Shale Drillers Warming to a Once-Unthinkable Idea: a Cap on Oil


(Bloomberg) -- Some old-guard Texas oil drillers are urging state regulators to clamp down on crude production to halt a price collapse more severe than any of them have ever lived through.

The largest U.S. oil-producing state hasn't restricted crude production in almost 50 years but a growing chorus of explorers and related industries are advocating just such a move. The Texas Railroad Commission that has overseen the state's industry for more than a century is scheduled to discuss so-called pro-rationing on April 14.

Closely held Texland Petroleum LP has already begun to reduce output as buyers cancel contracts and prices crater. By May 1, President Jim Wilkes expects every one of his 1,211 wells to shut down. With tens of millions of people avoiding travel and workplaces, fuel demand is collapsing and prompting refiners to slash oil processing. That, in turn, is cutting demand for crude and creating a glut.

"In all previous oil price downturns, we have always managed to sell our oil production and maintain operations at close to a breakeven level," Wilkes wrote in a letter to the commission. "This COVID-19 crisis has presented us with issues that we have never faced before."

Kirk Edwards, an industry veteran and chief executive officer of Latigo Petroleum LLC, estimates that within a month the oversupply will be so massive that Permian Basin drillers will no longer be able to send crude to refineries in the Houston area and Louisiana.

"Until two weeks ago, I was 100% against the use of proration in Texas to remedy these kinds of problems," Edwards said in a letter to the agency. The commission and the Trump administration need to "step up to the plate and save Texas and the American energy industry right now, before it is too late."

The appeals for supply caps highlights a growing schism between small, independent explorers and international behemoths like Exxon Mobil Corp. that oppose government intervention. In neighboring Oklahoma, oil-industry trade groups are at loggerheads over whether state regulators should step in.

Houston-based Hibernia Capital Resources III told the commission it will suspend drilling and other investments in Texas oil and natural gas assets "over the next few weeks" if something isn't done to arrest the freefall.

"We can't continue to develop and produce our hydrocarbons at these prices," CEO P. Embry Canterbury said in a letter to the commission. "The development and production of our assets at these current prices is a waste of our capital and a waste of the finite resource."

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