April 20, 2020 [Express News] – Both advocates and opponents of a proposal to order a 20-percent cut in Texas oil production offered a stark view of the industry’s future at a hearing that ran more than 10 hours on Tuesday.
While they disagreed on the long-term cure, most of the more than 50 witnesses agreed that more layoffs and oil company bankruptcies are coming in the weeks ahead.
The Texas Railroad Commission, the state’s oil and gas regulator, could decide at its next meeting, on April 21, whether to order energy companies to make the production cuts.
The price of West Texas Intermediate, the U.S. benchmark oil price, dropped to $20.61 per barrel on Tuesday, its second lowest price in more than a decade. That’s despite an international agreement over the weekend between Saudi Arabia, Russia and other countries to reduce oil production.
No oil producer can make a profit at that price.
Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association, told the Railroad Commission that he expects oil production in the state to drop significantly — equaling or exceeding 20 percent by the end of the year without any government action.
“In response to current market conditions, operators are being forced to shut-in wells, lay off employees and dramatically reduce capital expenditures,” Longanecker said. “Some operators are also seeking financial restructuring options, which will unfortunately increase in the coming months.”
The coronavirus outbreak has largely halted automobile and air travel, creating a worldwide oil glut. Analysts say even with Saudi Arabia’s and Russia’s agreement to cut production, a global surplus of 10 million barrels a day currently exists.
At Tuesday’s hearing, small oil producers said their contracts to sell oil had been canceled and storage facilities to hold the oil were quickly running out of space.
The U.S. is the largest oil producer in the world, with 13 percent of of the world’s production. Texas’s global share is about 5 percent. Nevertheless, questions remain about whether cuts ordered by Texas regulators could make a difference.
“Oil is a relatively fungible commodity, and one that can be shipped worldwide, so competition in the market is global,” Ed Hirs, a University of Houston energy economics lecturer, said during the hearing. “Because the U. S. oil market is a free market with imports and exports, Texas oil producers compete with oil producers everywhere.”
Two Texas-based oil producers, Pioneer Natural Resources Co. and Parsley Energy Inc., proposed the state production cut. The two companies have an ally in Ryan Sitton, one of the Railroad Commission’s three elected members.
Parsley’s CEO, Matt Gallagher, was one of the first witnesses Tuesday.
“I’m not under any illusion that cutting across the board would make things rosy again for the service sector,” he said. However, he added, mandatory reductions would help add some market stability.
Oil-field services companies have been particularly hard hit as producers slash new drilling and fracking.
“If we slam at full speed into a train wreck that we can’t predict, the outcomes are going to be much worse,” he said.
The commission’s other two members, Chairman Wayne Christian and Christi Craddick, appeared skeptical of the cutback proposal.
Most large oil producers at the hearing were against mandatory reductions. They said that following Saudi Arabia and Russia’s lead would be an economic disaster in Texas, resulting in the layoff of more oil-field services workers.
Diamondback Energy Inc. Chief Financial Officer Kaes Van’t Hof was blunt about what his company would do in the Eagle Ford oil shale play in South Texas and West Texas’ Permian Basin if the commission agrees to mandatory production cuts.
“We are going to cease all drilling activity right away,” he said. “This directly impacts the employment of almost 3,000 people across all service lines that work for us today.”
Lee Tillman, chairman and CEO of Marathon Oil Corp., said restrictions on production would be unfair and hurt his company. Even with low oil prices, he said, Marathon is making a profit in the the Eagle Ford shale play.
A production cut would force Marathon to shift more resources to shale oil plays in Oklahoma and North Dakota that are less cost-effective, Tillman said.
“The best solution to our current crisis is to get the world healthy and back to work, while not abandoning the free market principles that have created U.S energy independence,” he said.
Small independent producers lined up with Parsley and Pioneer at the hearing, saying the only way they could stay in business would be if regulators impose production cuts. They said that would allow them to sell more oil, and would free up oil storage capacity.
Big producers shouldn’t be allowed to monopolize storage, said Kirk Edwards, president and CEO of Latigo Petroleum in Midland. He said major energy companies hold an advantage because they can afford to keep oil in storage until the price rises.
“There should be equal pain felt by everyone,” Edwards said.
If the Railroad Commission goes head with the cut, it would create problems for the small state regulatory agency, said Anas Alhajji, an energy consultant who has studied the Railroad Commission’s operations.
“The Texas Railroad Commission doesn’t have the resources to enforce a (production cut),” Alhajji said. “It doesn’t even know the true oil production of each producer in recent months.”
In 1931, during the Great Depression, Alhajji said the agency had to enlist the National Guard to help monitor producers’ compliance with cutback orders.
Without enforcement capabilities, he said, a mandatory reduction “is a well-intended but futile exercise.”
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