Coronavirus: Texas oil producers clash on supply cut after historic OPEC+ deal

US oil producers clashed over whether to contribute to global oil cuts in a lengthy debate organized by the Railroad Commission of Texas in the wake of a collapse in demand caused by the coronavirus pandemic.

Many of the world’s leading oil producers struck a historic oil output cut deal on Sunday to reduce their output by more than 20 percent and the United States is expected to join the effort, although it is up to state regulators to decide if a compulsory cut should be imposed.

Speakers at the Railroad Commission of Texas, which has powers to impose cuts on the state’s producers accounting for 40 percent of US production, noted the importance of OPEC+ to their business.

“We have been reliant on OPEC and OPEC+ since 2016 … We have stolen market share from OPEC+,” Pioneer Natural Resources CEO Scott Sheffield said.

Sheffield called the commission to approve a 20 percent cut in supply, with a revision every month to check if demand is recovering from the coronavirus pandemic.

Many US oil producers are already making a loss on every barrel they pump because prices have fallen so sharply since the virus became a pandemic last month, creating an unprecedented demand vacuum.

Sunday’s agreement between the Organization of Petroleum Exporting Countries (OPEC), Russia, and others, known as the OPEC+ group, will see 9.7 million barrels per day (bpd) of crude supply removed from world markets. Expected deals with other producers and buyers will bring the total cut to 19.5 million bpd, Saudi Arabian energy minister Prince Abdulaziz bin Salman said Monday.

The virus has caused governments to place countries in widespread lockdown, significantly curtailing demand for petroleum products and crashing the price of crude by around half since the start of the year.

“We’re going to see $3 to $10 oil until you solve the problem … We have a crisis that’s going to hit in the next four weeks,” Sheffield added.

The proposal to cut output has deeply divided the industry.

Without naming specific companies or executives, Enterprise Products Partners Co-CEO Jim Teague suggested that advocates of mandatory output cuts may be just asking for a government order that will allow them to negate contracts. Marathon Oil Corp.’s Lee Tillman voiced similar concerns.

“When a vocal minority takes a position in favor of artificial market manipulation, that is so far removed from the consensus of a vast majority of operators, one can only surmise that their motives and objectives are primarily company-specific, as opposed to broadly industry-supported,” Marathon Oil Corp’s Lee Tillman said during the hearing.

Marathon Oil and Ovintiv said there should be no interference in the free market of oil. “Companies will adjust supply themselves, and regulation can hurt companies in the long run.”

Sheffield disagreed with the argument that the free market will solve the supply issue, however.

“If anyone thinks we really have a free market you have to be joking. After 35 years as the CEO, I've never seen a free market,” Sheffield added.

A first in 50 years

If the Railroad Commission of Texas approved proration, it would be the first-time statewide oil production cut since the 1973.

Emma Pabst, Global Warming Solutions Associate with Environment Texas Research and Policy Center, urged the commission to issue statewide production cuts, prorating cuts to companies with the worst rates of flaring. “Such a step will help stabilize the market, while significantly reducing the damage from flaring,” she said.

To make its decision, the Commission has listened to the testimonies from about 60 of the state’s oil and gas leaders and market experts.

Commissioners could take action on approving proration of the Texas oil supply, which would require companies to decrease production.

But practically, one of the regulators three commissioners, Christi Craddick, voiced concerns as to whether the Commission still has the expertise to enforce a statewide output limit. “We don’t even know how to do it any more,” she said.

A vote by the Railroad Commission on production cuts is slated for April 21.

With Bloomberg

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