By Jennifer Hiller
HOUSTON (Reuters) - Texas energy regulators on Tuesday started to hear from dozens of energy executives on an initiative calling for the state to mandate an output cut to stem the sharpest oil price drop in decades.
Oil and gas companies are gushing red ink and cutting tens of thousands of workers as oil prices have crashed to about $22 a barrel from $61 in January. On Monday, Texas refiner Valero Energy Corp (N:VLO) forecast a first-quarter loss of up to $2.1 billion on falling demand.
The proposal, submitted by executives from shale producers Pioneer Natural Resources Co (N:PXD) and Parsley Energy Inc (N:PE), has stirred up anger at the Texas Railroad Commission, the state's oil and gas regulator, for considering cutbacks, and fury that livelihoods are disappearing.
The industry is heading for a historic collapse with Permian Basin production still growing and storage filling, Pioneer Chief Executive Scott Sheffield warned commissioners on Tuesday. He predicted $3 to $10 per barrel oil in the next several weeks. "This is probably going to be worse than '86," Sheffield said. "Demand is not going to come roaring back."
With storage likely to fill in mid-May, Plains All American Pipeline (N:PAA) now requires proof of destination to ship oil, said President Harry Pefanis, who did not take a position for or against cuts.
"We can't act as a storage facility for everybody that doesn't have a market," Pefanis said, adding that the company has warned producers, "There's a wall coming."
Companies are already cutting spending as much as 50% and U.S. shale output has started falling, said Lee Tillman, CEO of Marathon Oil Corp (N:MRO), who opposes state-mandated cuts. "I would argue that among global producers, the U.S. has acted first and has acted quite strongly," Tillman said. "The bottom line is we're already cutting and cutting deeply."
But Marilyn Craaybeek, who owns a small oil company, said small producers were failing, something she blamed on government inaction.
"This was my retirement and I will die poor," she wrote in a letter to the commission in favor of the production curbs.
The hearing is being held days after the Organization of the Petroleum Exporting Countries and allies agreed to reduce their output by 9.7 million barrels per day (bpd) in May and June. Other non-OPEC countries and government reserve purchases could lift the total reduction to 19 million bpd, analysts said.
However, U.S. crude futures (CLc1) plunged nearly 6% on Tuesday to about $21 a barrel, below the average cost of production in all Texas oilfields. Traders have bet the historic OPEC deal was not large enough to counter oil demand destruction caused by coronavirus-related travel restrictions and business halts.
At least two votes on the three-member Texas Railroad Commission are needed to pass the proposal. Commissioner Ryan Sitton has pushed for evaluating statewide cuts, while Wayne Christian, the commission's current chairman, and Christi Craddick, the third commissioner, have been careful not to take a position.
Craddick voiced a common industry concern during the hearing that output curbs could cause operators to shift production to other states such as New Mexico and North Dakota. "What if other states don’t do this?" Craddick asked.
All three commissioners asked executives about the state's thousands of smaller oil producers, which Christian said "are going to be shut down" and might get wiped out if they cannot access pipelines and markets.
Some of the state's largest and most influential oil companies, Exxon Mobil Corp (N:XOM), Chevron Corp (N:CVX) and Occidental Petroleum Corp (N:OXY), have opposed imposing limits, along with some of the largest trade organizations.
The idea, however, has gained proponents elsewhere. A group of Oklahoma oil producers on Monday filed a request with their state also asking for a hearing to consider production curbs.