Will cutting Texas oil production in the coronavirus era save the industry or kill it?
A proposal by state officials to cut oil production in Texas faces a backlash from some in the industry who say they might have to close up shop.
But other producers say restrictions are needed to stabilize oil prices, which have fallen to historically low levels in large part because the coronavirus crisis has shut down the economy and led to an astonishing drop in demand for fuel.
Among those in favor of cutting production was Matt Gallagher, president and chief executive officer of Parsley Energy Inc. of Austin.
“Doing so 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,” Gallagher said in written testimony submitted to the commission.
The commission heard more than 10 hours of testimony this week, but hasn’t yet taken action on the issue.
Among those opposed to government intervention in oil production was state Rep. Charlie Geren, R-Fort Worth. He said the state was already expecting significant reductions in revenue from oil and gas proceeds to fund government services, and that mandating a cut in production would make the situation even worse.
“We cannot solve a demand problem with a government forced supply solution,” Geren said in written testimony. “This industry has proven itself to be resilient and will do so again once the effects of COVID-19 subside.”
Texas’ consideration of the matter came just days after Saudi Arabia and Russia resolved their dispute over oil production. That matter had led to a dramatic downturn in petroleum prices even before coronavirus became a worldwide pandemic.
By some estimates, oil and gas accounts for 8 to 10% of Texas’ economy.
Scott Sheffield, president and CEO of Pioneer Natural Resources USA Inc., argued in a joint proposal with Parsley Energy Inc. that production should be reduced because Texas would not have enough storage space available for the oil in May, and that continuing to produce under those conditions would be “wasteful.”
“Without Commission action, operators will shut-in wells in an ad hoc and haphazard manner that will heighten industry disruption and cause economic waste. In short, the Commission must act promptly to ensure the shut-in process takes place in an equitable and orderly manner across the state,” Sheffield and Gallagher wrote in a letter.
Beyond the differences of opinion in the industry, left unanswered were questions about how production could be cut in a way that was fair to all producers, said Josiah Neeley, Texas director for the Washington-based R Street Institute which opposes production cuts.
Mandated cuts in production are known in the oil industry as proration. Texas has not engaged in proration since 1973, Neeley said.
“It did seem like, even beyond the argument about whether the case (for cutting production) is good or not, the logistical problems involved in making it work seemed kind of insurmountable,” Neeley said in a phone interview.
