Texas Regulators Weigh Historic Oil Cuts After Coronavirus--Update

Texas regulators on Tuesday debated curtailing oil output in the state in response to cratering demand caused by the new coronavirus.

The virtual discussion by the Railroad Commission of Texas over whether to limit production -- a step the state hasn't taken since the 1970s -- attracted numerous oil industry leaders, including the heads of shale producers Pioneer Natural Resources Co., Parsley Energy Inc. (PE) and Marathon Oil Corp. (MRO)

It quickly became apparent that the industry was divided over taking such a historic step. West Texas shale producers Pioneer and Parsley have led the charge to cut production, while many larger companies including Exxon Mobil Corp. (XOM) and Occidental Petroleum Corp. (OXY) have opposed the idea. No immediate decision was expected Tuesday.

"Nobody wants to give us capital because we have all destroyed capital and created economic waste," said Pioneer Chief Executive Scott Sheffield, urging the state to reduce daily oil output by one million barrels in May, or nearly 20% from January levels. "If the Texas Railroad Commission does not regulate long-term, we will disappear as an industry like the coal industry," Mr. Sheffield said.

Marathon Oil (MRO) Chief Executive Lee Tillman urged commissioners to allow companies to chart their own paths.

"Supply-and-demand imbalances will always occur, and in those times, some companies will succeed and others will fail," said Mr. Tillman. "What will be the threshold to toss aside free-market principles in the future?"

He suggested that the federal government could support the oil-and-gas industry by having the military purchase refined products such as gasoline or by giving operators more flexibility to suspend production on drilling leases.

Jim Teague, co-chief executive of pipeline company Enterprise Products Partners LP, questioned the motivations of the companies pushing for the railroad commission to order cuts, though he didn't name the firms.

"Are they really trying to fix a problem, or do they want to argue that government action by you gives them the opportunity to get out of some of their obligations?" Mr. Teague said.

U.S. antitrust laws limit the federal government's ability to curtail oil production, but Texas empowers its railroad commission to do so independently when production exceeds market demand.

Regulators spent the early hours of Tuesday's hearing asking executives how proration, as the output cuts are known, would help to bring supply and demand back into balance, how they envision implementing cuts and what would constitute wasting oil.

Some of the panel's three elected commissioners have expressed reservations about forcing production cuts.

"The Railroad Commission of Texas has the power to limit oil production but the president does not, and that's kind of a sobering responsibility we find ourselves holding," Chairman Wayne Christian said at the hearing's outset. "Despite my reservations on this limiting, I am open to discussion."

Parsley Chief Executive Matt Gallagher, who supports cuts, warned of steep industry job losses if regulators don't intervene. He said Texas ought to pursue temporary cuts and potentially revisit them if other counties and states don't follow suit with additional reductions.

Over the weekend, an international coalition including Saudi Arabia and Russia agreed to reduce output by 9.7 million barrels a day, but many think that won't be enough to address lost demand.

"This pandemic storm has now been on our shores for over a month. There is no reason to run full speed into infrastructure gridlock," Mr. Gallagher said.

Write to Rebecca Elliott at rebecca.elliott@wsj.com

By Rebecca Elliott

Texas regulators on Tuesday debated curtailing oil output in the state in response to cratering demand caused by the new coronavirus, but it quickly became apparent that the industry was divided over taking such a historic step.

The virtual discussion by the Railroad Commission of Texas over whether to limit production -- something the state last did in the 1970s -- attracted numerous oil industry leaders, including the heads of shale producers Pioneer Natural Resources Co., Parsley Energy Inc. (PE) and Marathon Oil Corp. (MRO)

While West Texas shale producers Pioneer and Parsley have spurred regulators to cut production, many larger companies including Exxon Mobil Corp. (XOM) and Occidental Petroleum Corp. (OXY) have opposed the idea.

No immediate decision was expected Tuesday, when U.S. benchmark oil prices fell roughly 10% to $20 a barrel as concerns over oversupply grew. Over the weekend, a coalition of countries including Saudi Arabia and Russia agreed to reduce output by 9.7 million barrels a day, but many believe that won't be enough to address lost demand as people stay home due to the pandemic

Pioneer Chief Executive Scott Sheffield urged the state to reduce daily oil output by one million barrels in May, or nearly 20% from January levels.

"Nobody wants to give us capital because we have all destroyed capital and created economic waste," Mr. Sheffield said. "If the Texas Railroad Commission does not regulate long-term, we will disappear as an industry like the coal industry," he said.

Marathon Oil (MRO) Chief Executive Lee Tillman urged commissioners to allow companies to chart their own paths.

"Supply-and-demand imbalances will always occur, and in those times, some companies will succeed and others will fail," said Mr. Tillman. "What will be the threshold to toss aside free-market principles in the future?"

He suggested that the federal government could support the oil-and-gas industry by having the military purchase refined products such as gasoline or by giving operators more flexibility to suspend production on drilling leases.

Jim Teague, co-chief executive of pipeline company Enterprise Products Partners LP, questioned the motivations of the companies pushing for the railroad commission to order cuts, though he didn't name the firms.

"Are they really trying to fix a problem, or do they want to argue that government action by you gives them the opportunity to get out of some of their obligations?" Mr. Teague said.

U.S. antitrust laws limit the federal government's ability to curtail oil production, but Texas empowers its railroad commission to do so independently when production exceeds market demand.

At the heart of Tuesday's debate was whether the current situation amounted to a wasting of Texas oil resources, a condition regulators struggled to define after decades of not imposing curtailments.

Commission members spent the early hours of the hearing asking executives how proration, as the output cuts are known, would help to bring supply and demand back into balance and how they envision implementing cuts, as well as what constitutes wasting oil.

Some of the panel's three elected commissioners have expressed reservations about forcing production cuts.

"The Railroad Commission of Texas has the power to limit oil production but the president does not, and that's kind of a sobering responsibility we find ourselves holding," Chairman Wayne Christian said at the hearing's outset. "Despite my reservations on this limiting, I am open to discussion."

The threat of unemployment in the industry loomed large over the hearing, with opponents and supporters of output cuts both arguing that jobs would be lost if the wrong decision were made.

Diamondback Energy Inc. finance chief Kaes Van't Hof said the free market is working and that his company has positioned itself to operate through economic cycles. But he said Diamondback would cease all activity if the commission were to implement cuts.

"Diamondback will not be using any service providers to drill, complete or produce wells during the proration period," he said, warning of "a sector with zero revenue and zero employment."

Parsley Chief Executive Matt Gallagher, who supports cuts, warned of steep job losses if regulators don't intervene. He said Texas ought to pursue temporary cuts and potentially revisit them if other producers don't follow suit with additional reductions.

"This pandemic storm has now been on our shores for over a month. There is no reason to run full speed into infrastructure gridlock," Mr. Gallagher said.

Other oil-producing states are also weighing whether to take steps to address the oil glut. Oklahoma regulators are set to hold a hearing May 11 to consider limiting the state's oil output. Regulators in North Dakota, the second-largest U.S. oil-producing state, have not "looked seriously" at proration, Lynn Helms, director of North Dakota's Department of Mineral Resources, said in a Tuesday presentation.

--Collin Eaton contributed to this article.

Write to Rebecca Elliott at rebecca.elliott@wsj.com


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