A worker waits to load a piece of pipe that will be lowered into the well at a Chesapeake Energy drill site in Dimmit County on the Eagle Ford Shale. Photo credit: Tamir Kalifa for The Texas Tribune

Texas regulators contemplating a reduction in oil production amid coronavirus crisis

HOUSTON — The state agency that regulates Texas’ behemoth energy industry is weighing a reduction in oil production — at the behest of some producers — as the public health and economic crises fueled by the new coronavirus continue deepening both nationally and here.

The Texas Railroad Commission’s potential inquiry into its options comes as demand for oil across the globe has dropped significantly, with people staying home and implementing social distancing practices in hopes of avoiding the spread of the virus that causes COVID-19.

“A couple of Texas producers have inquired into the feasibility of the Railroad Commission prorationing production,” said Travis McCormick, chief of staff to commission Chairman Wayne Christian. “No formal change in policy has been proposed. Staff is looking into what that change in policy would entail from a practical standpoint at the agency.”

The Wall Street Journal first reported the producers’ request and the commission’s response Thursday.

Jason Modglin, director of public affairs for Commissioner Christi Craddick, said the agency has not yet received a formal request to curtail production.

“We haven’t really been able to look at it and see: 1) how we would do it and, 2) how it would benefit or help Texas producers,” Modglin said.

Ed Hirs, an energy economist at the University of Houston, said a reduction in oil production in Texas is not likely.

“It’s got to be some predators looking to just slam some people into bankruptcy in a heartbeat,” Hirs said. “None of that would make a difference in the overall market.”

There would be “some natural concerns” among some in the industry to a dramatic oil production cut, including ensuring low-volume wells, those that produce no more than 15 barrels per day, are exempt from any cut, said economist Karr Ingham of the Texas Alliance of Energy Producers.

“But I certainly understand the thought process behind producers watching their industry collapse before their eyes in the state of Texas and wanting to do something about it,” Ingham said, adding that the Texas Alliance of Energy Producers has not yet formalized a position on this issue.

Since Texans began limiting how much they’re in public, many people have lost jobs or had their hours cut by businesses adapting to limited or shuttered operations. As the new coronavirus has spread across the planet, oil prices dropped from over $60 a barrel at the beginning of the year to about $25 a barrel Thursday. The economic double whammy of the public health crisis combined with the steep drop in oil prices has experts here unclear about how deeply COVID-19 will impact Texas’ economy.

Oil production revenues made up about 6.1% of the state’s tax revenues in 2018, according to the Texas comptroller’s office. But the industry helps power the state’s economy, which is likely to take more of a beating since Gov. Greg Abbott on Thursday ordered statewide closures of bars and restaurant dining rooms as health officials prepare for an exponential increase in the number of Texans testing positive.

At a virtual town hall Thursday night, Abbott said that prices are near where they were in 2016 and that the state needs to understand the “contours” of the pricing drop before addressing it.

According to the most recent figures for this fiscal year’s state budget, Texas collected $17.5 billion in sales taxes and $2.5 billion in oil taxes. Together, those figures make up about 75% of the $26.3 billion in taxes the state has collected since September. But those figures only run through February. They do not include figures from March, which is when the virus upended Texans’ daily lives, entire industries and the economy.

When asked for comment, a spokesperson for the Texas comptroller’s office referred to a March 9 statement from Comptroller Glenn Hegar, which said the agency “is monitoring weakness in financial markets” and is “tracking revenues carefully since markets began to soften.

“Certainly, Texas has exposure if oil prices remain depressed for a sustained period of time, and slowdowns in economic activity related to the COVID-19 outbreak could also be a headwind,” Hegar said in the statement. “We are still only six months into the current budget cycle, however, and it is too early to tell with certainty how current fluctuations will impact long-term economic performance and state revenues.”


Disclosure: The Texas Alliance of Energy Producers, the Texas Comptroller of Public Accounts and the University of Houston have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune’s journalism. Find a complete list of them here.