Texas Oil Regulators Weigh Prospect of Production Cuts at Marathon Hearing

The sun sets behind an idle pump jack near Karnes City, Texas, last week. Demand for oil continues to fall due to the new coronavirus outbreak. (AP Photo/Eric Gay)

(CN) — It was the kind of thing that could perhaps only happen during a global pandemic and widespread shelter-in-place orders: executives of some of the nation’s most influential oil companies logging into a virtual meeting and sharing brutally honest anecdotes of their industry struggling to survive, for all the internet to hear.

The occasion was even more striking: Texas oil and gas regulators considering whether or not to impose government-mandated oil production cuts for the first time since the 1970s.

Some in the industry argue the move would help prop up oil prices that have sunk to their lowest levels in almost two decades, a result of the coronavirus pandemic and a onetime Saudi-Russian price war launched in March.

Others say the free market should be allowed to run its course and that the cuts would be ineffective even if they were enacted.

After about ten hours of testimony at Tuesday’s hearing, the three members of the Texas Railroad Commission did not reach a decision on whether to impose cuts and offered few clues as to how they might ultimately vote.

Despite its name, the commission oversees the state’s oil and gas industry.

The idea of regulators in this oil-friendly state even considering the prospect of production limits was unthinkable just weeks ago, before the industry collapsed.

Pioneer Natural Resources and Parsley Energy, two sizeable companies active in the sprawling Permian Basin oilfield of West Texas and southeastern New Mexico, had asked for Tuesday’s hearing. Speaking during the hearing by video call, Pioneer CEO Scott Sheffield pushed the commissioners to adopt a statewide, temporary oil production cut of up to one million barrels per day.

“Our storage is filling to the brim,” Sheffield told the regulators, saying he believed the cuts could help prices for West Texas crude oil recover to around $30 per barrel.

“We need $30 to survive,” he said. “$30 is what I call we’re crippled, but at least the industry will survive.”

But many oil companies and industry analysts argued forcefully against the idea of mandated production cuts, saying oil supply and demand is already stabilizing “organically.”

Some executives didn’t hold back in slamming those who support the idea.

“When a vocal minority takes a position in favor of artificial market manipulation that is so far removed from the consensus of a vast majority of operators, one can only surmise that their motives and objectives are primarily company specific, as opposed to broadly industry supported,” said Lee Tillman, CEO of Marathon Oil.

Larger oil companies and major trade groups urged the commission to let the market do what it will and insisted that the industry was already cutting back production on its own because of the low prices.

“This is an automatic, self-regulating market process,” said Todd Staples, head of the Texas Oil and Gas Association.

Some argued that even if Texas regulators did force companies to cut 20% of their oil production, as Pioneer has suggested, that level of cuts wouldn’t significantly lift prices anyway.

Staples said his organization had already counted some $50 billion in capital budget reductions among oil companies alongside declining drilling rig counts, moves he said are already leading to lower production.

“Texans fundamentally believe government should not be in the business of picking winners and losers,” Staples said.

Though it wasn’t clear by the meeting’s end how the commissioners would vote, all three asked executives detailed questions about how production cuts could be structured or enforced. Still, the commissioners have all expressed reservations about taking such a step.

Ryan Sitton, a commission member who was vocal ahead of the hearing about at least welcoming the discussion, repeatedly pressed speakers on whether or not they felt the industry was seeing “waste” of fossil fuels that would warrant taking action.

Sitton said in a statement Monday he would explore three key questions at the hearing: whether waste is happening, if the waste is because of excess production greater than market demand and if waste could be “effectively reduced” by production cuts.

“If the answer to any of these is ‘no,’ then I will vote against,” the statement from Sitton said. “If the answers are all ‘yes,’ then I may vote for it.”

At least one company with a sizable Permian Basin presence, Diamondback Energy, said production cuts would harm the industry beyond the impacts of the current crisis.

Diamondback Chief Financial Officer Kaes Van’t Hof said the company would entirely halt its operations in the region if the cuts were enacted.

Still, some of the state’s smaller producers said they would welcome forced production cuts, which they said would give them a fighting chance against bigger producers amid a dog-eat-dog fight for survival within the industry.

“We believe that the curtailment of production would be more fairly distributed between small producers and larger, integrated producers,” said Jim Wilkes, President of Texland Petroleum, a Fort Worth-based outfit that Wilkes said employs 73 people.

“This Covid-19 crisis has presented us with issues we have never faced before,” Wilkes said. “Our largest purchaser has asked us to reduce oil production by 15%. One producer cancelled our contracts effective May 1st.”

Kirk Edwards, head of another smaller company called Latigo Petroleum, begged the commission to think about the plight of workers in his call for production cuts.

“There’s such a face to this downturn that nobody seems to care about, and that is our service company guys,” Edwards said. “We’re going to lose 30–40,000 people when these rigs quit working.”

Environmental groups have argued in favor of production cuts, saying regulators should focus the cuts on companies that have the highest rates of “flaring,” the practice where producers burn off excess natural gas into the air.

“Use this crisis as an opportunity to put us on a sustainable path,” Robin Schneider, an advocate with Texas Campaign for the Environment, told the regulators.

Commissioner Christi Craddick said at the close of Tuesday’s hearing that 20,000 people had tuned into a livestream of the event from 86 countries. Commission Chair Wayne Christian said he would pray on the issue.

“I think this is a decision big enough we need to turn to a higher power,” he said.

The commissioners did not say when they will vote on the issue but they could take it up at their next meeting on April 21.

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