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Despite Coronavirus and Falling Oil Prices, Texas Regulator Backs Away from Production Cuts

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The Railroad Commission of Texas won’t be cutting oil production any time soon, even as the global coronavirus pandemic and falling demand continue to decimate the state’s vital energy sector.

The 3-member Commission was scheduled to vote on a proposal to cut production in the state by about 20%, or 1 million barrels per day, on Tuesday. But after two members – including the chairman — voiced their opposition last week, Commissioner Ray Sitton said he would not be bringing the measure up for a vote.

“At this point we still are not ready to act, and so it’s too late, so there is no proposal to make,” Sitton told Bloomberg News earlier today. “I think that pro-ration is now dead.”

Exxon Mobil, Other Big Energy Companies Opposed Production Cuts

The Texas Railroad Commission has not ordered a production cut since the 1970s. But with millions of people around the world sheltering-in-place and curtailing non-essential travel, global demand for oil has fallen from roughly 100 million barrels per day to 85 million barrels per day.

Late last month, futures for West Texas Intermediate actually fell into negative territory. Although the market did eventually rebound, prices continue to hover around $15 per barrel – far too low for any energy company to turn a profit.

The deteriorating situation had pushed Pioneer Natural Resources, Parsley Energy, and a number of small drillers to call for what was once considered unimaginable in Texas. However, their support for state-mandated production cuts was apparently not enough to overcome opposition from powerful industry groups, pipeline operators, and larger rivals, including Exxon Mobil Corp and Chevron Corp.

Coronavirus Slowdown an Existential Threat to Texas Oil

The ongoing economic crisis poses an existential threat to the Texas energy industry and has already costs thousands of oilfield workers their jobs. Rig counts—even in the prolific Permian Basin — are falling, frac crews have been idled, wells have been shut in, and drillers are running out of capacity to store their excess oil.

The situation is likely to become even more dire in the coming weeks, as three of the industry’s biggest players — Exxon, Chevron and ConocoPhillips – recently announced plans to reduce their combined American output by as much as 660,000 barrels per day by the end of June. Meanwhile, Permian Basin driller Cancho Resources Inc. had already shut in 4% to 5% of its total output before warning last week that it would likely be forced to curtail production even further.

With so many oil companies moving to scale back production in Texas, opponents to state-mandated cuts had argued the move was unnecessary.

“The market forces are stronger than the threat of proration ever was,” Cye Wagner, chairman of the Texas Alliance of Energy Producers, told Bloomberg. “It would be more harmful to the industry than the market-driven response that’s coming.”

Some other energy producing states are still considering their own production cuts, including Oklahoma and North Dakota. But most industry observers believe those proposals will also go down in flames without Texas on board.

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