April 12, 2020
This column originally appeared in the Midland Reporter-Telegram.
The ongoing global oil price war and COVID-19 are having a catastrophic effect on Texas families and businesses, including operators in every sector of the oil and natural gas industry. Given the importance of the industry to the Texas economy and our nation’s energy security, it is essential that Texas take the right approach in responding to the crisis by providing tools and options to assist operators, not by making it more difficult to manage the duress impacting their companies.
The Railroad Commission of Texas on Tuesday will consider a request to mandate reduced oil production in Texas, a policy also known as prorationing. While these are excruciatingly difficult times, government control of oil production is not the answer. Our association’s position was determined by a wide variety of member companies that overwhelmingly oppose proration as a remedy to the current situation.
Texas has been successful because our state embraces a free market philosophy that allows operators to respond to ever-changing market dynamics. This approach unleashed innovation and technological advancements that produced the most dynamic oil and natural gas industry in the world. If Texas implements artificial production quotas, we will abandon the free market principles that catapulted our state to become the world’s energy leader. As trying as these times are, now is no time to flinch.
Government moves slowly, while the market moves with lightning speed. Even now, as quotas are being discussed in Texas, Saudi Arabia and Russia have agreed “in principle” to curb their production, potentially ending the price war. Whether that deal sticks or not is anyone’s guess. But we know that the global market changes every day and we need to be nimble to compete.
Overproducing during a global pandemic doesn’t make economic sense. No responsible operator would take this action because it is not sustainable. If barbeque costs $8 a pound to make and you can sell it for only $4, you stop making barbecue. Texans do not need government to tell us this.
Likewise, operators in Texas and other states and nations are greatly reducing production in response to market factors without government telling them to do so. In the U.S., the number of rigs drilling new wells is down drastically and companies have announced a reduction of almost $50 billion in capital expenditures, a number that could grow.
Mandatory reduction in oil production would also have a significant impact on state and local budgets. In fiscal year 2019, Texas oil and natural gas activity generated more than $16 billion in state and local taxes and state royalties, money that directly supports our schools, roads, universities and first responders. According to James LeBas, Texas’ former chief revenue estimator, a government-mandated 10 percent reduction in oil production will cause a reduction in state revenue of at least $236 million per year. A 20 percent reduction will cut state revenue by at least $472 million.
Uncertainty is the enemy of recovery. While many operators have already publicly announced significant reductions, some are not taking final actions out of concern the Commission may be contemplating a mandated proration policy. The mere fact this is continuing to be discussed has created a “will they, won’t they” dynamic that may further delay the natural market response.
As the market corrects, we are hopeful that the federal government’s relief package, including the Paycheck Protection Program, will help impacted individuals and businesses get back on the road to recovery. Likewise, we applaud moves made by the Texas Railroad Commission to provide relief for oil and natural gas companies by adjusting certain administrative requirements and timelines.
As we weather the double impact of low oil prices and the virus, what we need is regulatory certainty and a return to a more stable economic environment, not to be disadvantaged by government control of our oil production. We are hopeful the Commission will dismiss the idea of prorationing. The surest way to ensure that we are positioned to recover quickly from these painful times is to let our operators run their businesses – not government.
Todd Staples is president of the Texas Oil & Gas Association.
