In the aftermath of the oil price collapse of the 1980s, the same bumper sticker could be seen all across Texas: “Please, God, give us one more boom. We promise not to piss this one away.” In the current price collapse and anticipation of a boomlet, prayer has been abandoned and the industry is burning surplus gas to prop up oil and gas prices. It is not working.
The Commission missed a golden opportunity to curb financial and environmental waste
Texas producers burned a record $749.9 million by flaring — venting unneeded natural gas into the air — during 2018, according to an analysis by the Institute for Energy Economics and Financial Analysis. The Texas Railroad Commission missed a golden opportunity to curb the financial and environmental waste last month when it voted against cutting oil production by 20 percent. While the pandemic and oil price war in the Middle East added an extreme dimension to industry problems, oversupply of oil and natural gas has plagued the industry for most of the last decade.
FROM A LEGAL STANDPOINT, THE VOTE DEFIES EXPLANATION. State law requires the commission to take action when the supply of oil and gas exceeds reasonable demand. The panel is also required to take action to “conserve and prevent the waste of gas.” Finally, the commission has been ordered by multiple U.S. Supreme Court decisions to consider the impact of the oil industry upon the entire state of Texas.
As a practical matter, the three-member commission’s refusal to curb production makes even less sense. Oil and gas supplies far exceed demand for existing reserves, oil companies are burdened with excessive debt, credit ratings are declining while bankruptcies are increasing, and stock prices are disappointing, to say the least. Industry self-regulation is not producing profits and is a costly indulgence.
Since the vote, oil prices have rebounded above $30 per barrel from zero, but even oil that sells at twice that amount isn’t likely to restore the industry to its blue-chip investment status. The oil and gas sector currently ranks last in the Standard & Poor’s 500 index after leading the market for decades. Oil companies made up seven of the 10 best-performing S&P 500 stocks in the 1980s; now, none are included. Industry stocks made up 28 percent of the S&P portfolio in 1980; as of June 1, they accounted for less than 3 percent.
BURNING ALMOST $750 MILLION IN REVENUE MARKS A STAGGERING AMOUNT OF WASTE. To put the flaring loss into perspective, revenue from the lost natural gas would represent 42 percent of the 2018 U.S. upstream earnings for ExxonMobil, the state’s largest company by market capitalization.
At its most basic, flaring is a symptom of oversupply, which is being exacerbated by factors that include the rise of unconventional U.S. drilling, greater competition among producer nations, an increasing market share of renewables, an uncertain outlook for petrochemicals, and a decrease in energy intensity as a foundation for general economic growth.
High levels of flaring are occurring at a time when the industry is performing at its financial worst
From a financial perspective, today’s flaring practices are gratuitous. The practice fails to bring supply into alignment with demand or to help prop up prices. High levels of flaring are occurring at precisely the time when the industry is performing at its financial worst. The waste of the resource, the costs in air pollution, and damage to the climate is ignored by regulators; the normal justification for this abuse, improved profitability for companies and investors, is not.
The Texas Railroad Commission must recover from this failure and prepare for a very different future. The environmental benefits are clear, and the financial benefits even more clear. Oil and gas prices have been low for multiple reasons, but an oversupply is at the top of the list, and flaring is a clear symptom of oversupply. The remedies require management of this declining industry. Curbing production is the right place to start for Texas, from both a legal and practical perspective.
Tom Sanzillo is IEEFA’s director of finance.