As demand shrinks, should Texas cut oil production? State commission discusses

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AUSTIN (Nexstar) — The state commission tasked with regulating oil production in Texas is weighing for the first time in nearly 50 years whether to cut output to respond to a decrease in demand.

The Tuesday hearing hosted by the Texas Railroad Commission ran in excess of 10 hours, with 55 witnesses slated to testify before the 3-member commission. The members discussed a proposal inquiring about the “reasonable market demand for oil in the State of Texas.”

The Tuesday hearing comes days after the Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce output by close to 10 million barrels per day in May and June.

Some said business is hurting due to the international negotiations paired with low demand due to the coronavirus pandemic.

“As this virus wreaks havoc upon the healthcare in system, it’s done additional tremendous harm to our oil and gas industry,” chairman Wayne Christian said.

Some oil producers have asked the state to step in and turn to proration, or proportionally limit production to respond to the current low demand. They argue it would help stabilize the market and could save jobs.

“The commission doesn’t have any wiggle room to do nothing in the unprecedented disastrous circumstances of today,” Scott Sheffield, chief executive officer of Pioneer Natural Resources told the commission.

The impact of COVID-19 is presenting problems, many of the operators in support of prorationing told the panel.

“Purchasers are canceling our crude oil contracts,” said Texland Petroleum’s Jim Wilkes, who has been in business since 1973. “Our largest purchaser has asked us to reduce all production by 15%.”

Others have urged the commission to let the free-market economy run its course.

“Texas should let it continue to work without regulatory intervention,” Kaes Van’t Hof, of Diamondback Energy, Inc. and Viper Energy Partners, said.

“Prorationing will have a more severe jobs and economic impact than the free market process,” Van’t Hof said.

President of the Texas Oil and Gas Association, Todd Staples, a former state legislator who also served as agriculture commissioner, said the market would not be overrun with surplus product if the state left the process to sort itself out.

“If you are producing more than you can sell, the simple response is you stop producing, and we think that the market doing that is going to be done much more efficiently and effectively,” Staples, the head of the state’s oldest and largest oil and gas trade association, said.

“If you’re a large operator or you’re a small operator, there can be no waste in today’s market, because as a responder to the market, you will reduce your physical production,” he explained.

An additional concern brought up Tuesday is what could happen if Texas took steps to curb outputs, but other states did not act, leading some operators to consider moving production to other states.

“What if other states don’t do this?” Commissioner Christi Craddick asked.

The commissioners are scheduled to vote on the proposal at an April 21 meeting.

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