The last barrel

It’s become clear that President Trump, the API, and now the Railroad Commission of Texas (RRC) support a total free-market solution for the low oil price problem. It appears these government officials are willing to sacrifice hundreds of mid- to small-sized operators, along with untold thousands of jobs in the process, to support their “free-market principles.” When WTI drops 300%, to minus $37.63/bbl, it’s apparent our industry needs some assistance from our “leaders” to help right the ship. However, not one federal or state agency has enacted meaningful legislation, or influence, on behalf of the industry they claim to represent.

API supports big business. In a rebuttal to World Oil’s editorial: “The market reality API doesn’t ‘get,’” API President Mike Sommers responded with the organization’s justification for abandoning the upstream industry’s most vulnerable factions. Here are a few excerpts from his response. “World Oil asserts that the API seems to be working overtime to stifle discussion of some potential remedies. That could not be further from the truth.” 

“For example, World Oil’s editorial argues for tariffs, but protectionist trade measures would do more harm than good for our industry. While the U.S. today is a net energy exporter, refineries do rely on some imports to process different types of crude for jet fuel, gasoline, and other products.”

“Others have called for quotas. Two things are clear: New DOE data show U.S. production is declining without a mandate, due to reduced demand from COVID-19. And abandoning competitive market dynamics that enabled our industry to become a world leader would enable foreign oil to fill future demand. As natural gas and oil companies navigate today’s economic turbulence, it’s important to position this industry to come back even stronger.” 

Editor’s rebuttal to API’s response. Can’t we roll back restrictions once prices recover? And many experts say that the U.S. has ample shale reserves to keep foreign supply at bay for decades. And how is eliminating many of the mid-to-small-sized operators going to help maintain competitive market dynamics and position our industry to come back stronger? These smaller companies keep many marginal wells operating long after larger companies P&A these types of properties. This “total free-market” solution will force smaller companies out of business and enable the majors to purchase the best properties at fire-sale prices.

TRRC governing principles. According to the Railroad Commission website, the RRC’s statutory role is to: 1) prevent waste of the state’s natural resources; and 2) to protect the correlative rights of different interest owners.” So, what do these statements mean and why were they implemented?

Although the industry has changed dramatically since the inception of the RRC, part of its function is to protect unsuspecting landowners from abuses by oil companies. To ensure fair treatment, Texas enacted laws to ensure all vested parties receive their fair share of proceeds from oil production. And remember, oil companies merely “lease” the minerals, they don’t own them in entirety. Not even after the well is drilled and producing. This is why the statement “protect correlative rights” is included in the RRC charter. The PCR statement also appears to empower the state to prevent a well operator from selling oil below fair-market value by limiting production in times of emergency. This prevents operators from wasting production at the expense of royalty owners and non-operated working interest partners, neither of whom have a say in how a well is produced. These owners are damaged greatly, when oil is sold at fire sale prices.  

RRC fails to act. Before the Texas RRC voted “no” on mandating production cuts, Chairman Wayne Christian published an op-ed in the Houston Chronicle. Here are a few excerpts from that article. “I am very concerned about the thousands of Texans who have lost jobs during this downturn. One solution proposed to my agency is to ‘prorate’ crude production in Texas. The Commission adopted ‘prorationing’ in the late 1920s, but abandoned the practice after 1973. Some critics have called on our agency to make ‘bold decisions,’ such as proration in these tough times. Implementing an antiquated policy, simply because it exists, is not bold. I refuse to do something just to say I took action, because taking the wrong action can actually make things worse.”

So, if I understand correctly, Mr. Christian is saying that because the RRC abandoned prorationing in 1973, it should no longer be considered a viable option because it’s archaic, right? Let’s remember that in 1973, OPEC launched an oil embargo against the U.S., driving up oil prices from $3/bbl to $13/bbl. At that time, prorationing legislation was moot, because the U.S. was a major importer of crude without prospects to increase capacity. Now, we have too much oil, and prorationing makes perfect sense and appears to be a key charter of the RRC “to prevent waste.”

Protect our grass-roots industry! Although the crisis will eventually fade, the next time an actual emergency occurs, the RRC needs to act decisively without extended discussion. Quick action by strong leadership could have saved thousands of jobs and averted damaging mid-to-small-sized operators that are the backbone of the Texas oil and gas industry. These companies play a vital role in our industry by maintaining and nurturing marginal wells, long past their prime.

Date that will live in infamy. The negative price event will go down in infamy as a lesson learned in the pitfalls of speculating on crude futures, but also for the total lack of action by those in public office, who are commissioned to serve and protect the people of Texas. In his closing op-ed statement, Mr. Christian proclaims, “It is for this reason that I plan to stick to my free market principles and oppose proration in Texas.” However, it appears Mr. Christian’s principles differ greatly from the statutory role outlined in the RRC charter.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com