Trump has said American oil production also will decline because of market forces let loose by the coronavirus pandemic and that the U.S. government will not impose quotas on producers — an act it doesn’t normally have the power to do anyway.
That’s not true for the states.
The Texas Railroad Commission regulated the quantity of oil production from the early 1930s to 1972, and on Tuesday it will consider a petition brought by two Texas producers to “prorate” oil production in the state once again. A similar appeal was filed with the Oklahoma Corporation Commission on Friday. Last month, North Dakota, another major oil-producing state, suspended a regulation that limited the amount of time wells could be inactive, in hopes production would fall without imposing quotas.
Proponents argue that the steep fall in prices — West Texas Intermediate traded for about $23 a barrel Monday — and demand for oil could bankrupt scores of producers and allow the oil majors to consolidate control of the American industry. Oil services companies already have laid off thousands of workers nationwide.
“We want to keep this industry alive and well, and it’s struggling today,” said David Little, head of Kingery Energy in Ardmore, Okla.
Opponents of prorationing, including the American Petroleum Institute, Marathon, Occidental and Chevron, argue that the government should let the marketplace determine oil production and not try to manipulate output.
The market already responded “flexibly and appropriately,” and prorationing could lead to “a precarious and slippery slope,” wrote R. Dean Foreman of API in a comment to the Texas commissioners. He also suggested Texas production alone isn’t big enough to make a difference.
“It’s naive to say we need a free marketplace in oil — there’s never been such a thing,” countered Mike Cantrell, of Cantrell Investments in Ada, Okla., and a member of the Oklahoma Energy Producers Alliance, which is asking the state to impose controls.
Citing the “monumentous” events of the past month, he said in a conference call last week that “we just need to make sure we have an American industry that’s as preserved as we can preserve it.”
The two Texas petitioners are Pioneer Natural Resources, of Irving, and Parsley Energy, based in Austin.
“This crisis, aggravated by government actions around the globe, calls for appropriate government measures to mitigate the economic consequences,” Mark Berg, executive vice president of Pioneer, wrote to the Texas Railroad Commission. Taking note of the steps to end the price war abroad, he then wrote, “For leadership from the United States to be most effective, however, Texas — the world’s fourth largest oil producer — must step forward as well.”
Berg has an ally in Harold Hamm, head of Continental Resources, based in Tulsa, and someone who appears to have Trump’s ear.
Landowners who collect royalties also would rather see cheap production cut back, calculating that the oil is worth more for now in the ground.
Judy Stark, president of the Panhandle Producers and Royalty Owners Association, endorsed the proposal to prorate and noted that many of the problems afflicting the Texas oil business predate the covid-19 pandemic and Saudi-Russian price war. She called on the commission to set up a proration system that would curb the tremendous loss of natural gas because of flaring at the well heads in Texas — enough gas to supply the entire residential demand of the state, according to some estimates.
She was joined in this by several environmental groups.
Ryan Sitton, one of three commissioners on the Texas Railroad Commission, said: “I have not advocated for Texas to prorate. I have advocated that we consider it. I felt that we should be open to evaluating any path that helps to bring the international oil community together in a global deal. ”
Sitton said while he has advocated for the state to “take a lead role in this conversation, I still have many reservations, and I will be examining heavily if and how proration could be done.”
Both state commissions are empowered to act to reduce “waste,” and naturally this has led to arguments about what constitutes waste. Stark and her allies say it’s flaring of gas. Some oil producers say the commissions should act to make sure that as storage capacity everywhere fills up, excessive oil won’t needlessly be pumped — and therefore wasted. Production should be moderated to meet demand, they say.
They argue it’s not about propping up prices but apportioning the remaining business fairly.
Others are overt about their motivations, especially as the price producers are getting for oil has dropped as low as $7 a barrel in Oklahoma, said Dewey Bartlett, head of the energy producers alliance. It reportedly dipped even lower in North Dakota. (The prices usually quoted for oil reflect what traders pay on global markets, not what producers receive.)
“The drilling and production of oil at these prices,” said Joe Warren, of Cimarron Production, of Oklahoma City, “constitutes economic waste.”
But regulating production would introduce “uncertainty” for investors and induce them to seek opportunities outside Texas, which produces 43 percent of American petroleum, wrote Douglas J. Suttles, chief executive of the Ovintiv oil company. “We respectfully submit that proration is not required to mitigate waste; waste is already addressed by strong market forces.”
The Baker Hughes company reported last week that the number of working rigs in the United States had fallen by 62, or 10 percent, in the previous month.
Energy Secretary Dan Brouillette said last week that he expects U.S. oil production to fall by 2 million barrels a day, or more, by the end of the year, as a reaction to market forces. Some analysts have said that’s understating it. Global demand is down by an estimated 25 to 30 percent from the beginning of this year — considerably more than the 10 percent cut in production that the OPEC Plus producers hammered out.
“No one’s driving, no one’s flying, no one’s on a cruise ship,” said David House, of Kizer Creek Energy in Tulsa. “We need to get our state to act in the best interests of the state.”
Offshore oil producers along the Gulf Coast are seeking relief on royalty payments to the federal government. Erik Milito, head of the National Ocean Industries Association, which represents offshore producers in the Gulf of Mexico, urged Trump on Monday to “utilize his full policy toolkit, including offshore royalty relief and lease extensions.”
The Trump administration already has dismissed the idea of a blanket royalty waiver for offshore drillers. But Sen. Bill Cassidy (R-La.), chair of a Senate subcommittee on energy, said Interior Secretary David Bernhardt promised his department would do “targeted royalty relief” for companies that applied for it. Interior Department spokesman Conner Swanson said Monday one offshore producer has begun the process of requesting relief.
Dino Grandoni contributed to this story.