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Texas Railroad Commission defers proration decision until May 5 meeting

Highlights

Delay due to need for Texas attorney general opinion

Want to 'make darn sure' to minimize any court challenges

May invite North Dakota, Oklahoma opinion, participation

Houston — The Texas Railroad Commission adjourned a webcast public meeting Tuesday without voting on whether to implement prorationing the state's production, instead deferring a decision until next month.

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Commissioner Wayne Christian, after hearing comments from the two other Texas commissioners that head up the energy regulatory agency, deferred action until the TRC's May 5 meeting to "make darn sure" it took opinion from the Texas state attorney general's office on the legality of some options being considered.

The Tuesday meeting followed a marathon 10-hour session April 14 when the trio heard testimony from dozens of oil companies, energy consultants and others on whether the state should proration, or apportion defined oil output cuts to Texas producers.

On Tuesday, Commissioner Ryan Sitton proposed the TRC vote Tuesday in favor of a mandate of 1 million b/d of total oil output cuts by Texas producers that have more than 1,000 b/d production each, or about 20% of the output of each.

But he also stipulated the cuts should be contingent upon 4 million b/d of additional OPEC+ reductions, as well as output reductions by other US producing states and possibly Canada. Earlier in April, the OPEC+ alliance agreed to nearly 10 million b/d of cuts.

TIED TO MARKET DEMAND

Sitton also proposed that the proration should be tied to market demand. He said it should be temporary and lifted when oil demand returns to 85 million b/d, or about 15% lower than consumption levels in early 2020, before the coronavirus pandemic ravaged worldwide demand.

He also suggested the mandate take effect June 1.

But Christian and Commissioner Christi Craddick preferred the TRC get a firm opinion from Texas' attorney general on the legality of those suggestions, some of which had been proposed by West Texas Permian Basin producers Pioneer Natural Resources and Parsley Energy at the April 14 meeting.

"I've seen too many times the courts have some quick ruling by some opposing faction which there will be, guaranteed," Christian said. "If we don't stand together legally, I have great fear it would delay [an implementation of any decision] even past two weeks" -- the date of the May 5 meeting.

Sitton's urging of a Tuesday vote was based on the urgency of action required in the face of a US energy industry in dire straits, with many oil prices in negative territory. But Craddick, who is also a lawyer, also expressed concern that whatever decision was taken by the agency, it would be challenged in court and possibly held up for months.

MAY PRORATION WITH OTHER STATES

Christian said Oklahoma and North Dakota are also considering some form of prorationing and one option is that Texas, if it decides to implement prorationing, should do it in tandem with other states and even Canada if that country chooses to do so.

Among the questions that Craddick said need clarification are other case laws since Texas proration hearings were last held in the early 1970s; whether prorationing must be done statewide or field-by-field; and if marginal wells and also very small operators can be excluded from a prorationing order.

"We need a broad-based understanding of what we need to do with prorationing," she said. "All other options should be on the table. Not just one, but all options, and [we] need to make sure legally we're up to date. I think there are some real questions about that."

In addition, Christian said the TRC has formed a Blue Ribbon Task Force on the oil sector's economic recovery that will look at everything that can be done at the state level to assist producers in the state and save jobs. State oil and gas associations are leading the effort, he said.

Exploration and production operators and oilfield service providers have already laid off thousands of employees as nearby crude prices plunged into negative territory on Monday.