Texas Regulator Considers Oil Output Cuts

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Texas Regulator Considers Oil Output Cuts

 

 

(Bloomberg) -- Texas’s main oil regulator is weighing for the first time in nearly half a century whether the state should curb crude production, a move that would have an enormous business and political impact.

The idea, still in preliminary discussions among the staff at the Texas Railroad Commission -- which, despite its name regulates the oil industry -- comes after U.S. oil prices plunged to levels last seen 18 years ago.

As a first step, the staff is reviewing how implementing the reduction of output via what’s known as pro-rationing would look like in practice, according to people who have discussed the issue with the staff. On first review, the staff believes it’s legally possible to mandate pro-rationing, one of the people said.

Ryan Sitton, one of three commissioners, wrote in a Bloomberg Opinion piece Friday that the federal government could coordinate output cuts with Saudi Arabia and Russia to stabilize the market. Such an approach could stabilize prices in the mid-$30s, Sitton wrote, which would “stave off a total oil industry meltdown.”

10% Cuts

“In theory, Texas could cut production by 10%, and if Saudi Arabia is willing to cut production by 10% from its pre-pandemic levels and Russia is willing to do the same, it would return the market to pre-crisis levels (and only somewhat oversupplied),” he wrote. “With other governments manipulating oil markets, it’s fair to ask: Why shouldn’t our government step in to try to reinstate a more market-based approach?”

Oil has lost almost half its value in the two weeks since the producer alliance led by Saudi Arabia and Russia unraveled. West Texas Intermediate, the U.S. benchmark, rallied by the most on record Thursday after U.S. President Donald Trump said he may intervene in the Saudi-Russia spat. Futures extended gains on Friday by as much as 9% to $27.49 a barrel.

The state agency began looking at pro-rationing after multiple independent shale producers reached out to see what a state response would look like, according to separate people familiar with the situation. No policy has been formally drafted, and a response from the commission isn’t guaranteed, the people said. The Wall Street Journal first reported that the commission was considering curtailments.

Historically, the commission allowed producers to pump to a percentage of the so-called maximum efficient rate of each well. The commission last imposed limits on Texas oil production in March 1972, when it allowed all wells in the state to flow at 100% of their rate for the first time since soon after the end of the Second World War.