Energy Capital & Power

No Deal on Texas Oil Production Cuts

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Texas will not move ahead with mandated production cuts, with the Texas Railroad Commission deciding Tuesday to instead waive industry fees and relax requirements on where crude can be stored so as to alleviate market concerns as storage fills up.

The long-awaited decision comes after nearly a month of debate, public hearings and task force meetings, but Wayne Christian, Chairman of the Texas Railroad Commission, said he was unable to secure additional cooperation in that time from other US states or countries in joining Texas on proration. Without that cooperation, he said mandated production cuts would just leave Texas producers at a disadvantage in the market.

“At least I made the calls, did the contacts, and could not confirm any other state that would join us and that was a prerequisite for the motion,” said Christian, saying that he reached out to North Dakota and Oklahoma, as well as Alberta Energy Minister Sonya Savage.

Commissioner Ryan Sitton had pushed for proration and urged the two other commissioners on the agency to vote for cuts at the April 21 meeting. However, he did not bring forward a motion on cuts on Tuesday, saying the time for proration to be effective had passed. Additionally, the other two commissioners, Christian and Christi Craddick, did not support proration.

“I’m not going to make a motion today because I don’t think there’s one to make,” Sitton said Tuesday. “We have to consider waste, and my disappointment is that we never really did that. We didn’t calculate how much waste was out there; we didn’t determine if proration could prevent waste and, if so, how. We didn’t look in detail or examine mechanisms for which we might do things.”

Still, Sitton said his big fear is that oil demand won’t fully recover, and that the United States will absorb much of the lost production as companies go under.

“My concern is that most of that production loss will come out of the United States, and as we sit here in two or three years and we evaluate: What happened? Why has the US really lost out in this COVID-19 environment? it will be sad to me that we couldn’t evaluate waste,” Sitton said.

Tuesday’s meeting seemingly brings an end to official efforts to regulate production cuts from key Western producers, including the United States and Canada.

Despite the failure to officially reduce production, market demand will see production decreases as companies across the world continue to face bankruptcy and go under. In the US, for example, production has already fallen to 2016 lows. Additionally, some analysts expect demand to begin to recover as restrictions from COVID-19 are loosened globally.

“Much depends on the pace of demand discovery, and it is unlikely that the back-end of the forward curve rallies whilst the frontend remains under pressure. However, modest upside to 2021 futures is starting to emerge, in our view,” said Morgan Stanley in its April 27 Oil Market Outlook.

The energy market has suffered the worst blow to energy demand in its history. Lockdowns from the global COVID-19 pandemic, which have forced at least 4 billion people globally to shelter in their homes, have caused demand to collapse at an unprecedented rate, falling by at least one-third of daily demand. Oil prices have reached record lows, with WTI even trading negative in April for May futures.

The lack of action from Texas comes as OPEC+ begins enforcing and monitoring its largest production cut ever, with members agreeing to cut 9.7 million barrels of oil per day between May-June. Members of the G20, such as the United States and Canada, are also expecting serious production cuts, but they will be market-driven and not mandated. The United States could see production fall by 2 million – 4 million barrels of oil per day, projections show.

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Charné Hollands

Charné Hollands

Charné Hollands is the Deputy Editor at Energy Capital & Power. She holds a Higher Certificate in Professional Photography and Masters in Media Studies from the University of Cape Town. Charné writes content for ECP's website and events as well as co-authored African Energy Chamber: Road to Recovery.