For the first time since the seventies, the Texas Railroad Commission, the agency that regulates the state’s energy industry, held a meeting Tuesday to decide whether or not to place a limit on oil and gas production in the state. It was a remarkable development for an organization that for the past half-century has let the free market reign. One of the CEOs who called for the hearing, Scott Sheffield of Pioneer Natural Resources, argued that the current crisis was more dire than when cutoffs were last in place. It reminded him, he testified, of the 1930 oil collapse, caused by a glut from the newly discovered East Texas Oil Field, right at the start of the Great Depression.
“My personal opinion is that this is going to go longer than anybody expected,” Sheffield said at the hearing. “If the Texas Railroad Commission does not regulate long term, we will disappear as an industry, like the coal industry.”
At the end of March, Pioneer was joined by Parsley Energy in petitioning the commission for the hearing on proration, which would place a to-be-determined upper limit on oil production across the state and fine companies for excess barrels sold. The economic slowdown from the coronavirus pandemic, coupled with a price war between Saudi Arabia and Russia that flooded global markets with cheap crude in early March, has led to a precipitous decline in global oil consumption. Oil prices have now fallen to multiyear lows, around $20 a barrel, far below the break-even point for many Texas producers. Parsley’s CEO, Matt Gallagher, cited a forecast from Rystad Energy to argue that hundreds of thousands of Texans could be unemployed without some intervention, and that jobs would never return.
The commission, which is made up of three elected officials, took up the call Tuesday and heard more than seven hours of testimony from oil and gas operators and environmental advocates. It isn’t expected to announce a decision for several days.
When the Railroad Commission was first granted the power to curtail oil production, Texas controlled nearly half the world’s supply of crude, and the agency essentially controlled worldwide prices the same way that OPEC does now. Today, Texas supplies about 6 percent of the world’s crude. As several people commented during the hearing, without more aggressive production cuts from OPEC and cooperation from other major oil-producing states like North Dakota, the Railroad Commission’s prospective proration might not be enough to raise oil prices. Over the weekend OPEC Plus’s twenty member nations agreed to cut oil production by 10 percent—which experts also say likely is not enough to stabilize prices.
Joining Parsley and Pioneer in calling for proration were former railroad commissioners, including David Porter, who served in office until 2017, as well as industry and interest groups. The Association of Workers, Professionals and Wildcatters, a social media group representing workers for smaller-scale producers, submitted written comments arguing that the industry’s “rank and file” members such as truck drivers, pumpers, geologists, and hourly employees are most at risk if price controls aren’t put into place. “The major [companies] have balance sheets to take advantage of hard times; we do not,” the letter stated.
But the calls for proration were met with blanket criticisms of government intervention. The CFO of Midland’s Diamondback Energy, a large shale exploration company, said that his organization would halt all its operations in Texas rather than face state quotas.
Much of the testimony against proration included passionate defenses of the free market. Producers that can’t sell or store oil, opponents argued, are already shutting down their least profitable wells. “Companies are the ultimate arbiter of economics in the fields,” Lee Tillman, the president of Marathon Oil, told the commissioners.
“It’s government intervention itself that would cause haphazard curtailment,” said Todd Staples, the president of the Texas Oil and Gas Association. “The government should not be in the business of picking winners and losers.”
One Midland rancher, John Mabee, told the commissioners in his comments against proration that he wasn’t even convinced the agency was equipped to monitor production around the state if it eventually set quotas. Commissioner Christi Craddick echoed that sentiment during the hearing, saying, “We don’t even know how to do it anymore.”
Large companies including Chevron and Exxon provided testimony during Tuesday’s hearing advocating against production limits. Giants like Exxon, which reported $14 billion in earnings last year, are far from facing bankruptcy. Owen Anderson, an oil and gas law expert at the University of Texas, said big companies see the crisis as a buying opportunity: the little guys go under and the giants snatch up their assets on the cheap. Exxon, Shell, and others have cut back on new drilling exploration and expenses in the past few years. But small operators are more likely to take risks on drilling new wells, making this a potentially lucrative opportunity for big companies to acquire new capacity.
(Texas Monthly’s parent company, Enterprise Products Company, also owns interests in the midstream oil and gas industry, among other investments. The company’s CEO testified against proration at the hearing.)
Meanwhile, environmental advocacy groups took the opportunity to remind the commission that its regulatory power to curtail “waste” and glut also applies year-round, and not just during crises, to companies that flare off, or burn, excess gas production. “We ask you to prioritize production cuts for producers and fields with the worst records of excessive flaring, and to develop a plan to ratchet down production of oil throughout the next decade,” Luke Metzger, the executive director of Environment Texas, wrote to the commission. The CEOs of Pioneer and Parsley, the companies that requested Tuesday’s hearing, have also been supportive of flaring regulations in the past, calling on investors to stop working with companies that don’t move to limit the practice.
The Railroad Commission is known as one of the most regulation-averse entities in the state, making its consideration of proration all the more significant.
“I’m surprised that [the commission] is considering this,” Anderson said. He added that collapsing oil markets in the nineties and during the 2008 financial crisis had not led to any “serious consideration” of curbing production. If the commission decides to institute quotas, he said it comes with the specter of more government regulation in the future. “It’s a ‘be careful what you wish for’ moment.”
