The Railroad Commission of Texas (RRC) hesitated Apr. 21 to prorate oil production in the state amid coronavirus-related demand destruction that pushed near-month West Texas Intermediate (WTI) futures prices to nearly minus $38/bbl, instead postponing a decision to May 5. Chairman Wayne Christian and Commissioner Christi Craddick cited concerns regarding possible legal action in response to any prorating as prompting the delay.
Such concerns are likely well-founded, as is Christian’s belief that legal challenges to any state-mandated production controls would last longer than the 2 weeks taken to further consider the matter. RRC’s concerns also suggest that it’s inclined to introduce prorating but needs to figure out how best to do so, as do subsequent consultations with legal staff and the state attorney general.
The third commissioner, Ryan Sitton, proposed that the Railroad Commission require operators producing more than 1,000 b/d of oil in the state reduce production starting June 1 by 20% from their own recent peak. Sitton said such a move would cut about 1 million b/d of production, but that it should be contingent on another 4 million b/d of production cuts from the rest of the US, Canada, and OPEC and its allies (OPEC+). He further proposed that the prorationing automatically end when global demand returned to 85 million b/d or more. Projected 2020 demand pre-COVID-19 was 100.5 million b/d.
Drops in a bucket
US crude oil inventories grew by 15 million bbl the week of Apr. 17, the third-highest weekly storage build ever, trailing only the previous week and the week before that. The build concluded the fastest month-over-month storage build of all time: 63.3 million bbl of new crude oil in storage over 28 days, roughly 2.3 million b/d. And this happened despite a 900,000-b/d drop in production between Mar. 13 and Apr. 17, as reported by the US Energy Information Administration. In an Apr. 28 analysis Rystad Energy forecast total shut-in US production for May and June of at least 300,000 b/d.
As of Apr. 22, there was about 78 million bbl of storage available in the US Strategic Petroleum Reserve. Commercial storage at Cushing, Okla., the WTI pricing hub, was 77% full, leaving about 30 million bbl. There have even been suggestions of storing as much as 25 million bbl in unused railcars.
But none of these steps come close to addressing the scale of demand destruction in place. Nor will production curtailments already underway in Saudi Arabia and Kuwait. Storage will fill up. Action is needed now.
Texas produced 5.4 million b/d of crude in January 2020 according to the EIA, putting it in the same neighborhood as Canada and definitively behind only Saudi Arabia and Russia. This lofty position has greatly benefited both the state and the country. It also requires that those producing oil in Texas figure out a way to cut back. Without their proactive participation, little else that happens regarding supply will matter.
Producers have already cut capital expenditures and rig counts. But they’ve also had ample time (since at least early March) to see the current supply-demand imbalance forming. Up to this point, including the 2-week effective reprieve given by RRC, they’ve largely chosen not to curtail production.
There have been exceptions, especially among smaller producers. But perhaps it’s time for regulators to save the industry from itself, particularly if majors persist in resisting regulation on the one hand while actively soliciting government support on the other.
Then again, if oil and gas producers want to go out of business the old-fashioned way, independent and free to die, that should be their prerogative. Live by the market, die by the market. Just don’t come looking for the government to make you whole again on the backside.
