World Oil Analysis: Texas RRC’s task force measures are underwhelming, say advisors

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The Railroad Commission of Texas (RRC) held yet another meeting on Tuesday, and the results, while predictable, are mostly ineffective, as a whole. As expected, the three RRC commissioners voted 2-1 to reject implementation of prorationing, with Chairman Wayne Christian and Commissioner Christi Craddick voting in favor of rejection. Commissioner Ryan Sitton, who has argued for a number of weeks that prorationing is needed, voted against its rejection.

Instead, the RRC agreed to consider implementing a raft of more minor measures recommended by its much-ballyhooed, but hastily assembled Blue Ribbon Task Force. More on that, further down in this analysis, including comments from three of our editorial advisors and one contributing editor. But first, it is instructive to review the comments by Christian and Sitton, while it is noticeable that Craddick had little to say.

The chairman’s unapologetic view. Preparatory to voting to reject proration, the chairman launched into what can only be described as a vociferous, somewhat angry and very defensive set of remarks that extolled why the “free market” is the only way forward, while prorationing, in his mind, should be shunned. “One of the greatest threats to a market is uncertainty, not knowing an answer,” declared Christian. “And, that’s why every election year, you have an up-and-down market; pretty volatile. We’ve combined that, this time, with all types of political problems that I think are out of the norm, but then this collapse and pandemic have all come together, to make this a very uncertain market. And I believe we owe the market or the companies or our constituents, to say that the Railroad Commission has come to a durn decision.”

Christian went on to say that this will give certainty to the process that the commission has gone through for many weeks. “By allowing the free market to work, producers can determine for themselves what level of production is economical. As the last couple of months have shown, for many that requires voluntary cuts in production.” He complained that some analysts have argued that the proration debate is a conflict between large and small operators, and then declared that this is not the case. He cited the opposition to prorationing by one Texas association, of which a sizeable majority of its members employ 20 people or less. However, one is tempted to ask him whether that association actually polled its members (we think not) as to whether they favored prorationing, as we polled our Texas professional readership at World Oil.

Thumping prorationing. “Those in favor of proration are trying to use every tool at their disposal, to turn this thing around,” said the chairman disapprovingly. While this might be partially true, it could be said just as easily that Christian and others have spent a great deal of effort in using every method at their disposal to stop prorationing, including the quiet placement of an op-ed on the Houston Chronicle’s website, late in the day on Wednesday, April 29. In that op-ed, Christian declared that he was against prorationing, even though the task force was only halfway through its two-week mission to supposedly consider “all” methods of dealing with the crashed oil market. By inserting that op-ed, he steered the task force completely away from considering prorationing and made yesterday’s vote by commissioners a moot point.

Continuing his thrashing of prorationing, the chairman said, “I refuse to implement an antiquated policy, simply because it exists. As tempting as it is to do something, just to say I took action, I believe that the four-dozen items that we’ve addressed, and the others this morning, are a statement that the Railroad Commission is actively doing something with industry.” Again, the matter is one of effectiveness, and judging by the comments of our advisors and contributing editor (see further down in this story), these task force measures, alone, are not likely to move the needle nearly as much as prorationing could have, in conjunction with some of these items.

In contrast to Christian’s fiery remarks, Sitton expressed his thoughts in a calm, measured manner. “My disappointment is that we didn’t calculate how much (physical) waste was out there,” he lamented. “My big fear is that in two to three years, demand will not reach back to 100 MMbopd, and will be 5 to 10 MMbopd less. And most of this will come out of the U.S. (to the detriment of U.S. producers). We’ll look back and wonder why the U.S. wound up in this situation.”

Task Force items. The four-dozen Task Force recommendations for action are grouped under four large categories, with two miscellaneous groupings. Under Operations, there are testing, market access, agency funding (for RRC operations), and the Orphan Wells Program (more funding). The Storage/Pipeline Capacity grouping includes storage and transportation assessment, waiving TCEQ permits, and waiving state leases and royalty payments. Under Extensions/Timelines, one finds additional time or relaxed enforcement for drilling and MIPA permits, Statewide Rules 8 and 15 (pits and surface equipment), inactive wells, extensions, compliance times, etc. As for Tax/Fee Policy, there are things like reducing and eliminating various fees, extending and revising production tax credits, severance tax relief and several other related items. The other two groupings include Other (infrastructure development and road maintenance) and Federal (several actions that could be taken, exclusive of an import tariff or Texas prorationing).

Back on April 21, Chairman Christian trumpeted how he was deferring the commissioners’ judgement on how to proceed on improving the market to the task force. So, we thought it might be useful contrast, to defer our judgement of the task force recommendations to a grouping of three of World Oil’s editorial advisors and one contributing editor. All four of these folks have extensive experience, now or at other times, in running Texas projects and operations.

Task Force points, as a whole. Our group found a few Task Force items that can be helpful to producers marginally, but they believe that the measures, as a whole, are not all that effective. Our most optimistic advisor said, “There are several items that are important to our conventional oil operations in East Texas. The wells are characterized by low daily production rates and high (+/-95%) water cut. At today's prices and the increases in purchasing fees demanded by [the common carrier], we are currently in the process of shutting these wells in. The ability to delay reporting and receiving extensions on permitting, etc., will certainly be welcomed. Receiving Production Tax credits is of real importance to us.” Yet, he quickly added, “As for much of the rest being discussed, I did not see much that was an impact to our position.”

 “Another advisor commented, “I’ve read the RRC report, and there are some good bits and some disappointments.” A third advisor characterized the task force offerings as “A lot of ‘give us some tax breaks and regulatory relief’ in a nothing burger.” Asked to explain what he meant by that, the advisor said, “Nothing in the recommendations does anything to address the oversupply issue; every recommendation is just a list of ‘give us some breaks’ and [the feeling that] ‘the RRC is sure great, the legislators should give them some more money." Finally, our contributing editor described the task force points as “a great study for a five-year plan, but too complicated for immediate relief.”

Examining specific points. Looking at some of the specific points, one advisor said, “For the good, I see that the commission recommended relief to small operators by relaxing some regulations. Items such as suspending well testing through the end of 2020, adding funding towards orphaned wells that require P&A—thus keeping field personnel engaged—and looking for options to increase storage capacity. Also helpful is selected royalty relief to help mitigate costs in the short-term.” But on “the not-so-good side” he added, “I would like to have seen support for proration, to help reduce storage and help work off the glut of oil. The faster we can work off the glut, the faster companies can return to a sense of normal. Texas has used proration in the past, so I don’t understand why not do it now.”

Another advisor found what appears to be a hole in the task force recommendations. “As I mentioned above, we, as well as others, are having our sales contracts revoked, due to the heavily reported storage problems. It would be nice, if there could have been some protection against the increase in fees, which for us was nearly 50%.”

Our contributing editor commented, “I like the orphan well suggestion. The tax credit per barrel price could be helpful, if credits were [to happen] now and [be] higher, and if the legislature could act fast.” On the other hand, he noted, “changing paperwork, testing or TCEQ will have no impact. And storage ideas are more important and immediate than the task force states. “I am working on two now in conventional fields.”

Shut-in wells. One of the advisors expressed the concern that many industry people have about the potential number of shut-in wells, and how many of those may come back. ““I participated in a webinar, in which I was a panelist, where we spoke at length about shut ins. One of the panelists reminded us that wells are shut in all the time for various operational concerns and to avoid frac hits. Almost always [it’s done] without damages. Frankly, I think the number of shut-ins is much higher than what the commission might have ordered [if prorationing had been adopted]. The other panelist said that all his vertical wells, and a large number of horizontal wells, were shut in, based largely on opex. However, I doubt the RRC was swayed by potential damage. The commission has been loath to restrict production for any reason, including the perfectly legitimate reason of avoiding flaring.”

It should be noted that the commissioners on Tuesday did agree to continue investigating what to do about flaring levels in Texas and come up with potential actions.

Finally, as regards shut-ins, another advisor looked for a bright side to the RRC’s thinking. “Perhaps the reason that the RRC is not pursuing proration, is the belief that shutting in wells will damage the reservoir. Indeed, this is a serious concern for conventional production. However, the unconventional plays, like Eagle Ford shale, Permian basin and Ft. Worth basin, likely would not be impacted negatively by shut-ins. This is due to the very low perm that these reservoirs have, and thus shutting-in should only be a near-wellbore effect. Indeed, a shut-in may allow the near-wellbore to re-pressurize and actually improve production in the future.   I know this is speculation, but I’ve seen this effect in the Bakken and Eagle Ford plays.