Pioneer Natural Resources and Parsley Energy requested a hearing by the Texas Railroad Commission to consider cutting production of crude oil in the state. The hearing on April 14 lasted more than 10 hours, and the three commissioners heard from 55 speakers who had something to say on the subject.
The oil industry triangle
For the Railroad Commission to cut production is not unheard of, but it has been awhile. The last time the power was implemented was back in 1973 during the Arab oil embargo. This time, we are dealing with the glut of oil caused by the oil industry’s own Bermuda Triangle: COVID-19, the oil price war between Saudi Arabia and Russia, and the resulting price crash. While Saudi Arabia and OPEC+ have at last come together and promised to cut production by 10 million barrels of oil a day, it is very much too little too late. That is not saying it won’t help; it most certainly will. But the uncertainty of how long the lack of energy demand will last is more to the issue.
Railroad Commission looks at low oil demand
COVID-19 forced 187 countries around the world to enact confinement measures on citizens. This is unheard of. The result, according to the International Energy Agency (IEA), is that almost a decade of growth will be wiped out in a year. “Even assuming that travel restrictions are eased in the second half of the year, we expect that global oil demand in 2020 will fall by 9.3 million barrels a day versus 2019, erasing almost a decade of growth,” they reported on Wednesday.
Enter the request for the Texas Railroad Commission to cut production. Those in support of cutting production feel it is the logical next step after the recent, historic OPEC+ agreement. They feel if the commission sits back and does nothing, that much of the industry will disappear. Pioneer and Parsley believe the Railroad Commission should start with a 20% cut that would hopefully only last for 30 days.
Many speakers opposed the idea of cutting production. Among them were Lee Tillman of Marathon and Doug Suttles of Ovintiv. They feel the free market system has worked up until now, and there is no reason for it to stop working. Mr. Tillman pointed out that it is already beginning to work since many companies are cutting production back on their own. There are companies, he went on, that drill in other states as well as Texas. These companies are better equipped than the commission to judge if, when and where production cuts should be made. He said if the Railroad Commission proceeds to cut production it will ultimately hurt Texas.
Cutting production back to zero
Indeed, Diamondback Energy announced to the Railroad Commission that they are already planning a 30% cut in drilling, but if the commission decides to cut production, they are prepared to take drilling all the way to zero. Diamondback Energy is one of the largest shale explorers in Texas, and for them to completely shut down would be a tremendous loss in jobs for the state.
Ultimately, the Railroad Commission left the decision on the table. It is a huge responsibility, and they are unsure even if they know how, or are capable, of accomplishing such a feat. They will no doubt be watching on May 11 as regulators in Oklahoma conduct a hearing on cutting the same subject in that state.