The Nickel Report

In the midst of an oil market experiencing an extraordinary downturn but citing a need for further review and coordination with other states and the federal government, the Railroad Commission of Texas (RRC) delayed a vote on oil production cuts at an open meeting held yesterday.[i] As previously reported, the RRC held a ten-hour long meeting on the issue of production cuts last week, hearing from more than 50 witnesses with wide-ranging opinions on the merits of moving forward with proration, a remedy that has not been employed since the 1970s.

Although no decision on proration was made, the establishment of a Blue Ribbon Task Force for Oil Economic Recovery (Task Force) was announced. The Task Force will be comprised of various Texas oil and gas trade associations charged with expeditiously exploring options that can be undertaken at the state level to assist operators and save jobs.[ii] During the meeting, a number of initiatives undertaken to date that provide relief to oil and gas operators were also highlighted, including those involving extensions of deadlines for various requirements and the consideration of enforcement discretion under certain circumstances. While discussing whether to prorate production, each of the three commissioners placed emphasis on different aspects of the overall issue.

Commissioner Christi Craddick expressed her reservations with moving forward with a vote. She underscored the need for RRC staff to consult with the Office of the Attorney General in light of the likely litigation that would follow any RRC action and the need to consider coordinated action with other states, the federal government and other countries, including Canada and Mexico. Specifically, she indicated that, while not an exhaustive list, she was interested in obtaining legal advice from RRC staff, in conjunction with the Office of the Attorney General, regarding the following concerns: (1) the legality of moving forward with proration on a state-wide basis; (2) the need for an evidentiary hearing; (3) the effect of Administrative Procedure Act requirements on proration hearings; (4) the establishment of exemptions such as those for marginal wells; and (5) the need for a data call to inform decision-making. Thus, to a significant extent, Commissioner Craddick’s remarks focused on the legal grounds for the RRC to take action.

Stating that any delay was itself a choice, Commissioner Ryan Sitton pressed for a vote and set forth potential criteria for proration. His proposed plan would provide that Texas producers would prorate production of one million barrels per day. In addition, his proposal for proration would: (1) begin in June of 2020; (2) be contingent on other states and nations as well as OPEC ordering production cuts of an additional four million barrels per day; (3) apply to Texas producers generating over 1,000 barrels per day; (4) be based on fourth quarter 2019 production levels; (5) function as an across-the-board cut of 20 percent by operator (rather than by lease); (6) serve as a temporary measure that would be reevaluated on at least a monthly basis; and (7) be flexible but also include clear enforcement measures. While Commissioner Sitton indicated that he was ready to vote on proration, neither of the other two commissioners were willing to take up a vote at that time. He indicated that he would have his staff prepare an order for a vote at the next open meeting.

Chairman Wayne Christian echoed the concerns expressed by Commissioner Craddick regarding legal implications of RRC action, but he also focused his attention on the previously mentioned Task Force and the need for further coordination. Chairman Christian indicated that he has been working with, and will continue to coordinate closely with, other states, including North Dakota and Oklahoma, as well as members of the Texas Congressional delegation on potential solutions. It is now expected that the RRC will take up the proration issue at its open meeting on May 5, 2020.

As Texas (and other state) regulators continue to focus significant attention on options for oil and gas market stabilization, the federal government is also taking action. Yesterday, President Trump directed the Secretary of Energy and the Secretary of the Treasury to develop a plan to provide for economic relief to the oil and gas industry. We will continue to closely monitor and report on developments. For more information on these developments, please contact Myles Reynolds at mreynolds@HuntonAK.com or Lydia G. Gromatzky at lydiagromatzky@HuntonAK.com.

[i] The archived RRC webcast is available for viewing (no longer available).

[ii] Members of the Task Force include the Texas Oil & Gas Association, the Texas Alliance of Energy Producers, the Texas Independent Producers and Royalty Owners Association, the Permian Basin Petroleum Association, the Panhandle Producers and Royalty Owners Association, and the Texas Pipeline Association.