Oil pipeline, producer standoff prompts new call for Texas shale curbs

HOUSTON (Reuters) - As a weekend standoff over oil shipments emerged between Texas pipeline operators and shale producers, a state energy regulator has renewed his controversial call for mandated cuts to address a growing crude glut.

Oil prices have fallen more than 60% this year as the coronavirus pandemic has destroyed fuel demand and Saudi Arabia and Russia kicked off a price war in a battle for market share. Oil in Midland, Texas, home of the biggest U.S. shale field, traded on Monday for under $10 a barrel, far below the cost of production.

“Large-scale production interruptions appear inevitable and imminent,” executives from Pioneer Natural Resources and Parsley Energy wrote in a joint letter to the state’s energy regulatory commission on Monday. In the latest sign of a growing oil glut in the state, crude oil purchasers across Texas have warned producers that storage will be limited in May and output must be cut, they said.

In at least one case, a shale pipeline operator told customers it planned to renegotiate its contracts.

Texas Railroad Commission, the state’s energy regulator, is set to meet on April 21, but Parsley and Pioneer have asked it to meet sooner and curtail production as early as May.

“I want to do it as soon as possible,” said Ryan Sitton, the commissioner who first floated the idea of cuts two weeks ago.

“We think it’s important to save this industry,” said Pioneer Chief Executive Scott Sheffield, adding that he would suggest a uniform 20% production cut but leave out the state’s smallest producers.


One of the state’s top producers and the three largest oil and gas producer groups in Texas have opposed mandated production cuts.

“Putting any kind of export quotas on Texas producers could penalize the most efficient producers,” Chevron Corp Chief Executive Michael Wirth said in an interview last week. “We don’t expect unique assistance from governments.”

Chevron is the second largest U.S. oil company and a top U.S. shale producer.

“I’m not advocating we do anything on our own,” Sitton told Reuters, saying he would expect any state-mandated cuts to hinge on Saudi Arabia and Russia agreeing to cut their output. “If it is the right thing to keep some stability in the world, we can do it.”

His comments prompted a call from OPEC Secretary General Mohammad Barkindo and an invitation to the group’s next meeting in June. Sitton said he plans to attend.

But mandated output cuts would lead to less cash for already hurting producers, said Karr Ingham, executive vice president of the Texas Alliance of Energy Producers, which represents more than 3,300 small and midsize oil and gas companies and opposes such reductions.

“You’re worse off than you were before,” Ingham said.

The state has not imposed production limits since 1972, but has the authority to do so, said Sitton.

“For 90 years someone has been setting the price of oil in the world,” he said, referring to Texas in the 1930s and later to the role of the Organization of the Petroleum Exporting Countries. “I don’t see why we can’t at least be part of the discussion right now.”


Top shale producers have pledged to reduce their 2020 oil budgets by 30% to 50% and slashed jobs as prices fell well below production costs. Widespread cuts could lower U.S. output by up to 1 million barrels per day by December.

U.S. President Donald Trump said he would get involved in the oil price war at the appropriate time and last week named an envoy to Saudi Arabia to press U.S. concerns.

Oil gatherers who buy shale from producers are cancelling contracts with producers and insisting on new terms, according to letters reviewed by Reuters. One buyer said its own contract with a refiner had been canceled and would be renegotiated May 1.

“This is a uniquely catastrophic time for the industry,” said Parsley CEO Matt Gallagher, adding that mandated cuts could keep the shale industry from collapse.

The state’s two other regulators have not publicly endorsed cuts. Commissioner Wayne Christian said he is willing to discuss the topic and Commissioner Christi Craddick has declined to comment.

Reporting by Jennifer Hiller in Houston; Editing by Marguerita Choy and Rosalba O’Brien