The Texas Railroad Commission must tap the brakes on oil and gas production

The Texas Railroad Commission must tap the brakes on oil and gas production

It’s time for the Texas energy regulator to step into its historic role of setting regulations that keep the industry healthy.

 By James Coleman on Jan 5, 2020  dallasnews.com/opinion/commentary

Texas is now the center of history’s biggest oil and gas boom. This boom, like past booms, is cementing the U.S. as the world’s superpower. But as in those earlier booms, our regulators may need to slow production slightly to preserve our natural resources and the health of our oil industry.

Texas producers are now draining so much oil and natural gas that there aren’t enough purchasers to use all of the gas. Oil and gas often come from the same well. The industry sells the oil but cannot build pipelines fast enough to get all the new gas production to distant gas consumers. As a result, producers are burning off, or flaring, more and more gas — wasting this clean burning gas, which is prized by consumers and industry around the world.

The U.S. Energy Information Administration recently reported that the U.S. is flaring more gas than ever before. Texas alone now flares more gas than many states use. These flares, burning round-the-clock, can be seen from space — nighttime satellite pictures make the Permian Basin look like Texas’s biggest metropolis. This tremendous waste of resources is sparking both public concern and private lawsuits, with regulators, landowners and the industry all pointing fingers at different villains. But for solutions, Texas need only look to its past.

The Railroad Commission of Texas, despite its name, is the world’s premier oil and gas regulator. During the 1930s, Texas dominated oil production to an extent never equaled, pumping as much as a quarter of the world’s oil. During that oil boom, the Railroad Commission learned an important lesson: Sometimes to maximize the value of an oil bonanza, you have to slow it down a little.

Everyone knows that as oil production rises, the price of oil falls. But individual companies can’t do anything about that. Instead, they have to take what they can get for their oil, find ways to produce more for less, and hope for higher prices. But a dominant regulator can help all companies by slowing down all production a bit. As production slows, prices rise, benefiting all companies.

In 1931, the Railroad Commission changed the oil industry forever when it began limiting oil production to ensure higher prices. Companies tried to evade these limits and cheating on the limits became more profitable as prices rose. Texas eventually had to send in the Texas Rangers and the National Guard to enforce the law. But when the limits were enforced, oil companies benefited. They sold slightly less oil, but received substantially higher prices. Ever since, the Railroad Commission’s limits on oil production have been used as a model by dominant commodity producers around the world.

Today, the Railroad Commission has far less influence on Texas oil prices. Our global oil market means that local prices depend on supply and demand around the world. But the commission can shape Texas gas prices. There aren’t enough pipelines and gas export facilities to bring the new flood of gas to market, so local prices are very dependent on local production. Modest reductions in local production can lead to substantial prices increases. Such limits could benefit all producers and preserve Texas’s natural resources until they can be brought to market for their full value.

The Railroad Commission should moderate the pace of the current boom to ensure that Texas gets full value for its gas. It could reject some new flaring permits, although that kind of all-or-nothing regulation might be unfair to the rejected companies. It could also impose modest limits on gas production, forcing all companies to slow their production and also ensuring higher prices for all. The commission is properly cautious about intervening in one of the free market’s biggest energy success stories. But careful regulations can build on the commission’s legacy of using production limits to ensure the long-term health of the oil and gas industry.

James Coleman is an associate professor at Southern Methodist University’s Dedman School of Law in Dallas and publishes the Energy Law Professor blog. He wrote this column for The Dallas Morning News.

 

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BP and Shell have been more forthcoming and honest about taking climate change into  account in their business models.  Not surprising as they are European companies and Europe is more attuned to the climate crisis.  Has more public and governmental support for actions.  Although Exxon and Chevron have made some statements along the lines you mention, they have also, behind the scenes, supported groups and efforts that have lobbied against addressing climate change.  I think that both US companies will continue to trend toward positions more close to their European counterparts but have been slow to read the tea leaves and begin to plan to take actions that bolster their standings with public opinion while decreasing their emissions and supporting climate actions that make sense but do not represent any significant near term threat to their businesses.

IMO, government should make it clear that fracking and pipelines will not be banned but will be appropriately regulated for environmental impacts.  The government should support both research into renewable energy sources and provide incentives such as tax rebates for EVs.  The O&G industry writ large meaning upstream, midstream and downstream will have to evolve and grapple with how to move into additional business niches particularly those associated with other energy sources.  Natural gas should remain a key component of the energy evolution but should be highly regulated as to methane emissions.  Coal needs to go away completely and quickly to provide more time for the entire industry to have more time to evolve.

In Louisiana, a part of our family land has been leased and drilled for over a hundred years. I'm thankful (and we're blessed) to have shared our minerals with some very decent operators over the years (even though some of the old leases had us at an 1/8th royalty, which are holding per HBP). Still, I know history and know how over-production can decimate petroleum prices. In the book "The Last Boom" -- I think a barrel of oil had gotten down to about 50 cents due to too much drilling in E. Texas. And no, that's not a typo. Read the book. Fifty cents a barrel or less. And right now, we're facing historic low prices for NG. It could easily drop down below $2 in the coming months. Now, like most landowners and mineral owners, I dearly like leasing and drilling. Mailbox money is a wonderful way to make an income. But I also very much like getting a decent price for my minerals since there's only so much of the Texas tea and associated gaseous bubbly under the ground in our land. Thus, if the state has to regulate operators to keep them from bankrupting themselves and the O&G industry, in general, I'm all for it, even if it means no mailbox money for a few years. In other words, if that's what it takes to get a fair price, I'll vote for it. Yeah, and I preach this with my eyes wide open, knowing when they eventually pull/pump our next series of horizontals, we may not have yet another formation to enjoy the benefits of.   

My grandfather ("Paw-Paw") told me he would sell 3 small RR tanker-cars (per month) of hot oil back in the 30's for 10 cents per barrel.  That is - 10 pennies, a/k/a "10 coppers".  The oil came from our own wells on our own minerals.  His justification was that he caught his neighbor doing the same thing & that well was 50 feet from the property line.  Also, my grandmother told me she saw the tommy-gun toting Texas Ranger 'Gonzales' driving around in an open car - while he was arresting more men than the jails could hold.  A significant amount of the arrested were there because they were running hot oil (after the RRC came up w/ rules on production). 

The posted (legal) price was around 50 cents.  The RRC justified the very small allowables based its theories of "waste".  One was "economic waste" - that being a free-for-all slugout in cutting prices.  The State of Texas (as well as local govt. entities) was/were not pleased w/receipts for severance taxes & property taxes. Also, a "waste" theory joined in with the discussion of that voodoo known at "reservoir engineering".  It was shown that - if left unregulated - there was going to be a lot of oil left in the woodbine, due to mis-management of the reservoir ("let 'er rip").. 

I think the jury is still out about reservoir damage in the shales because an operator will "let 'er rip".  I understood some companies would NOT flow the wells as much as other operators... "hoping to ultimately get more gas out of a given well.  If this practice is deemed to actually be valid, operators could bring an argument that BOTH of these reasons/theories caused the RRC to curtail production of OIL back in the 30s & now it's GAS's turn... 

Good stories, GoRicky.  Lone Wolf Gonzales rented an abandoned church, put railroad rails down the pews and hand cuffed those arrested to the rails.  The Kilgore jail was nowhere near big enough and Lone Wolf was always planning ahead.  Over production caused formation pressure to drop drastically and slowed the natural flow of oil.  Regulations weren't just to stop that through allowables, there were other problems like "slant hole" drillers.  Leases too far east did not find economic volumes of oil so drillers learned to slant their drill strings back west to tap the formation where it did have sufficient oil under lands owned by others and leased by other companies.  Look up the richest acre in Kilgore.  An entire city block with wells crammed derrick to derrick.  Not an efficient means to produce oil capable of flowing over hundreds of feet to a wellbore.   Texas had good and sufficient reasons to start regulating drilling and production.

YEAH - and the casinghead gas was simply flared.  My grandmother (Gran) said - you could read a newspaper in Gladewater at night, without a light, from the glow of casinghead gas being flared from the wells down by Kilgore.  Then, the boom came to Gladewater & they rented out cots in their 1-car garage... by the 8 - hr. shift. 

On the other hand, she and Paw-Paw were relatively generous.  Whole families would show up, hoping that hubby/daddy/son/brother (and even grandpa) could find that good oilfield work.  Some families lived in tents for years.  Because there were so many hungry children, they tended to want to "hang" with the kids that WOULD get supper.  My father had 4 siblings & poor, hungry kids would follow them home from school, hoping to stay for supper.  Gran had 1 full-time maid/do-it-all & they would sometimes feed up to 20 kids in an evening - over & over & over.  As my dad would say: " - and feature this..." the grocery store was only 1 - block away & Gran had a charge account.  She told me that sometimes her monthly bill was higher than $300 !!  Can you imagine how much food that was - in the 30s, in the depression - when a loaf of bread was a nickel -.

But, of course, as I said - - for two nickels, you could buy a barrel of hot oil from Paw-Paw!!!

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