Oklahoma regulators clear way for voluntary shut-ins, will consider mandatory cuts

The Oklahoma Corporation Commission (OCC) approved an emergency order Apr. 22 to allow oil well operators to shut in money-losing wells.

A commission meeting scheduled for May 11 will allow the Oklahoma Energy Producers Alliance and others to make their case for additional actions, possibly including prorationing of oil production. The Oklahoma Energy Producers Alliance has filed a request for mandatory prorationing.

The emergency order was issued after oil producers sought the order and detailed their problems Apr. 17 at a hearing before an administrative law judge. OCC Chairman J. Todd Hiett and Commissioner Dana L. Murphy participated in the hearing and signed off on the order. Commission Vice Chairman Bob Anthony did not participate.

Some operators in Oklahoma may have already begun shutting in wells at their own discretion, but many companies may have been uncertain of their legal standing to do so, including the question of whether their leases would allow wells to be shut in.

The order is a tool to support producers if they decide to halt some operations, Murphy told Oil & Gas Journal. It still leaves the operators with a difficult decision, as the shutdown of a well or field can cause more financial loss than a temporary period of money-losing crude oil sales, she said.

The commission decided it was better to act to ease legal or regulatory concerns while the commission continues to evaluate the situation and see if additional steps are needed, Murphy said.

Order to prevent waste

The commission ordered that “to assist in the prevention of waste, protection of correlative rights, and to optimize production, operators/producers my shut-in or curtail production from wells where they determine such action is necessary and warranted to prevent economic waste.”

The order was made effective as of the date of the Apr. 17 hearing and is to remain in effect for 90 days or until superseded by a subsequent order.

The order said it “is subject to extension or modification as necessitated by this abnormal market pricing environment, or as the Commission determines otherwise.”

Under Oklahoma law, waste can include economic waste.

The commissioners heard at the Apr. 17 hearing about some of the financial losses being endured.

One producer, Eddie Rongey, testified that he operates about 600 wells in Oklahoma that cannot under current conditions be produced economically. He was losing $200,000/month by producing his “economically challenged” wells, and he worried that the title to his leases could be jeopardized without an order from the commission.

To act or not to act

The order does not mean all money-losing wells will be shut in. Companies may worry about losing more money if a shutdown affects the geology of a field, such as where waterflooding or other enhanced recovery techniques maintain pressure balances and oil flows that could be lost by shutdown.

Hedging also may reduce the pressure on a company to halt production.

“A lot of these producers, it’s just going to be hanging on, trying to survive,” Murphy said.

The Texas Railroad Commission will meet May 5 for another consideration of the idea of prorationing and any other proposals for reducing economic losses during the industry downturn. Texas commissioners have indicated they do not want to act alone, without other states and nations sharing the burden.

North Dakota officials also have been reviewing the regulatory question of production cutbacks. In each state, voluntary output cuts could reduce the pressure for mandatory cuts.