A Proration Order and its effect on Texas
The Texas Railroad Commission (RRC) posted its draft order on oil proration at its website on Wednesday. Shale Magazine reached out to key representatives of the Texas industry and other interested groups for their reactions.
Here is what they had to say:
Karr Ingham, a petroleum economist and current Executive Vice President of the Texas Alliance of Energy Producers: “Commissioner Sitton’s detailed proposal certainly provides some needed clarity on how he would propose the Commission approach the adoption of proration. However, the essence of the proposal remains the same – to adopt production limitations as imposed by the Texas Railroad Commission on a temporary basis in response to the collapse in crude oil demand and price. The Texas Alliance of Energy Producers continues to believe the market is quite capable of imposing production limitations, and in fact doing so in an orderly fashion. We certainly know the market has already acted, and has done so swiftly, well in advance of any action by any agency of government, which is virtually always the case. It’s much to early to tell, of course, but it is plausible that a 20% production decline in Texas may be achieved by the end of the month of May. We also continue to believe that unilateral action taken by Texas puts the state at a competitive disadvantage, and in fact lessens the need for production from other states to come down at the same time under a similar and equal set of market conditions. Like everyone, we wish there were clear path forward that would eliminate the pain the industry is experiencing at the hands of the COVID-19 phenomenon. We can talk about production cuts and the supply solution all we want, but clearly the real solution comes on the demand side, by a return to normal economic operations as quickly as possible.”
Staples, President of the Texas Oil and Gas Association:“Proration is a bad idea no matter how you package it. Texas and U.S. producers are announcing new production curtailments and CAPEX reductions almost daily, without a government mandate. Here’s why: If it costs you $8/lb to make BBQ and you can only sell it for $4/lb, you stop making BBQ. You don’t need government to tell you this. Texas producers are doing their part to curtail production. These circumstances are catastrophic and government trying to manage daily production will make matters worse, not better.”
Ed Longanecker, the President of the Texas Independent Producers and Royalty Owners Association (TIPRO): “We project an organic decline of 2.5 – 3 million barrels of oil per day in the U.S. before the end of this year, with more than 40 percent of that reduction coming from Texas. Based on the significant reduction in capital expenditures and decline in domestic production this year without a mandatory curtailment, it’s evident that the market will continue to work faster and more efficiently than any government entity. TIPRO supports regulatory certainty for oil and natural gas producers, free market principals, and continued dialogue with all stakeholders to identify solutions to protect U.S. energy producers and mineral owners.”
Kenny Stein, the Director of Policy for the Institute for Energy Research: “The oil market situation we see today cannot be solved by government cuts, the only government solution is letting the economy restart. RRC intervention now will have virtually no effect on prices, but sets a terrible precedent and will lead to calls for more government cuts every time prices dip. The domestic energy boom came about because of aggressive competition and innovation, dropping the dead hand of government onto the oil industry in an effort to ‘help’ will only suppress the very characteristics that created that boom in the first place. We can continue to hope that Commissioner Craddick and Chairman Christian will not go along with this half-baked Five Year Plan.”
Scott Anderson, Senior Policy Director for the Environmental Defense Fund’s (EDF) Energy Program:“Authority for proration comes from the commission’s statutory obligation to prevent the waste of natural resources and protect property rights. Flaring, of course, is the very definition of waste. Protecting wells that don’t flare from any cutbacks required by proration would create added incentive for producers to operate more efficiently and with less pollution and provide fair reward to those that already do.”</li>
Obviously, there is a growing consensus in the Texas oil and gas industry that this proposed 20% reduction, and likely significantly more than that, is already baked into the cake in response to prevailing market conditions.
RRC Chairman Wayne Christian, in an op/ed published by the Houston Chronicle on Wednesday, made it clear that he will not support the proposed order, which was brought by Commissioner Ryan Sitton. Here is an excerpt from that op/ed:
Instead of simply going down the road of more government mandates, I established the Blue Ribbon Task Force for Oil Economic Recovery with every major trade association and the thousands of companies they represent. The task force will bring together government and industry to develop ideas, suggestions, and best practices to provide regulatory relief, keep businesses afloat, and save jobs. Rather than Texans listening to their government, Texas government officials will listen to Texans – the same Texans that made American energy dominance a reality.
Some have argued that further restricting or eliminating flaring would reduce oil production during these times, solving two problems at once. As the first commissioner in recent history to vote against a flaring permit, I have asked the task force to examine this issue to make future recommendations to the Commission that will both reduce flaring and maintain our status as a production powerhouse. Relief from the current demand crisis is my priority, and I want to make sure the issue of flaring is addressed separately from proration to ensure we don’t inadvertently harm struggling producers.
Given the opposition to the order coming from the industry’s trade associations in the state and from Chairman Christian, we should expect the Commission to take no action following its May 5 hearing.
A Proration Order and its effect on Texas