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.
Views: 979
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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I suspect that "The Big Fish" and the "hot oil" boys back in the 1930's had a similar reaction when the Texas Railroad Commission decided that a few basic rules were called for. Messrs. Clark and Halbouty were wrong, that was not "The Last Boom".
https://www.amazon.com/Last-Boom-Exciting-Discovery-Greatest/dp/039...
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Permalink Reply by Skip Peel - Mineral Consultant on
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I was under the impression that what you can produce falls under the allowable (proration order) proscribed by the Railroad Commission. Permission to flare must be granted by the Commission. There were ~6,000 applications approved by the Commission in 2019.
Allowable: Amount of oil or gas which a well, leasehold or field may produce per month under proration orders of the Texas Railroad Commission (RRC).
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Permalink Reply by Skip Peel - Mineral Consultant on
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That bastion of communist ideology - Southern Methodist University?
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Permalink Reply by Skip Peel - Mineral Consultant on
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Those Methodists.
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Permalink Reply by John M Santamaria on -
That's nothing but a bunch of spoiled rich kids from Highland Park. Now THE University of Texas where I went; we are the Kings of Liberal and don't you forget It! Hook 'Em!
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Permalink Reply by John M Santamaria on
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Do you know the difference between Methodists and Baptists? The Methodists talk to each other in the liquor store. That was told to me by a Methodist minister by the way.
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Permalink Reply by jffree1 on
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Allowables are still set for trap formations/fields, I think. Jay can correct me if need be. Shale gas and oil have no allowable production limit set except for the rare instance where a lateral is drilled too close to a unit boundary, for instance, or some other reason the well doesn't meet with field rules and statewide regs. Then it gets "no allowable" and the well cannot produce. I've only seen a couple of those in over 1200 wells drilled in E TX Haynesville.
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Permalink Reply by Skip Peel - Mineral Consultant on
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All Louisiana horizontal wells received state allowables. There is much that is the purview of the TRC. Whether the Commission chooses to exercise that authority or not is at their discretion. Obviously the commissioners have not seen fit to turn down many (any?) requests to flare since they approved 6000 in 2019.
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Permalink Reply by GoRicky on
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Hey, guys - I think everyone would have a better chance by trying to influence the Trump administration to get some tax goodies/subsidization on natural GAS production. Only wells that are designated as gas wells. People & companies poured money into the "clean-burning dream", like T. Boone pouring water out of his boots after taking a swim.
Not only is it a precious (domestic) natural energy resource, but also greatly reduces emissions now & even will more-so in the future. It is also now an instrument of foreign policy and security. We ship a lot of gas to other countries. This keeps the Russians from dominating those energy-needy countries & makes us all 'pals'.
I know most people in energy have not wanted intervention, but the solar panel & wind turbine people get a lot of goodies & gas producers have to compete...
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Permalink Reply by Skip Peel - Mineral Consultant on
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The incentives (goodies) that solar and wind get are a small fraction of what O&G gets. Here's a sample of federal tax breaks. Not listed, a bunch of state tax breaks.
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Permalink Reply by full name on
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Actually this has been wrongly reported for years by the press. When compared on equal footings (MM BTU or KWH) wind and solar get much higher tax breaks.
See attachment from CBO. Note figures 1 and 2. Don't forget that solar and wind only produce a fraction of O&G.
Suggest everyone read "How to lie with statistics" by Darrell Huff (1954). It is easy to read.
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52521-energytestimony.pdf, 299 KB
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Permalink Reply by awharris on
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Dang Skip, for a petroleum landman, you're either clueless or a mouthpiece for anti-"big oil" propagandists.
https://www.aei.org/carpe-diem/the-truth-about-all-those-subsidies-...
The above article does a good job of explaining why the investopedia article you posted is a lie. What you call a "tax break" is just a normal deduction that every other industry gets in another form. They just call it a different name for O&G so critics misrepresent this as special treatment.
And for state tax breaks, you mean like severance and ad-valorem tax deductions? You don't think that interest holders should be able to deduct taxes paid to states on their federal return?
There may have been a few instances of state and federal tax subsidy programs to incentivize O&G exploration in the distant past but it's pretty dried up now. "Renewables" on the other hand are not on a level playing field. Here's an article I read just yesterday about how taxpayers are on the hook for 3/4 of a billion: https://www.bloomberg.com/news/articles/2020-01-06/a-1-billion-sola...
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