Texas regulators steer clear of mandating oil production cuts

May 5, 2020
The Texas Railroad Commission decided May 5 it would not require cutbacks in oil production as a step to cope with depressed prices amid a global oil glut.

The Texas Railroad Commission decided May 5 it would not require cutbacks in oil production as a step to cope with depressed prices amid a global oil glut.

Only one of the three commissioners wanted to take conditional steps in that direction, but that commissioner, Ryan Sitton, recognized he did not have the votes and chose not to make a motion at the hearing.

Sitton lamented that the commission did not try to determine what constituted waste of the natural resource, which could have served as a foundation for trying a system of prorationing to limit oil output. Prorationing, or proportional reductions of output by companies, was used by several states during the 1930s-1960s to restrain price-depressing overproduction.

Chairman Wayne Christian argued that production cuts would not solve current problems.

“This problem is 90% demand,” Christian said. “It’s not going to be solved until people are on the roads and in the skies again.”

Analysts have been estimating that the demand slump globally over the last 3 months has been about 20%, a drop to 80 million b/d from 100 million b/d, as the coronavirus pandemic cut a broad range of economic activity, including travel. The pandemic started to spread while Saudi Arabia, Russia, and US producers were boosting oil output.

2-1 vote on company request

Two oil companies, Pioneer Natural Resources Co. and Parsley Energy Inc., had asked the commission to determine reasonable market demand, a step in laying the groundwork for prorationing.

Christian moved to dismiss that request, and he and Commissioner Christi Craddick both voted to do so, while Sitton voted against the motion to express his regret that the commission did not at least try to determine market demand and waste, even if no prorationing were to follow.

Sitton’s tentative proposal, discussed by the commission in April, would have allowed prorationing in Texas only if other states and nations also cut production.

Christian said he had been calling other states about that possibility. “I could not confirm that any other state would join us,” he said.

North Dakota regulators have discussed the matter but have not taken steps toward prorationing. Oklahoma regulators similarly have discussed the subject without calling for prorationing. New Mexico has taken a wait-and-see attitude.

Market forcing reductions

Oil industry representatives and some state officials have stressed that the market may take care of the matter, as oil producers cut production to reduce their financial losses. That was the position that trade association American Petroleum Institute (API) emphasized after the Texas commission’s decision.

“We commend the commission’s recognition that market-driven policies are best suited to balance supply with demand,” said API Senior Vice-President Frank Macchiarola. “Producers in Texas and across the country have already adjusted production to align with this historic drop in demand.”