Pioneer, Parsley request emergency hearing for Texas production quotas

Houston — Top Permian Basin producers Pioneer Natural Resources and Parsley Energy formally requested Monday an emergency hearing seeking to implement mandatory crude oil production quotas in Texas.

The Texas oil producers are asking the state's oil and gas regulatory body, called the Texas Railroad Commission, to use regulatory measures not utilized in nearly 50 years to tackle the "virtually unprecedented" global demand crunch brought about by the new coronavirus pandemic and heightened by a coinciding Russian and Saudi Arabian oil pricing war.

Texas Railroad Commissioner Ryan Sitton said Monday he will seek an emergency virtual meeting to be held as soon as next week to prevent the matter from dragging out for several months. Failing to act now could lead to a collapse in much of the US energy sector, he said.

"About 90% of the people I talk to say we need to definitely explore this," Sitton said. "Let's not dismiss it out of hand."

Texas produces more than 5 million b/d of crude oil, representing over 40% of the nation's supplies. And, without action, US oil production could fall from 13 million b/d to 7 million b/d in the next 18 months, wrote Pioneer CEO Scott Sheffield and Parsley CEO Matt Gallagher.

"Texas is well positioned to jump-start an international solution," they wrote. "What Texas does will be heard around the world."

The idea is that Texas could act as the White House works with both Saudi Arabia and Russia to come to a global agreement to scale back production to help balance a market that could lose more than 20 million b/d in worldwide demand. President Trump discussed a potential oil agreement Monday with Russian President Vladimir Putin, and they agreed to continue the dialogue with their energy ministers.

'LARGEST IMBALANCE IN HISTORY'

Sheffield and Gallagher contend that production quotas in Texas aren't anti-capitalist because they're responding to government intervention to the pandemic that created the demand loss. More government intervention is now required to stabilize the markets.

"The Texas oil industry faces disruptions that far surpass the merely extraordinary: the global COVID-19 pandemic has collapsed global demand, while foreign oil

producers simultaneously have ramped up production to gain market share explicitly at the expense of U.S. shale oil producers," Sheffield and Gallagher added.

Permian Basin crude is trading at deep price discounts as refiners have cut runs, while storage has started to fill. Midland WTI was assessed by S&P Global Platts at just $10.09/b Monday.

"Nearly overnight, U.S. producers have been engulfed by the largest imbalance in history in global supply and demand for oil," the letter continued. "This massive oil glut will quickly overrun available storage capacity and drive down oil prices to shut-in levels, threatening investment, especially in Texas."

The Texas Oil & Gas Association and the American Petroleum Institute, among other industry groups, are opposing Texas quotas, arguing they're committed to free-market solutions.

Railroad Commission Chairman Wayne Christian said he sides with the free market, but he said he's open to the quota approach, called pro-rationing, if other countries come on board.

"Any action taken by Texas must be done in lockstep with other oil producing states and nations, ensuring that they cut production at similar times and in similar amounts," Christian said in a statement last week.