Lots of talk for little action in big Texas: Fuel for Thought

In an oversized state known for its ingenuity, pride, stubbornness and free-range capitalism, it’s a borderline miracle that Texas is even seriously considering implementing a plan for mandatory oil production reductions.

Texas and oil go together like chips and queso, but if there’s way too much cheese, you just end up with a bunch of waste and soggy chips.

During the worldwide collapse in oil triggered by the coronavirus pandemic, the contention is that Texas is producing way too much oil at no profit, potentially leaving the state’s economy much weaker and wasting valuable natural resources.

One of the production cut plan’s primary proponents, Texas Railroad Commissioner Ryan Sitton, even acknowledged there was a drinking game for people to drink every time he referenced “economic waste.”

Not wanting to disappoint his haters, Sitton repeated “waste” over and over at the end of a recent meeting in April. After that meeting, NYMEX WTI made the historic plunge into negative pricing territory for the first time ever.

But for opponents of the plan, the argument is pretty easy, regardless of its merits: Let the free markets work and don’t allow Texas to resort to “socialist” government interference. The producers are already cutting back and shutting in wells – it will all work itself out eventually.

And so the Railroad Commission, which regulates the energy sector in the state, will meet again May 5 to consider forcing producers to cut their outputs by 20% from the fourth quarter. The goal is essentially to force Texas to temporarily reduce its oil volumes by at least 1 million b/d from a previous high of more than 5 million b/d.

The measure, called prorationing, hasn’t been utilized in Texas in nearly 50 years.

However, the bottom line almost certainly is that Texas won’t intervene in oil. Sitton is just one of three votes, and the other two commissioners have vocally leaned against taking action, citing the free markets.

On Wednesday, Chairman Wayne Christian made his opposition official in an opinion column in the Houston Chronicle.

“This is not the first crisis our nation has faced, and it won’t be the last,” Christian wrote. “But a hundred percent of the time we have faced hardship, America has come back stronger and so has Texas. It is for this reason that I plan to stick to my free market principles and oppose proration in Texas.”

TEXAS OIL PRICES UNDER PRESSURE

It’s a long, hard road

The seemingly inevitable opposition comes after weeks of debating the topic, including a marathon hearing April 14 that lasted 10 hours and involved more than 55 speakers testifying remotely, online, because of the pandemic.

That was followed by an April 21 meeting during which the commission kicked the can down the road until May in order to get legal opinions from the Texas state attorney general’s office and others.

The initial argument was Texas and the White House could work in conjunction with the OPEC+ group and other nations to enact a broader global agreement to scale back production to help stabilize markets that have seen worldwide oil demand plunge by nearly 30%.

But the OPEC+ deal to cut almost 10 million b/d has come and gone since Saudi Arabia and Russia agreed to end their pricing war. That deal has done little to help boost WTI oil prices, which have fallen from $20-something per barrel down to the teens.

TEXAS OIL PRODUCTION POISED TO NOSE-DIVE

But the opposition has always been stronger than the group of proponents asking for Texas to intervene.

Oil majors line up to oppose

Apart from Sitton, the argument for prorationing was led by large Permian Basin producers Pioneer Natural Resources and Parsley Energy. The connection is that Pioneer is led by Scott Sheffield and Parsley was founded by his son, Bryan.

“We will disappear like the coal industry,” Scott Sheffield warned, and 80% of the companies could fall into bankruptcy if government action isn’t taken.

That familial connection gave ammunition to opponents to claim it’s the Sheffields versus everyone else.

But other companies have joined in support of mandatory cutbacks, including a bevy of small, private producers that would have been exempted if they churn out less than 1,000 b/d.

Still, opponents certainly outweigh and outnumber those in favor of prorationing, including majors ExxonMobil and Chevron, the top oil and gas trade groups and most of the other big Texas producers.

And, quite frankly, the Texas regulators have made it clear they are unsure if they’d even be able to properly implement and oversee the cutbacks anyway, given their inexperience on the topic and the commission’s relatively small staffing levels.

That’s why the debate was won by appealing to that Texas pride and love of “freedom.”

“Support Texas as a free market state that promotes freedom and competition,” Marathon Oil CEO Lee Tillman said. “The bottom line is we’re already cutting and cutting deeply.”