IEEFA urges Texas Railroad Commission to curtail state oil production
April 7, 2020 (IEEFA U.S.) – Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis (IEEFA), today submitted comments urging the Texas Railroad Commission (RRC) to approve production cuts for the state’s oil industry. The Commission will hold a public hearing on April 14 to address the measure.
The RRC is a blunt instrument trying to perform a delicate surgery
“The Texas Railroad Commission is being asked to set production goals for oil and gas producers. It should do so. U.S. companies now produce more oil and gas than any other country in the world. And, right now, the world wants less of it. Prices are low. Companies and countries are locked in a senseless competition. The economy is down, the people are crippled by a strange virus and worried about climate change. Patience is in short supply and there is no time to waste. The RRC is a blunt instrument trying to perform a delicate surgery. The situation is unprecedented, unfair, uncertain and unreasonable. Leadership is required,” said Sanzillo.
The cuts were requested by two companies active in Permian Basin oil and gas exploration and production (E&P), Pioneer Natural Resources U.S.A Inc. and Parsley Energy, Inc. (“the complainants”). The fracking companies had asked the RCC to mandate production limits to protect the sector from decreased demand and plummeting prices.
ACCORDING TO THE COMPLAINANTS, THE GLOBAL MARKET IS EXPERIENCING DISRUPTION due to two major “shocks” affecting both supply and demand: “a market share war between Russia and Saudi Arabia, resulting in a sudden, massive surge in the supply of oil; and the outbreak of the COVID-19 pandemic, resulting in the precipitous decline in oil demand.”
The RRC invited comments on whether the complainants were characterizing the problem accurately.
The economic fallout from the coronavirus compounded a long-standing oversupplied market
“Yes and no,” wrote Sanzillo, “It is plain that the coronavirus pandemic has substantially curtailed demand. What is not made clear in the complaint is that the recent demand shock from the economic fallout over the virus compounded an already existing long-standing oversupplied market.”
Sanzillo noted that cohesion in the governing structures of the energy industry, in particular, the Organization of Petroleum Exporting Countries (OPEC) was seriously undermined, not only by the Saudi-Russia price war but also from deeper market forces that have created a supply and demand imbalance long before the production dispute or the emergence of the coronavirus pandemic.
“NONE OF THESE FACTORS ARE OF RECENT ORIGIN. The current precipitating events of the coronavirus and the conflict between Russia and Saudi Arabia simply bring these festering problems into sharp relief,” wrote Sanzillo.
He pointed to the contributing role of the fracking industry in creating an oversupply of oil and gas in the United States over the last decade, adding “the inability of unconventional producers to establish a successful business model is also well known. The retreat by institutional investors from the fracking sector is well recognized.”
The continuing underperformance of the energy sector in global markets points to a shift in economies that rely increasingly less on fossil fuels for GDP growth. Market and governmental interventions to raise prices may have an impact in the short term Sanzillo noted, “But as prices rise, the level of increase will be constrained by competitive pressures from alternative technologies and other challenges. Price increases are unlikely to reach levels where investors will be confident of returns.”
The oil and gas sector will consist of fewer companies…and be less powerful as a political force
SANZILLO CAUTIONED THE RRC THAT THEIR ACTIONS NEEDED TO GO BEYOND THE CURRENT CRISIS. “The RRC will fail if it only addresses the short-term problems posed by the coronavirus and price war. The RRC must become a forum for a wholesale shift in the role of the industry as it becomes smaller. Broad market forces are telling the RRC and the industry that the future of the oil and gas sector will consist of fewer companies, extract less oil and gas, be highly competitive, produce lower profits, require greater emphasis on innovation and be less powerful as a political force. The entire industry and government business model that has evolved in the United States over the last sixty years no longer works.”
“Without rules, the process is likely to result in serious market disruption ‒ which the complainants only hint at – including job losses, tax losses and the destruction of local economies throughout Texas (and beyond),” he concluded.
Tom Sanzillo is IEEFA’s director of finance.
Read the full comments: IEEFA to the Texas Railroad Commission on the matter of the request for determination of reasonable market demand
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About IEEFA
The Institute for Energy Economics and Financial Analysis (IEEFA) conducts global research and analyses on financial and economic issues related to energy and the environment. The institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.
