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The Texas Railroad Commission at open meeting today considered Pioneer and Parsley’s petition asking the Commission to institute oil proration. Commissioner Sitton moved to institute proration, conditioned on other states and countries committing to a total of 4 mm bbls/day additional reduction in oil production by June 1. Sitton’s motion provided that each Texas operator would be required to reduce its production by 20% effective June 1, amounting to 1 mm bbls/day of Texas production, but exempting operators producing less than 1,000 bbls/day. Sitton got no second on the motion.

Commissioner Christian announced he has appointed a blue-ribbon panel to study the issue. He named only associations – TxOGA, TIPRO, Panhandle PRA,O and Permian Basin PA, and Pipeline Association — and not individuals, to be on that panel.

Commissioner Craddick said she wanted staff to present “all options” for how to institute proration and wanted guidance from the Texas Attorney General as to what was legal before taking any action, commenting that any action by the Commission is bound to end up in litigation.

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The Texas Railroad Commission heard comments yesterday in a virtual open meeting on the proposal from Pioneer and Parsley that the Commission re-institute proration of Texas oil wells in response to the drastic reduction of world oil demand. Unsurprisingly, those providing comments did not agree.Top-Ten

In general, the division was between majors and independents – though not totally.

Marathon, Ovintiv, and Diamondback opposed proration, as did TxOGA, Texas Alliance of Energy Producers, the American Petroleum Institute, Texas Pipeline Association, Plains All American Pipeline, and Enterprise Products Partners. Parsley and Pioneer testified in favor of proration, as did Latigo Petroleum, Discovery Operating, Elevation Resources, and former Railroad Commissioner and Congressman Kent Hance. Surprisingly, Quantum Energy, a major independent, testified in favor. In addition, the following provided written comments in favor of proration: Continental Resources, CrownQuest, Hibernia Resources, Texas American Resources, the Panhandle Producers and Royalty Owners Association, and Permian Basin Petroleum Association. Those submitting written comments opposing proration included Chevron, Cimarex, Concho, ConocoPhillips, EOG, Occidental, TXO, and former Commissioner Michael Williams. Written comments can be viewed on the Commission website, here.

Arguments against proration included: Continue reading →

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Two studies by University of Texas’ Jackson School of Geosciences analyzed data on water use in eight major US shale plays from 2009 to 2017. The first study, published in Environmental Science and Technology, quantifies how much water is produced from wells and how much is need for hydraulic fracturing. The second, published in Science of the total Environment, assesses the potential for using produced water in other sectors, including agriculture. UT’s announcement and summary of the studies can be found here. The announcement includes this:

Oil plays produced much more water than natural gas plays, with the Permian Basin producing about 50 times as much water as the Marcellus in 2017. As far as recycling potential for hydraulic fracturing, the research shows that in many cases there’s plenty of water that could be put to good use. For instance, in the Delaware Basin, which is part of the larger Permian Basin in Texas, scientists found that projected produced water volumes will be almost four times as great as the amount of water required for hydraulic fracturing.

Managing this produced water will pose a significant challenge in the Delaware, which accounts for about 50% of the country’s projected oil production. Although the water could theoretically be used by other sectors, such as agriculture in arid West Texas, scientists said water quality issues and the cost to treat the briny water could be hurdles. In addition, if the water is highly treated to remove all the solids, large volumes of salt would be generated. The salt from the produced water in the Delaware Basin in 2017 alone could fill up to 3,000 Olympic swimming pools.

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The failure of Saudi Arabia and Russia to agree on reductions in oil production, combined with the crash in demand caused by COVID-19, are blamed for the rapid decline in oil prices and the glut in supply. But looking back, it can be argued that another cause is the rapid rise in US oil production since 2010.

oil-production-chartUS producers have relied on OPEC to regulate the world oil price, while ramping up their production. Maybe US producers should take some responsibility as well.

Texas accounts for 41% of US oil production, and increased production from the Permian is the principal driver of increased oil production in the US.

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Pioneer Natural Resources and Parsley Energy sent a letter to the Texas Railroad Commission formally requesting that it institute proration in Texas oil fields. Scott Sheffield and Matt Gallagher concluded:

We thus implore you to act as stewards of Texas’s oil resources and to support rationally tailored actions – consistent with the Commissions state mission – to “enhance development and economic vitality for the benefit of Texans.” As the chief executive officers of the second and tenth largest oil producers in the State of Texas, we are responsible for the employment of thousands of employees by our companies and our contractors. It is on their behalf, as well as other companies that share our concerns, that we submit this request.

Read the letter here: Parsley Pioneer letter to RRC

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Another recent bankruptcy court ruling may bode ill for producers and royalty owners in Texas in light of the collapse of oil prices and increased risks of bankruptcy of producers and oil purchasers. In Re: First River Energy, LLC, 2019 WL 1103294(US Bankr. W.D. Tex., March 7, 2019), also highlights a fix to the First Purchaser Statute the Texas legislature needs to address.

The oil industry in Texas fell on hard times in the early 1980’s. Several large oil purchasers filed for bankruptcy, leaving many royalty owners and producers unpaid. In response the Texas Top-TenLegislature passed a law intended to give producers and royalty owners a better chance to recover their monies in bankruptcy court. The statute is now Section 9.343 of the Texas Business and Commerce Code, which is Texas’ version of the Uniform Commercial Code (UCC). All states have passed their version of the UCC. The UCC is intended to govern rights of parties in commercial transactions; the intent of having a “uniform” code in all states is to ensure that such transactions will not be hindered by differing laws from state to state. Article 9 of the UCC governs security interests granted in “goods” and proceeds from the sale of goods. “Goods” includes oil and gas, once they have been produced. So, the UCC, and particularly Article 9, govern how security interests are granted in produced oil and gas and in proceeds from the sale of oil and gas and the priority among creditors claiming security interests in oil and gas and proceeds. Continue reading →

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What a month.

We are all under the illusion – especially in the West – that we have some control over our lives. COVID-19 has reminded us to the contrary. It is humbling. We can’t see into the future, but what we can see does not look good.

We are asked to stay home, to practice social distancing, to halt commerce and tank the economy. All to prevent something that seems (until recently at least) distant and contingent. We are learning that the only way to prevent the spread of this virus is to act preemptively, before it has attacked. This goes against our instinct as humans. Social distancing has reminded us that we are social animals, that we crave human contact. Conference calls and video conferencing are a poor substitute.

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As evidenced by the fight between Williams MLP Operating and EXCO Operating over EXCO’s flaring of Eagle Ford wells on the Briscoe Ranch, now pending on appeal in the 345th District Court of Travis County, flaring continues to be an issue in Texas. I thought a little history might enlighten the subject.

Controversy over gas flaring is not new. In the 1940’s flaring of gas was also an issue in Texas, and the Texas Railroad Commission successfully fought to reduce flaring as a waste of Texas’ valuable resource.

In the early days of oil exploration and production there was very little market for natural gas. It could not be stored and had to be transported by pipeline. In 1930 oil sold for about a dollar a barrel, and gas sold for 3.6 cents per mcf. Six mcf of methane gas produces the same heat as one barrel of oil. So based on heat equivalency, oil was five times more valuable than gas.

The giant Panhandle Gas Field was discovered in 1918 with the completion of the Masterson No. 1. Three additional wells soon followed, and those four wells were tested in March 1920 at 160 million cubic feet per day. Initially no one could be found to buy the gas. The City of Amarillo spent $60,000 advertising the resource but found no buyers. The city offered free gas for five years to any industry that would move to Amarillo. No takers.

But, by 1929 several gas pipelines were laid to move the gas to distant markets and fifty-three gasoline plants and twenty-four carbon black plants had been constructed. The value of gas had been realized. Continue reading →

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From POLITICO:

OIL IN THE TIME OF PANDEMIC: The global oil market is in an unprecedented situation, one that will hasten companies falling out of the sector, IHS Markit vice chairman and long-time energy industry doyen Daniel Yergin said Thursday. Yergin, in D.C. for an Energy Department board meeting, would normally have been in Houston to preside over the mammoth CERAWeek energy conference this week if the spread of the coronavirus hadn’t forced its cancellation for the first time in its nearly 40-year history. The economic distress, coupled with the flood of oil coming from Saudi Arabia and Russia, has put the overall industry in a situation it has never faced before and one that the federal government would be hard-pressed to fix, he said.

“I mean, there’s just so much weakness,” Yergin told reporters after the meeting. “There’s so much oil out there flooding into the market. It’s a problem of an oil price war in the middle of a constricting market and the walls are closing in. Normally, demand would solve the problem in a way. But not in this case, because of the freezing up of economic activity. Low gasoline prices and low oil prices don’t do much when schools are closed, when people are canceling all their trips and people are working from home. There have been many cases of an oil market collapse and competition for market share, but I can’t think of any one that was in the context of a larger global epidemic.”

Some of the possible solutions being bandied about probably wouldn’t work , Yergin said. Government purchases of oil to put into the Strategic Petroleum Reserve? “You’d have to write some very big checks, and I don’t know if they could deal with the amount of oil coming into the market,” Yergin said. Anti-dumping complaints of the sort Continental Resources CEO Harold Hamm said he’s pursuing? “I don’t think it would solve things overnight,” Yergin said, and it would be tough to prove Saudi Arabia is selling its oil below cost. “I think this is certain to accelerate consolidation” in the industry, Yergin said of the current market. “But it’s still early days.”

Here’s one idea: Railroad Commission should (1) order all flaring in the Permian to cease, requiring those wells flaring gas to shut in the wells or sell the gas, and (2) re-institute proration of production in the Permian, reducing economic waste.

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To better understand the recent news about the precipitous drop in crude prices, it is helpful to review the global picture of world oil production and consumption. (click on images to enlarge.)

In 2018, the US produced 18% of total world oil production, the most of any country. If Saudi Arabia increases its production by a million barrels a day, that would increase world production by about 1%.

top-world-producers-2018
In 2017, the US consumed 20% of total world oil consumption.

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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