

“What I do not want anybody from this meeting to go forward with, is that the Railroad Commission is hesitant, is not taking action,” he said.

The regulators could again take up the proposal at a May 5 meeting.

Meanwhile, parts of the industry remain divided on the idea.

While trade groups and larger companies say oil output is already falling naturally and will continue to do so thanks to market signals, smaller producers argue that government-orchestrated cuts would distribute the burden more equally across the playing field.

Kirk Edwards is one of those smaller producers. The president of Odessa-based Latigo Petroleum said in an interview that he agreed with the commission’s move to delay a decision, though he still supports a “smart” approach to production cuts.

“We have to and will do something in Texas,” Edwards said. “It’s just we’ve got to do it in coordination with the rest of the country.”

Christian said at Tuesday’s hearing that he was already in talks with officials in North Dakota and Canada about a possible coordinated effort.

A pro-industry group in Texas that opposes the idea of forced cuts praised the lack of a vote Tuesday.

“We applaud the commissioners for maintaining regulatory certainty, which is essential to economic recovery, and encourage them to focus on recovery not on creating a cartel,” Todd Staples, head of the Texas Oil and Gas Association, said in a statement.

After the meeting, the Texas chapter of the environmental group Sierra Club urged regulators to crack down on companies that have high rates of burning off excess natural gas into the air. The group described that approach as a quick way to also reduce oil production, as the excess gas often comes up as a byproduct from oil wells.

“The commission must use the ‘waste-not’ approach, and require companies to either capture well gas or simply stop producing,” the group’s interim director Cyrus Reed said in a statement.

Tuesday’s meeting came as President Donald Trump announced he would move to help the ailing oil sector, though details were scarce.

“I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!” Trump said on Twitter.

Analysts say the freefall in oil prices could continue as economies remained shuttered from the pandemic and planned production cuts from other oil producing nations fail to keep pace with the massive drop in demand.

“We believe the market will be under continued downwards pressure for the coming weeks as well, as supply shut-ins have not yet occurred to a sufficient extent to balance supply with the low demand,” the Oslo-based firm Rystad Energy said in a research note Tuesday morning.

The firm said it expects the so-called “OPEC plus” alliance of oil producing nations will fail to live up to its promise of cutting almost 10 million barrels per day in May, due to some nations not fully complying with the agreement.

Beyond that, the firm said, global oil production needs to fall an additional 6 to 7 million barrels per day to help balance an expected demand loss of 20 million barrels per day from the pandemic.

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