Over the last decade, Texas could only think of one thing to tell its oil industry: “drill, baby, drill!”
Now, the Lone Star State is telling those same drillers: “slower, baby, slower.”
The coronavirus has upended the world, including Texas, which is home to Houston, the “Energy Capital of the World” and Permian, the shale basin that last year surpassed Saudi Arabia’s Ghawar as the top producing oilfield.
As U.S. crude prices fell to 18-year lows of nearly $20 per barrel on Wednesday from the systemic destruction of demand caused by the Covid-19 and fear of oversupply from the Saudis’ new pump-till-we-drop mantra, Texas was weighing a decision that could be a new “shock and awe” in its more-than-century-old drilling history.
Energy executives in the state had reached out to the Texas Railroad Commission, which regulates the industry, for relief, and the TRC was considering curtailing production in America’s largest oil-producing state, the Wall Street Journal reported on Thursday.
First Potential Curb on Texan Oil in 50 Years
If that were to happen, it would be Texas’ first curb on drillers since the 1970s, when overproduction by the state set off the infamous Arab oil embargo, price shocks, long lines at U.S. gas stations, shifting American geopolitical alliances and wars in the Middle East.
Texas was, in fact, a model for the Saudi-led OPEC, which has largely influenced global oil prices for the past 50 years with production controls.
As the Journal itself highlighted, it was unclear if the regulators at TRC would act to curtail production, although staffers at the commission were examining what would be needed if they were to proceed. Such curbs would certainly produce another watershed moment for Texas drilling since the first great gusher from a well in Beaumont city in 1901.
Without Texas’ Permian and Eagle Ford shale basins, the United States wouldn’t have a record high output of 13.1 million barrels per day that have made it the world’s largest oil producer and net crude exporter for the first time since 2019.
Twitter exploded after the Journal story about the potential TRC curbs, with comments that ran the gamut, from whether the TRC had the political will for such an act to discussing the appropriate enactments and tools in the regulators’ arsenal for such curbs.
“No action by the TRC can help Texas producers while Texas refiners can import unlimited amounts of oil — especially the grade of oil best suited for the refineries,” tweeted Ed Hirs, Energy Fellow at University of Houston and managing director at Hillhouse Resources, an oil drilling company on the Texas Gulf Coast.
Act On Flaring Could Be The Catalyst
Many referred to a report on natural gas flaring being prepared by TRC member Ryan Sitton that could become a catalyst for the commission to place curbs on the industry.
Gas is a byproduct of crude production and its flaring has become one of the worst side effects of the shale boom in Texas.
As Bloomberg noted in an interview with Sitton, vast amounts of gas from oil wells in the Permian Basin were being burnt off for lack of pipelines to ship it away. While pressure mounts to curb the practice, a supply glut, depressed U.S. gas prices and the distance from key markets for the heating fuel means the byproduct of crude production has little value for explorers in the state.
Now with oil prices at multi-year lows too, and green groups continuing to target the shale industry for flaring and other environmental concerns, the TRC might feel empowered to act, though the outcome remains uncertain.
“Not even sure quotas will go into effect,” Bob McNally, president at Rapidan Energy, a Washington-based think-tank, said in a tweet that discussed the merits of Sitton’s flaring report resulting in production quotas for Texan drillers.
Still, the fact that cuts were being considered seriously for the first time since 1972 underscored the point that “it's hard to run the world economy without a swing oil producer,” McNally said, referring to Saudi Arabia’s abandoning its role as OPEC’s arbiter.
Even if the TRC doesn’t act, drillers might self-police to protect themselves, said John Kilduff, founding partner at New York energy hedge fund Again Capital.
“We’re going to see a new level of capex cuts and production discipline that could amaze us,” Kilduff told Investing.com.
“It’s the only choice drillers across the U.S. have: cut or go bankrupt.”
Data from Haynes and Boone’s Oilfield Services Bankruptcy Tracker showed there were six new bankruptcies in the oilfield services area in Q4 2019.
Up until now in 2020, Pioneer Energy Services has been the only major oilfield services company to enter Chapter 11 bankruptcy. But many others, like Chesapeake Energy (NYSE:CHK) and Whiting Petroleum (NYSE:WLL) were already carrying heavy debt burdens before this month’s 55% drop in crude prices.
Capex And Rig Cuts Are Coming
Now, several exploration and production companies in the U.S. energy space have started moving in the right direction.
Last week, Pioneer, one of the leading producers in the Permian Basin of Texas and New Mexico, said it was running a series of models to decide next steps.
Diamondback Energy (NASDAQ:FANG) cut its activity from nine completion crews to six, dropping two more completion crews than scheduled. The shale producer said it will also cut capital spending, though it hasn’t specified an amount.
Parsley Energy (NYSE:PE) said it has slashed its 2020 free cash flow outlook to at least $85 million from a prior view of at least $200 million, and announced a general activity slowdown as well.
EOG Resources (NYSE:EOG) also plans to curb spending to protect return to its shareholder dividend, and will release details later.
On Thursday,Continental Resources (NYSE:CLR), a pioneer driller in the Bakken field that straddles Montana and North and South Dakota, said it will cut its 2020 capital budget by $1.2 billion, a 55% reduction from its $2.65 billion.
Continental also announced something else that might make an immediate impact on the market — a cut in the number of active oil rigs it ran.
The company said it will reduce its average rig count in the Bakken to 3 from 9 currently, and in Oklahoma to 4 from 10.5.
The U.S. oil rig count — a trusted indicator of production, even if lagged — is down 152 or 18% year-on-year. But it’s still up 367 or 116% from May 2016 — when U.S. crude last traded at $26 per barrel, not far from where it settled Thursday.
“We might be back down to the 300 levels on the rig count over the next six weeks,” said Kildfuff. “Look out for it.”