The Nickel Report

With oil prices plummeting and markets battered by the disruptions caused by the COVID-19 pandemic, two oil and gas producers filed a joint motion late last month for the Railroad Commission of Texas (“RRC”) to consider curtailing oil production (“Joint Motion”), an extraordinary remedy that has not been employed since the 1970’s.[1] In response, the RRC convened an initial public meeting yesterday to consider the request and comments filed by more than 50 stakeholders with, not surprisingly, wide-ranging views on the subject.[2] The RRC took care to include in the notice of meeting a statement that the initial meeting would not be “a meeting to conduct a hearing under the Administrative Procedure Act” signaling that no determinations would be made at the initial meeting.[3] Nevertheless, due to the significance of the issues under discussion and the potential impact on not only oil and gas producers, but also the midstream and downstream sector, the ten-hour long meeting drew a substantial audience across the country and the globe.[4]

Citing the authority granted to the RRC under Chapter 85 of the Texas Natural Resources Code to prorate production of oil and gas in Texas to meet reasonable market demand and to call a hearing to determine if waste[5] is occurring or is imminent, the movants requested that the RRC issue such orders or rules as needed to impose statewide market demand prorationing (i.e., the reduction of a percentage of production) beginning in May of 2020. Without action by the RRC, it was argued that “operators will shut-in wells in an ad hoc and haphazard manner that will heighten industry disruption and cause economic waste” and that it was incumbent on the RRC “to bring fairness and uniformity to any curtailment of production.”

Commenters were divided in their support for, or opposition to, any curtailment. Supporters argued that, among other things, storage shortages are acute, a record number of bankruptcies are likely to occur in response to market conditions, recent production cuts by OPEC+ countries that were announced on April 12, 2020, do not solve the large supply-demand imbalance that currently exists in the market, and the RRC needs to act expeditiously to help stabilize markets. Opponents argued that, among other things, producers are already taking action to shut in the least profitable wells, the market is self-calibrating, and any action by the RRC would not solve global market issues. Potential ripple effects on contractual obligations were also noted by commenters from both the upstream and midstream perspectives.

The RRC commissioners questioned the effectiveness of any action at the state level when global demand is down by 20 million to 30 million barrels per day, but also considered whether a coordinated response with other states and nations might be appropriate. The RRC commissioners also grappled with the questions of both how long an order restricting production would be in place and how such restrictions would be implemented or allocated among producers. The imposition of stricter restrictions on natural gas flaring as a means to reduce production was also discussed, as flaring of natural gas that is produced with oil has become a larger issue over the last ten years as natural gas prices have remained low and pipeline takeaway capacity has been limited.

While no votes were taken yesterday, the RRC is scheduled to consider the matter again at a virtual conference scheduled for April 21, 2020. With producers in Oklahoma requesting similar relief, the Oklahoma Corporation Commission is currently scheduled to consider oil production cuts at a hearing on May 11, 2020. Companies that will be affected by this action would be well advised to at least monitor these proceedings and consider weighing in to protect their interests.

[1] See Motion on Verified Complaint of Pioneer Natural Resources U.S.A, Inc. and Parsley Energy Inc. Regarding Conservation and Prevention of Waste of Crude Petroleum and Natural Gas in the State of Texas available at the RRC website at https://www.rrc.state.tx.us/general-counsel/open-meetings/comments-received-re-the-rrcs-april-14-2020-open-meeting.
[2] The list and contents of comments are also available at the RRC website at https://www.rrc.state.tx.us/general-counsel/open-meetings/comments-received-re-the-rrcs-april-14-2020-open-meeting.
[3] See Section 85.051 of the Texas Natural Resources Code requiring a formal hearing before the RRC can make a determination that waste is taking place or is reasonably imminent and take action to adopt a rule or order to correct, prevent or lessen the waste.
[4] Reportedly, the webcast of the April 14, 2020 initial public meeting drew a viewership of 20,000 in 86 countries and 49 states. See https://twitter.com/ChristiCraddick/status/1250228036642971648?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Etweet.
[5] “Waste” is defined to include certain operations including the escape of gas into the open air in excess of the amount necessary in the efficient drilling or operation of the well and the production of oil in excess of transportation or market facilities or reasonable market demand. See Tex. Nat. Res. Code § 85.046.  The production, storage or transportation of oil or gas in a manner, in an amount, or under conditions that constitute waste is unlawful and is prohibited.  See Tex. Nat. Res. Code § 85.045.