The Railroad Commission of Texas (RRC) – the state’s oil and gas regulator – has been urged to approve mandatory production cuts across the region’s industry in response to the escalating oil market crisis that has dealt significant damage to the US shale sector.
It follows a surprise request last week from two prominent shale operators – Pioneer Natural Resources and Parsley Energy – for the agency to consider enforcing limits on how much oil can be produced as companies deal with low demand, falling prices and a growing market oversupply.
Without intervention, they argued, the achievements of the Texas shale revolution could be “decimated” as storage fills to capacity, well shut-ins become a reality and companies struggle to survive the low-cost environment.
Railroad Commission of Texas will consider first enforced productions cuts since the 1970s
If proration were to be adopted, it would be the first time since the 1970s the Texas regulator dictated how much companies under its watch would be permitted to produce.
A public meeting is due to be held next week to address the issue, ahead of which Tom Sanzillo, finance director at the Institute for Energy Economics and Financial Analysis (IEEFA), submitted a plea for the measures to be implemented.
He said: “The RRC is being asked to set production goals for oil and gas producers, and it should do so.
“US companies now produce more oil and gas than any other country in the world, and right now the world wants less of it.
“Prices are low, companies and countries are locked in a senseless competition, the economy is down, and the people are crippled by a strange virus and worried about climate change.
“Patience is in short supply and there is no time to waste. The RRC is a blunt instrument trying to perform a delicate surgery. The situation is unprecedented, unfair, uncertain and unreasonable – leadership is required.”
US shale industry faces intensifying market pressures
US shale has come under growing pressure from the dual shock of lost demand caused by coronavirus and the Saudi-Russian price war that has inundated global markets with an oversupply of cheap crude oil.
Industry observers have identified US operators as a key target of the price war, and last week the industry recorded its first casualty of the low-price environment as Denver-based Whiting Petroleum filed for Chapter 11 bankruptcy status.
Efforts have been made in recent days to galvanise international co-operation to bring the spiralling crisis under control, with statements made by US President Donald Trump raising the prospect of co-ordinated global supply cuts.
A key meeting of Opec+ is scheduled for Thursday (9 March) – the first since the oil-producer group failed to agree a response to the pandemic, sparking the price war – while on the following day a summit of G20 oil ministers has been arranged that could result in non-Opec+ nations joining the cuts.
IEEFA director says problems for US oil pre-date the current crisis
Despite the intensification of these market forces since the outbreak of coronavirus at the start of the year, Sanzillo argues that the pressures currently facing the US shale industry can be traced back much further.
He identified an oversupply of US shale recent years that had challenged Opec for market share and inhibited corporate returns, the growing challenge of clean energy alternatives, as well as the mounting struggles of fracking operators to attract financing.
“The RRC will fail if it only addresses the short-term problems posed by the coronavirus and price war,” he added.
“The RRC must become a forum for a wholesale shift in the role of the industry as it becomes smaller. Broad market forces are telling the industry that the future of the oil and gas sector will consist of fewer companies, extract less oil and gas, be highly competitive, produce lower profits, require greater emphasis on innovation and be less powerful as a political force.
“The entire industry and government business model that has evolved in the US over the past sixty years no longer works.
“Without rules, the process is likely to result in serious market disruption — including job losses, tax losses and the destruction of local economies throughout Texas and beyond.”
