Interview: First Texas oil limits in decades look more likely as prices drop

Washington — Struggling with a collapse in oil prices, some oil producers have requested the Texas Railroad Commission impose statewide production limits for the first time in decades.

The following is a brief interview with Bob McNally, president of Rapidan Energy Group, on the probability of government-mandated production cuts in Texas, how such cuts may be structured and the legal standing behind them.

McNally, a former energy adviser to President George W. Bush, is the author of 'Crude Volatility: The History and the Future of Boom-Bust Oil Prices,' which details the history of government-mandated production cuts in Texas.

Related coverage: Texas Railroad Commission chairman opposes OPEC-style oil production cuts

The interview was edited for purposes of clarity.

Q: When was the last time the Texas Railroad Commission imposed production cuts? What was the reason?

A: They ended in March 1972 because demand was roaring beyond supply, and the US ran out of spare capacity. [Byron Tunnell, the chairman of the commission at the time] called it a "damned historic occasion."

Q: Why hasn't the commission imposed them since?

A: We were short oil until recently.

Q: Do you think a commission-ordered reduction is likely? If so, why is this price collapse different?

A: It's hard to say. It becomes more likely the lower oil prices go. This price collapse threatens the lowest oil prices since 1930-1931, the last time two black swans appeared at once - a demand collapse and production surge. At this rate, global storage will fill up this summer and oil prices will fall to single digits if not negative. US production, along with production in Canada, is on the chopping block.

Q: If they go through with this what obstacles might the commission face? Could there be a legal challenge?

A: The railroad commission enjoys legal authority to order production declines. However, some companies and politicians will oppose quotas. There will be a political battle.

Q: What happens if a producer does not go along with the order?

A: I'm unaware of any current penalties, if there are any.

Q: Is the railroad commission limited in how much production it could order cut?

A: Not legally to my knowledge. It would have to justify a quota cut based on fundamentals and policy objectives.

Q: If something does go forward what's your best guess in what it may look like? Will it be phased in? Will it be based on a percentage of each well?

A: I would expect a prospective company-level reduction with a one or two month lag. In the past, railroad commission orders went into effect immediately, in weeks. But that was when companies complied by choking back wellhead production on primary drive wells. But with fracking, it makes more sense to give operators time to adjust drilling and completion programs, to enable declines to achieve the required cuts.