With crude prices plummeting to 20-year lows and tens of thousands of oil workers already laid off, the Texas agency that oversees the oil and gas industry will meet Tuesday to discuss the prospect of curtailing statewide oil production for the first time since the 1970s.
The meeting comes as some independent oil producers, including Irving-based Pioneer Natural Resources and Austin-based Parsley Energy, urge the Texas Railroad Commission to use its authority to reduce oil production to stabilize a volatile oil and gas market.
The recent downturn, sparked by a geopolitical skirmish between Russia and Saudi Arabia that led to a petroleum supply glut, coupled with a sharp drop in demand during the coronavirus crisis, has Texas officials thinking of doing the sort of thing that runs counter to their political DNA — intervening in the free market.
The likelihood of such a move appears low, however.
Two of the agency’s three elected commissioners have signaled their discomfort with such a maneuver, and officials at major energy companies have said they worry it would set a precedent for long-running government meddling. And on Thursday, Russia and OPEC, which includes Saudi Arabia, reached a tentative agreement to temporarily cut production — possibly making moot a Texas move.
The idea of cutting production to reduce supplies and boost prices has been promoted by the agency’s third commissioner, Ryan Sitton, who lost his Republican primary race in March and now has a long lame-duck stint through the end of the year.
The United States is the largest oil producer in the world — and Texas is the largest oil-producing state, accounting for 5 million of the 13 million barrels produced nationally each day.
The Railroad Commission adopted “prorationing,” as production cuts are known, in the late 1920s during a period of widespread wildcatting for oil. The practice ended nearly a half-century ago, and the agency has not curtailed the production of crude oil since 1973, when OPEC began asserting management authority over vast amounts of the world’s oil production.
Setting production limits is “not warranted except in extraordinary circumstances,” Parsley CEO Matt Gallagher and Pioneer CEO Scott Sheffield wrote on March 30 to the commission.
“But today, the Texas oil industry faces disruptions that far surpass the merely extraordinary,” they wrote. “Nearly overnight, U.S. producers have been engulfed by the largest imbalance in history in global supply and demand for oil. This massive oil glut will quickly overrun available storage capacity and drive down oil prices to shut-in levels” — the price at which it becomes more expensive to produce a barrel of oil than to leave it in the ground.
The crash in oil prices — and the prospect of a production cut — has consequences for vast sectors of the Texas workforce and for the state budget.
Of the $59 billion in tax revenue the state collected in 2019, 10% was from oil and gas, and $3 of every $5 collected were from sales taxes — which itself is partly dependent on the financial health of the hundreds of thousands of Texans who work in the industry.
The good news for consumers is that the statewide gas price last week averaged $1.63 for a gallon of regular unleaded fuel, according to the AAA Texas Weekend Gas Watch. That’s 86 cents cheaper than a year ago.
At the same time, the COVID-19 crisis has severely limited the need for fuel as families stay home, air traffic has plummeted, many long-haul truckers are marooned with delivery orders slashed. Pipeline companies are running out of places to store oil.
But many oil and gas companies — especially major ones involved in production, refining and selling finished gas — are opposed to government intervention.
“Chevron wants to operate in a fair competitive market and believes that the free market system will aptly regulate the price and supply of crude oil,” Chevron Vice President Jeff Gustavson wrote the commission on April 8.
The company is one of the largest acreage owners in the Permian Basin, with 2.2 million acres in Texas and New Mexico. “One state’s actions will not positively affect the global market supply, but it could negatively affect Texas’ competitiveness in that market,” Gustavson wrote.
Sitton, who has had a series of often fraught differences with his fellow commissioners, said on CNBC last week that he’s open to cuts.
“This is a time with an unprecedented level of challenge on everybody around the world, (and we) also have an unprecedented level of cooperation,” he said.
But the other commissioners sound lukewarm, at best, about such a maneuver.
In a piece in World Oil on March 25, Railroad Commission Chairman Wayne Christian wrote that he has many reservations about a cut, “particularly without enforceable commitments from other states and nations to limit their production by a similar amount.”
Commissioner Christi Craddick similarly said, in an op-ed April 5 in the Midland Telegram-Reporter, that “the last thing we want is to implement a system that limits our growth once we move past this virus.”
“Texas, while the largest producing state, cannot unilaterally make the cuts necessary to reduce global oversupply,” she wrote.
In their letter to the Railroad Commission, Gallagher and Sheffield wrote that “recognizing the imperative need for a national response does not mean that Texas is powerless to contribute to market-calming actions.”
“If the State of Texas is willing to make these difficult decisions for the good of our industry,” they continued, “then other jurisdictions around the United States and the world will be inspired to follow our state’s lead.”
The commissioners plan to discuss the matter, and take public comment, during an online hearing Tuesday. The earliest they could vote on it is April 21.
Asher Price, Austin American-Statesman (TNS)