Texas Says No to Oil Production Quotas, Yes to Well-Plugging and Pit-Cleanup Delays
The Texas Railroad Commission finally ended its uncomfortable flirtation with limiting production by declining to set quotas, but it changed rules to speed oil storage construction and allow companies to conserve cash by giving them more time to plug wells and clean up waste pits.
After weeks of talk and deliberation, the Texas Railroad Commission officially decided it will not go back into the production management business.
Rather than trying to influence prices, the commissioners changed a handful of rules to allow operators to delay the plugging of wells and the cleaning up of waste pits; reduced fees and fines; and encouraged construction of new underground oil storage facilities.
Those motions preceded the final decision on a plan to try to push up oil prices by cutting production.
The lone commission member who had supported a 20% production cut, Ryan Sitton, did not bring up the motion because it was clear he did not have the votes to pass it on the three-member commission.
Railroad Commission Chairman Wayne Christian said there was no point in cutting Texas production unless other states and producing countries would do the same.
“We could not confirm any other state would join us and that was s requisite of the motion,” based on a request for action submitted by Pioneer Natural Resources and Parsley Energy, Christian said.
He also pointed to the opposition of every oil and gas industry association to state intervention at a time when producers are cutting production because of low prices and dwindling oil storage space.
When the chairman proposed to dismiss the motion, which led to a marathon hearing in April, Sitton said he would oppose it because “Parsley and Pioneer asked us to determine reasonable market demand, which we did not do.”
The commission has begun gathering data to answer a critical market variable—how much storage is available in Texas. As of 20 April, unfilled storage capacity owned by Texas refineries and pipeline companies was 71.2 million bbl (about 75% responded to the commission’s query).
To encourage more storage, the commission passed an emergency motion allowing underground oil storage in formations other than salt domes. Producers will need to convince commission staffers that the formation will securely contain the oil and not harm water supplies.
To speed the process, no hearing will be required, except for protests of the commission’s ruling. Also, several fees were waived as an incentive to build storage. Some of the fees, related to injection into disposal wells, could benefit a broader group of companies.
Also, in the name of helping struggling operators, the commissioners extended the deadlines for plugging nonproducing wells and cleaning up waste pits from 1 year to 2 years.
Commissioner Christi Craddick said the plugging change would apply to marginal wells with some production this year that produce nothing for the year beginning after 1 March. The hope is it will help some companies stay in business, and perhaps allow the restarting of some of those wells in the future.
But Sitton pointed out that industry conditions now are so bad that the commission might inherit a lot of wells and pits that need cleanup after oil companies have failed.
Paul Dubois, assistant director at the commission, said that in past downturns the commission has taken on more abandoned wells and facilities. The cleanups are supposed to be paid by the financial security insurance required of operators.
The hope is that the extended deadlines will reduce current expenses for financially pressed operators.
“Maybe there will be some more liabilities, but some more operators around to take care of it” because they did not have to pay to comply this year,” Craddick said.
The potential cost of abandoned wells and pits is unknown. Dubois said the commission has “not enumerated” the number of wellsites that will be left behind after this deep downturn.
The potential cleanup cost is likely to be significantly higher than after the 2014 price crash. After years of high-volume drilling, the percentage of older, low-producing wells is much greater, as is the pressure on producers.