Texas Oil Regulator Poses the Fundamental Question: “How Do We Start?”

After taking more than 10 hours of verbal testimony from more than 50 witnesses at Tuesday’s hearing, the three members of the Texas Railroad Commission tabled any decision on whether to move to limit oil production from Texas wells through its power of prorationing. During the course of the hearing, Commissioner Christi Craddick hit on the fundamental impediment that will likely prevent the RRC from any quick implementation of limits: There is no institutional memory on how to do it.

“We don’t know how to do it at the agency anymore,” Craddick said to one witness who was around during the last time the RRC enforced prorationing back in 1972. “Do we start on Jan. 1? Where do we start? How do we start?”

Exactly. As much as many struggling independent producers would like to think the Commissioners possess some magic bullet power that would boost prices and help them survive the most severe oil industry downturn in modern times, reality tells a different story. No one working at the RRC today was there in 1972, and even if they were, the industry the Commission regulates has fundamentally reinvented itself at least half a dozen times since then. The Commissioners and their current staff can read all the history books on the market about the golden age of prorationing, but that wouldn’t be much help to them in implementing new production limits soon.

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Commissioner Craddick’s mention of a possible January 1 date for trying to implement the change is very telling. If professional industry analytical firms like Rystad Energy, IHSMarkit and Wood MacKenzie are accurate, the immediate crisis in global oil over-supply will have been resolved well before then, and oil prices should be well on their way back up to higher levels. It is equally likely that dozens of Texas oil producers will have been forced into bankruptcy in the meantime.

Another potential logical date of implementation would be September 1, which is the start of Fiscal Year 2021 for the Texas government. Even if the RRC currently possessed the budget and staff to meet that quick goal (it possesses neither) it is quite likely that the Texas industry will have already lost upwards of 2 million barrels of daily oil production by that time due to dramatically-lowered drilling activity and voluntary shutting-in of production.

Then there is the other practical limiter that the commissioners must consider: The budget. The Texas government famously operates on a two year budget cycle, with the legislature meeting for 140 days in odd-numbered years to make biennial adjustments. The RRC is currently operating under a budget that does not expire until August 31, 2021. Any upward adjustments to that budget designed to enable the Commissioners to hire in additional staff and build new computer systems to implement and police prorationing would have to be authorized by a special session of the Texas Legislature, subject to a call by Governor Greg Abbott.

Think of how unlikely that is to take place at a time when Texas is currently functioning under an executive order to avoid gatherings of more than 10 people due to the COVID-19 pandemic. Also consider how unlikely Gov. Abbott and the legislature would be to agree to increase any agency’s budget during this time of massive economic destruction.

Having said all of that, there are valid, logical arguments supporting the notion that the RRC should move ahead to limit the state’s oil production on whatever timetable their staffing and budgetary limitations would allow them to meet. Because the fundamental weakness facing America’s shale industry has not changed in recent months.

A price collapse that had already begun due to demand destruction caused by the viral pandemic was exacerbated by the dispute between Russia and Saudi Arabia that led to the collapse of the OPEC+ agreement to limit exports. The announcement over the weekend of a new, U.S.-brokered deal between those oil-producing nations will likely lead to an eventual price recovery, but America’s shale producers will still find themselves dependent on those other countries with adverse economic interests to remain willing to sustain their own businesses.

An eventual collapse of OPEC+ like the one we saw in early March was always an inevitability, because every time that group implemented additional reductions in their own production, U.S. shale producers swooped in to fill the void and grab more market share. Left to its own devices, America’s free-market industry consisting of hundreds of aggressive competitors will only continue this behavior. That, too, is inevitable.

In that situation, is it any wonder that banks and other investors have shied away from the shale business even as it has boomed in recent years? Scott Sheffield, the CEO of Pioneer Natural Resources who requested yesterday’s hearing, put it this way: “No one wants to give us capital because we have all destroyed capital and created economic waste.”

True, and left unbridled by state regulators, what assurances would investors have that that cycle of destruction and waste would not just take place in the industry all over again?

In the wake of yesterday’s long hearing, these three elected Commissioners have a very tough decision to make, one that will leave half of the Texas industry disappointed regardless of which way it goes. I’m just glad I’m not one of them.