Reed Smith Client Alerts

The recent plunge in crude oil prices triggered by the Saudi/Russian fight for market share and the global shutdown in demand triggered by the COVID-19 pandemic has upended the oil markets. To counter these market disruptions and salvage the price of oil, Pioneer Natural Resources U.S.A., Inc. (Pioneer) and Parsley Energy, Inc. (Parsley) recently called on the Railroad Commission of Texas (Commission) to wield rarely used authority to proration oil production in Texas.1 Faced with plummeting demand for oil and a glut of supply that is depressing global oil prices, Pioneer and Parsley contend that the Commission must assert greater control over production in Texas to boost oil prices and buoy the oil industry in Texas and across the U.S.

Authors: Peggy A. Heeg Jorge I. Gutierrez McKenna E. Andrepont

On March 30, 2020, Pioneer and Parsley petitioned the Commission to convene a hearing to consider whether a lack of market demand necessitates the Commission’s use of prorationing policies to restrict oil production in Texas. Pioneer and Parsley’s controversial petition comes at a time when the U.S. oil sector has been whiplashed by a production duel between Russia and the Saudi-led OPEC and an economy frozen by COVID-19 shelter-in-place orders.

Pioneer and Parsley argue that the Commission must revisit its prorationing authority to prevent imminent waste of Texas oil and gas production and reserves. The petitioners acknowledge that individual producers are beginning to curtail production in response to the current economic conditions, but they argue that this ad hoc and uncoordinated shutting-in of producing wells will cause further industry disruption and economic waste, especially in light of recent actions by midstream companies in exercising their rights to curtail or suspend acceptance of crude oil from producers. The petitioners believe that only the prompt action of the Commission, in the form of statewide curtailment of production, can “ensure that the shut-in process is done in an equitable and orderly manner.”

The petitioners’ grim outlook concerning the necessity for producers to rapidly shut-in production is supported by independent analyses. The petition cites to IHS Markit estimates that the global oil surplus stemming from the coronavirus pandemic and the production surge in the Middle East will exceed demand by approximately 1.8 billion barrels in the first six months of 2020 if oil markets remain unstable. With the spike in supply, global storage capacity has evaporated. The petitioners allege that insufficient storage capacity and swelling production will lead to spot prices falling below $10 per barrel for an extended period of time. Pioneer and Parsley claim that these extraordinary circumstances warrant the use of the Commission’s prorationing authority.

It is without question that the Commission is the sole regulatory agency with authority to regulate the volume of production of oil and gas in Texas. The Texas Natural Resources Code expressly grants the Commission the authority to regulate the production of oil and gas, including the right to order a curtailment of production. Specifically, should the Commission determine that “waste is taking place or is reasonably imminent,” the Commission has the authority to “adopt a rule or order . . . to correct, prevent, or lessen the waste.” The Texas code defines “waste” as “production of oil in excess of transportation or market facilities or reasonable market demand.”2

Since its inception, the Commission has asserted its prorationing authority over oil and gas production in Texas on several occasions. In 1930, the Commission issued its first prorationing orders limiting production in the state of Texas to 750,000 barrels of oil daily and in the Panhandle district to 80,000 barrels daily. Thereafter, for the next 40 years, the Commission continued to actively monitor and occasionally curtail production for a variety of reasons, until instances of prorationing waned in the 1970s in the midst of diminishing U.S. oil production and rising oil prices. The Commission has not mandated a statewide prorationing order in nearly 50 years.