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Coronavirus in Oklahoma: Oklahoma Energy Producers Alliance asks Corporation Commission for oil production cuts

Tanks for crude oil at Cushing. [OKLAHOMAN ARCHIVES]
Tanks for crude oil at Cushing. [OKLAHOMAN ARCHIVES]

The Oklahoma Corporation Commission was asked Friday to require operators curtail oil production in the state until markets improve.

The Oklahoma Energy Producers Alliance and companies owned by some of its members filed the request.

“We are fighting for our families and our employees,” said David Little, president of the OEPA and the president of Kingery Energy Co. in Ardmore, a third-generation, family-owned company established in the mid 1940s.

Little said the organization represents more than 500 members who own companies that mostly operate older, vertical wells that typically produce a dozen or less barrels of oil daily.

Little said Friday those wells produce about 47% of the state’s daily crude production.

“We want to keep this industry alive and well, and it is struggling today,” he said.

The application filed by the OEPA asserts the price of West Texas Intermediate crude oil has fallen from about $60 to about $20 in recent months because of actions taken by Saudi Arabia and Russia to undercut market prices so that they could reclaim market shares lost in recent years to U.S. producers.

It also attributes lower prices to softened demand for both crude and refined products created by the ongoing coronavirus pandemic.

The application argues there is no correlation in Oklahoma between what producers in the state are getting (usually discounted, compared to WTI pricing) and its actual value, and further asserts the cost to recover crude oil for many operators exceeds current value, which statutorily constitutes waste under Oklahoma law.

Crude oil waste, the application states, adversely impacts royalty owners, working interest owners, the operators themselves and Oklahoma, which gets much of its revenue from gross production taxes and is the state’s largest mineral owner.

The organization and its supporting companies ask in their application that the commission adjust, modify, amend, set or establish allowables for Oklahoma crude oil production or to take other steps it deems appropriate to prevent its waste.

If commissioners were to fully grant the OEPA's request, it is at least possible that many independent producers who operate older wells could continue to produce because their costs to do so are low, while others that drill and complete expensive horizontal wells that have high rates of front-loaded production would be forced to shelve their plans.

“The Corporation Commission has … the duty and obligation to prevent the waste of Oklahoma crude oil and prevent it from being taken and sold below its actual value,” its petition states.

Another company also filed an application with the commission on Friday seeking a declaration that oil production in Oklahoma under current existing conditions “may” constitute economic waste, in some circumstances.

That petition, filed by LPD Energy Co. of Tulsa, asks the commission to issue an interim order “to assist in the prevention of waste and optimize production, which provides that operators may shut-in or curtail oil production from wells where the operator deems such action necessary in the current abnormal and volatile oil pricing environment.”

The filings came after some Texas operators asked that the Texas Railroad Commission consider similar requests.

On Thursday, the Organization of the Petroleum Exporting Countries and Russia pledged cutting production in May and June by 10 million barrels daily, provided that other countries including Mexico and the U.S. also agree to cuts.

President Donald Trump, who was expected to discuss the issue Friday with other global leaders, stated the same day during a news conference that Mexico agreed to make some cuts and that the U.S. would help its neighbor by cutting its production, too.

However, Trump has little authority in controlling oil production outside of wells drilled on federal lands, given that issue historically has been overseen by state regulators.

Pledged cuts may not have a positive impact on pricing. Many analysts believe more oil will be produced than what is needed, even if they are implemented.

Not all operators believe government ordered production cuts are needed.

David D. Le Norman, founder and managing partner of Reign Capital Holdings and chairman of the Petroleum Alliance of Oklahoma, wrote an op-ed for a local publication also partially published on his company’s website that states the market can take care of itself.

Le Norman wrote he expects production within the state to begin to drop rapidly as fewer horizontal wells are drilled and completed.

While he described the supply war launched by Saudi Arabia and Russia and the COVID-19 crisis “a double black swan event” leading to a massive oversupply of crude oil and creating a challenge for the nation’s national security, he wrote that production cuts called for by the OEPA are desperate.

The organization’s request, he wrote, discounts that operators may choose even now to drill and complete wells to protect their leases, drainage boundaries and infrastructure-related capital investments.

“The Oklahoma Corporation Commission should remain diligent and monitor the macro environment, but should not involve itself in picking winners at the expense of other industry participants,” he wrote.

“It should also not deem product prices either wasteful or imperative for an operator’s criteria to determine its development plans.”

Jack Money

Jack Money has worked for The Oklahoman for more than 20 years. During that time, he has worked for the paper’s city, state, metro and business news desks, including serving for a while as an assistant city editor. Money has won state and regional... Read more ›

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