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Point of View: Lessons learned from state’s intervention in natural gas markets

This past year Oklahoma officials pursued a unique experiment — with the state Corporation Commission reducing how much natural gas would be produced from a well, called “natural gas production prorationing.” The intervention has been costly for the state and suggests that governments should be more cautious when considering actions that could affect markets.

Last year, Oklahoma was the only state that imposed more stringent natural gas production limits. The state also increased its efforts to enforce those rules in response to market conditions associated with the COVID-19 recession — that is, strong supply, weak demand and low prices.

It’s looked like a mistake. In 2019, Oklahoma produced 8.7 billion cubic feet per day (bcf/d) of natural gas marketed production, which was 8.7% of the U.S. total of 100 bcf/d, per the U.S. Energy Information Administration (EIA). Both were record highs.

By December 2020 (latest EIA data), Oklahoma’s production dropped by 15.9% year-on-year to 7.3 bcf/d, or 7.3% of the U.S. total. That was the largest percentage decrease and loss of market share by a major natural gas-producing state.

Moreover, Oklahoma severance tax collections fell by $121.3 million or 54% year-on-year in the third quarter of 2020 (latest), per the U.S. Census Bureau.

Recent Oklahoma natural gas prices have been insufficient to compensate for the incremental cost of pipeline transportation to Gulf Coast markets. In turn, this suggests that Oklahoma consumers recently paid relatively more than they have historically, and as the state’s production has fallen (and there is less gas available to export other states) Oklahoma’s interstate natural gas deliveries could come under additional pressure.

During extreme winter weather like that of mid-February, natural gas proved to be essential, and the Commission temporarily waived production prorationing. In fact, revised EIA data showed record-high U.S. natural gas consumption of 123.3 bcf/d for the week of Feb. 11-17 — the highest natural gas deliverability on record.

While we do not yet know how much Oklahoma’s production may have increased with prorationing waived, we do know that nationwide natural gas production bounced back over the following week.

The current reality is that the stakes for Oklahoma couldn’t be higher for the state to participate in an economic recovery and compete in U.S. and global natural gas markets going forward.

Dean Foreman is chief economist with the American Petroleum Institute.