The argument behind production limits is that curtailing the supply will raise prices to a level that “matches” the demand, which is currently very low.
The RRC has not prorated Texas oil production in almost 50 years.
Their initial hearing is scheduled for April 14. Before the meeting can take place, the RRC is required to field public comments on the proposal. This is not unique to the RRC as virtually every regulatory body must allow for public comments to be submitted on any issue brought forth.
Ahead of its meeting tomorrow, numerous organizations, companies, and citizens have submitted comments for the commission to consider.
An official request by two independent energy producers, Parsley Energy and Pioneer Natural Resources, initiated this inquiry by the RRC. It was sparked by the plunge in global oil prices after Russia and Saudi Arabia ramped up production, flooding the markets with supply in a tit-for-tat intra-Organization of the Petroleum Exporting Countries (OPEC) dispute.
This, coupled with the dive in transportation demand caused by coronavirus and corresponding shelter orders across the country, has left producers with significantly less profit. Only a couple of months ago, the oil and gas industry thrived thanks to stable oil prices and high production levels.
However, since the downturn and Commissioner Ryan Sitton’s stance in support of the production limitation, sides have been taken. In his op-ed, Sitton mentioned a 10 percent production cut but did not go further than that hypothetical.
Since comments are open to the public, anyone can advocate whatever position they please. Many oil and gas companies and similarly minded organizations submitted comments in opposition to the proposed measure.
Organizations such as the Texas Oil and Gas Association (TXOGA), the Texas Independent Producers and Royalty Owners Association (TIPRO), and the Texas Alliance of Energy Producers (TAEP) also oppose proration at this point.
Those opposing proration often cite allowing market forces to solve the issue and preventing government intervention in the industry.
Conversely, unlikely bedfellows have formed a momentary alliance of producers, former regulators, and environmental groups in support of proration.
Parsley CEO Matt Gallagher stated that proration “will not only correct, prevent, and lessen the ongoing waste of Texas oil but also will hasten the stability of the Texas oil and gas industry for the benefit of the thousands of employees, contractors, and service companies who have built Texas to become the preeminent oil-producing State in the country.”
Pioneer’s vice president advocated for “carefully tailored prorationing that is explicitly temporary in nature to address this crisis, and no longer.”
Those producers’ position is supported by one-term former Railroad Commissioner David Porter, specifically stating that RRC action would establish much-needed structure and enable producers to institute long-term planning rather than short-term reactions to current market conditions.
Meanwhile, a bevy of environmental groups have joined these parties but with different reasoning. Those include the Sierra Club; Environmental Defense Fund (EDF); Environment Texas; Public Citizen, an organization which lobbies for (among other things) a transition to renewable energy; Texas Campaign for the Environment; and the Institute for Energy Economics and Financial Analysis (IEEFA), a think tank which advocates for increased use of renewable energy.
The Sierra Club stated that while they have no position on proration as a price control, they support it on the grounds of facilitating a transition away from fossil fuels. They also suggested ramping up flaring regulations rather than proration.
Environment Texas took a similar position arguing that the RRC “has a legal obligation to prevent such waste [given off by natural gas flaring].” They added, “Such a step will help stabilize the market, significantly reduce the damage from flaring, and manage an orderly decline of oil production in Texas.”
In advising the RRC to prorate, Public Citizen concluded, “We further urge the commission to take this opportunity to reevaluate Texas’s role as a global fossil fuel producer in light of permanent shifts in global demand.”
IEEFA wants the RRC to take a “long-term approach” to the situation, a route that would have the RRC “become a forum for a wholesale shift in the role of the industry as it becomes smaller.”
While most commenters took a stance for or against, some did not.
Organizations like the Permian Basin Petroleum Association (PBPA) and the Association of Workers, Professionals, and Wildcatters stated their support for having a hearing but stopped short of supporting proration outright.
Many of these commenters will have the opportunity to give live testimony in front of the body at the hearing tomorrow
Over the weekend, an OPEC production cut deal was announced — negotiations in which the U.S. played a role. It is unclear just how this will affect the commissioner’s decisions on the matter.
President Trump applauded the deal on Twitter, adding that OPEC is considering a 20 million bbl/day cut in its production, rather than the 10 million bbl/day cut frequently cited. In total, OPEC countries produce about 34 million bbl/day, according to the U.S. Energy Information Administration.
Trump also reportedly told Mexican President Andrés Manuel López Obrador — who announced a 100,000 bbl/day cut of his own — the U.S. would also make cuts. In January, the U.S. itself produced nearly 13 million bbl/day.
Notably, unlike the OPEC countries, the U.S. federal government does not have the authority to decide production levels. The producers make those decisions themselves based on supply and demand. If anything, the RRC has more authority on this matter than President Trump.
With all this context and debate unfolding around them, the RRC will face immense pressure from both sides over an action that hasn’t been implemented in decades.
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Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.