Texas Railroad Commission Hearing on Energy Production Limits

Here is the website for the "virtual" hearing.  Might be interesting

http://www.adminmonitor.com/tx/rrc/open_meeting/20200414/?utm_sourc...

Not sure if you can open this link... Houston Chronicle

https://www.houstonchronicle.com/business/energy/article/Railroad-C...

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If oil storage is full in approximately four weeks, as projected if circumstances do not change, the meeting outcome may be moot.  I would be interested to see a list of those supporting RRC action and those opposed.

Here is link to live broadcast of Texas RRC Hearing going on now

https://gohaynesvilleshale.com/forum/topics/texas-railroad-commissi...

Thanks.  Interesting hearing.

I watched about two hours at the beginning.  That time covered three individuals commenting.  The first two were CEOs of Pioneer and Parsley, appearing simultaneously, they represent the operating companies that have request that the TRRC consider slowing production through proration.  The third was the CEO of Marathon Oil.  The first two being in favor and the last against.  All made strong presentations and the commissioners asked probing and appropriate questions.  There were many others signed up to speak but I didn't have time to invest beyond that two hours this morning.

Skip:  I got dragged away and was not able to watch.  But I'm glad some were able to do so.  I'll look at some news coverage tonight/tomorrow and try to figure out which way the RRC is leaning.

I'm betting that the vote is to not institute prorationing.  Pioneer and Parsley seem to be the only advocates and they are not representative of the majority of operating companies that would fall under the limitations.  Both companies are independents with low debt compared to their peers and the bulk of their production is in Texas.  Many small independents are highly leveraged and the majors/supermajors have operations in other basins/states.  The Marathon CEO made the case that those companies that wish to voluntarily reduce production would do so by shutting in their least economic wells.  If the RRC instituted prorationing that would mean reducing or shutting in Marathon's most profitable wells in the Eagle Ford instead of their wells in Oklahoma or in the Bakken.  There are also legal issues and those opposing seem to think that part of the push for prorationing is to create force majeure which would provide a legal argument for invalidating contractual obligations.  Although these are substantial arguments, they do not address the looming storage issue and will keep some companies operating that should go out of business as they are zombies and responsible for much of the over production and supply glut.  Some refineries are on the verge of refusing to take more oil.  Although the majors and supermajors are drastically cutting their capital investments, the argument that all operators would do the same is hard to make.  Those making the argument for free markets and no intervention from the RRC are liable to find that the market shuts them in when storage is full and pipelines and refineries refuse to take any more oil.

Oklahoma Joins Texas in Formally Considering State Oil Quotas

Bloomberg News   Updated: April 14, 2020

(Bloomberg) — Oklahoma is joining Texas in formally contemplating crude output curtailments to cope with a collapse in prices as some producers in the oil-rich state press for action.

The Oklahoma Corporation Commission will hold a meeting on May 11 to consider whether the state’s crude is being wasted at current prices and, therefore, should be curbed. The effort is being spearheaded by the Oklahoma Energy Producers Alliance, which filed a formal motion last weekend.

This latest development comes as Texas holds a marathon hearing to weigh similar proposals in the Lone Star State. As of 3 p.m. in Houston, the Texas Railroad Commission had heard from roughly 20 speakers signed up to testify at Tuesday’s meeting, with more than 30 executives, environmental groups, and consultants still scheduled to share their thoughts.

Also see: Shale Giants Clash Over Oil-Production Cap to Survive Rout

While some smaller producers in Oklahoma support curtailments, not everyone is on board. A separate industry group, the Petroleum Alliance of Oklahoma, has called such requests “naive.”

Texas' oil and gas regulators aren't ready to cut production yet. They're not even sure how it would work if they did.

The Railroad Commission, which oversees the state's oil and gas industry, took more than 10 hours of testimony about whether the agency should lower production as the coronavirus lowers demand.

Facing a steep drop in oil demand with much of the world staying home to practice social distancing, more than 55 energy executives, analysts and critics appeared one after another Tuesday at a video meeting of the Texas agency that regulates the oil and gas industry to weigh in on a request that the state's oil production be cut.

Some oil producers asked the Texas Railroad Commission for such a cap. Others said regulators should not get involved in determining oil production, even during the novel coronavirus' parallel public health and economic crises. And a few speakers who testified took a neutral position but provided their thoughts on industry matters anyway.

“If we are forced to prorate, we are going to cease all activity right away,” testified Kaes Van’t Hof, chief financial officer of Houston-based Diamondback Energy, a company that focuses primarily on the Permian Basin.

He said a move to cut oil production “directly impacts the employment of almost 3,000 people.”

Texas has not cut oil production since the 1970s, but the unprecedented plunge in oil demand has led to a split among industry leaders about how to fix the issue as the global economy has come to a halt and more than 16 million Americans are out of work, including at least 760,000 Texans.

Commission Chairman Wayne Christian and Commissioners Christi Craddick and Ryan Sitton were nowhere near making a decision about cuts Tuesday, but they can draw ideas from more than 10 hours of testimony. Should the three elected officials implement production cuts to level the playing field? Should the commission exempt small producers from a cut while having large producers pay the price? Should the state stay out of the way and allow the market to drive companies’ decision-making?

Scott Sheffield, the CEO of Irving-based Pioneer Natural Resources, is in favor of curbing oil output in Texas in this “unprecedented” moment, saying that “it’s about fairness.” To further illustrate his point, Sheffield said there’s a need for some oil industry oversight after years of energy companies borrowing risky money to finance expansion.

“No one wants to give us capital because we have all destroyed capital and created economic waste,” Sheffield said of the shale industry.

(much more at link)

https://www.texastribune.org/2020/04/15/texas-oil-production-cuts-n...

I agree with Mr. Sheffield.  The industry painted itself into a corner before COVID-19 hit.  I think it is helpful to think more in detail regarding jobs.  I think the vast number of jobs are not with the operating companies but in support companies, independent contractors.  Those that build surface locations, drill wells, complete wells, service wells and sell and transport supplies.  If proration is applied to the larger producers I would suspect that the loss to those support companies would be great even if it saves the jobs of some employees of smaller operators.  There are no good options and no company or industry segment can escape the carnage.  Regardless of what decision the RRC commissioners may make, market forces are about to winnow out the zombies.

Houston-based service companies take more hits as oil industry weakens 

Sergio Chapa April 14, 2020 Updated: April 14, 2020  houstonchronicle.com

The three largest oilfield service companies continue to face economic difficulties even as OPEC, its allies and other nations reached a milestone deal over the weekend to cut production.

Houston-based Baker Hughes was quick to react Monday, saying that it plans to write down $15 billion of assets and cut capital spending by 20 percent from 2019 levels. Meanwhile, Wells Fargo and Scotiabank downgraded stock market expectations for rivals Schlumberger, the world’s largest oilfield service company, and No. 2 Halliburton.

The three companies, headquartered or with principal offices in Houston, employed a combined 226,000 people across the world at the beginning of the year, but the oil price crash has decimated their ranks.

Despite OPEC and Russia agreeing over the weekend to cut global crude oil production by 10 million barrels per day, the world remains profoundly oversupplied by more than double that amount as the coronavirus pandemic crushes global demand. West Texas Intermediate fell by 35 cents Monday and settled at $22.41 per barrel.

With oil prices near a 20-year low, the oilfield services sector, like the rest of the industry, is hobbled by stay-at-home orders, furloughs, layoffs and executive pay cuts as their customers cut spending on new drilling projects.

Baker Hughes expects to take the $15 billion write down in the first quarter. It won’t affect the company’s cash flow but could result in a net loss when the company reports first quarter figures April 22.

A 20-percent cut would leave the company with a capital spending budget of $780 million, down from the $976 million it spent in 2019.

Baker Hughes followed Schlumberger in slashing capital spending. Schlumberger said March 24 that it would cut its budget by up to 30 percent, including restructuring, pay cuts and layoffs.

The magnitude of the budget cuts depends on changes to customers’ plans, but a full 30-percent cut would leave the company with a $1.2 billion capital budget for the year. The company spent $1.7 billion on capital projects in 2019.

Halliburton recently laid off more than 400 employees in Oklahoma and furloughed 3,500 workers at its Houston headquarters through the end of May. The company isn’t expected to release a new headcount or revised budget figures until it releases its first quarter earnings April 20.

Shares of Schlumberger and Halliburton fell Monday while Baker Hughes closed higher.

Schlumberger closed at $15.95 per share, down 51 cents from Friday. Halliburton closed at $7.85, down 36 cents. Baker Hughes closed at $13.29, up 43 cents.

Vebs Vaishnav, an oil-field service company analyst with Scotiabank, wrote in a Sunday report that a declining number of operating rigs in U.S. shale plays doesn’t bode well for the companies and that the production cuts established over the weekend could also cut activity overseas.

The shale industry must cut hydraulic fracturing capability to align with falling demand, Vaishnav wrote, and that could hurt Halliburton, the largest frac crew operator in the U.S.

Schlumberger, he wrote, has another set of problems.

Unlike some of its rivals, Schlumberger has not pledged to cut its shareholder dividend, Vaishnav said. So despite having $5.4 billion in cash, the company could wind up borrowing to fund the payouts.

“We expect Schlumberger to cut its dividend in the first quarter 2020 or at worst, second quarter 2020,” he said.

James West, an oilfield service company analyst with New York investment banking advisory firm Evercore, wrote that Baker Hughes is in a much stronger position now than during the 2015 oil bust, when the company’s decision-making was hampered by a failed merger attempt with Halliburton.

“This time around, Baker Hughes can respond quickly to adjust its cost structure, has better systems in place to make faster decisions, and is closer to its customer base,” West said.

Probably quite a long shot per the states-rights politics involved, but there is a smidgen of a chance that the deer-in-the-headlights WH could pull the trigger on a U.S. oil production cutback to mollify its bully pulpit do-as-I-say-not-as-I-do jawboning to OPEC +, especially the wildcard Puntin KGB/oligarch who continues to toy with our intelligence services via election hacks, etc. It's sort of like a flock of hungry vultures are circling over our healthcare weaknesses. Telling scenarios.   

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