Texas regulator drops plan to mandate oil output cuts

(Reuters) - The Texas energy regulator who pushed the state to consider cutting 20% of its oil output and promoted the idea with calls to Russia’s energy minister and OPEC officials abandoned the proposal on Monday after failing to win his fellow commissioners’ support.

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo

Global energy demand has tumbled amid coronavirus-related travel and business restrictions, a glut of oil from shale, and the end of an OPEC and allies production pact.

The turmoil prompted State Railroad Commissioner Ryan Sitton last month to urge the first mandated cuts in 50 years. He promoted the idea on Twitter and TV, calling on his fellow commissioners to consider curbing 1 million barrels per day and winning audiences from OPEC Secretary General Mohammad Barkindo and Russian Energy Minister Alexander Novak.

But Sitton scrapped the plan a day before his commission, which regulates oil and gas in the state, was to vote on the proposal. Small and large companies including Chevron, Exxon Mobil and Occidental Petroleum were already planning to cut hundreds of thousands of barrels per day of shale, well ahead of any state action.

“This is dead,” Sitton told Reuters in an interview. “What we should have done six weeks ago now would no longer have the right impact. We lack the leadership between the three commissioners to get that done.”

Texas is the largest U.S. oil-producing state, pumping about 5.4 million barrels per day (bpd) of crude. Last year its output rose by 600,000 bpd, to about 41% of the nation’s total.

(For a graphic on Texas pumpers led to record U.S. oil output, click here: )

Commission Chairman Wayne Christian last week said he would oppose state-mandated cuts and would “stick to my free market principles” and vote no. Commissioner Christi Craddick had worried about legal battles. Two votes are needed to pass a measure.

“How this could benefit anybody has never been very clear to me,” Craddick said on Monday, adding that she does not support state-mandated cuts and that Texas producers are already cutting output. “The market is correcting itself without a regulatory intervention. We’re not picking winners and losers.”

Sitton’s proposal grew out of a request from Texas oil producers Parsley Energy and Pioneer Natural Resources. But the idea was staunchly opposed by oil trade groups and larger shale producers’ Exxon Mobil, Chevron and Occidental Petroleum.

“The Texas Railroad Commission had an opportunity to lead and bring a level of stability to the market chaos and it chose not to act,” said Matt Gallagher, chief executive of Parsley Energy.

In April, the commission held a hearing on the issue that lasted more than 10 hours.

Exxon and Chevron, the top two U.S. producers, on Friday said they plan combined global shut-ins of 800,000 bpd in response to plunging crude prices and fuel demand. ConocoPhillips, the world’s largest independent oil and gas company, plans to cut output in North America by June to 460,000 bpd, the largest cut by any producer.

By the end of May, Texas output is likely to drop by 20% anyway, said Karr Ingham, executive vice president of the Texas Alliance of Energy Producers, which opposed the cuts.

“Operators are shutting in anywhere from 20-50%, and some more than that, based on what they think they can get to market,” Ingham said. The idea that producers needed the state to tell them to cut is “hubris and nonsense,” Ingham added.

Texas regulators have a mandate under state law to “prevent waste of the state’s natural resources,” and some argued that the current oversupply of oil and price crash amounts to “economic waste.”

Oklahoma regulators recently approved an order saying some production in that state could be deemed “economic waste,” which companies have said they could use to shut in wells without risk of losing their leases.

(For a graphic on Texas' production growth, click here: )

Reporting by Jennifer Hiller; Editing by David Gregorio, Tom Brown and Sonya Hepinstall