Texas regulators, drillers split over wisdom of imposing caps
Proponent of limits in Texas fields says industry’s at risk
Prospects of a rare détente between OPEC and the biggest U.S. oil state faded as quickly as they rose as Texas regulators and explorers clashed over a proposal to cap crude output for the first time in almost 50 years.
Just hours after one of the most powerful officials in Texas oil landed a rare invitation to OPEC’s inner sanctum in June, prospects for an accord between the historically antagonistic crude powers began to unravel. The rapid crumbling shed light on the independent streak that has long run through wildcat Texan explorers and the laissez-faire predilections of the state’s political caste — and their shared antipathy for centralized decision-making.
Texas Railroad Commissioner Ryan Sitton said Friday he was invited by OPEC Secretary General Mohammad Barkindo to attend the group’s summer meeting in Vienna. But even as the surprise announcement reverberated through petroleum circles, Sitton’s call to curb Texas crude output for the first time since the 1970s was criticized by fellow regulators and some of the industry’s biggest drillers
“While I am open to any and all ideas to protect the Texas Miracle, as a free-market conservative I have a number of reservations about this approach,” Wayne Christian, chairman of the Texas commission that oversees the oil industry, said in a statement. If Texas cuts supply, “there is no guarantee other nations, or even states will follow suit
Sitton, a Republican Party activist who ran for re-election on a platform of opposing “socialism and climate-change myths,” proposed Texas would curb oil output by 10% in exchange for an equivalent gesture by the cartel that controls more than one-third of global production.
The third commissioner, Christi Craddick, also expressed doubts about capping production, according to a person with direct of knowledge of the situation. Shortly thereafter, EOG Resources Inc., the biggest shale specialist, and the American Petroleum Institute panned the idea.
Sitton’s outreach came at the end of a brutal two-week stretch in which international crude lost almost half its value, triggering layoffs, cash crunches and the steepest dive in Permian Basin oil drilling in more than three years. The demand-sapping spread of coronavirus was compounded with the disintegration of the Saudi-Russia supply compact on March 6.
“An exceptional situation calls for exceptional solutions,” Sitton said in an interview with Bloomberg. Without action to stabilize prices, production eventually will tank and within a couple of years trigger economic pain, he said. “It’s not trying to keep oil prices up today. It’s about preventing a massive upswing in the future, $100 oil, $4 gasoline.”
In Washington, federal officials are concerned that Saudi Arabia’s move to flood oil markets is exacerbating the collapse of financial markets and contributing to volatility among drillers, a senior State Department official said in a briefing with reporters. Government officials are hearing from both lawmakers and companies worried about how the crash in prices will add to economic uncertainty, the person said.
Although Sitton’s proposal faces an uphill battle, the potential consequences of an OPEC-Texas agreement would be hard to overstate. The cartel’s primacy over world crude markets is unrivaled; Texas pumps more than 40% of U.S. oil and as a standalone entity gushes more than every member of the confederation except mighty Saudi Arabia.
Such a tie-up would also confront Russian President Vladimir Putin with a formidable and heretofore unimaginable foe in using petroleum as a geopolitical weapon.
U.S. Energy Secretary Dan Brouillette told Fox Business he’s aware of the Texas proposal, but he said his agency is “not part of that conversation.”
“There are state laws that are available to Governors, state regulators if you will, to manage production within the states,” he said.
Riyadh and Moscow have been locked in a bare-knuckle fight for market share after they failed to agree on a response to the oil-demand crash, and dissolved a partnership that had coordinated oil supplies for three years.
READ: Why a Texas Oil Regulator Could Play the Role of OPEC: QuickTake
In addition to his philosophical objections, Christian cited the state agency’s lack of experience in throttling back output by thousands of independent companies. “Our IT capabilities to handle this process are limited at best,” he said.
It wouldn’t be the first time Sitton has split with his fellow commissioners. Last year, Craddick nominated Christian to serve as chairman, even though tradition dictated that Sitton would lead the agency as he ended his six-year term.
In a shocking election upset earlier this month, Sitton lost the Republican primary to Jim Wright, a rancher and chief executive of an oilfield-service company. Two Dallas lawyers, Chrysta Castañeda and Roberto Alonzo, will compete in a May runoff for the Democratic nomination to challenge Wright.
Permian oil explorer Parsley Energy Inc. said the industry needs a coordinated approach, and railroad commission caps on state oil output could be one part of the solution. “This is a uniquely catastrophic time for the industry,” Chief Executive Officer Matt Gallagher said Friday in an email. Pioneer Natural Resources Co. said capping output is necessary for national security reasons.
But American Petroleum Institute Senior Vice President Frank Macchiarola blasted the proposal as “shortsighted” and “anti-competitive” efforts that will “harm U.S. consumers and American businesses.”
“It seems totally irrational that the solution to the disruptive behavior of Saudi Arabia and Russia would be to imitate OPEC,” Macchiarola said in a phone interview.