Released April 15, 2020 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Proponents and opponents of temporarily reducing oil production in Texas clashed on Tuesday before the Texas Railroad Commission (RRC) (Austin, Texas), the state body charged with regulating the
About 58 speakers were scheduled to address the panel during the virtual meeting. Pro-reduction speakers would alternate with anti-reduction speakers. Each speaker was given an initial allotment of three minutes to make their case, but time for initial remarks could be extended at the request of one member of the three-member panel. Each speakers' opening remarks were followed by a question-and-answer period. It took two hours to get through the first three speakers, suggesting the meeting would extend well into the night or that a one or more additional meetings would be needed.
At the outset of the meeting, RRC Commissioner Christi Craddick said she was "looking for ideas" from the speakers, and that the commission would not be issuing an order at the meeting. A second commissioner, Ryan Sitton, noted that the commission "has the power to limit oil production (in Texas) but the president does not." At least two of the panel's three members expressed thanks to President Donald Trump for his actions that support the oil and gas industry.
Among the first three speakers addressing the panel, the pro-reduction camp was represented by Scott Sheffield, president and chief executive of Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), and Matthew Gallagher, chairman, president and chief executive of Parsley Energy Incorporated (NYSE:PE) (Austin, Texas). Lee Tillman, chairman, president and chief executive at Marathon Oil Corporation (NYSE:MRO) (Houston, Texas), was one of many speakers carrying the flag for free-market opposition to production cuts.
Sheffield began by saying he "preferred stable prices with proration (of production) to what I've seen the last decade, where prices for West Texas Intermediate (WTI) have swung wildly between $140 per barrel and $20 per barrel." The last time the RRC imposed production cuts, he added, was 1973, "when Texas was OPEC."
"No one will give us capital today," Sheffield continued. "If Texas relies exclusively on the free market, oil prices will collapse below 1986 levels and stay there for many months." In 1986, during an OPEC price war, the price for a barrel of WTI fell into the single digits. He added that WTI prices in some Texas markets have fallen to as low as $3 to $10 per barrel, largely because available storage and pipeline capacity had fallen dramatically.
The Pioneer chief predicted that storage at Cushing, Oklahoma, would be completely full in four to five weeks. Once that happened, producers, pipelines and storage companies would shut down virtually overnight, causing vast disruption inside the industry and to the broader economy. He noted that some refiners and pipelines already have been unwilling to conduct business with some producers, citing scant storage capacity.
Sheffield said the railroad commission was "obligated by law" to preserve the state's critical resources and minimize waste, including economic waste, which he and other pro-reduction speakers defined as supply exceeding consumption plus storage. On a global basis, prior to OPEC+'s decision last weekend to reduce production by about 9.7 million barrels per day (BBL/d), global supply exceeded global demand plus storage by an estimated 20 million to 30 million BBL/d. Assuming the nations of OPEC+ comply with their reduced production, the world's surplus would shrink to 10 million to 20 million BBL/d.
"The market is saying what OPEC+ did over the weekend isn't enough," Sheffield said. Texas should reduce production as part of a global effort to rebalance supply and demand. "The commission doesn't have the option of doing nothing," he added. "This is worse than 1986 -- demand will not be coming back any time soon."
Sheffield and another pro-reduction speaker, Matthew Gallagher of Parsley Energy, urged the commission to order an immediate, 30-day production cut of 1 million BBL/d, about 20% of the state's current production. Subsequent monthly cuts of 10% should be considered. But if Texas' cuts were not followed by other oil-producing states, the G20 and a second production cut by OPEC+, speakers said Texas should reconsider its production options.
Although 90% to 95% of the state's oil is produced by 100 large companies, Sheffield advocated exempting smaller producers from production reductions.
Pro-reduction speakers said a 1 million-barrel production cut from Texas would result in 30 million barrels of oil storage per month, take unneeded barrels off the market, reduce economic waste and put upward pressure on prices. Speakers cited research that most independent exploration & production (E&P) companies can break even when WTI is priced at about $25-$26 per barrel, well under what oil is trading at today. Selling a resource below the cost to produce it was an economic waste that that could reach $100 million per day, speakers said.
But the pro-reduction camp was forcefully rebutted by Lee Tillman of Marathon, who repeatedly invoked the importance of the free-market. "An unprecedented health crisis has created extraordinarily tough times," he said. "But we believe in free markets and the commission should support Texas as a free-market state."
"The shale revolution would not have begun in Texas without free-market principles," Tillman continued. "This is a unique challenge, but the oil and gas industry will emerge stronger than before."
He noted that independent producers and integrated oil majors have cut their capital spending by 40% to 50%, which will result in lowered production. Citing data from the U.S. Energy Information Administration (EIA), Tillman said U.S. oil production is projected to fall by 400,000 BBL/d between January and May. For the full year, the EIA recently projected production would decline about 1.8 million BBL/d, roughly 14%. Production cuts by operators is a sign that the free market is working, he said.
Production cutbacks will only serve to disadvantage Texas producers, Tillman said. The oil market has changed a lot since the last time the RRC imposed production cuts in the early 1970s, he added: "Supply and demand imbalances will always occur. Some (companies) will succeed, some will fail."
He was particularly critical of pro-cutback speakers like Sheffield and Gallagher. "When a vocal minority takes a position for artificial market manipulation that is so far removed from the consensus of the vast majority of operators, one can only surmise that their motivations are primarily company-specific," Tillman said. Pioneer and Parsley operate only in the Permian Basin, while Marathon operates in various states.
"Opening this Pandora's Box creates a powerful tool to restrain future production for reasons other than waste. What will be the threshold for tossing aside free-market principles in the future?"
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
About 58 speakers were scheduled to address the panel during the virtual meeting. Pro-reduction speakers would alternate with anti-reduction speakers. Each speaker was given an initial allotment of three minutes to make their case, but time for initial remarks could be extended at the request of one member of the three-member panel. Each speakers' opening remarks were followed by a question-and-answer period. It took two hours to get through the first three speakers, suggesting the meeting would extend well into the night or that a one or more additional meetings would be needed.
At the outset of the meeting, RRC Commissioner Christi Craddick said she was "looking for ideas" from the speakers, and that the commission would not be issuing an order at the meeting. A second commissioner, Ryan Sitton, noted that the commission "has the power to limit oil production (in Texas) but the president does not." At least two of the panel's three members expressed thanks to President Donald Trump for his actions that support the oil and gas industry.
Among the first three speakers addressing the panel, the pro-reduction camp was represented by Scott Sheffield, president and chief executive of Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), and Matthew Gallagher, chairman, president and chief executive of Parsley Energy Incorporated (NYSE:PE) (Austin, Texas). Lee Tillman, chairman, president and chief executive at Marathon Oil Corporation (NYSE:MRO) (Houston, Texas), was one of many speakers carrying the flag for free-market opposition to production cuts.
Sheffield began by saying he "preferred stable prices with proration (of production) to what I've seen the last decade, where prices for West Texas Intermediate (WTI) have swung wildly between $140 per barrel and $20 per barrel." The last time the RRC imposed production cuts, he added, was 1973, "when Texas was OPEC."
"No one will give us capital today," Sheffield continued. "If Texas relies exclusively on the free market, oil prices will collapse below 1986 levels and stay there for many months." In 1986, during an OPEC price war, the price for a barrel of WTI fell into the single digits. He added that WTI prices in some Texas markets have fallen to as low as $3 to $10 per barrel, largely because available storage and pipeline capacity had fallen dramatically.
The Pioneer chief predicted that storage at Cushing, Oklahoma, would be completely full in four to five weeks. Once that happened, producers, pipelines and storage companies would shut down virtually overnight, causing vast disruption inside the industry and to the broader economy. He noted that some refiners and pipelines already have been unwilling to conduct business with some producers, citing scant storage capacity.
Sheffield said the railroad commission was "obligated by law" to preserve the state's critical resources and minimize waste, including economic waste, which he and other pro-reduction speakers defined as supply exceeding consumption plus storage. On a global basis, prior to OPEC+'s decision last weekend to reduce production by about 9.7 million barrels per day (BBL/d), global supply exceeded global demand plus storage by an estimated 20 million to 30 million BBL/d. Assuming the nations of OPEC+ comply with their reduced production, the world's surplus would shrink to 10 million to 20 million BBL/d.
"The market is saying what OPEC+ did over the weekend isn't enough," Sheffield said. Texas should reduce production as part of a global effort to rebalance supply and demand. "The commission doesn't have the option of doing nothing," he added. "This is worse than 1986 -- demand will not be coming back any time soon."
Sheffield and another pro-reduction speaker, Matthew Gallagher of Parsley Energy, urged the commission to order an immediate, 30-day production cut of 1 million BBL/d, about 20% of the state's current production. Subsequent monthly cuts of 10% should be considered. But if Texas' cuts were not followed by other oil-producing states, the G20 and a second production cut by OPEC+, speakers said Texas should reconsider its production options.
Although 90% to 95% of the state's oil is produced by 100 large companies, Sheffield advocated exempting smaller producers from production reductions.
Pro-reduction speakers said a 1 million-barrel production cut from Texas would result in 30 million barrels of oil storage per month, take unneeded barrels off the market, reduce economic waste and put upward pressure on prices. Speakers cited research that most independent exploration & production (E&P) companies can break even when WTI is priced at about $25-$26 per barrel, well under what oil is trading at today. Selling a resource below the cost to produce it was an economic waste that that could reach $100 million per day, speakers said.
But the pro-reduction camp was forcefully rebutted by Lee Tillman of Marathon, who repeatedly invoked the importance of the free-market. "An unprecedented health crisis has created extraordinarily tough times," he said. "But we believe in free markets and the commission should support Texas as a free-market state."
"The shale revolution would not have begun in Texas without free-market principles," Tillman continued. "This is a unique challenge, but the oil and gas industry will emerge stronger than before."
He noted that independent producers and integrated oil majors have cut their capital spending by 40% to 50%, which will result in lowered production. Citing data from the U.S. Energy Information Administration (EIA), Tillman said U.S. oil production is projected to fall by 400,000 BBL/d between January and May. For the full year, the EIA recently projected production would decline about 1.8 million BBL/d, roughly 14%. Production cuts by operators is a sign that the free market is working, he said.
Production cutbacks will only serve to disadvantage Texas producers, Tillman said. The oil market has changed a lot since the last time the RRC imposed production cuts in the early 1970s, he added: "Supply and demand imbalances will always occur. Some (companies) will succeed, some will fail."
He was particularly critical of pro-cutback speakers like Sheffield and Gallagher. "When a vocal minority takes a position for artificial market manipulation that is so far removed from the consensus of the vast majority of operators, one can only surmise that their motivations are primarily company-specific," Tillman said. Pioneer and Parsley operate only in the Permian Basin, while Marathon operates in various states.
"Opening this Pandora's Box creates a powerful tool to restrain future production for reasons other than waste. What will be the threshold for tossing aside free-market principles in the future?"
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
