A debate over whether Texas regulators should intervene in a historic oil industry downturn continues to intensify while crude prices dipped as low as $19.46 Friday.
The price of West Texas Intermediate settled at $22.43, with some producers are intensifying calls for the Railroad Commission of Texas, the state agency that regulates the industry, to invoke a power that has not been used in nearly 50 years to cut statewide production — potentially raising prices by at least a few dollars.
Parsley Energy CEO Matt Gallagher has found himself as a leader of a small group of producers asking the Railroad Commission to order the production cuts, a power the agency hasn’t used since 1973, while the industry is hammered by a global oil glut and plunging demand.
“We’re firmly in support of free markets but during wartime, such as what we’re experiencing with COVID-19, we have to put all the options on the table,” Gallagher said.
Oil &Gas: Railroad Commission considers production cuts as crude prices fall
Austin-based Parsley is among those feeling the overwhelming effects of two challenges that have plunged oil to near 20-year lows. A price war between Russia and Saudi Arabia has created a global oversupply while the coronavirus pandemic has dramatically cut demand for oil industry products as millions of people around the world shelter in place to help slow the pandemic.
Meanwhile, Parsley, like others in the industry, is shutting down hundreds of low-producing wells — those that produce less than 15 barrels a day and that have become unprofitable over the past week as the price of crude plummeted.
“Any well that’s actively above the cost of production, we’re shutting in,” Gallagher said. “It’s an economic no-brainer.”
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Texas has 143 confirmed cases of coronavirus infections with more than half in the Houston area, where tens of thousands of people are working from home to slow the transmission of the disease. Bars and nightclubs in the area remain closed while restaurants offer only take-out and delivery. Supermarkets and pharmacies remain open but many retailers have temporarily closed stores.
Even as the industry faces the crushing fallout of the war against the outbreak, the Railroad Commission is led by three elected officials who describe themselves as free-market Republicans.
Railroad Commission Chairman Wayne Christian and commissioner Ryan Sitton said they would listen to both sides of the debate over state-led production cuts while commissioner Christi Craddick has remained silent on the issue.
In a Friday statement, Christian praised the Trump administration for issuing an auction to buy 30 million barrels of oil to refill the U.S. Strategic Petroleum Reserve but said that he has a “number of reservations” about the agency using its production cuts power.
“First, Texas does not operate in a vacuum,” Christian said. “If we prorate our oil, there is no guarantee other nations, or even states, will follow suit. From a practical standpoint, the Railroad Commission has not prorated oil in over forty years. We do not have staff at the agency with experience in this process and our IT capabilities to handle this process are limited at best.”
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The Railroad Commission canceled its March 31 meeting in response to the coronavirus outbreak, so the soonest the commission could discuss the issue would be at its April 21 meeting. In a tweet, Sitton said OPEC Secretary General Mohammed Barkindo invited him to attend the oil cartel’s general meeting in Vienna in June.
In the meantime, record low crude oil prices may soon trigger a tax credit for more than 200,000 wells across Texas for the first time in four years.
Under state law, there is a 4.6 percent tax on oil produced at each well, but in 2005 lawmakers created exemptions for wells producing less than 15 barrels per day when prices fall below certain levels for a prolonged period of time.
The Texas Comptroller's Office manages the oil well tax exemption and is expected to issue a ruling in early April. The agency exempted more than $8 million of taxes on thousands of wells during five months at the height of the 2016 oil bust.
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There are more than 200,000 qualifying wells producing an estimated 580 million barrels of crude and 3 trillion cubic feet of gas in 2019, data from the Texas Independent Producers & Royalty Owners Association shows.
The association supported the 2005 bill that introduced the tax exemption and supports its activation under current market conditions.
“The program has been an effective tool in providing relief during more extreme periods of market volatility, including many small businesses that own marginal wells in Texas,” TIPRO President Ed Longanecker said.
sergio.chapa@chron.com
@SergioChapa on Twitter
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