Texas agency won’t cut oil production despite cratering prices

Midland's skyline is a backdrop for another pump jack that has ceased to move its head as oil prices continue to drop. Photo credit: Ben Powell for The Texas Tribune

By Mitchell Ferman, Texas Tribune

After overseeing the state’s energy sector through one of Texas’ largest oil booms in recent years, the Texas Railroad Commission has suddenly found itself in the middle of two global crises that have delivered devastating reversals of fortune to the state’s industry and its economy as a whole.

First, an oil price dispute between Russia and Saudi Arabia, which started in early March, led the Saudis to ramp up oil production for a global market that did not need more of it, crushing Texas producers in the process. At the same time, the novel coronavirus kept spreading, eventually keeping most of the world at home, decimating demand for oil.

As a result, the oil industry in Texas was impacted quickly through furloughs and layoffs, and many oil producers were forced to take the unusual step of shutting down wells. The events brought worldwide attention to the powerful Texas Railroad Commission — whose name is something of a misnomer — as it figures out how to navigate an oil crisis during a pandemic. The process has appeared, at turns, to energize and frustrate the commissioners as they’ve watched the value of the state’s featured commodity crater negative for the first time.

On Tuesday, after formal requests from the state’s leading oil producers, a marathon public hearing last month and perhaps more attention paid to it than ever before, the commission decided against imposing oil production cuts, one of the most powerful tools it could employ. Railroad Commission Chairman Wayne Christian and Commissioner Christi Craddick opposed cutting production while Commissioner Ryan Sitton supported it.

Division over such a move centered on a fundamental Texas question: Should the government get involved? Supporters of cutting oil production argued that it could help protect smaller Texas producers by spreading the economic pain. Opponents said the move would hardly make a dent in the global oil demand issue, that the state does not have the bandwidth to enforce such a sweeping new measure and that producers can determine for themselves what is best.

“I refuse to implement an antiquated policy simply because it exists,” Christian said Tuesday, pointing to Texas’ history of coming out of disasters “stronger, richer more successful and better off,” which is why he trusts history “and not some darn model that’s fed ifs and buts and comes out with some predetermined result. This is the facts of history.”

Sitton, who has run models of what the oil market could look like if the pandemic worsens, said the commission did not take the issue of cutting oil production — also known as proration — seriously.

“We didn’t look in detail,” Sitton said.

Craddick had raised legal concerns over curbing production, worried that the commission would almost certainly end up in court over the issue. On Tuesday, Craddick said she was concerned about small Texas oil producers and focused more on “regulatory certainty.”

Over the last two months, some of the state’s largest oil producers filed formal requests and testified before the commissioners for hours in front of a global online audience that reached more than 29,000 people from 49 states and 86 countries. It was an opportunity, Sitton and some experts have said, for the agency to lead the world in helping the oil industry navigate disaster.

“Not acting in this prorationing doesn’t make them irrelevant,” professor Jon Olson, chair of the Hildebrand Department of Petroleum and Geosystems Engineering at the University of Texas at Austin, said in an interview. “But it shirks part of their responsibility, which is to try to encourage the stewardship of Texas natural resources. That’s the part of their duty that I think they are not living up to.”

It’s a tall task, according to Todd Staples, president of the Texas Oil and Gas Association, who said in an interview the extensive attention during a global event “highlights the importance of the commission.”

That became clear after the coronavirus spread across the United States in March. At first, the commission took steps to reduce strain on the industry by issuing disaster waiver requests and requesting tax filing extensions. But a much larger conversation was needed, according to two leading Texas oil producers. They wanted the commission to impose oil production quotas, a move Texas oil regulators hadn’t made since the 1970s.

“If the Texas Railroad Commission does not regulate long term, we will disappear as an industry,” Scott D. Sheffield, president of Irving-based Pioneer Natural Resources, testified near the outset of the hearing that lasted more than 10 hours.

“After 35 years as a CEO, I’ve never seen a free market,” he said.

The commissioners did not take Sheffield’s word for it. Instead, Christian said he would stick to his “free market principles.”

“Should a conservative state like Texas trade the free market for government central-planning in the oil patch?” Christian wrote in an op-ed published in the Houston Chronicle ahead of Tuesday’s meeting.

Sitton, who will depart the commission after this year following a Republican primary defeat in March, said in April that the agency is responsible for handling wasted resources, and he has asked many oil producers if the oversupply of oil is classified as waste. If so, Sitton said, the agency should act.

Oil industry critics also sought involvement in the prorationing process, but in a different way. For years, the statewide commission has been criticized for not enforcing environmental infractions by oil companies.

“The Railroad Commission has an opportunity to protect the environment, dark skies, and health of the residents of West Texas by stopping the harmful and wasteful practice of flaring,” James Newsom, executive director of Big Bend Conservation Alliance, said in a statement.

Christian said during Tuesday’s meeting that “as production rebounds, the goal is to drastically reduce flaring.” He asked the task force that the agency created last month to report back in June about flaring, among other things.

But the discussion about prorationing amounted to hardly anything other than politics, Sitton said. Before Tuesday’s meeting, Sitton wrote a post on his personal website titled “Politics win, Texans lose.” He expressed similar sentiments on Twitter.

“I wish I could explain why so many Texans will lose their jobs while oil production drops in the US worse than anywhere else,” Sitton tweeted, “but politics beats data, so there are no answers. Just ‘free market.'”