The Texas Railroad Commission hesitated Apr. 21 to make a decision on prorationing of oil production in the state amid a market downturn more severe than any in decades.
The commissioners debated the matter during a webcast meeting and decided to hold off on a vote until May 5. Chairman Wayne Christian and Commissioner Christi Craddick said they intend to consult with legal staff and the state attorney general in the hope of preventing any action from being hung up in court by lawsuits.
Christian argued that a legal challenge could hold up action far longer than a 2-week delay to the May 5 meeting.
All three commissioners indicated they would prefer any prorationing to be contingent on other states and countries joining in production cutbacks.
The third commissioner, Ryan Sitton, said he would have preferred a vote Apr. 21 given the dire condition of oil operators in Texas.
20% cut proposed
Sitton proposed that the Railroad Commission require operators producing more than 1,000 b/d of oil in the state reduce production starting June 1 by 20% from their own recent peak.
Sitton said that would cut about 1 million b/d of production, but that it should be contingent on another 4 million b/d of production being cut from the rest of the US, Canada, and OPEC and its allies (OPEC+). He further proposed that the prorationing automatically end when global demand climbed to 85 million b/d.
Craddick, an attorney, expressed strong misgivings. “Anything we do will probably end up in court,” she said. She wanted consultation with legal staff and the attorney general not only on Sitton’s proposal but other ideas.
Craddick said she worried about how the Texas Administrative Procedure Act would apply to prorationing and such details as the legal form of prorationing, such as whether it needed to be statewide or field by field, and whether it could include marginal wells, and whether the commission needed market data to support its action.
Christian said North Dakota was scheduled to discuss the idea of prorationing that same day. He and Craddick both indicated they agreed with the idea that Texas should not go it alone.
Oil producers divided
Producers are divided on prorationing. At a marathon, 10-hour Texas Railroad Commission hearing Apr. 14, larger companies tended to speak against mandated output reductions while several small operators spoke in favor.
One small operator explained that some refiners were telling small companies that their output wasn’t needed. His argument was that refiners were satisfying their reduced needs with their longer-term big suppliers, and that prorationing could equalize the pain for producers of all sizes.
Companies already are shutting in wells, some voluntarily, some because they cannot book pipeline capacity or find oil buyers. Market dynamics may force the cutbacks that prorationing would require, according to many observers.
Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association, told the Apr. 14 commission meeting that his organization estimated market conditions would lead to a decline of US oil production of 2.5-3.4 million b/d by the end of 2020, with 1 million of that decline coming from Texas.