By Rachel Adams-Heard, Vonnie Quinn and Guy Johnson

May 4, 2020

(Bloomberg) A lame-duck Texas regulator who proposed mandatory oil-output cuts said the effort is “dead” a day before the biggest U.S. crude-producing state was set to vote on the measure.Texas Railroad Commissioner Ryan Sitton said in an interview on Bloomberg TV that the three-member agency wasn’t prepared to vote on curtailing supplies in a process known as “pro-rationing.” His comments likely mark the end of a month-and-a-half-long saga that divided the shale industry over whether regulators should adopt OPEC-style production caps amid a historic collapse in crude prices.The unprecedented implosion of the entire oil industry has been so swift and severe that American companies have been turning off drilling rigs, demobilizing fracking crews, slashing jobs and shutting wells without the need for a government order. Fracking activity in U.S. fields has slumped 82% in the past seven weeks, while oil drilling is down 52%, according to data compiled by Bloomberg.

“At this point we still are not ready to act, and so it’s too late, so there is no proposal to make,” Sitton, one of three Republicans on the commission, said Monday. “I think that pro-ration is now dead.”

Exxon, Chevron and ConocoPhillips plan to curb as much as 660,000 barrels a day of combined American output by the end of June. Permian Basin producer Concho Resources Inc. has shut in about 4% to 5% of total output and warned last week that it will likely be forced to curtail even more.

“The market forces are stronger than the threat of proration ever was,” said Cye Wagner, chairman of the Texas Alliance of Energy Producers, which was opposed to state quotas. “It would be more harmful to the industry than the market-driven response that’s coming.”

Fracking downturn has been steeper than drilling dive

Sitton, who lost the primary election for his own seat earlier this year, had been the only member of the Texas Railroad Commission — the state’s chief energy regulator — to come out in favor of production caps. Chairman Wayne Christian recently stated his opposition to cuts in an opinion piece for the Houston Chronicle, and Commissioner Christi Craddick had expressed numerous concerns during the agency’s most recent meeting.

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Among oil companies, Pioneer Natural Resources Co. and Parsley Energy Inc., founded by a father and his son, had been the biggest champions of instituting mandated cuts.

But Exxon Mobil Corp. and Chevron Corp., along with a long list of independent producers, had argued that the market was already driving curtailments and that it was best for the government to stay out of it. The chief executive officer of Enterprise Products Partners LP even went so far as to say that quota-supporting producers were simply trying to skirt contractual obligations.

$1,000 Penalty

Sitton’s proposal called for a 20% cutback in the state’s output, conditional on other states and nations making similar moves. The measure would have penalized producers who exceeded quotas to the tune of $1,000 a barrel. But Christian and Craddick both said they feared legal repercussions that would make such an effort ineffective.

“I may be the only lawyer in the group, but I guarantee you this is going to the courthouse,” Craddick said last month.

While the debate over production caps may be sidelined in Texas, other states are still considering whether such a response is warranted. Oklahoma is scheduled to discuss quotas on May 11 and North Dakota will take up the issue on May 20. Still, those efforts are likely a long shot without Texas on board.