OPEC+ and large producers such as Canada, Norway, Mexico and Brazil came to an output cut agreement this weekend, but a coordinated output reduction in the United States isn’t likely to happen any time soon.
The Railroad Commission, Texas’ oil regulator, failed to propose a concrete plan on Tuesday after more than 10 hours of talks. The three commissioners, Christian, Craddick and Sitton may be forced into action soon though as storage space is expected to run out within weeks.
Texas oil drillers have mixed opinions about output restrictions, with oil majors such as ExxonMobil and Chevron opposing any form of government intervention while shale specialists Pioneer Resources and Parsley Energy are in favor of a state-wide 20 percent production cut.
In an interview with Bloomberg TV, Parsley CEO Gallagher came out saying that his company is happy to reduce production by 20 percent if other companies follow suit. He also mentioned that Parsley is already shutting in production at ‘’400 lower-producing wells’’.
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Scott Sheffield, chief executive at Pioneer Resources, also in favor of a production curtailment said that the industry is in dire need of some regulation after years of expansion fueled by cheap money. Looking at the shale industry he said “No one wants to give us capital because we have all destroyed capital and created economic waste,”.
Oilprice.com’s Irina Slav stated today that ’’For the smaller companies, statewide production cuts would be beneficial, helping them continue to sell some oil, according to one industry executive. Larger companies are naturally opposed because they have more cash reserves and lower production costs that will ensure their survival anyway.’’
Yesterday’s 10-hour meeting raised a couple of important and painful questions for oil producers and for the commission itself.
Which companies will be forced to cut, by how much and for how long? And perhaps more importantly, how will the commission organize these cuts?
The current three commissioners aren’t old enough to have experienced the last time that production was prorated back in the 1970’s and asked some of the veteran attendants for advice during yesterday’s virtual meeting.
Commissioner Craddick perhaps voiced the lack of experience best, “We don’t know how to do it at the agency anymore,” Craddick said. “Do we start on Jan. 1? Where do we start? How do we start?”
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The date mentioned by Craddick is both interesting and confusing as the commission doesn’t have much time to come up with a solution, and January 1 would be far too late. A string of bankruptcies will follow in the next couple of months if regulators can’t agree on a state-wide output quota.
Has the urgency of the demand-crisis not resonated in the Commissioners’ boardroom? Or is there simply no consensus about any form of state-wide output cut?
Drillers in North-Dakota didn’t have much time to discuss output cuts and have already idled more than a quarter of oil wells in the northern state.
As the demand crisis continues, Texas drillers are likely to shut in more production in May when the storage hub Cushing in Oklahoma reaches its limit.
State regulators agreed to hold the next meeting on the 11th of May, and one can only hope that it proves more fruitful the second time around.
By Tom Kool for Oilprice.com
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US shale oil producers have been producing recklessly even at a loss without sparing a thought for other oil-producing nations of the world whose livelihood they have trampled on for years. They have been for years enhancing their market share at the expense of OPEC+ producers and operating on the principle that even if their outstanding debts top $1 trillion, the US tax payer will come to the rescue bailing them out because of their economic and strategic importance to the United States. It is high time that they share the pain other oil producers have been feeling for years.
President Trump has been angling for tariffs with the objective of bailing out the bankrupt US shale oil industry at the expense of foreign oil exporters. This won’t work as major oil exporters will shift their exports elsewhere rather than pay the tax.
However, before considering tariffs, President Trump should ask the shale industry to voluntarily cut production to help the OPEC-led efforts to stabilize prices. Still, I don’t think the shale industry will mend its ways and that is why it will be no more in 4-9 years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London