Host: Radio.com, we'll begin momentarily.
Thank you- -: I will be moderating
for today's open meeting.
Just a few quick reminders, we kindly remind speakers
to be ready to appear two speakers ahead of you,
and to please respect the three-minute time limit,
given to speak.
There will be five to 20-minute breaks,
given at different intervals of the meeting,
where we will pause the video,
and return at the appropriate time to reconvene.
If you experience technical difficulty,
or do not appear when called upon,
please send an email to rrcconference@rrc.texas.gov,
with your name, phone number,
and we will have someone assist you
with further instructions.
The Commission does reserve the right to remove
any audio or video sharing capabilities
for any person engaging
in disorderly conduct while speaking.
But I am more than confident in our speakers
that we will not have to do that today.
With that said, Chairman Christian,
if you would please start the meeting.
-: This is Chairman Christian.
This meeting of the Railroad Commission of Texas
will come to order, to consider matters
which have been duly posted
with Secretary of State for April 14, 2020.
The Commission will consider the items on the agenda
as posted on the agenda, and Commissioner Craddick,
would you like to make an opening statement?
Callie: You'll need to unmute, Commissioner Craddick.
-: Why messed up when we're just started.
Good morning and thank you, and thank you Chairman,
for allowing me to speak this morning.
Real quickly I thought I'd start by thanking staff
for getting us up and going,
hopefully we'll stay up and going and I have no doubt.
And also thanking the staff for continuing
to work under these unprecedented times.
I think we've got a lot of great staff,
they're doing great job from across this state,
and most of them from home, and we continue to do our job,
which I think has been really important.
The second person I wanna thank is frankly, the President.
For understanding and appreciating
that this industry is really, really important,
not just to this state, but across the world,
and for what, how he's been specifically engaged
in the oil and gas industry and helping
with the OPEC negotiations for the last several weeks,
and we are moving forward I think in a good way
on the international front.
And then look, this here is really important
to all of us, I think.
We wanna continue this discussion for Texas,
and so I wanna thank everybody who is sending comments
and also everybody who is on today,
and is giving us some good feedback,
I have a lot of questions.
So first I wanna say, I understand
that the statute prohibits this Commission
from adopting an order, curtailing marginal wells,
as well as discovery wells up to a certain amount.
So I'm not listening for issues about that necessarily.
I'm gonna be listening for proposed solutions,
about how the Commission will utilize existing resources
to implement, monitor and rescind an order timely,
and I want to hear how this will help
or hinder all Texas producers.
And so I look forward to all the information
we'll get and the testimony we'll get today,
and thank you, Mr. Chairman for calling the meeting.
-: Thank you Commissioner.
Commissioner Sitton, would you like to make any remarks?
-: I would, thank you, Chairman,
and also thank you, Commissioner Craddick,
I thought you put that very, very well.
This has been an interesting time
not just in our industry, but around the world.
I think it's the first time, certainly in modern history,
but as far back as the last hundred years
that we, not just our nation, and but really our people,
I mean the people of the world that face
such a common and global threat.
And so to watch people in all areas, industries,
countries figure out how to navigate this,
it has been a special thing to watch, and I applaud
both Chairman Christian and Commissioner Craddick
for our actions to try to figure out not only
how to help our staff and support them
and dealing with all the challenges working from home,
but also looking at options to help stabilize things
in this industry, which is so vital to Texas.
Since I've been in office, I've always felt like
one of the charges that the public puts in us is,
that look, affordable, reliable energy is good
for everybody in the United States.
It's good for the state of Texas.
And so as we look at this,
I think that always is in the back of my mind.
All that said, what Commissioner Craddick opened up with,
talking about what statute says, this is a fairly,
I feel like it's a fairly data-intensive exercise.
Good discussion as we listen to what people see,
what data they're seeing.
As I ask these three questions, at least for myself:
Is there a waste happening?
Is that waste tied to an overproduction
in excess of reasonable demand?
And then if the Railroad Commission was to prorate,
how would it address those two things, and would
it make a positive impact in terms of preventing waste?
And that's the data I'm hoping to see today,
so I'll probably ask those same series of questions,
over and over, and like the Chairman
and like Commissioner Craddick, I'm really looking forward
to the discussion today.
Thank you everyone who has prepared remarks
and has come prepared to talk through this with us.
-: Thank you Commissioner, I appreciate that.
I wanna thank everybody on my part
for taking time to join us.
It says a lot for the citizens of Texas
and for this industry that we've had a tremendous
amount of response to having this invitation to participate.
And we are honored and appreciate everybody
that is participating today.
Those that have just written in remarks or taking a stand,
it's important for people to know
that the Railroad Commission is listening during this time
of unprecedented problems in OPEC.
Who would have thought a month ago
we'd be facing this type of dilemma?
As this virus, wreaks havoc upon the healthcare system,
it's done additional, tremendous harm to our oil
and gas industry as all are aware of.
I'd like to start by saying, I think President Trump,
as did the Commissioner Craddick and Commissioner Sitton,
that he's done a job of standing up for oil and gas,
and I appreciate him, his administration,
the folks with him, but I also also thank,
the phone calls that he's arranged for myself,
and I'm sure that other Commissioners,
with the Department of Energy, the Department of State,
and it's been quite an inspiring time to be involved
in a conversation worldwide as a significance,
and understand the power of the state of Texas,
the industry and the Railroad Commission
has in this situation.
It was interesting to read an article this morning
that the Railroad Commission of Texas
has the power to lend oil production,
but the President does not.
And that's kind of a sobering responsibility
we find ourselves holding today.
I'd like to thank our Texas congressional delegation,
especially our senators.
It was inspiring to see the two senators
that showed up in the White House office
when the industry had the meeting, were Senator Cornyn
and Senator Cruz, they were both there from our state,
representing oil and gas in that meeting
that President Trump held.
I appreciate everyone's patience that the Commission
has put this meeting together.
Our staff at the Commission is what I always say,
the value of the Texas Railroad Commission,
as has been posted the most respected regulatory agency
on planet earth, is not necessarily
the elected Commissioners through the years.
It's the hundreds of employees across the state of Texas,
that make the Railroad Commission of Texas,
respected as this.
Much like it is in our nation's best interest
to manufacture consumer goods, to protect ourselves
from foreign entities that may own the rights to,
we found our pharmaceuticals
that I think our Congress administration
is now very concerned about.
And I thank luck so is this discovery and this oil
that we have found and natural gas and minerals
that God has blessed Texas with.
And I think it's very important that we
and the Federal Government understand,
we do not want a foreign entity controlling the production
of oil and gas from the United States,
and especially do not want that in Texas in times ahead.
So I believe this is a national security issue,
much like pharmaceuticals have been planned.
I'll state in my initial statement on this issue,
and despite my reservations on this limiting,
open to discussion, and I think all of us
as Commissioners have our individual concerns,
and I wanna join Commissioner Sitton
in saying how much I appreciate, and I will make it clear,
that when I say something in public,
or through an article or I'll do something,
it is totally independent of the other two Commissioners,
and it's independent of the Railroad Commission of Texas.
It's only when the three of us, with equal power,
come together and make a decision
that the Railroad Commission has spoken.
So for the press and all who here,
perhaps me make statements, that's Wayne's opinion.
And until these three come together,
we share equal authority in this agency,
I'm only chairman by the gift and grace
of the other two Commissioners that have allowed it.
And so that concludes my opening statement,
and are there any more remarks before we begin testimonies?
Okay, hearing none,
Callie would you please call up the first witness?
-: Yes, thank you.
This is Callie Farad, moderator for the open meeting.
Scott Sheffield, with Pioneer Natural Resources,
you are invited to speak.
-: Hello, this is Chairman Christian.
Before you begin your testimony, would you please state
for the record, your name, who you represent,
and whether you're testifying for,
against or neutral on prorating?
(participant speaks faintly)
Yes, I mean, Sheffield (voice drowned out)
This is Chairman Christian.
Before you speak, your testimony,
would you please state your name, who you represent
and whether you are testifying
for, against, or neutral on prorating.
-: Thank you, good morning (voice drowns out).
I'm Scott Sheffield, CEO and President
of Pioneer Natural Resources, and for proration.
I'll go and begin my remarks.
Chairman Christian, Commissioner Craddick,
and Commissioner Sitton, hope everyone is well
in your families and your staffs are well.
Also thank you for doing something
about having a hearing for the first time since 1973,
to consider proration.
(indistinct) towards the OPEC from 1930 to 1973,
in prorating and setting the price of oil.
The price of oil was set between two and $3 a barrel.
As an Ex-reservoir engineer, I'd rather have stable prices
with you, that is prorated, than what I have lived with
in my entire career, 35 years, as CEO.
As you've seen on slide four, tracking the price of oil,
over the last 40 years.
OPEC took over in the seventies,
and been prorating since 1973.
Look at the price chart on slide number four.
It has been an economic disaster,
especially the last 10 years.
Our industry has created so much economic waste,
that nobody would buy our stock, or own our stocks.
We have gone from 15% of the S&P 500,
to 2.5% of the S&P 500.
We were at 28% in the 1980s.
Exxon has gone from 500 billion of market cap,
to 130 the last few years, recently.
Nobody would want to give capital,
because we have all destroyed capital
and created economic waste.
Only the Majors and EOG have raised capital
in the last five weeks, 50 billion of debt.
The equity and debt markets are closed, to everybody else.
I have read most of the pros and cons against proration,
and will spend most of my time on slide number two.
I love the (indistinct) paper by IEEFA,
which I'm not familiar with written by Tom Sanzillo,
who will present later.
I circulated that paper to our board
who thought it was very thought-provoking.
The Railroad Commission is compelled to act
when production is an excess of reasonable market demand.
Secondly, they say if the Texas Railroad Commission
does not regulate longterm, we will disappear
as an industry like the coal industry.
For those that do not know, the entire market cap
of coal is equal to Pioneer's market cap.
Callie: Mr. Sheffield, the time has expired.
Commissioners, would you like to continue
to hear the presentation,
or are there any questions at this time?
Scott: I still have about two more minutes.
Chairman: I'd like to hear the rest of this two minutes,
if that's okay.
-: Please continue, Mr. Sheffield.
-: Our goal, when we started five weeks ago,
we thought it would be part of a global solution
to reduce supply and reduction
of 25 to 30 million barrel demand loss.
We've been dependent on OPEC and OPEC-plus since 2016,
since we've added 4 million barrels a day,
three of it from the Permian since 2016.
We have stolen market share from OPEC-plus.
Again, we have invested billions in the last four years.
Most of those wells now are considered economic waste.
The return on capital employee for our industry last year,
averaged five to 6%,
with only two companies exceeding 10%; Pioneer and EOG.
The Majors averaged five to 6%.
This is not efficient, but against economic waste.
All other industries have averaged 10% plus.
The President has entered into a historic deal
with OPEC-plus, which we support.
But oil prices did not move, in fact, they dropped about 8%.
They're down to $21 today.
Last week, the Delaware was getting $3
in the Midland Basin was getting $10.
The cuts were 10 million barrels a day, we need more.
Texas can lead in getting a real G-20 cut,
a 5 million barrels a day.
Not a fake 5 million barrels a day.
Oklahoma, it looks like they're moving forward
on Commission hearings.
North Dakota is reducing flaring to reduce production.
Secondly, our storage is filling to the brim.
Pioneer had called our 10 largest producers
of crude oil about two weeks ago.
We're going to be full in Cushing in the next four
to five weeks, and we'll be full all across the state.
No one that is saying disputes this.
Small producers and medium producers without a mechanism
to transport the crude oil to the Gulf Coast
or Cushing will be totally disadvantaged.
If you read the article about Texland
in the "Wall Street Journal", a great article,
"They will be curtailed 75 to a hundred percent,
is that fair?"
Storage is full and the Fujairah and Saldanha,
in the Middle East and South Africa.
Cushing again, will be full four weeks.
Storage does not have to be totally full in the world,
but will create huge bottlenecks.
It does not take a rocket science to do the math.
30 million barrels a day of loss
minus 10 million barrels a day, if OPEC cuts 20 million.
20 times 30, 600 million.
That's 1.2 billion of filling up storage
within 30 to 60 days.
As I understand, under the law, waste occurs
when production of oil is in excess
of reasonable market demand.
Waste is occurring today, and expected to continue,
and the Texas Railroad Commission is obligated by law,
to act to prevent or lessen the waste.
Is waste occurring? Obviously, yes.
Callie: We've hit the five-minute mark.
Commissioners, would you like
to continue hearing the presentation,
or are there any questions at this time?
-: How about one more minute, please?
-: Please extend your statement.
Callie: Please continue, Mr. Sheffield.
-: Yes, is waste occurring? Yes.
No one disputes that production in Texas
and globally vastly exceeds demand.
Certainly none of those who submitted comments
to the Commission disagree.
Witnesses here today, have strongly different views
about whether proration is the remedy, and that's the issue.
But no one disputed the fact that waste is occurring.
The Commission really does not have any wiggle room
to do nothing in the unprecedented,
disastrous circumstances of today.
Now I'm gonna go to the cons.
Free market; if anyone thinks we really have a free market,
please look at slide four.
You have to be joking.
After 35 years as a CEO, I've never seen a free market.
Me and the company speaking after me
are asking for government debt bailouts,
tariffs, carbon tax credits, is that free market?
Survival of the fittest, deficient operators.
Those companies could care less
about the small and medium producers.
Most of the companies using this have the worst track record
in shareholder-returns and return on capital employed.
They are not efficient and causing economic waste.
Government intervention; people don't really admit,
but I had several calls from CEOs.
They do not want the Texas Railroad Commission
to running their business.
They're afraid of OPEC continuing, that's another cartel.
EIA data recently shows 2 million barrels a day declined.
800,000 taken off of growth, it's misleading.
So we're only dropping from 12-three to 11-eight.
They're also using 900,000 barrels a day, at stripper wells.
Pioneer has only removed 5,000 barrels a day
in 30% of our marginal wells.
Those stripper wells will come back,
When the oil is back to 25 to 30.
Only 500,000 barrels decline in 2021 from EIA data.
Also they released their productivity report.
It's showing the Permian is only dropping 76,000
from April to may.
So how do you solve the storage problem,
with Permian dropping?
Lastly, to preserved the industry,
I highly suggest the Texas Railroad Commission
begin to lead, learn, take action,
getting more involved in OPEC.
I had a chance to get to know several of the oil ministers
over the last several years,
both from Saudi Arabia and across the world.
I'm always amazed what work Ken Heinz did.
It's easy to prorate and monitor.
We recommend that Texas reduce 1 million barrels a day,
for the month of May and be prepared to reduce again,
maybe cut to 10% in June.
I compare this to a crisis in 1986.
This is probably gonna be worse than 86.
Demand is not gonna be come roaring back.
I'm gonna conclude with the final comments,
we did have six comments about flaring.
So I wanna finish on that suggestion.
As a leader to reduce flaring in Texas,
I love the idea to shut-in everyone
in the monthly rise state report that is above 2%.
It'll be a home run for
the three Texas Railroad Commissioners.
You can cut off, you can also reduce CO-two emissions.
I will stop there, we conclude my remarks.
Thank you for giving me more time.
Thank you.
-: Are there any other questions at this time?
-: I do, Mr. Chairman.
-: Mr. Sitton.
-: Mr. Sheffield, you talked about waste,
you have a lot of comments in here about waste.
One of our challenges I believe is to quantify that waste.
In other words, there's gonna be a lot of opinions
about waste today.
Can you quantify that waste for us?
-: Yes, Commissioner Sitton.
I'm gonna let Mark Berg answer that question.
-: Good morning Commissioner.
Just to quickly review what we mean by economic waste.
I just want to run through
our understanding of the definition.
Economic waste is production in excess of market demand,
and market demand is defined as,
what is needed for consumption plus storage.
Some have argued that
there's sufficient storage in this market.
Many of those are trade associations
who are seeking a certain objective in this hearing.
If you seek out the multiple market intelligence firms,
including two of whom are speaking today,
they would agree that market demand loss
from the COVID-19 virus is somewhere
in the range of 20 to 30 million barrels per day.
So at this rate, the world storage,
including the storage in the United States
will fill up sometime between May and July.
It can't possibly mean that the Railroad Commission,
must wait until all storage is completely consumed and gone,
before it prorates because that would make proration futile.
And the law is clear
that the Railroad Commission must prorate.
If you look at the legislative history,
Ernest Thompson testified in the early 19 hundreds
that it should be permissive that the Railroad Commission
could elect to prorate,
and our the legislature decided otherwise.
And they did that because they thought it was important
to preserve the critical resources of the state,
and not allow them to be wasted for political reasons.
So to get to your question, Commissioner,
you have to ask what good will it do?
And the best way I can answer that question
is to look at the behavior of all of our companies
over the last few weeks.
All of us united in the belief, in asking our president
to go to all of the international community,
and particular of the OPEC countries, and seek a compromise
between the Russians and the Saudis, to end a price war.
And we all applauded the cut in production that came
as a result of OPEC, of 9.7 million barrels per day.
So why did we do that?
We did that because it's constructive for pricing.
It reduces waste.
We didn't do that for any other purpose
than the simple laws of economics.
When you have an oversupplied market,
if you cut supply, it stabilizes improves prices.
The same will occur, if the Railroad Commission cuts.
The same will occur if other G-20 nations cut.
And so the way we look at it, if Texas cuts 20%,
as Scott suggests, the 1 million barrels per day
that would come out of the market for every month,
would create another 30 million barrels of storage,
which is equivalent to what we're all pointing
to as the SPR, for every month
that we prorate a million barrels per day.
Can you actually pinpoint the dollar amount per barrel
that it improves as a result of a cut and supply?
That's a very difficult thing to forecast,
but I go back to the fact that all of us sought cuts
from OPEC for the very reason that we thought
it would improve pricing and reduce waste.
-: Mr. Berg, if you would please state your name,
who you represent and whether you're for, against,
or just neutral on the issue.
-: Yes, Mr. Chairman, thank you.
I'm Mark Berg, Executive Vice President,
Pioneer Natural Resources, and I'm for proration.
-: Thank you, sir.
-: Mr. Chairman, I have a follow up question
that may I continue?
-: Certainly.
-: Mr. Berg, you said that how would...
You kinda jumped forward to my third question,
how would this help you?
You said if we cut 1 million barrels a day
of production in Texas, then that would result
in 30 million barrels
of additional storage created per month.
Can you unpack them, how would that prevent waste?
I think what's the crux of our discussion today is,
great there's new storage or more storage.
What will that do to actually prevent waste?
-: It has to be price-supportive, Commissioner.
That's the reason why all of us saw OPEC cuts,
that it supports pricing.
It takes only 80 barrels off the market,
it reduces oversupply in the market,
it reduces the overhang that will exist
until this COVID virus is brought under control,
and it supports prices.
It's all the reasons why over the last 40 years,
we all look to OPEC to control pricing by cutting supply.
Can you pinpoint an exact dollar amount?
That's a very hard thing to do.
I would ask you to seek out advice from some
of the independent market intelligence firms
who're speaking to you today.
It's very hard to predict
what sort of incremental price support you'll get.
But that's the reason why that's done.
It provides greater pricing support for the industry,
it also puts the industry in a position
where you don't have every single barrel
of available storage left,
and forcing in widespread shutting of oil production
in Texas, as a result of that.
And the waste that will occur as a result of that.
It also, in a situation, will avoid forcing prices
to the very lowest levels, so that producers
are forced to shut-in light of the fact
that the storage is going to be low.
And as the point I made earlier, it cannot possibly be
that the Railroad Commission has to wait
until every single barrel of storage is consumed,
before you prorate, because otherwise there's no point
in having a statute that you must prorate.
-: So Mr. Berg, is your point that you're making
on waste and proration is,
if one of the independent economics firms
that are presenting today, gives us a price differential
at current production and prorate production,
or at a excess capacity and full capacity
that that's the mechanism
by which we should calculate waste.
Is that the point you're getting to?
-: It's one mechanism,
but I would also point out Commissioner,
you don't have to calculate waste.
The statute doesn't say that the Railroad Commission
must calculate waste in order to prorate.
All you have to do is to determine that there is waste.
Ryan: But, I understand that-
-: And again, as it's defined, it's production
in excess of market demand, and it's that simple.
And as Scott pointed out, it cannot be that anyone
is arguing that we're producing in excess
of market demand in this situation.
The only question is, how much has demand dropped
as a result of this awful virus?
And there are some conflicting views on that,
but if you look at most of the market intelligence firms,
they are all in the range
of 20 to 30 million barrels per day
of demand loss associated with the virus.
-: Thank you, actually lead to my last question,
I think for Mr. Sheffield and Mr. Berg.
If the world is oversupplied,
20 to 30 million barrels per day,
which I've used the number you just gave,
how does...
Texas is producing 5 million barrels a day, give or take.
How does our proration bring balance to that market?
(Scott speaking faintly)
I can't hear Mr. Sheffield, can-
-: Is it unmuted now?
-: Oh, thank you.
-: Commissioner Sitton, in my view,
somewhere between 10 and 20 million barrels a day of cuts
is gonna cause the futures market
to start turning around green versus red.
I don't know what that number is; 15, 12, 13, 14.
But I thank the President, that he did a great deal
in getting the 10 million barrel day cut,
but what was missing is getting the G-20 countries,
Brazil, Canada, and the US to really create real cuts.
So if we cut a million,
is that gonna help Oklahoma get over the hump?
Is that gonna get out of North Dakota?
Is Canada gonna come back?
Saudi has already mentioned that they're gonna have
to probably cut some more.
So I'm guessing they're got a need another four
or five or 6 million barrels a day cut,
before you turn the futures market around
to where we see that oil will start moving to $30,
versus just today, we're getting $15.
Sitton: Why do you pick the number $30?
-: The breakeven cost of most independents today,
including finding costs, was published last week
by Rusty Braziel, it's about 25 to $26.
We need $30 to survive.
$20, you'll have 80% bankruptcies,
250,000 employees laid off.
$30 is what I call, we're crippled.
But at least the industry will survive,
waiting until the virus ends,
and demand picks up by the end of 2021.
Sitton: Okay.
(voices drowned in crosstalk)
-: Any more questions?
Ms. Craddick.
Callie: You'll need to unmute yourself,
Commissioner Craddick.
Try one more time.
-: Okay, sorry.
Technology is not my game some days.
All right.
So thank you all, and thanks all for testifying.
So I've got some just procedural questions.
Scott, you and I have talked a little bit
in the last couple of days about EIA.
So let me ask this question and whether you or Mark,
whoever wants to answer.
So y'all, didn't make a nomination,
but you're talking about 20%.
Is that the number you're kinda looking at generally,
if we decide to go down proration,
is that an appropriate number you think today?
-: Yes, I recommend 20% and then evaluated
every 30-day period, and be willing to cut it
to 10 the next month that things are improving,
could be loaned to cut to zero.
It all depends on how fast demand comes back,
and what happens to the storage.
-: Okay, 'cause it's kind of obviously moving.
So I just wanted to clarify what your number was.
So you and I both agree, I think that EIA never
has the greatest numbers.
So I've looked at Railroad Commission numbers,
we just put out January numbers in the past week about,
and so we're three months behind,
of what I think real time numbers.
So in January, we've already declined, from December
of last year, we've already declined, roughly 17%,
that companies had already begun production cuts.
Let's assume from January to today,
because we don't have good numbers,
EIA doesn't have good numbers, they don't exist yet.
We're a three month lag time.
Let's assume we're more than that.
If we're looking at proration, you're suggesting
we starting at may, what number do we start with?
Do we start with December numbers, with January numbers,
with May numbers, so we take into account
that people have already began to cut,
I guess is my question.
I just wanna know what our starting point is.
If you have an idea can you give us some direction?
I don't know the answer.
-: Yes, to give you an idea of what's gonna
happen first quarter
is that most producers probably are going
to report a significant increase in production.
I know that Pioneer is.
I can't get into it because we're a public company,
we haven't announced earnings.
So the amount of wells are being completed
in January, February, and March,
we're gonna report it in May and all the producers
had first quarter increased significantly
over fourth quarter '19.
My suggestion is use fourth quarter '19 data
because it's three months behind, there'll be less cut.
If you want to be more aggressive, use the first quarter.
But if you cut 20% off the first quarter,
it'll be a higher number
for all the producers versus fourth quarter in '19.
-: Okay, all right.
Well that gives me a starting point
because my question is what's my starting point.
And so because I don't know the answer to that.
That's one of our questions.
So if we started in December and say, we've got,
I'll get to that one because I've got somebody else
who says they've already begun to cut.
So do we take into account then,
that some people will have begun the cut.
There are some operators
that are unfilled as by written testimony.
We can take into account that
they've already begun doing those cuts,
or do we just start with the end of last year?
-: I'll use the "Wall Street Journal" article as an example.
Texland who's testifying later, I've never met the CEO
and the owner of Texland, but it's an interesting story.
So the reason they're cutting, 'cause they were providing,
their oil was being sold by a large producer I gather.
I will not comment on the name.
That that company told them
that we're not gonna take any oil.
And so they don't have firm transportation
to get their oil out.
And so that's an example of if you cut him 20%,
so he would go from 7,000 to 5,400 barrels a day,
5,600 barrels a day.
So at least he's selling 5,600.
And so he's being disadvantaged by the large,
integrated in the large companies, and the large purchases
because he doesn't have firm transportation.
So that's an example, Texland, is that
the reason they're cutting is they have to cut.
Harold Hamm, when he announced them in the journal
on the Wall Street last week, he had to cut
because the refiner says, "We can't take your oil."
It was a forced cut.
And so by prorating, it's about fairness in my opinion, too.
That's the last pitch, I try to stress.
I started with the company, as you all know,
as a fifth person, I've always cared about the small
and medium independents, to be fair.
-: And I appreciate the Chair,
I think that part of the conversation today
is about the small guys.
What I'm not sure that there's an agreement
that us versus forced cuts by industry
because the market's working are the same,
but we can argue that.
I got another question just though for you,
just cause I'm gonna ask you as an engineer.
'Cause if I'm not the engineer in the room.
I'm just trying to understand.
If we're shutting in wells or forcing cuts,
however they're happening, tell me what it could
or couldn't do to our fields and our reservoirs.
Can you explain just kind of, I wanna make sure
that we are not damaging reservoirs
in the short and/or long-term because that to me
is a way that we would have waste as well.
And so I'd like to understand that,
just to remember, I'm not the engineer,
so just kind of high level if you don't mind,
I'd appreciate just for understanding.
-: Yeah, sure Commissioner Craddick.
We have examples of wells that we have shut-in
for as long as six months, and brought them on,
and there's been no damage.
Since we have drilled the most horizontal wells
in the Permian Basin today, also we have the
most operated wells in the Permian Basin,
all in the Midland Basin.
We have some of the best examples,
we have seen, I've spent hours and hours with our staff,
talking about proration.
We think it's best to give the operator a choice.
You can do it on leases or you can shut-in.
You can do it by reducing the time clock,
on a horizontal well, you can run
it 18 hours a day versus 24 hours a day.
It's probably better to actually shut-in leases,
as long as you don't lose production.
If you shut in the leases,
at least you can reduce the operating expense.
And so you have more positive cashflow in that example,
but I think you should leave it up to each operator,
how they shut-in their 20%, but no damage at all.
-: So you're talking 20% across the board.
So you envisioned that we don't say 20% in a field,
it's just 20% across the board,
no matter where you are in the state?
Is that what's on your vision?
-: Yes, by the operator, and I think you should come up
with an exemption, maybe a thousand barrels a day
for small producers, maybe you raise that.
Anybody less than a thousand would be totally exempted.
-: Okay, all right.
And so let me ask you, what if you have the joint venture,
who gets the 20%?
Do you have a thought about that?
I'm just asking-
-: Yeah, we actually have a joint venture
with the Chinese in southern part of the Midland Basin.
And so it would be cut equally in that joint venture.
-: Okay, all right.
All right, so let me ask this, and Mark you kinda touched
on this too, so that's why kinda,
I don't care which one of you answer.
So you're only talking about doing it month-to-month.
In Mark's comments you say, under control,
whenever coronavirus is under control.
So how long do y'all anticipate, or do we know
if we decided to prorate, how long would we be doing this?
Would we be doing it till we get back to a hundred percent,
which is what we've done historically?
You need to be a hundred percent of availability
of what you produce in the market?
How long do you have any idea?
Can you give a timeframe for that?
I mean the end of the year, six months,
I mean, I don't know the answer.
-: Yes, I have a good example.
We had a board meeting yesterday.
One of our directors is on the board of one
of the largest carriers, airline carriers
in the United States.
They have two scenario plannings.
Nobody is wanna get into a tube
when we lift shelter-in-place.
Nobody wants to get into a steel tube with 250 people.
And so they planned two scenarios.
One scenario, if we get a treatment, not a vaccine,
but if we get a treatment that lowers the mortality rate,
down to the normal flow, they're assuming 50% capacity
by the end of this year for airlines.
Their second scenario is that no treatment comes.
Mortality rate is still high.
So the vaccine comes in 12 to 18 months.
They have 0% capacity or less than 10 until the end of 2021.
My personal opinion is, this is gonna go longer
than anybody expected.
It's back to the 1930s.
So I'm probably more pessimistic that you may have
to prorate longer, sad to say.
-: Okay.
All right, and then you all have talked about,
and I appreciate, you all want Texas to lead,
but what if other states don't do this?
And I think that's a concern
that we might all share sitting in this room.
Look, I know Oklahoma was talking about it
and they have a different process,
but to me we all have the same process to figure out
how we're all doing it or doing it pretty much the same.
If you disadvantage one state, in my mind then that's it.
And I appreciate Texas is big,
but we aren't the only one carrying the load
as far as the United States.
And so what if no other state does it,
are people just gonna, I mean, I get where your land is,
but others may just move across the border
to New Mexico, for instance.
If you're in the Permian, you might have an opportunity,
or to North Dakota,
or you might have some other opportunities.
I think that concerns me that
if we're the only ones doing it,
and decided to go down this road, then one,
have we really helped and moved the market enough
for our operators, and two, we disadvantaged ourselves
in a lot of respect?
-: Yes, thank you.
We have never recommended that Texas do it by itself.
We always recommend that'd be part of a global deal.
That global deal, as I said earlier is way too small.
I think there has to be a second cut.
Maybe you'll put it under consideration.
I think there's gonna have to be a second cut.
Maybe you'll participate in that second cut.
But the 5 million barrels a day that the G-20 promised,
based on capital reductions is not real.
And so that's why the market is turning down,
all is down 10% since this deal was cut.
And so it's not helping.
The market is saying, you need more cuts.
So maybe you put everything on hold and wait until,
see what Oklahoma does,
see what North Dakota does and see what the G-20 does.
See if Saudis comes back and ask for a second cut.
That's my recommendation.
-: Okay.
And then my kind of last question in this line, real quick.
If Saudi, look we're gonna have a challenge,
I think we've all talked about this,
about how we, as staff and process,
since we haven't done it since '73,
we're trying to figure it out.
So I'm asking some procedural and some other questions.
We don't know if we can manage it or figure out
how we're going to.
If somebody, and so that's gonna be a challenge for us
and we're trying to figure it out, but in your mind,
if somebody's cheating the system,
which we know OPEC does a bit,
so I'm not suggesting anybody is,
but if somebody's not giving us good numbers
or we catch them, do you anticipate we would put
some kind of penalty to those operators?
Do you have any idea how would that would work?
-: Yes, I did a research,
which the Commissioners did back in 1932 to 1973.
I know there was penalties, but I strongly suggest
that people need to adhere to it,
and that you would install some type of penalty.
-: Okay.
And then my last question as we go in,
you said we come back in monthly,
which I think is what we've historically done.
So I appreciate your recognizing that.
Historically we've always gone in and looked at,
purchasers have given us numbers,
and this is an operator-driven,
I'm not saying it's wrong or right.
It's just different than we've ever done,
and I know we're gonna get some other data.
Are there specific people that may not have commented
that we need to continue to reach out to,
to continue to get good data as for a purchasers
or other people?
That's how it's always been driven for us,
and I think Oklahoma as well, to my understanding.
I'm just trying to figure out process again for me.
Do you have any idea who you'd add?
-: Yeah, I mean market intelligence,
I mean there's various players,
I mean all the big producers.
I mean all the big gatherers in the state,
will have data, market intelligence groups.
There's a lot of groups out there.
So we can research
and make recommendations to you.
-: Okay, okay.
And then from your perspective,
and this may be Mark going to answer this question,
you've answered this question more than,
Scott you're doing a good job, you know the answers,
but do we need to be concerned about antitrust?
I get that, we as a regulator don't,
but is that a consideration you all are looking at?
'Cause I think that's something we don't,
I don't want anybody to get in that loop by the way.
So I just wondered on.
-: Yes, Commissioner, I think it's very clear-
-: Mark, will you unmute please?
-: Oh sorry.
-: That's okay.
-: Commissioner, I think it's very clear as producers,
we cannot agree to orchestrated cuts that's
in violation of the antitrust laws and we haven't
nor would we participate in anything like that.
That's the reason why we really appealed
to the Railroad Commission because we saw
that as the only legal and proper way to go
about the taking the over-supply off the market.
-: Okay, and then my last question,
just to clarify, just one more time,
Scott, you brought up flaring.
Is there anything else we ought to be looking
at besides just proration?
I mean, are there other tools that you
would suggest to us actively looking at as we're trying
to look at, say even the independents, frankly,
that might be helpful besides just proration?
I mean, you mentioned flaring, are there the things
that you have looked at?
-: Yeah, the only other issue on flaring,
I didn't get a chance to finish was that
it'll probably hurt the real small producers.
They don't have the cost, we'll probably need
some type of exemption on the small producers on flaring.
It turns out some of the biggest flarers
are some of the integrateds.
When you look at Rice Dean's list, they're way over 2%,
most of them in the Permian Basin.
And so it's the small producer.
I think the flaring has got to go down.
I wish I would get stricter in regard
to giving flaring permits.
Most producers say it's operational,
but the problem is as we had the hearing
and or the testimony that you came to,
I appreciate it Commissioner Craddick,
with Jason Bordoff, 'cause I think we learned a lot there,
but there was a mismatch between the producer,
the midstream company, the plant operator,
and then the downstream.
And that's one of the biggest problems.
But if you get stricter in that regard,
it'll force all three groups to talk in the future.
Craddick: Okay, thank you.
Thank you all for answering questions,
that's all I've got right now Mr. Chairman,
thank you very much.
-: Thank you, Commissioner.
A couple of questions I have before we go.
The market's already cut production.
Pipelines had to stop, we're about to peak storage.
So production, if I'm not mistaken is already down,
the market is decreasing this.
Why is it necessary that we have additional regulations
if the market in itself has already cut production,
or is limiting production?
-: Yes, Chairman example that I gave you is EIA data,
is only showing a very, very small drop
in the Permian Basin.
Permian Basin is your biggest culprit in regard to oil,
and the Eagle Ford has been on a decline,
even before the crisis hit.
And the Permian is still growing.
As I said earlier, we were growing first quarter.
Almost every producer I know was growing first quarter.
And so the reason you cut is basically to open up storage
and allow the, it's going to take too long
for what you're saying.
So I've stated publicly, at the current prices,
we're gonna lose 3 million barrels a day,
to 6 million barrels a day by the end of 2021.
The problem is, most of that occurs next year.
It doesn't occur in the third quarter,
it doesn't occur in the second quarter.
The reason is, most independents are hedged,
private and public.
There's $22 billion worth of hedges
in place by our industry.
So people are drilling through their hedges or completing
through their hedges.
And so what happens is that we're gonna fill up
and the price is gonna collapse even more.
We're gonna see a $3, a $10 oil until we solve the problem.
By you prorating, and we're gonna get that price rebound
at some point, along with others.
As I've stated, never do it by yourself.
Always do it with OPEC, OPEC-plus, or with the G-20,
or with other states.
But we're having a crisis
and it's gonna hit the next four weeks.
So what you're saying, the production cuts are happening,
but it's a very, very slow process.
We don't see much production decline ourselves
until towards the end of the year.
until you go into 2021.
So it's happening very, very slowly.
If you understand.
-: You've stated that we don't need to do this in a vacuum,
and we're 40% United States production.
Are you saying we should pass this contingent
upon agreement of other states or somebody else?
I mean, you mentioned we should not do it ourselves alone.
And Commissioner Craddick mentioned that in her question,
we are not by ourselves.
So I'm not understanding clearly how,
are you suggesting we do it contingent upon
some other states agreeing or somebody else?
-: The other states is not as critical.
I think what's more important is part of G-20,
a second round of OPEC cuts, which I think will happen.
Otherwise G-20 more enforced cuts.
As I mentioned, the 5 million barrels a day
is not a real cut.
Even Saudi has mentioned that, my sources tell me,
that they would like for the US to have real cuts.
It wasn't mandated in this 9.7 Agreement,
but they would like the US to have real cuts.
I'm saying the market's going to create the atmosphere
to have real cuts by all G-20 countries,
and probably another round of cuts by OPEC.
North Dakota, if they reduce flaring like
they're looking at, we'll get to 150,000 barrels a day,
maybe 140, 10% of 1.4 million barrels a day,
140,000 barrels a day.
Oklahoma is only producing 500,000 barrels a day.
If they agreed, if Commissioners agreed
to have their hearing, which is the next step,
there are only 500, so 10% there is 50,000.
So I wouldn't make it contingent just
on North Dakota or Oklahoma, but more a part
of the next round of cuts,
whether it's G-20, or OPEC or OPEC-plus.
-: Okay, so what I'm understanding is, you're saying we
should make this contingent upon a series of OPEC cuts.
Is that correct?
-: Including G-20.
So G-20, OPEC, OPEC-plus.
So you can go different directions.
You can say you'll take this testimony today with everybody,
after they testify under advisement.
But be prepared, do their homework,
do the research, be prepared to implement
at the moment's notice, if it looks like it's needed.
-: Okay, last question is,
what would you suggest the penalties, how would that work
from the Railroad Commission for those who overproduce
after we pass this agenda.
Do you have any suggestions?
Scott: Mark, you can-
-: Mr. Chairman, I think probably what would be best is,
Brian Sullivan could speak.
Brian has done a lot of research
on how this worked previously,
and how we would recommend that it be done.
Chairman: That that'd be good.
Please, is he available?
-: Yes.
-: If he would.
-: Apparently it can't be done on a moment's notice.
-: Then we'll ask him to give those records
to all three Commissioners, because recommendation on that-
-: In a nutshell, Mr. Chairman, it can be done
through a penalty system where basically
if there are barrels sold in excess of the prorated amount,
the producer would owe a premium in the form of a penalty,
and you would have to account for that.
It could be accounted for on a monthly basis
on production reports, from the producer to the Commission.
-: Thank you very much.
Are there any other questions?
If not, we thank you gentlemen for appearing today,
and I appreciate so much your concern for Texas
and for all those main workers that you have
and represent here in Texas and across the United States.
Thank you-
-: Thank you,
thank you, chairman. -: Thank you, chairman.
Callie: Okay, moving on to our next speaker.
Lee Tillman with Marathon Oil and Gas,
you are invited to speak.
-: Mr. Tillman if you would, please identify yourself,
who you're representing, whether you're for, against,
or just speaking neutral on this issue.
Callie: And it may take just a few minutes
to transfer here.
Okay Mr. Tillman, you're on,
and I see that you're muted at this time.
Are you able to unmute?
Okay, it looks like we can hear you now.
-: Mr. Tillman, are you there?
Callie should you just move to the next,
and come back to Mr. Tillman
when the electronics are worked out?
-: Or we can just talking amongst ourselves,
as apparently no one else wants to talk with us today.
-: (laughing) I think there's a few waiting.
So might work out, if we can work out
the problems with Mr. Tillman,
if he's not available this time,
can we move to the next speaker?
-: I'm just happy, I'm not the only one
that can't figure out how to work the technology,
I feel much better, so much better.
Callie: Yes, let's move on, thank you.
Mr. Tillman, just email the RRC conference email,
and they will assist you.
At this time we'll call Matt Gallagher with Parsley Energy.
You are invited to speak.
-: Mr. Gallagher, if you would please identify yourself,
who you represent and whether you're for, against,
or just speaking neutral on this subject.
Matt: Hello, this is Matt Gallagher.
Do you have video capabilities if needed?
I believe I have some slides.
I'm President, CEO of Parsley Energy,
and I am for proration, based on market demand.
-: Okay, please proceed.
Matt: Thank you, Chairman Christian,
Commissioner Craddick, and Commissioner Sitton,
for the time today.
We are living in unprecedented times.
This past month, we have seen a larger deviation
from historic supply/demand imbalances than ever before.
Ever!
Slide two, please.
In the United States and specifically in Texas,
our industry relies on stable regulatory frameworks
to operate successfully.
It is because of this balance between regulators
and free enterprise that our American oil and gas industry
has seen such great success.
Regulators, exercising lawful authority
during extraordinary conditions is not anti-free market.
Rather it is essential to stable free markets.
It's even called upon by the great economist Adam Smith.
In this case, it is utilizing a symphony of solutions
to ensure that we are able to return
to the conditions of pre-COVID-19 times.
The Texas Railroad Commission is instructed to act,
when excess production exists or is imminent.
According to the Texas Natural Resource Code,
already small operators are having purchasing contracts,
canceled and storage is nearing capacity.
Excess production exists, and is imminent.
Our President and the United States Congress injected
over $6 trillion into the economy,
when combining congressional stimulus
and Federal Reserve actions.
6 trillion, to provide stability
to our national free market system.
What we are talking about in this hearing
is not fiscal (indistinct), not a bail out,
but pragmatic, lawful and temporary regulatory action,
to help mitigate chaotic physical flow conditions,
caused by projected infrastructure limitations.
We have the forecasting and knowledge
that demand is impacted
by over 30 million barrels per day, worldwide.
OPEC-plus has agreed to a 9.7 million barrels per day cut.
That leaves 20 million barrels per day in surplus supply,
with growing concern about physical storage capacity.
A temporary proration of domestic production
is pragmatic and urgent, and shouldn't even be an argument.
We are asking our industry to take the reigns
in their own hands.
And for the regulatory body of the largest producing state,
in the largest producing country in the world,
to take their well-earned leadership position.
We saw dramatic interruptions to infrastructure capabilities
during Hurricane Harvey, a storm that came quickly
and left devastating results.
This pandemic storm has now been on our shores
for over a month.
There is no reason to run full-speed
into infrastructure gridlock.
It's the obligation of the regulatory bodies
to prevent waste.
The numbers are indisputable.
I'm approaching three minutes,
I have about two to three minutes more.
five, three, please.
Next let's talk about what is at that stake.
The domestic energy sector, and energy security is at stake.
Our industry changed the world geopolitical dynamic
in the last decade on the shoulders of the independents.
It was the small operators that fostered innovation.
And we need the small operators to remain.
That's why the proposed temporary proration
should exempt the smaller companies
on a volume measure basis.
Innovation does not come in isolation.
It comes from hundreds of operators and healthy partnership
with our oil-field service sector-
Callie: Mr. Gallagher, we have reached
the three minute timeline, Commissioners,
would you like to continue or do you have any questions?
-: I'd like to let him continue, please.
Callie: All right, please continue.
Matt: Thank you, Commissioner Sitton.
I've spoken to many domestic heads of service companies.
They're hanging on by a thread.
They've noted operators would drop them
on a dime's notice if their pricing is off slightly,
or if they take a public stance opposing a policy
of a customer.
Rystad projects that 100,000 jobs
are set to be cut in Texas alone.
The service sector has no oil production.
Their lifeblood is capital activity.
If we allow storage to hit tank-tops
while at full production, a return to base activity levels
will be extended by months.
The service sector will have no operating cashflow to get by
and will lay off hundreds of thousands more.
These jobs once lost, will not return to current levels.
That has been the case in the downturns of the eighties,
late nineties, and 2014 to 16.
Uniform temporary proration by operator
will enable a healthier condition for a broad swath
of the service sector and to maintain baseline activity
across the state of Texas,
instead of concentrating on a depleted pool of labor
into a few large service companies.
This will help innovation and competition,
when the effects of COVID-19 have eased,
and Texas is again needed as a leading supplier of crude.
Finally, I wanna look forward to bringing
the country back online.
With COVID-19, temporary social distancing efforts
have flattened the curve, mitigating the peak
of both new cases and deaths versus early expert modeling.
Similarly, temporary proration will help extend
the useful capacity of our domestic infrastructure.
It will especially help bring our industry back online,
months sooner versus a scenario where we produce
at maximum rates, until infrastructure gridlock is achieved.
Slide four, please.
If Texas takes no action, we find ourselves producing
at a national decline rates due to single digit pricing.
Texas could lose 2.5 million barrels per day,
in one year's time.
Or Texas takes a pragmatic leadership stance,
providing comfort for others across the country
and the globe to assess their volumes,
and adhere to their reductions.
Many other states are considering similar actions,
I encourage the Railroad Commission to take action,
cementing it's place
as the best-in-class industry regulators.
If Texas takes this step, others will follow.
In summary, Texas needs to temporarily prorate production
to provide the best chance
at stabilizing its strongest industry.
It's temporary proration, based off market demand,
gives clarity to the nearly 3,000 operators in Texas.
It will mitigate the rate at
which infrastructure hits maximum capacity,
smooth the chaotic responses to that situation,
slow our state's effective decline rate,
and accelerate the time until our industry
and our service sector partners
can return to base level activities.
Action taken by the Railroad Commission,
is one part of a symphony of solutions needed
to protect our workers and ensure a healthier industry
for the long run, and for Texas.
Thank you very much.
Chairman: Are there any questions members?
Commissioner Craddick.
-: I have a question, I heard you say that contracts
were being canceled.
Is it your position that it's our job
as a regulatory agency to be involved with contracts?
I wanna clarify that, 'cause I've heard that on both sides,
and that you think you should have firm contracts,
which I'm all for, but you're telling me contractor
are being canceled.
Could you clarify what is going on with that,
and if you think as a regulatory body,
it's our role to be involved
in your contracts and placement?
Matt: Yes, Commissioner, thank you for the question.
I personally do not believe that the Railroad Commission
should get involved in any business contractual situation.
I think the definition of waste and some
of the counter arguments is that there
is a fulsome market for all of Texas' crude.
And that's simply not the case,
through talks with many operators,
having their purchasing contracts canceled.
There's clearly not a market for their crude.
And it goes back to the definition
and the regulatory action when waste occurs.
So I think each operator will have to live
with the consequences of their contracts,
and have those discussions on their own.
Parsley has not had any contracts canceled.
It does generally affect the smaller producers,
but there is not a fulsome market for Texas crude,
currently as evidenced by many producers getting
their contracts canceled.
-: Thank you, for answering the question.
-: Any more questions?
-: Yes, sir, Mr. Chairman.
-: Mr. Sitton.
-: Mr. Gallagher, I'll ask the same question.
One of the challenges I think for us is that we have to,
there's gonna be an argument about,
certainly the debate is, is there waste?
Is that waste brought on by production
in excess of reasonable demand, i.e over-supply?
How might Railroad Commission progression affect that waste?
I think what I'm trying to get round is,
can we quantify the waste and therefore tie
that to quantifying proration.
So I ask you the same question I'm asking everybody,
can you quantify the waste for us?
Matt: I reckon that
it is very difficult to quantify,
but if we used the data of demand versus supply,
we've seen currently global waste on the tune
of 20 million barrels a day.
If we take that back to Texas volumes,
there are data through business intelligence
that show that the Texas storage capabilities.
I would argue that it is not healthy and not safe,
to go over 80% of our operating capacity
in storage capacity at these storage facilities.
So that could be a number that we use to watch.
You have lightning conditions through natural storms,
fires that can occur, and then of course,
spills that would happen in a dramatic fashion.
You saw that after Hurricane Harvey,
you saw many chemical plants and storage facilities
in the Houston areas with devastating results
when they were at maximum storage capacity.
So I think potentially that 80% of storage
where we were able to quantify the storage amount
and the volumes in storage across Texas,
that could be one tool to use
through the third party aggregation firms.
-: If I can ask you to clarify a little bit,
you're saying that if we use 80% of our total storage,
of the nation's, of Cushing total storage volume
is kind of a threshold that anything
that produces over that would be waste?
Matt: I think it's yes.
I think you'd have to look into the slope
of storage increases, and I just know at Parsley,
we have our tank set tops at 80% of capacity,
due to optimal operating conditions,
to not allow physical waves to occur beyond economic waves,
so I think the economic argument is more cut and dry,
but then above that 80% threshold on capacity,
you get into physical waste conditions
that are very risky for the state operating conditions,
and across the country as well.
-: Can you unpack this so I got that?
Can you unpack the economic side of that,
so you said the economics is more cut and dry.
Barrels per day, how do you translate
that to economic waste?
Matt: I think when you look
at the local market pricing,
you've seen almost single digit pricing at times
in the Midland Basin.
And then you're having producers produce
these volumes below their operating costs
for periods of time, responding too slowly
to market conditions,
as evidenced by our industry's economic results
over the past two decades, really.
So I think it's clear that the resources of Texas
and even the mineral owners are being wasted
in short spurts of time, and although potentially 80%
or so of the companies will react in a timely fashion,
it hasn't been timely enough for what's happening
with this COVID-19 shock to demand.
-: So did I understand your point?
There was that this discounted price over all of the barrels
being produced is ultimately the measure of the waste?
Is that your point?
Matt: Yes, if you compare it
to the Rusty Braziel report where the producing cost
is in the mid-twenties per barrel,
and if you see all the production produced
in the state minus that's currently still being produced,
minus the $21 posted price, minus the net-backs
and the transportation costs, the data
between a healthy operating cost and the current sales price
would be a good proxy to use for economic waste.
-: All right, I appreciate you working with me on this,
but because I'm trying to get to these numbers as you say,
and if they will sell for $21 a barrel,
net-backs and discounts and then the wellhead
is something else, you're saying
that there's some differential in here,
both by the times all the barrels being produced.
So if it's a $10 differential,
times 10 million barrels a day,
that's a hundred million dollars a day.
I'm using example I don't know
if it's not following your logic correctly?
Matt: Yes, Commissioner,
I think that's a logical way to calculate economic waste,
as it's occurring today.
-: Okay.
Jump forward to the question that if we were to prorate,
get title for us here,
I mean, how is that going to resolve this?
You talked, I think same thing as the Pioneer guys,
you've talked about there's 10 to 20 million barrels a day
of excess supply remaining, I believe after the 70 cuts
is what you're projecting.
So if we cut the 20% to get to your 80% number,
we got 20% or 1 million barrels a day change,
how does that address, or how does that prevent waste?
Matt: I equated, I'm a visual learner, I guess,
and I equated it to the optics of the flattening
the curve situation when we tackled COVID
as a country four weeks ago.
There were early spikes of, the draw on the infrastructure,
the healthcare infrastructure.
And if you did nothing, you almost spike into that,
and it would be chaos at the infrastructure level,
the healthcare infrastructure level.
Through social distancing efforts, you mitigated,
but did not alleviate the situation.
And I think we can all agree
that we are better off for it as a country.
This would be much the same.
This would alleviate, but not mitigate the situation.
OPEC's cut was a good first step,
rather than the Commission taking action
as the largest producing state,
it would be the next leadership stance.
And again, this would be temporary, you could review
if others are coming along in the G-20,
and potentially reverse the order after a 30 day period,
if other states and other countries are not acting properly.
But it is doing our part to flatten the curve
and draw on the Texas infrastructure.
-: Mr. Gallagher, (indistinct) can you for example try
to quantify if we were prorate, how does that prevent waste?
Excuse me, I said, how, maybe the better question is,
can you get me just the numbers, if right now
there is a hundred million dollars of waste per day,
in economics using that logic,
how would us prorating affect that?
Matt: I think you'd see the stabilization,
and this is speculation, but by cutting off,
instead of continuing at the current high production rates,
if we saw a reduction of 20%, we would see a stabilization
into the mid twenties, equalizing near your cash costs,
instead of negative costs.
And again, that calculation logic that we walked
through earlier, instead of taking away a negative number,
it would be breakeven
at the 80% production levels essentially,
and you would no longer have economic waste at that time.
So it would be dependent on further cost stabilization.
And that's where reviewing on a 30-day basis
would be necessary to see
if that stabilization is occurring.
-: Okay, last question I think.
We heard the gentlemen from Pioneer
about when storage is going to fill up,
they're saying Cushing, filling up
somewhere four to five weeks, which seems
to be the critical point at which they're concerned
about the supply chain issues.
How long do you think until that issue surfaces
and we ran into that wall?
Matt: That is if you look
at current production rates and you look
at spreadsheet capacities, that is the timeframe
that we would see that occurring.
Additionally, there's 14 million barrels a day of VLCC's,
in addition to historic import rates
that people are bringing over from Saudi Arabia
that Texas refineries have purchased at discounted prices,
that will accelerate some of that storage capacity
that's off of historic trends.
And then as I mentioned, spreadsheet calculations
do not always translate to healthy operating conditions.
So I would be biased towards thinking
that you would hit those conditions a week to two sooner.
So I do think the situation is urgent.
-: Okay.
Thank you, Mr. Gallagher, that's all I have.
-: Thank you Commissioner. -: Mr. Gallagher,
a couple of questions I have.
Earlier it was said that we pass this proration,
contingent upon other states and internationally,
other things being done.
Can you give your opinion on this,
contingent upon other forces agreeing to this?
Number one, our concern is, Texas being 40%.
Are we gonna undershoot just our own state
with no help from anybody else?
So is there a contingency you
would agree to upon us passing this?
Matt: Thank you chairman.
I was refined that I think we need
to take a leadership stance,
but on a temporary and reviewable basis.
We've seen the strength
of American diplomacy across the globe.
With Texas taking this stance,
the Commission taking a potential.
temporary proration stance, that would allow the Governor
and our President to continue those diplomatic efforts
with new leverage, a newfound leverage position of action.
So I don't think we should wait.
I think we should take pragmatic action
on a temporary basis, use the diplomatic efforts,
and if we do not see a commensurate response
from the G-20 and other states, I think it's very fair
for the Railroad Commission to take that into consideration,
When they do a 30-day update, and potentially pull away
from proration, if there is no broader response.
-: You mentioned earlier that, if I understood correctly,
that you estimate as an earlier witness,
there's gonna be under four to five weeks
that we'll reach maximum capacity for storage.
Will that not in itself stop the production?
What's the disadvantage of that occurring,
versus us passing the rule if it's gonna happen anyway,
that's what I'm saying, or will happen anyway?
Matt: Yes, sir.
I think that's what we were trying to address
with our visual on the slide.
If you slam into max capacity with these peaks,
it really wipes out the industry in a dramatic fashion.
Especially the service sector,
and hundreds of thousands of additional jobs.
It's the trigger of an additional, as you mentioned,
four weeks, that's an additional month
of complete shutdown operations for the service sector.
I'm not under any illusion that cutting across the board
would make things rosy again for the service sector,
but it could stabilize some activity
across the board at known rates.
It gives clarity to operators
and planning on the service side.
If we slam in at full speed into a train wreck,
then we can predict the outcomes are gonna be much worse,
even if it's a four-month delay, I mean, four-week delay
to return activity.
We're going to have much less competition
and hundreds of thousands of additional lost jobs
on the backside of it.
So you slam in at a peak rate,
and then you go on very steep decline,
versus moderating that even four weeks sooner, would help.
-: I'm concerned as I'm sure all are
about our smaller producers.
And these are folks that are perhaps
just barely producing oil on some old wells
across the state of Texas, they're very small producers.
Do you have any comments of how we can address the concerns
of these small producers producing small royalty checks
for some of our royalty owners across the state,
that really are gonna be shut down,
if it's just not worth producing for some of those?
Do you have any answer or any comments toward
those small producers?
Matt: Yes, so I think over 90 to 95%
of Texas' production is administered
through the top 100 operators.
So you're left with almost 2,900 remaining operators
that are very immaterial to the cut, but as you mentioned,
very material to the way of life for thousands
or hundreds of thousands of people across the state,
and the country, when you include royalty payments
to make their mortgages, et cetera.
So I think the state can still achieve its objective
with exemptions based off marginal wells
and small producers.
And if we look at the daily production of those producers
and do some sort of exemption based off that,
I think it will still move the needle based
on the remaining operators.
-: Okay, thank you very much.
Any other question members?
Commissioner Craddick.
-: Yes, I've got one more, Matt.
So one of my other questions
and I gave it to Scott too, are there other things
that you see we should or shouldn't be doing besides,
or other tools we have besides just doing proration?
Matt: I read through a lot of the ideas
and through my talks with nearly 40 other heads
of businesses, one of the competing ideas I saw,
which I have not run the analysis on it,
but it was to limit allowables on early tied in-line wells
when we file our completion allowable to 500 barrels a day.
That would disproportionately hit,
obviously the horizontal Permian producers,
the large producers as well,
but it's just a tool to look at.
So as you evaluate how to administer this,
that's one within the toolkit that they have
at your disposal is what type of allowable
to approve to new wells, new completions.
-: Okay, all right, thank you very much.
I mean, I'm not sure that that's the best option I have had,
frankly, I've had somebody that emailed me last week,
saying we just shouldn't issue any more drilling permits.
Which I don't think is necessarily the best option either.
But so let me ask you, 'cause you are more
of the horizontal space.
Do you think we at tree and we're talking
about limiting allowables, do you think
we're out of trade verticals versus horizontals
different as far as how we look, how we proration,
or how we would deal with them?
Matt: Well, I think the cleanest tool
would be to apply it by operator.
Again, the operators will have the best knowledge
with their purchasers of how to administer the 20%.
The purchasers do have limits on how much
they can produce currently by lease.
We've hit maximums when they haven't been filed
and the purchasers call us and say,
"We've hit maximums, please update your allowables."
So they would just follow that condition by operator basis,
and I think if there's exemptions for the small operators
that produce less than if it's 10,000 barrels a day,
or 1000 barrels a day,
that would be the cleanest way to administer this.
-: Okay-
(Craddick's voice drowned) -: Mr. Gallagher,
I'm concerned, I'm thinking you're talking
about such a short time window, under one month
for our proration to take effect.
And I'm wading through the norm, procedures
of the Railroad Commission, this may be a question
for our staff, but you may have done research on this.
I don't know whether we can pass proration
as per a certain date, certain and then retro-fine,
retro-implement penalties to those
that pass that certain date?
Do you have any ideas on how we can this quickly,
get proration taking effect, to prevent less than a month
from now, the problem that you've stated?
Matt: Well, I commend you, Chairman
and the Commissioners for pulling
this emergency meeting together.
Of course, we started our efforts about four weeks ago.
It took a lot of time for us to pull our data
together for this request.
And you move very quickly, once you heard the request,
I do think you're moving at an expeditious rate.
I do hope that with the other marginal wells,
that there are temporary marginal wells being shut-in,
Parsley has shut-in about 400 barrels a day,
through my talks with others, they have shut-in
small amounts of uneconomic wells
that maybe it extends a week or so.
So all we can hope is that we continue
in an expeditious manner.
But I think what you're pointing out
is that the urgency is real, and continuing
at this expeditious pace, I'm very thankful for that.
-: And so I take it, the normal hearings process
would be too long for us to go into it,
we needs some type of emergency action, would you think?
Matt: Yes, to the extent of those are available
with the data and hearing that you have heard,
I think, and with emergency,
it just shortens the temporary nature as you can.
So a 30-day temporary start should be
within the comfort zone.
And then that can be reviewed
in a more fulsome manner as time unfolds.
'Cause this COVID-19 is clearly an emergency shock
that hit us very quickly.
-: Alright, thank you very much.
I appreciate it, any other question members?
-: I do have one more, Mr. Chairman.
-: Mr. Sitton.
-: Thank you.
Mr. Gallagher, the previous presentation,
they threw out the options followup
on Commissioner Craddick's question about mechanisms.
What do you think about the idea
that's been floated out there and was mentioned before,
about us getting a lot more strict about flaring
and restricting flaring permits or flaring volumes
as a mechanism to reduce the effects of prorating?
Matt: I do think it's a separate topic,
but it definitely dovetails into what the Commission
has been evaluating over over the prior months,
and the unique situation we had with growing production
on a world scale by millions of barrels a day,
over the prior few years.
So I think our industry is trying to improve,
every operator is trying to reduce their footprint,
and we want to sell products, not vent or flair our product.
So I do think that's a logical thing
to tie in to this analysis.
If it can help accelerate the reduction of our waste,
be it on the crude side or on methane and natural gas side.
I think that is a very reasonable solution.
-: Thank you.
-: There are no further questions.
Thank you for speaking with us today, we appreciate
so much your participation.
And we'll give it back to Ms. Farad.
Callie: Yes, I understand that Mr. Tillman
is now available.
-: Mr. Tillman, if you're available, please state your name,
who you represent, and if you're for, against,
or just speaking neutrally on this issue.
Lee: Yes, thank you, Chairman.
Lee Tillman, Chairman, President and CEO
of Marathon Oil, against proration.
First, let me just start off by saying good morning,
Chairman Christian, Commissioners Craddick and Sitton.
Thank you very much for the opportunity
to provide remarks on this issue.
These are extraordinarily tough times, some of the toughest
in my over 30 years in this industry,
and I wanna thank the Commissioners
and all RRC employees for their dedication
to public service during this unprecedented health crisis.
Let me begin by simply stating that we believe
in free markets and oppose actions suggested
by the petitioners, that aim to prorate domestic production,
in the great state of Texas.
I urge the Commission to support Texas
as a free market state, that enables efficiency
and competition among independent EMP companies,
big and small alike with the freedom
to react to global market conditions.
We do not believe proration in Texas
will have the desired effect, or any meaningful effect
on global oversupply, and would only serve
to disadvantage Texans, for four key reasons.
First, Texas operators are already shutting in,
the least profitable wells in response to market forces,
the way a free market should work.
To assume that operators would shut-in production
in an ad hoc and haphazard manner,
as stated by the petitioners, is inconsistent
with fundamental business principles,
and would better describe the outcome of a unilateral
and blanket proration, not the free market.
Second, our world has dramatically changed
from the last time proration was used.
Global markets are so interconnected
that it is easy for capital investment dollars
to simply be moved to other basins with less regulation.
It also supposes that the regulator, not the operator
is best positioned to make curtailment decisions
and that the regulator can implement
such reductions in a fair and equitable manner.
Third, supply and demand imbalances will always occur.
And in those times, some companies will succeed,
and others will fail.
So we have to ask, what would be the threshold
to toss aside free market principles in the future.
Last, opening the Pandora's box of proration,
especially when it cannot be expected
to have any meaningful effect on global over-supply,
would put it in play as a powerful tool
to be used to restrain production
for reasons other than preventing waste.
In closing, the Shale Revolution would not have began
here in Texas without free market principles.
We're facing a unique set of challenges,
but the oil and gas industry will emerge
from this stronger than before.
When a vocal minority takes a position
in favor of artificial market manipulation
that is so far removed from the consensus
of a vast majority of operators, one can only surmise
that their motives and objectives
are primarily company-specific,
as opposed to broadly industry-supportive.
The best solution to our current crisis
is to get the world healthy, and back to work.
While not abandoning the free market principles
that have created US energy independence.
Thank you very much for the time.
-: Thank you Mr. Tillman.
Commissioners, any questions? Commissioner Craddick.
-: Lee, thank you for being here,
and I'm glad you had electronic problems too,
'cause I'm the one who always has seemed to have issues.
So I appreciate you making the effort today.
I wanted to follow up.
You said, that you are already making some cuts.
We had testimony earlier that people
were gonna have the first quarter,
a lot of people who have increased their production.
You're saying there's already cuts.
Do you have some perspective on that,
whether which direction we're going,
it seems we were cutting back?
Just trying to understand that dynamic at this point.
Lee: Yes, Commissioner Craddick, obviously,
I can't disclose specific company information at this point,
but what we do know-
-: I don't expect you to.
-: Is that capital budget cuts have occurred 40 to 50%
in the space.
I think this notion that the US is not taking action
is simply false.
The US is well ahead of this curve.
Well ahead of even OPEC-plus' decision.
And I know there are flaws in any data set,
but if you look at current EIA estimates,
US shale production is already expected to fall
by 400,000 barrels per day from January to May of this year.
If you expand that and you look at total US oil production,
exit to exit volumes for T 19 and for T 20,
are expected to fall by 1.8 million barrels per day.
And I would suggest that that information today
is even dated, that those numbers
will likely head to much higher levels.
So for us, the free markets are working.
Decisions are being taken on both economic
and commercial basis,
and that's the way markets should work.
-: Thank you, I appreciate the information.
My other question you operate in other states.
So can you maybe give me a perspective,
are other states considering this, that you work in?
How would that work?
Do you see, I know Oklahoma you're up in Oklahoma.
Some days had, maybe they've had a petition.
I don't know if they're really having conversations,
or other, not just states, but in other markets
you're working in, kind of how would that affect.
If we did, one done in other states, other markets,
how would that affect what you do
and are other people looking at?
Lee: Yes, as you're no doubt aware,
both of the petitioners for Texas proration,
are Texas Permian producers only.
In other words, they are single-basin companies
with no production outside of the Texas Permian.
Our company, Marathon Oil, and many other opponents
of proration have multi-basin portfolios.
Specifically, Marathon Oil has production
in Texas, Oklahoma, New Mexico, and North Dakota,
which provides us a much broader perspective
across the US oil and gas space.
As such our decisions with respect to production,
curtailment are not limited to just Texas,
but rather we must consider which barrels
across our multi-basin portfolio,
have the highest cash contribution per barrel,
which we define as revenue minus variable cash cost.
And for Marathon Oil, our South Texas Eagle Ford Asset,
has some of the highest cash contribution barrels
in our portfolio, and consequently business fundamentals
would dictate that our Eagle Ford barrels
will be the last barrels we will consider curtailing,
on a purely economic basis.
In this scenario, Texas proration
would eliminate our freedom to protect some
of our most economic barrels by arbitrarily forcing us
to curtail legal production.
This in my opinion, highlights yet another shortcoming
of unilateral proration by Texas,
as there is an underlying assumption that Texas barrels
must be the least economic and a given company's portfolio,
which is simply not the case.
It also serves to demonstrate
how archaic state-level proration is,
as a mechanism to eliminate waste
in an interconnected global market,
where Texas cannot be isolated,
and is simply one participant
in a much broader supply and demand landscape.
And I'll reiterate, operators exercising
free market principles is the only efficient
and equitable means to respond
to supply and demand imbalances,
in what today is a global market.
We are not living in the energy market of the 1930s,
when these rules were initially developed.
Otherwise, regulators will be forced to pick winners
and losers, via flawed mechanisms developed at a time
when global energy markets could be simplified
to state-level supply and demand.
-: Okay, thank you, I appreciate.
I think that's all my questions right now Mr. Chairman.
I appreciate.
Thank you Lee, for participating.
-: Thank you, Commissioner Craddick.
-: Any other questions?
-: Yes, I guess sir.
Lee, thanks for being here.
I appreciate as your insight.
I'm going through the same set of questions.
Right now if you look at the statutes,
you look at what's happening in the market, is there waste?
Lee: I believe that there
is supply and demand imbalances Commissioner Sitton,
that exist at various points
in time and the commodity cycle.
And if we're gonna ascribe waste to all of
those fluctuations, where we have a deviation
between supply and demand, the Railroad Commission
is gonna be very busy.
-: So is that a yes, there is oversupply
but no, there is no waste?
Lee: I would say today, there is certainly
over-supply at a global scale in the market,
to define waste within the boundary of the state of Texas,
I think is not prudent to do so.
-: Going off of the guy who presented
right before you, Lee, was walking through some logic
in terms of margins and current price levels,
loosing money versus break-even,
backed by an upkeep maths, whatever it is,
it's some number of dollars per barrel,
times the number of barrels produced.
We didn't get the specifics,
but between the first few presentations,
it seems like it's anywhere between five and $15 a barrel.
So if I do that math, it works out
to a hundred million dollars a day of discounts,
due to the oversupply,
and due to the current production levels.
How do you feel about those economic numbers?
Let's say the economics are $100 million a day,
that this level, let's just cap at this many barrels.
What is your response to that?
What's your feeling on that?
Lee: Well, I would say that those economics
have applied beginning time we've seen supply
and demand imbalances and dislocations
that created abnormal downward pressure on the commodity.
We saw that in 2015, we saw a bit of in 2008,
but certainly then even with those price dislocations,
we didn't declare waste and start trying
to artificially manipulate what is a free market
and an independent market in the state of Texas and the US.
-: So in other words, the fact that the economics,
I guess, it's your point
that we should ignore the economics?
Lee: No, I mean, I would argue that companies
are the ultimate arbiter of the economics within the fields.
They will have shareholders and stakeholders
that they have to account to already.
Again, my argument is that the prudent operators
are taking the necessary actions
to support their own business models
and their unique portfolios.
And again, to presuppose that a regulator can intercede
with all the various commercial arrangements,
a global market place, and do that in a fair, equitable,
and efficient manner, I find very challenging.
I also find it not to be particularly an effective
or fair solution in a market
that is already strongly responding.
Again if, whether you believe the EIA numbers or not,
the bottom line is that production is coming down.
We are essentially carving capital investment
in unconventional reservoirs that typically
have declined, on the order of 30 to 40%,
without further divestment.
So the decline is happening today,
it will continue to happen.
I would argue that among the global producers,
the US has acted first and has acted quite strongly
in terms of their contribution to the supply side.
But the reality is that we are not going
to solve the current commodity price dislocation
until demand returns.
Today, all the supply actions, and you've seen it even
with an almost 10 million barrel reduction,
announced by OPEC-plus,
that this has become a demand-driven correction.
And that demand destruction has been created by an event.
And that event is a global pandemic.
But my argument is, the markets are responding
as they should, particularly here in the US.
And again, to intercede in what
is a very complex market again,
this is not the state of Texas in the '30s and '40s,
when we could draw a material balance around the state
and match up supply and demand.
That is simply not the case any longer.
-: Just so that we put fine points on it,
because the other day the statute
that we're working under talks about waste,
production in excess of reasonable demand.
And it sounds like what you're saying is,
but please correct me if I'm wrong here,
that I understand that look,
Texas is not an isolated vacuum, so that's what to look at,
and in the end it seems like what you're saying to us
is that when we consider waste, we shouldn't be considering
the economics, leave that to private business.
Lee: Correct, I would say that, economic forces
will ultimately drive supply and demand back into balance.
It may be long, it may be painful,
we are a price-taker as an industry.
I mean, we could make the argument that Texas
has been over-producing into a well-supplied market,
probably for five to seven years.
But certainly we have not asked the regulator
to intercede and correct that imbalance
such that it would offer price support.
-: If I can jump over to, coming to the over-supply
and trying to get our hands around Texas specific.
It seems like from the first two presentations
that they thought it's weighing heavily
on the local storage issues.
Well, I've read through some accounts here,
I don't know which economics probably it was,
I think we had Web Mackenzie, Rice Dad, Rob Bidan,
(indistinct) trading information.
And one of them mentioned the disparity between WTI
and Brent that as a percentage basis,
that's at its highest levels in history right now.
I think Brent set up 40, forgive me,
I remember the number was 40% premium today.
How does that speak to between local storage issues,
and therefore the local impacts here,
as well as the disparity between Brent and WTI.
How does that speak to local over-supplies
as opposed to global over-supply?
-: Well, obviously Brent and WTI are ultimately traded
on the global market.
Brent has some advantages, from an access and being pretty
much a waterborne product for the most part.
US barrels that we do have been a net exporter,
clearly are much more confined in that sense.
And therefore in times when storage arbitrage exists,
you can get obviously that Brent/WTI spread gets higher.
But again, these are all elements of the global marketplace.
I mean, we fought hard to get our barrels,
made in America barrels into the global market.
It wasn't so long ago that we essentially
could not export US barrels.
It took action at the federal level
to give us that opportunity and we have
become a net exporter in that sense.
So we enjoy the benefit of that, and we also have
to accept the fact that participation
in that global marketplace will always have
some downside risk as well.
That's part of the risk of being a going enterprise
in any business, particularly a commodity business.
So storage is simply yet another one of those market factors
that we have to contend with.
It's no different than access to transportation
and other things that many others have mentioned.
Companies that have made those arrangements
and have made those investments, including things
like hedging will ultimately be better prepared.
Whether that supply and demand imbalances is really large,
and what we hope is short-lived like today,
or whether we end up in a lower
for longer commodity price environment,
again, the most efficient, the most well-prepared companies,
will ultimately be the ones that not only survive,
but also thrive in that environment.
-: Specifics, I wanna unpack
this one a little more detail please.
The talk about the storage issue, from the stuff
that was turned in and the previous two presenters,
it seems there's some consensus that storage
is gonna fill up as early as four weeks,
as late as some time in July.
It seems to be that it's some where in there.
Do you agree with that time frame?
Lee: I certainly think that physical storage access
is a major question right now.
A lot of that obviously is highly dependent
upon where domestic production had,
and how that storage is ultimately used.
And a great example was the fact that,
yeah, I think domestic storage is a bit North
of 640 million barrels.
Obviously you have to look at the individual paths
to draw specific regional conclusions,
but let's just take that as a gross number
that generally speaking is probably pushing 50%
of ultimate physical capacity.
That is of course X any action
from the Strategic Petroleum Reserve, and we know
that on the federal side, the Department of Energy
has clearly opened that up for storage.
And ultimately we hope for some direct purchases as well.
So I do think there's a lot of variability in that number.
And again, we may be able to pinpoint very precisely
where we might think supply is, the elasticity and demand,
and the timing in which that demand reasserts itself
is very challenging.
We already have some global economies that are responding.
China is one of those, and has of course been one
of the biggest importers of US crude over time.
So I would just argue that there is that risk,
that physical storage risks, to try to put an exact timing
on that with all of the variables that we're facing today,
I think it's very challenging.
And I do think that there is capacity today.
We need to use that capacity in the most efficient manner.
The DOE is also aggressively seeking additional
above-ground storage opportunities, and I would also add
that there are other, I think more broad regulatory actions
that can continue to help our industry,
but those are much more broad and probably
much better implemented at a federal level.
-: This last comment you just made about federal level,
are you speaking to actions that might be taken for example,
to have some involve foreign crude,
are the things you're talking about?
Some of the comments in the text we received
about those reactions?
Lee: No, I think I'm talking about some things,
much more fundamental, Commissioner Sitton.
I'm talking about flexibility
to suspend production on leases,
flexibility for automatic lease extension.
Again, giving operators the flexibility
to take the necessary supply reduction actions
without negative impacts in the future,
the extension of STR storage,
as well as potential direct purchases.
Even government and military purchases of refined products,
to try to support refinery runs, and maybe advance
some of that demand recovery that is gonna be so essential,
as we move into the second half of the year.
Those are the types of things I'm referring to.
-: Okay.
When we talk about our role at the Railroad Commission,
we're following the Natural Resources Code, and statute.
The statute that this process is falling under,
talks about waste, production in excess of facility,
market facilities, and regional market demand.
You've given very eloquent explanation of why you feel like,
and I think what you're saying is,
"Yes, there's over supply, but it doesn't constitute waste."
And ultimately you don't think that there's a role
for the government to be involved in any of this.
Did I understand that, that's the gist of it?
Lee: Yeah, my core argument here is
that the correction in supply and demand imbalances
is best served through free market principles,
where you have operators that have the knowledge
of their own portfolios,
the knowledge of their commercial agreements,
making those decisions,
as opposed to a very blunt instrument.
And today, anyway, an instrument that
would only be applied to the state of Texas.
And I think you would unduly penalize Texas at a time
when I just don't think that is proper or fair.
-: On that point is that, I was going to ask you,
one of the things that the previous presenters talked
about was more of, not just a US,
but even a global continued process to cut more barrels.
But yes, the question is, do you believe
that the United States, for example, the President
should continue to work with other nations to try
to curtail production if that's needed?
Lee: Well, I think that we are positioned
as a company all along has been on the supply side.
The role of the President, Secretary Pompeo,
who have we talked directly with,
was to drive toward a diplomatic solution
between the Russian and the Saudi.
In that discussion, the President, his advisors,
Secretary Pompeo, Secretary of Energy,
had been very clear that we are
not negotiating with Saudi and Russia.
This is their issue to resolve.
The free markets and the actions of independent companies
here in the US are already taking the necessary steps
to address US supply.
So that discussion, I think now has yielded
at least an agreement to make the first step
in those supply cuts for these large,
foreign state-owned players.
And I think that's a great first step.
And I truly see the benefit of those steps in themselves,
as we get into a more normal demand situation
in the second half of this year.
I think it will be very difficult to correct
some of the shortcomings simply by pulling the supply lever
in the second quarter, as we are really experiencing
the most dramatic effects of this demand destruction.
-: So I guess my, sorry, my question was, if the market today
is still 10 to 20 million barrels a day over-supplied,
and if this demand destruction remains,
do you believe that there still should be efforts
to get international supply down?
And that is your position then that's the United States
would say, "We will continue to allow companies
to make decisions but we
should urge international countries to cut"?
Lee: I think the President
has already demonstrated his willingness,
particularly for those state-owned entities
that control a good portion of the global supply,
to ensure that they're not artificially manipulating
or destabilizing the market by their actions.
And to the extent that he can continue that dialogue
and pull barrels out of the supply side,
that can only be helpful.
The concept that somehow that we're going to come
into play by Texas prorating and actually holding sway
in those discussions, I find somewhat hard to fathom.
I mean, the bottom-line is, is that we're already cutting,
and cutting deeply.
There is going to be damage to our industry
from this correction, just as there's been damage
to the industry in past corrections.
And unfortunately, today there is no amount of supply cut
that will mitigate some of that damage.
I think longer-term, those supply actions
will prove to be constructive.
But in the near-term, I think it's very difficult
to see how those will ultimately outweigh
the demand impact from COVID-19.
-: Thank you Lee, that's all I have.
-: Thank you, Commissioner.
A question I have, from reading your letter Mr. Tillman,
you mentioned that previously the Commission
only regulated leases, and in this case,
we're talking about regulating production.
Can you clarify what the difference might entail
that you brought up between leasing and implementing
this provision on production?
Lee: Yeah, well, certainly at a lease level,
you're bringing it down to a granularity
where many more specifics can be considered,
including I think a wonderful point
that Commissioner Craddick brought up
around longterm reservoir impacts,
which as some presenters have already alluded to,
there are certainly in the horizontal wells that we drill,
depending upon the reservoir type,
we can endure those shut-ins, but there are other producers
where having very specific shut-in requirements,
even at a lease level will prove to be damaging
to the longterm recovery of those reservoirs.
At a producer level, I think the challenge is that
you have such a diversity in the producers.
Trying to level that playing field
at that kind of gross level,
I believe will be very challenging
to create a fair and equitable solution.
You've already heard people talking about the exceptions
that might be required, and I can just see
that spinning out of control.
And at some stage you have to question,
who is in the best position to render those decisions?
And should the Railroad Commission again be interceding
in what will ultimately be commercial arrangements,
potentially force majeure declaration.
Is that where the Railroad Commission wants to find itself?
-: Okay, thank you very much.
Fellow Commissioners, at this time,
we've taken in our first three witnesses,
about two-hours time.
And I know we've established a lot of details,
and great information we've made.
And mine I encourage having sent those with testimony over
in the dome across the street to, following
in the morning, many times taking testimony.
We certainly are willing, every question, everything.
This too important to take shortcuts.
But may I suggest we, in respect
of the several dozen scheduled testifiers coming ahead,
We might be very prudent with our questions
both coming from this side, but at the same time discussion
is taking much more than the limited testimony.
So just I've thrown that out there as consideration
in fairness to the several dozen ahead,
to be as efficient as we can
with our questions and our answers.
Thank you. Callie, your time.
Callie: All right, thank you.
We now ask Doug Suttles with Ovintiv, to speak.
-: Mr. Suttles, if you would please identify yourself,
the company that you're representing, and whether
you are for, against, or neutral on the subject at hand.
Doug: Yes, my name is Doug Suttles.
I'm the CEO of Ovintiv, and we're against proration.
Thank you Commissioners for the opportunity to speak today.
I'm the CEO of Ovintiv.
We are a publicly traded independent oil and gas company,
whose roots go back to 1881.
We are a major producer in Texas,
and the second largest producer
of unconventional oil and gas.
We've pioneered many of the innovations
for developing shale resources.
I'm the third generation to work in this industry,
and my daughter is the fourth.
My grandfather began working in the oil fields
of West Texas some 80 years ago.
My mom grew up in Midland, my dad Fall City.
My parents were married in Midland, Texas.
I've worked in this industry almost 40 years.
Texas, and the oil and gas industry mean a great deal to me.
The market is always in a condition of imbalance,
at times, over-supplied and at times under-supplied.
In the last 50 years, we've had many periods
where the market was over-supplied, resulting in low prices.
The late eighties, the late nineties, the financial crisis,
and the significant downturn in 2015 and 16.
None of these periods was it deemed that waste
was occurring in Texas and prorationing necessary.
In fact, despite these difficult periods,
the industry grew and the Texas Miracle occurred.
The nation reached energy independence, oil and natural gas
were available on affordables, communities prospered,
thousands were employed in great jobs,
and billions of dollars were invested.
Companies and individuals risked capital.
They took their chances.
Some prospered, some did not.
Texas disproportionately prospered.
Texas has been a place open for business,
where you can take a chance,
where free markets are celebrated,
where innovation is encouraged.
Entrepreneurial-ism is part of the culture,
and where government doesn't control business.
The market is working.
Activity and production are realigning
to the current unusual circumstances, and doing so quickly.
The market effectively dealt with disruptions
over the last 50 years, and the Texas Miracle occurred.
It will work again today.
The industry will survive, and it will prosper again.
It will emerge stronger and more competitive.
We've always dealt with uncertainty;
prices, access to capital, new technology,
social concerns, and, the next big discovery.
But we haven't had to worry
about Texas interfering in the market.
If you interfere, our industry will ultimately be weaker,
less efficient and less competitive.
It will have a new risk; government interference.
When will it happen again?
I urge you not to interfere.
Keep Texas a place where entrepreneurial-ism
and innovation are celebrated,
the market is open, and free from interference.
I say this as someone whose family has lived
through the ups and downs of our industry
for four generations.
My company and my family are proud of what we do,
and proud we can do it in Texas.
What we do powers the world,
and makes our modern life possible.
Thank you for the opportunity to speak this morning.
-: Thank you.
Any questions members?
Commissioner Craddick.
-: I just have a couple of quick ones.
Thank you, Doug, for being here today, and taking the time.
You talked in your letter and you touched
on waste and mitigation of that.
Could you elaborate just a little bit,
if we believe there's waste or not,
how you're mitigating some of those issues?
Doug: Yeah, Commissioner, it's a great question,
because if you look, the market's already dealing with that.
In last week's report, the DOE estimated production
was down in United States, 600,000 barrels a day.
Our company has voluntarily shut-in production.
We anticipate we'll probably shut-in more production,
and we're determining ourselves
where we believe waste occurs, and where it doesn't occur.
Where the price we're receiving for the barrel
is insufficient to not only cover our costs,
but generate what we think
is a suitable return on our investment.
So I think that actually the market
is the most efficient mechanism for dealing
with this question, and it's done so
in all of the last downturns,
in 2015 and 2016, we saw prices similar to
what we see today,
and the market effectively dealt with that.
-: Thank you.
And my other question is, and you touched on it too,
in both your letter and your testimony
about regulatory certainty.
Could you address that and kind of elaborate
why you would choose to be in Texas for instance,
versus another area that you might operate,
and how important that is in your investment,
and what you do across the board?
Doug: Yes, Commissioner.
So our company, as I stated in my comments there,
we actually are one of the largest producers,
independent oil and gas producers in the world actually.
We produce in Texas, we produce in Oklahoma,
we produce in North Dakota, Utah,
and British Columbia and Alberta.
And actually when we deploy capital,
because capital is quite fluid.
It looks at risk and opportunity,
and it flows to the point where those two look optimal.
And one of the reasons the Shale Revolution occurred
in places like the United States and Canada is,
we had a stable regulatory environment.
It was predictable.
So it removed one of the big risks
you actually have in other parts of the world.
In fact, the parts of the world,
where they have significant government control
of production, don't have independents of any scale.
If there are any, there are very few and very large.
It's only in places like the United States
where you have this stable regulatory environment,
where we actually understand what the risks are
and the rules we'll play by are,
before we make our investments.
That actually led to what we all refer to now
as the Texas miracle.
-: And when you touch on Alberta,
and if you don't have to go very far,
but I have talked to the regulator up there,
can you kinda tell us the difference between
what Alberta does and what potentially
is proposed down here?
And some of the pitfalls we need to be aware
of in case we're going down this road?
I'll appreciate it since you operate in both areas.
Doug: Yeah, in Alberta several years ago,
they decided to control the amount of heavy-oil production.
And we're not a heavy-oil producer in Canada.
We produce condensate and lighter oils up there.
But what was interesting when they put this in place,
they were trying to impact the market.
But in fact, the unintended consequences
were quite significant.
And in their case, they actually had more time
to put the program in place,
than what people are talking about here.
And I think previous witnesses have already talked about
some of the great complexity here,
and actually some of the inefficiencies.
So what happens is, if you don't do this in the optimal way,
it actually means that producers, on average,
may be performing much poorer,
as opposed to performing better,
because they now can't control which barrel
they believe is most economic to produce,
versus which barrel they should actually shut-in.
The current government in Alberta has been trying
to figure out how to unwind their proration program.
And it's found it very difficult once they put it in place.
And I think this would be a concern in Texas,
that once we've done this, when will we do it again?
What are the rules under which it will be applied?
And of course, it feels very unusual
because we've successfully operated with wide swings
in oil and gas prices.
We've actually successfully operated with periods
of over-supply and under-supply.
And through that period, the Texas industry, and globally,
the industry has grown and met the needs
and created a lot of benefits in particular for Texas.
-: Thank you, I appreciate you taking the time.
-: Any other questions, members?
-: Yes, sir.
Doug, thank you for being here, and for presenting today.
You talked a lot about the previous history,
and the ups and downs in terms
of over-supply, under-supply in history.
Some of the data that we're getting from some of the groups
that are analyzing this downturn,
they've talked a lot about the fact that they're aware
the world is currently as much as 30% over-supplied today.
I think the biggest before this was
in the five point something range.
I ask the same question; do you think that there is waste?
The statute defines waste as production
in excess of reasonable market demand.
Do you think there's waste?
Doug: Yeah, Commissioner.
I think that if we applied it strictly,
as you just described it,
there were lots and lots of periods of waste,
because the market is always imbalanced.
It's always either under-supplied or over-supplied.
And actually what happens is the market responds to that.
Capital increases or decreases, people shut wells in,
or they drill new wells and turn those wells on.
So I don't believe that's the correct way to define waste.
And in fact, at the time at which those ideas
were originally proposed,
Texas was producing most of the world's oil.
Today it produces only 5% of the world's oil.
So I think the market is clearly over-supplied,
at the moment, it's a demand problem.
And of course what's very difficult to predict is,
is when will demand begin to return?
Let's all hope it's sooner rather than later.
And we can all see governments at the federal level,
at the state level, at the national level,
are all working to try to figure it out
how to get the economy moving again.
But today we are over-supplied.
But if we use that definition,
we're over-supplied quite frequently over time.
-: Doug, so back to it, seems like what you're saying,
"Yeah, we're over-supplied,
but that's not waste in today's world."
Is that right?
Doug: That's correct.
I think that, and in addition, each company needs
to make its own decision about,
and it does this all the time.
It considers risk, it considers regulatory environments
and costs, on whether it deploys capital
and when it produces oil or gas or when it doesn't.
And trying to artificially set that number,
I think is incredibly difficult and will lead
to a much less efficient system, which likely
in the end of the day, means that the consumer
ends up paying more for these products,
and probably has less reliability about their availability.
-: So I think my last question then, to you is,
similarly, the first presenter talked
about being a part of a global initiative.
It seems like you're fairly against
any government involvement.
Does that mean that you, as we talk about looking for,
if there are additional cuts, maybe ask this,
are you supportive of the national efforts
to try to get Saudis and Russians to curtail,
or do you feel that we shouldn't be involved in that either?
Doug: Well, I think once we get
into the geopolitical sphere, it becomes quite complex.
Because of the relationship the United States
has with places like Saudi Arabia, or the Russians
is more than just about oil
and it involves many, many different features.
So I think those are best left
to the decisions by the White House.
Clearly the timing of the dispute between the Saudis
and the Russians was quite unfortunate,
and destabilized these markets.
But that was a dispute between two countries,
and for lots of geopolitical interests,
the President of United States,
and his team have decided to intervene.
I do not believe that is wise for Texas,
or the United States, or free-market countries
to become embroiled in the politics of OPEC.
-: I'm sorry, I'll get the last question.
First presenters talks about flaring as a mechanism
to cut back on, or reduced permanent flaring
as a way to prevent waste and then curtail production.
What are your thoughts on that?
Doug: Yeah, I mean, just as a company,
we do not develop where we have to flare.
We do not develop oil or gas resources
that we can't sell into the marketplace.
So the only time you'll see our company flaring
is when they're operational upsets.
We would actually support and have supported
and have been a part of regulatory discussions
in multiple jurisdictions about putting stricter regulations
on flaring and venting.
I don't believe it's the right tool
to manage this supply issue today,
the supply/demand issue today.
But we do support the concept that we come up
with stricter rules to reduce flaring in the state of Texas.
I just don't think those can be developed
in the time necessary to impact this issue around demand.
-: Okay, thanks Doug.
Doug: Yup thank you, Commissioner.
-: (Which solves) is an old financial guy.
The only question I have for you;
if we were to implement this proration,
how would that affect, do you feel the future investment
from your company or others on Texas versus other location,
would it have an effect long-term investment,
knowing that tool that we were using?
Doug: Yes, Chairman, it would.
And my career has taken me all over the world.
I've worked in the Middle East, I've worked in Russia,
I've worked all over South America.
I've worked in the Caspian, I've worked in Africa,
and I've worked in the North Sea.
And every place you deploy capital,
you look at the risks you're taking.
And some of those are technical,
some of them are geological, some of our access to markets,
but also the regulatory environment matters a great deal.
There's a reason why in countries
where the governments control production,
that independents are rarely seen.
And that is there's just too much risk.
So if Texas decides to prorate production,
we'll have to consider when we invest in the future,
will we be able to produce those barrels or not,
and under what circumstances?
And that will create a new risk,
and it will make Texas ultimately less competitive.
-: Thank you so much for your testimony today.
We appreciate it tremendously.
Callie, your turn.
Callie: Okay, thank you.
It has been requested that we take a short five minute break
that will put us back at 11.47.
Commissioners, are you okay with that,
or would you like to continue on?
-: Sounds good to me. (voice drowned out)
Callie: All right, we will continue at 11:48.
-: Thank you.
Callie: Thank you.
I believe you're still on mute somehow.
-: Did that unmute me?
Callie: It did, thank you.
-: Okay, can you please introduce our next speaker,
and I'll recognize him.
Callie: Okay, next we have Harry Pefanis,
with Plains All American Pipeline, you are invited to speak.
-: Mr. Pefanis, if you would, please welcome
to the discussion and please identify yourself,
who you represent, and if you're for, against,
or just commenting on the issue at hand.
Harry: Thank you Chairman Christian,
Commissioner Craddick and Commissioner Sitton.
We appreciate the opportunity to offer comments today,
for the record, my name is Harry Pefanis,
and I'm the President and Chief Commercial Officer
of Plains All American Pipeline, (indistinct) entity,
engaged in transportation, storage and term link
of crude oil in North America.
And to be honest, we have not dedicated the resources
to take a position in this matter.
So our comments today will be based on relaying our views
of supply and demand and the fundamentals
and the potential impact to the Permian Basin,
and just clarifying some of the positions
that we had communicated to
some of our producers and suppliers.
So let me start with adding little color to a communication
that we sent on March 24th, to a number of our suppliers.
And I'm just gonna give you the 32nd version
of that letter.
At that time, our view, as the demand was falling
at a faster rate than production could be reduced,
it decreased drawing activity in deferral completions.
And storage could balance the market temporarily,
but without adjustments by producers,
commercial stores could be filled by mid May.
And at that point will just leave the SPR,
the only facility with a meaningful amount
of storage capacity.
And so we encouraged our producer customers
to practically manage their production,
as we felt like they were best suited to manage
how they would produce in this type of environment,
instead of just waiting to find out sometime in may,
that there would potentially
not be at home for the oil production.
Looking back at mid May, the date was sort of based
on the assumptions that there's roughly 120 million barrels
of unused commercial stores in the United States.
We thought we could see reductions
in refinery runs in the 30 to 35% range,
and that we thought there could be a potential reduction
in crude oil exports at that same level.
So that would translate into, when you factor out
sort of reductions in net imports,
maybe a three to 4 million barrel a day reduction
in demand for US production.
And of course all that assumed
that there would be no curtailments
or no actions proactively taken by producers.
So we all know the market's not static and linear.
And the actual scenario that unfolded
over the next few weeks or months,
it's could be different than what we modeled,
but we have gone back since the time of our letter,
looked at what the stores done over the last few weeks.
If you look at the EIA, it's sort of built
at the range we're expecting trending
towards a mid May fill day.
But we're seeing producers make adjustments,
and that could push the timing out of that.
And I'll also point out that
if you look at the Permian Basin,
storage there has actually been pretty flat,
really for most of the year.
So before I sort of conclude the comments that I prepared,
I just wanna point out one thing from comments,
that I heard earlier, someone had mentioned
that a report had stated that the difference
between Brent and WTI was at historical levels.
And so you're looking at my computer screen,
if you just look across the board,
it's about a $2 differential between Brent and WTI.
So I just wanted to point that out before I conclude it.
So that's really concludes my comments.
And I'm happy to try and answer
any questions you may have for me or Plains.
-: Okay, thank you very much.
Members, are there any questions?
Ms. Craddick.
-: Harry, I've got kind of question for you.
Maybe know the answer or not, but it's kinda me trying
to understand from your perspective of pipes.
So say we've decided proration
and that's the direction we go.
Do you believe that we will allow
whether it's from your company or others,
additional opportunities for smaller operators
to have access to your pipes?
I appreciate the storage issue, I'm talking longterm.
Does that give them some additional opportunities,
is there more opportunity for them
or better pricing opportunities to get it to market?
I think that's one of the questions that I've had,
if this helps them or not longterm
from a pipeline perspective.
Harry: I would say that if you look
at the Permian Basin in general,
there's more pipe capacity than production.
So it's really gonna be dependent
on who is your purchaser.
Who's moving the crude on the pipe.
And does that purchaser have a market
for the crude they're requiring?
-: Okay.
-: All right, (indistinct) was one
of my main questions so there is...
I just wanna see if we're gonna help out
some of these operators or not.
So I appreciate the answer.
(Harry mumbles).
-: Any more questions members?
-: Yes, sir.
-: Yes, thank you.
-: Harry, thank you once again for coming,
for being here and testifying.
Back to the same question I keep asking.
Production in excess of reasonable market demand.
You appreciate you laid out that early scenario.
It sounds like what you're saying is,
you sent these letters a while back,
and your current analysis still looks like mid May
is when storage becomes an issue.
Did I understand that right?
Harry: Yeah, so let me just say,
if you go to Cushing instance, Cushing's gonna fill.
The differentials there, it doesn't matter,
people are gonna be encouraged to fill storage equation.
But yes, the trend is,
maybe we're seeing some production reductions implemented,
but over the last few weeks, the trend is still,
we're still seeing that we should fill sometime in May.
-: Okay, as a midstream transporter, (chuckles)
and I know you're (indistinct) your pipeline open,
but what I'm asking-
Harry: What do you mean (voice drowned out by Sitton)?
-: Fair, thank you.
What I'm asking is from the standpoint of,
you've got so much, you can push out the back end of a pipe,
and so much you can pull in the front of the pipe.
When storage fills up, so when you came up
with these letter were sound,
but it was two, three weeks ago.
What are you seeing in terms
of supply in excess of demand?
Once storage fills up,
what does that mean you guys will need to do
in terms of curtailing production at that point?
Harry: Yes, so that's a good question.
Well, what we've done from a transportation standpoint
is we've told all of our shippers
that we have provision on our carers,
a carer is rules and regulations on the pipeline.
That they have to have proof of a market
at the destination, before we would accept nominations.
So we can't act as a storage facility
for everybody that doesn't have a market.
So what we tried to do is, we've implemented a process
that we're only taking crude into the pipe
that has a home at the other end.
Did I answer your question?
-: It does in terms of process.
What I'm asking is when you,
clearly you see something coming,
a concern over amount of location to send that crude.
And so what I'm asking is, how much of a challenge is that?
When you look out and say, "When your storage fills up,
we're gonna be able to take this much crude," at that point,
versus what you were taking today or two weeks ago.
Harry: So it's a hard question because
it's gonna really just depend on who at the other end
of that pipe can take the crude.
So operationally it's not difficult,
because all pipes have storage and storage
is sort of the shock absorber.
And when it gets filled, it is a tougher environment
because it's basically a barrel in, barrel out scenario.
in that environment, which is not usually the case,
usually we use our system stores
to balance daily fluctuations in supply and demand.
So it could end up backing up production at the wellhead.
-: I realized here, forgive me if I'm asking you
to speculate too much, but I feel like you guys are trying
to do your best to look at this from a data perspective.
A month ago, how much crude did the Plains move per day?
Harry: So if we moved about, we can look at it
in the context of how many barrels of crude
that we charged tariffs on every day.
So some of that is, moving the same barrel
on two different pipes, so it's a little bit
of double counting, but it's about 6 million barrels a day
on our system, six and a half million barrels a day
on our system, overall.
-: Okay.
Thank you Harry, if we fast forward to mid May,
storage fills up.
At that point given what's happening in the market today,
what you're seeing, how much crude would you be moving
by the end of May, if we continue on this path?
Harry: (laughs) Yeah, that is a tough question.
We look at it more globally, not globally,
more North American, (indistinct) saying.
We think three to 4 million barrels a day,
coming off pipes in general, in the US.
-: Okay.
And I'm not just explaining why,
I'm trying to, you guys have a different vantage point
than say a refinery or a producer.
So I'm trying to understand, in our statute's definition
of waste, which is production in excess
of reasonable market demand, trying to get a sense of that.
So thank you, that is (voice drowned out by Harry)
Harry: Yeah, and I'll say what we were trying to do
with our suppliers and producers is say,
"Listen, there's a wall coming,
and you have a chance to be proactive.
Think about how you can manage your production
so that when the wall hits,
you have curtailed the production
that is best suited for your company."
That's the way we were trying
to advise our suppliers and producers.
-: Have you seen a notable drop in the last couple
of months in terms of the people shipping
on your, in a crude oil
Harry: Yeah, so it's actually been,
I would say, when I look in Texas, our binds have been
about flat through the first few months of the year,
slightly down in April, but not huge.
And we've had conversations with a number of producers
that have indicated that they would be curtailing
and shutting in production second half
of April and into May.
Those vines are meaningful, but those are just discussions.
Those curtailments haven't occurred yet, I would say.
-: I appreciate, let me make sure that I'm not coming
to far and too much of this.
Because we've had some presenters today saying
the market is responding, we're taking barrels offline.
It sounds like you have not seen that yet
in terms of the products that you're moving,
but you expect to see it, based on commentary.
Harry: Yeah, we are seeing a little bit so far.
So I would also say that a lot of the April business
was sort of concluded before we started seeing
a lot of demand disruption in the US.
So we thought May would be the month
where you would see the larger market impact.
-: Okay, so it's too early right now to see the impacts
of voluntary sheddings?
Harry: Yeah, to large scale, like I said,
I think we're starting to see
some producers curtail production,
and we're definitely getting feedback on producers
that they plan to curtail more production.
-: Okay, my last question, and I know the chairman
is trying to get me to lighten up my questions a little bit.
The question I'm trying to understand for everybody is,
is there waste, is that due market over-supply?
And if we were to do some sort of proration,
is there any positive impact on that?
Does that help to prevent waste?
My question to you is that one;
if we were to somehow curtail production, prorate,
what does that mean to you in terms of balancing supply
and production and consumption, sorry?
Do you see a benefit to that in terms of
you all moving product, supply chain, that sort of thing?
Harry: I hate to avoid your question, but we've really,
haven't dug that deeply to develop informed opinion
as to whether, sort of a systematic proration
would make more sense or not.
We sort of looked at curtailments are gonna be required.
So it's hard to envision a scenario
where demand increases soon enough to create a situation
where we don't have some type of production curtailment.
-: Okay, thank you, Harry.
Harry: Certainly. Thank you.
-: Any other questions, members?
If not, we thank you so much for appearing today.
Harry: Thank you, good afternoon.
-: Thank you. Callie.
Callie: Yes, thank you.
We now have Jim Teague, with Enterprise Products Partners.
You are invited to speak.
-: Mr. Teague, it's glad to have you at the proceeding,
by the way just as I
(voiced drowned out due to radio interference)
Callie: Mr. Teague, if you've got the admin monitor going
and the same conversation as this,
you will need to end the admin monitor.
-: I wish I knew what she was talking about Mr. Teague,
but whatever she said, you need to do it. (laughs)
Well, it's good to have you here, Mr.Teague
and of course, Dan Duncan the founder
of your company originated from about five miles
from where I now sit.
And he's a proud citizen originally
of our Shelby County, Texas.
So it's good to have you here today, if you would please,
identify yourself, the company you represent,
and if you are for, against, or just speaking
on neutral to the motion at hand.
James: (laughing) Chairman and I grew up just
across the border in Desoto Parish.
So I'm really familiar with Central Texas.
-: Okay, good.
James: I'm Jim Teague
with Enterprise Products Partners, and we are against.
We thank you for the opportunity
to speak today on this topic.
We presented a letter to the Commission on April eighth,
outlining our views, and today I'm really
in support of that letter.
This virus has destroyed,
approximately 25 million barrels a day,
of global hydrocarbon demand.
And it was like it fell off a cliff, it was overnight.
We've seen wholesale gasoline being sold
for less than 25 cents a gallon in some markets.
As a result, refineries have got their operating capacity
at 25 to 40% as they scrambled to adjust
to new market conditions.
Global oil and gas and venture chemicals,
aren't really just a Texas issue, these are global issues.
And until the global economies re-open,
that healing will not begin.
To give you an example of the cliff that we fell off of
from the beginning of March to the end of March.
Worldwide commercial flights went from 14,000 flights a day,
to 5,000 flights a day.
North America was much the same.
US gasoline demand has dropped 50%,
and currently stands at a 50-year low.
Retail stores have shuttered under staying at home orders,
our restaurants are closed,
and frankly the most devastating thing to me,
is that bars were also closed.
Putting all of this in perspective,
global demand for hydrocarbons has fallen
from about a hundred million barrels a day,
to something under 75 million barrels a day,
and it may still be falling.
However, the Texas Railroad Commission
cannot solve a global pandemic issue.
Other states would love to see a cut by the Commission
that would, it would give them more running length.
Frankly, for the life of me,
given a 20 million barrel a day overall,
I don't see the rationale of those pushing for this.
Do you really think that a cut by Texas
could fill a 25 million barrel demand hole?
Asking for you to take this action makes me wonder
about the true agenda.
Are they really trying to fix a problem
or do they wanna argue that government action
by you gives them the opportunity
to get out of some of their obligations?
We have to see the reality of the situation.
It's not hard math.
This is a demand issue.
But I believe, and by the way, Mr. Chairman,
(indistinct), free markets work.
Free markets will balance the supply-demand equation.
Free markets are already working.
OPEC-plus has agreed
to almost a 10 million barrel a day production cut.
They didn't do this because they were magnanimous.
They did it because they couldn't stand the price.
Price creates supply, and price creates demand.
When this is behind us, low prices will create more demand,
and low prices create less supply.
and the market will move towards balancing.
That's the way it's always been.
That's the way it always will be, regardless-
Callie: That's the three-minute mark at this time,
Commissioners, would you like to hear further comments,
or are there any questions?
-: Please let him complete his remarks, I requests
James: I'm almost through.
Callie: Very good, please continue, Mr. Teague.
James: That's the way it's always been,
and that's the way it always will be,
regardless of what you guys do.
I listened to Lee's comments and Doug's comments,
and let me make a point.
We've had to make difficult decisions in the last month,
on our pipelines plants and our docks.
We made those decisions based on our own economics.
And we will make more difficult decisions based
on the economics we have,
based on what the market gives us at the time.
We believe in free markets.
We believe that markets will ultimately balance.
It'll be a dynamic balance, because sometimes
we'll have more supply than we need,
sometimes we'll have more demand than we need.
Thank you.
-: Thank you, Mr. Teague, are there any questions members?
Commissioner Craddick.
-: Jim, thanks for being here and taking the time,
I've a couple of questions.
You referenced that you've already made
some tough decisions and I know you're not just one part
of the food chain, but all the way across.
Could you kinda give us that perspective of,
you're not an EMP, but you're the rest of the part of it.
And could you kind of give us the perspective
of how you're balancing that
and what you see for you all as a company?
James: Well, one of the things is as refineries
have cut their operating capacity,
what we're finding is what we sell to them
or what we buy from 'em, they don't have what we wanna buy,
and they need less of what we want to sell.
That's one thing, Commissioner.
The other thing is, we are seeing through-puts
in our pipelines start to go down.
Nominations are due tomorrow, I think.
And I expect that those nominations will be less
than they have been, and in discussions with our producers,
most of them are saying, "Expect us to cut production."
-: And so we're seeing it,
you're starting to see it go down, as we speak.
And my second question is you're not just doing crude.
So you've other products.
If we prorated, would that affect your other products?
Or just, how could you explain that
to us a little bit more in detail?
James: Yeah, if you prorate,
this is rich gas with a lot of LPG.
That's the one area of our business
that has remained strong, is our LPG export.
Our docks are pretty are (voice drowned out)
actually we're sold out on LPG exports.
So to the extent you prorate, given the richness of the gas,
there'll be less LPGs.
-: Okay, thank you.
-: Okay.
Are there any questions members?
If not-
(voices drowned in crosstalk)
Oops! Commissioner Sitton.
-: Yeah, I think I have one.
Jim, thanks, thank you very much for being here.
And I may just have one question because you seem
like you agreed with some of the previous testimony that if,
I'm gonna sum up, if I'm wrong, tell me but I'm trying
to be efficient as I was instructed to be,
that yeah, there's over supply,
we've got demand destruction, but it seems like,
is your position on this, yes, there's over supply,
but that doesn't constitute waste, and that we,
as a Commission should ignore the economics,
let private business work that out?
That from a waste perspective,
all we should focus on is the molecules themselves, I guess,
and let you guys worry about the economics?
James: Yeah, I think I define waste
as inefficient producers continuing
to produce in a time like this.
Ultimately producers have a difficult decision to make.
You keep talking about waste,
and you keep talking about storage filling up.
Well, first of all, I've never seen a situation
where storage fills up.
Market adjusts for that.
And at a certain point, at a certain price,
somebody's going to buy this crude oil.
Now what the producer has to decide is,
do they want that price?
And if not, then they have to cut production.
But I don't believe that I just, I've never seen,
and I've been around a while,
I've never seen storage filled up!
I don't accept that thesis,
because invariably, markets work,
and somebody will stick their head up, and offer a price.
Then the seller has to decide whether they want the price.
-: Okay, I appreciate that.
I guess you don't agree with my questioning on the storage,
but I'm going off of the testimony that was submitted,
the comments that were submitted
by a lot of these independent firms.
I think Wood McKenzie says that storage
will be 98% full in July,
Rice Dad says we would hit sometime in mid July,
Rapidan actually said in their presentation
that a crude tsunami was unavoidable.
So it seemed like that was a pretty common theme
that I saw in all of the testimony that was submitted.
It seems like you disagree that?
James: I disagree with it in the sense
that a little later somebody is going to make an offer
for their crude, and then they got a hard decision to make.
But I mean, if you place an offer to me,
I'll listen to that.
And I think, "Okay, that's an academic definition."
We're dealing with a commodity that has a global market.
And it's either gonna muscle its way
into the global market, or it's gonna be shut off,
one of two.
You're talking about storage as if
everything's always static,
and people are gonna keep producing
and this pandemic is gonna be around forever.
That's just not the case, Commissioner,
I don't believe that for a minute.
-: I agree with you, that wasn't just,
I got to be the person, that was my question.
That was not, I'm certainly trying to assess
whether or not there are so much excess capacity
in produce that we run into a supply-chain issue
with a limited amount of storage
that I believe exists in the United States.
But once again, I'm going off of the testimony
that I receive in trying to assess that data.
James: Yeah, you don't just have storage,
you've got docks, you've got water access.
When demand starts recovering, refineries crank up.
So I've personally not accept that everything's
just must keep building, sooner or later a bubble opens
and somebody sticks their head up and makes an offer.
And somebody has to decide, do they wanna sell it?
Frankly, we are converting in-gel wells.
Right now we're converting wells to diesel storage
we're converting wells to gasoline storage.
And we have offered to convert wells to crude oil storage,
and we've made that offer to a couple of folks
and we've not gotten any takers.
-: I don't have any other questions.
-: Thank you very much, Mr. Teague.
I appreciate very much your participating today,
and good to visit with you.
Thank you, sir.
Callie: Thank you, moving on,
we now have Mark Houser with University Lands,
you are invited to speak.
-: Mr. Houser, welcome to the discussion.
Would you please state your name, who you represent,
and if you're for, against,
or neutral on the issue at hand.
Mark: Well, thank you Mr. Chairman
and Commissioners Craddick and Sitton
for having this session.
My name is Mark Houser, I'm the CEO of University Lands.
And in my role, I'm here
to just present information relative to the issue.
I appreciate the Commission's efforts on behalf of Texas,
specifically for allowing these discussions
and feedback from so many stakeholders.
And I think we're the first
and they'll be other mineral owners.
And putting it in perspective, University Lands manages
the surface and mineral interests
of 2.1 million acres across West Texas,
that benefit more than 20 educational
and health institutions across the UT and AM systems.
UL's primary revenue source is royalty income
from oil and gas development
on 1.4 of these 2.1 million acres.
Over the past 10 years, we've generated $8.2 billion
of royalty income and 460 million of surface income.
Daily gross production is about 180,000 barrels a day
and 600 million cubic feet from 9,000 producing wells.
And they're over 250 different oil
and gas companies operating on these lands.
And they have a huge economic impact beyond just the royalty
and surface income in West Texas, and in our state.
We work proactively with oil and gas operators
to maximize longterm value,
through promoting consistent development
through price cycles.
We estimate there's about 20,000 potential
additional drilling locations
within the resource-base of these lands,
with current break-even prices from $25 a barrel to 60.
Unfortunately with the unprecedented coronavirus,
demand shrank and Russia and Saudi disagreements,
supply (indistinct) has created, in my opinion,
what's a chasm instead of a down-cycle.
In response to this chasm, UL is working with operators
to significantly reduce activity.
Examples include deferring existing drilling
and completion requirements, allowing wells shut-ins,
while ensuring leases remain in good standing.
We expect our UL rig count, the operators rig count
to decline from an average of 17 rigs in 2019,
to somewhere around five to seven by late 2020.
We're projecting mineral revenue will decline
from 1 billion in 2019 to around 500 million,
depending on price in 2021.
According to a new Federal Reserve Bank survey,
almost 40% of producers face insolvency
within the year if crude prices remained at $30 a barrel.
This implies that a hundred companies operating
on University Lands could become insolvent,
if there aren't significant and quick oil price increases.
This would create a significant disruption
on both University Lands and across the market,
putting the availability of capital and manpower
at further risk, and not providing
for consistent development,
and leaving a lot of oil in the ground.
I know some of you oil operators support the concept
of prorationing, some oppose, and likely many
that are undecided.
While all companies are hurting presently,
there are many operators that are somewhat well positioned
for this chasm and many in significant perils.
There are always winners and losers in markets
and oil companies can or should be protected.
That being the case, this unparalleled challenge
to our industry requires the consideration
of all options and opportunities.
The US position as the leading oil producer in the world,
seems to be requiring our federal leaders,
consider helping reduce the staggering oil inventories,
by working to reduce oil and gas production countrywide.
While market forces are already driving reductions
to some extent, and there have been
some global reduction commitments, the volumes needed
to affect real change at the global level,
may ultimately require more sacrifice by all.
Considering Texas' position as the leading producer
in the US, the Texas Railroad Commission's authority
to prorate oil production is one potential tool
in the toolbox for a US solution.
This could also provide a more orderly
and organized adjustment across the state,
than is currently occurring.
As many shut-ins are being driven by pipeline companies
that are refusing to move product
for companies with unsecured takeaway.
From a more tactical perspective, the Railroad Commission
should consider utilizing it's prorationing authority
to help promote reducing the amount of associated gas,
unnecessarily being flared in the Permian Basin.
This could help in reducing oil supply,
reducing the waste of natural gas, and demonstrating
to an observing public, the industry's commitment
to the continued environmental stewardship.
Thanks for listening, I know from talking with each of you,
that you realize the incredible positive impact
that the development of our state's oil and gas resources
have on Texans and all Americans,
as we work to provide low-cost energy for the world.
That concludes my comments.
-: Thank you, Hr. Houser,
are there any questions, Commissioners?
If none, Callie it's back to you.
-: I do. I'm sorry, I'm lined up.
I'm not flagging very well, sorry,
(panel laughing)
Callie: (voice drowned in crosstalk) please.
-: Yeah now, there you go.
Mark, thank you for being here for lending your testimony.
You went through that really quick,
I tried to get some numbers down but,
I guess, let me just ask you broadly,
from a mineral perspective,
in this landscape is there production
in excess of reasonable demand?
Are you seeing waste?
And if so, how would you quantify
that from mineral owner perspective?
Mark: Well, again, we're I think
maybe a somewhat unique mineral-owner
in that our revenue goes into an endowment.
So we really think about the long-term,
and with all the projections I see around,
oil demand for the longterm,
to sell at these prices is just not acceptable.
And we have been proactive in that,
and calling a lot of our operators and saying,
"look, if there are drilling commitments you have,
we'll talk about extensions.
If there's wells you can shut-in
that may compromise the lease,
we'll talk about delaying it."
And that's because to me, if we can lower production
and maybe as an example, sell eight barrels
at 35 bucks a barrel, instead of selling 10 barrels
at 20 bucks a barrel, I'll do it.
Because ultimately we wanna capture the most resource.
And I wanna make sure
there's good longterm decisions made here,
to make sure we're capturing the most oil we can
out of these oil and gas fields over the longterm.
I do get concerned, then these times,
operator's gonna start making hasty decisions,
drilling wells they shouldn't, not spacing wells properly,
and those sorts of things.
Callie: Are there any more questions at this time?
-: Ms. Craddick?
Commissioner Craddick.
-: Mark, thanks for the chance, I had one question.
You said that there were other tools,
are you considered this one tool.
Are there any other tools that you think
would be helpful for us to consider at the point?
Mark: Well, I think certainly the proration
and he is the topic of the day.
I mentioned in my comments, considering I think
this will be less impactful in terms of oil volumes,
but the discussion around flaring,
I think Commissioner Craddick it's something that
this could be a tool in helping
to kind of solve two birds with one stone.
But in any sort of event, I believe that prorationing
really needs to be part of the somehow coordinated US effort
for it to be impactful.
-: Thank you.
-: Thank you very much, Mr. Houser.
I appreciate your being with us today.
Mark: Thank you.
-: Okay, Callie?
Callie: Okay, I have been directed that
this is now the lunch break.
Commissioners, are you okay with that?
-: Certainly.
Participant: Done.
Callie: Okay, it'll be a 20-minute break.
So therefore we'll
be returning- -: 20 minutes!
Callie: (chuckles) You better eat fast that.
We'll be returning at 12:47.
-: Sound, okay.
(participant speaks faintly)