Global oil producers are discussing an unprecedented cut in output to face up to the collapse in demand caused by the coronavirus pandemic.
President Donald Trump has already committed to cutting 250,000 barrels per day of US oil output on behalf of Mexico, and the world’s largest producer is expected to pledge a much larger cut in negotiations with the Group of 20 most advanced economies, which are currently under way.
This raises the question of whether the government actually has the legal power to enforce a production cut by its industry. Members of the Organization of the Petroleum Exporting Countries (OPEC) can instruct their state companies to reduce output, and where the oil is produced by private companies, they generally have clauses in their production agreements allowing the government to impose cuts.
In the United States, the situation is significantly more fragmented. The federal government has jurisdiction over offshore oil production in the Gulf of Mexico, while independent state commissions regulate the onshore industry in most oil producing states.
Most of these commissions have powers to regulate oil production in their states, in particular through their powers to prevent waste and pollution, according to industry analysts.
The Railroad Commission of Texas is the largest of these regulators, overseeing 40 percent of US oil and gas production. According to its statutes, it “regulates the exploration, production, and transportation of oil and natural gas in Texas. Its statutory role is to prevent waste of the state’s natural resources, to protect the correlative rights of different interest owners, to prevent pollution, and to provide safety in matters such as hydrogen sulfide.”
“Each month the commission assigns production allowables on oil wells and gas wells, receives operators’ production reports on oil leases and gas wells, and audits the oil disposition path to ensure production did not exceed allowables. Allowables are assigned according to factors such as tested well capability, reservoir mechanics, market demand for production, and past production,” the statutes read.
The commission used these powers to limit oil production from the 1920s until 1973, according to commission chairman Wayne Christian. It could order a reduction in oil output on the grounds of avoiding waste, as it has done in the past when oil prices have fallen below the cost of production, according to industry analysts. It can also impose limits on the flaring of natural gas, which is a by-product of producing oil production, which would have the effect of capping oil output.
The Railroad Commission of Texas has applauded efforts by President Trump to broker a global accord to cut output and has announced an open meeting with companies on Tuesday, April 14th to discuss the issue of “prorationing,” or regulating oil output.
“The double punch of demand drops associated with COVID-19 and an international price war has been devastating to Texas producers and the hundreds of thousands of Texans they employ,” said chairman Wayne Christian. “It is essential for us to stabilize the market quickly to ensure the future survival of the industry.”
Other major oil-producing states such as Oklahoma, New Mexico and North Dakota also have the same commissions.
However, some analysts do not expect the US to take this approach.
“I don’t expect it to work like that,” said Roger Diwan, Vice President of IHS Markit. “They are just forecasting a decline in production because of low prices,” he added.
The US Energy Information Administration (EIA) on April 7 revised its forecast for US oil production down to 11.8 million barrels per day (bpd) this year, a fall of 500,000 bpd from 2019. In 2021, the EIA expects US crude production to decline further by 700,000 bpd.
“If realized, the 2020 production decline would mark the first annual decline since 2016,” it said in its latest short-term energy outlook.
In the oil cut talks, negotiators have been using much larger estimates of the decline in US output.
“We see US projections of declining oil production by 1.7 million bpd this year,” Kirill Dmitriyev, the head of Russia’s sovereign wealth fund, said Thursday, echoing US government projections released Tuesday about the drop in US output between the first and fourth quarters of 2020. “We believe it can even be higher,” he added.