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Shale oil industry battles over Texas production limits as US prices drop

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Essential Energy Insights - May 14, 2020

Shale oil industry battles over Texas production limits as US prices drop

Texas shale oil producers fought over forced production cuts in front of the state's energy regulator on April 14 as the industry worked through how to respond to collapsing demand due to the coronavirus pandemic.

The Texas Railroad Commission has faced requests to intervene and force production cuts in the state to help mitigate the damage from the collapse of oil prices. If the three elected members of the commission vote to curb production, it would be the first action of its kind in Texas since 1973. During a session that began at 9:30 a.m. CT and continued late into the afternoon, the commissioners heard the two sides clash in prepared statements.

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Pioneer Natural Resources Co. President and CEO Scott Sheffield, one of the loudest proponents of proration, said the commission was within its bounds to enact mandatory restrictions due to the "waste" created by reckless producers.

"As I understand, under the law, waste occurs when oil production is in excess of reasonable market demand. Waste is occurring today and is expected to continue, and the Railroad Commission of Texas is obligated by law to lessen the waste," he said. Sheffield said the waste created by the industry had led to billions of dollars in wasted capital, both internal and money from lenders.

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"Our industry has created such economic waste that nobody will buy our stocks or own our stocks," he said. "Nobody wants to give us capital because we all destroyed capital and created economic waste."

Sheffield said that without extended cuts in production from Texas and elsewhere, oil storage facilities worldwide will fill up in a matter of weeks.

"The [OPEC+] cuts were 10 million [barrels per day]. We need more," he said. "Storage is filling to the brim. We are going to be full in Cushing [Okla.] in the next four to five weeks."

Most other independent producers, however, took the opposite stance and said market forces are already working to reduce production to more acceptable levels. Marathon Oil Corp. Chairman, President and CEO Lee Tillman said the changes in the global markets since 1973 would make "the Pandora's Box of proration" in Texas almost irrelevant.

"We do not believe proration in Texas will have the desired effect, or any meaningful effect, to global supply and would only serve to disadvantage Texans," Tillman said, also mentioning that Texas producers need the "freedom to react to global market forces," which would be destroyed by prorated production levels.

"Texas producers are already shutting in production on their least profitable wells in response to market forces, the way a free market should work," the CEO said. Tillman also took a swipe at Pioneer and other supporters of proration, questioning their motives for supporting proration.

"When a vocal minority takes a position in favor of artificial market manipulation, that is so far removed from the vast consensus of operators, one can only surmise that their primary motives are more company-specific as opposed to broadly industry-supported," he said.

Industry advocates, including the Texas Oil and Gas Association and the Texas Alliance of Energy Producers, also came out in opposition to the idea of proration.

"An overwhelming number of our members do not support mandatory curtailment of production in Texas. That includes both large and small operators," said Ed Longanecker, the president of the Texas Independent Producers and Royalty Owners Association. Longanecker said the actions taken by TIPRO members and other producers to reduce production would result in "notable" declines, perhaps as much as 3 million bbl/d, in oil production nationwide by the end of 2020.

"The low end of our projection, the decline in Texas would be equivalent to the proposed mandate, about a million barrels of oil per day," he said. "We are confident the Texas oil and gas industry will continue to respond to market conditions in an efficient manner without government-imposed mandates."

The commissioners heard hours of testimony in the marathon meeting, which was still ongoing at the time of this article's publication.

NYMEX front-month crude futures settled at $20.11 per barrel April 14, down $2.30.