WEBVTT
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Radio.com, we'll begin momentarily.
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Thank you-
I will be moderating
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for today's open meeting.
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Just a few quick reminders, we kindly remind speakers
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to be ready to appear two speakers ahead of you,
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and to please respect the three-minute time limit,
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given to speak.
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There will be five to 20-minute breaks,
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given at different intervals of the meeting,
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where we will pause the video,
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and return at the appropriate time to reconvene.
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If you experience technical difficulty,
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or do not appear when called upon,
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please send an email to rrcconference@rrc.texas.gov,
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with your name, phone number,
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and we will have someone assist you
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with further instructions.
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The Commission does reserve the right to remove
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any audio or video sharing capabilities
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for any person engaging
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in disorderly conduct while speaking.
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But I am more than confident in our speakers
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that we will not have to do that today.
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With that said, Chairman Christian,
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if you would please start the meeting.
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This is Chairman Christian.
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This meeting of the Railroad Commission of Texas
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will come to order, to consider matters
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which have been duly posted
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with Secretary of State for April 14, 2020.
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The Commission will consider the items on the agenda
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as posted on the agenda, and Commissioner Craddick,
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would you like to make an opening statement?
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You'll need to unmute, Commissioner Craddick.
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Why messed up when we're just started.
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Good morning and thank you, and thank you Chairman,
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for allowing me to speak this morning.
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Real quickly I thought I'd start by thanking staff
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for getting us up and going,
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hopefully we'll stay up and going and I have no doubt.
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And also thanking the staff for continuing
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to work under these unprecedented times.
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I think we've got a lot of great staff,
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they're doing great job from across this state,
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and most of them from home, and we continue to do our job,
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which I think has been really important.
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The second person I wanna thank is frankly, the President.
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For understanding and appreciating
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that this industry is really, really important,
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not just to this state, but across the world,
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and for what, how he's been specifically engaged
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in the oil and gas industry and helping
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with the OPEC negotiations for the last several weeks,
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and we are moving forward I think in a good way
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on the international front.
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And then look, this here is really important
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to all of us, I think.
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We wanna continue this discussion for Texas,
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and so I wanna thank everybody who is sending comments
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and also everybody who is on today,
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and is giving us some good feedback,
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I have a lot of questions.
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So first I wanna say, I understand
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that the statute prohibits this Commission
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from adopting an order, curtailing marginal wells,
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as well as discovery wells up to a certain amount.
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So I'm not listening for issues about that necessarily.
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I'm gonna be listening for proposed solutions,
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about how the Commission will utilize existing resources
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to implement, monitor and rescind an order timely,
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and I want to hear how this will help
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or hinder all Texas producers.
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And so I look forward to all the information
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we'll get and the testimony we'll get today,
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and thank you, Mr. Chairman for calling the meeting.
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Thank you Commissioner.
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Commissioner Sitton, would you like to make any remarks?
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I would, thank you, Chairman,
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and also thank you, Commissioner Craddick,
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I thought you put that very, very well.
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This has been an interesting time
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not just in our industry, but around the world.
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I think it's the first time, certainly in modern history,
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but as far back as the last hundred years
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that we, not just our nation, and but really our people,
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I mean the people of the world that face
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such a common and global threat.
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And so to watch people in all areas, industries,
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countries figure out how to navigate this,
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it has been a special thing to watch, and I applaud
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both Chairman Christian and Commissioner Craddick
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for our actions to try to figure out not only
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how to help our staff and support them
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and dealing with all the challenges working from home,
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but also looking at options to help stabilize things
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in this industry, which is so vital to Texas.
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Since I've been in office, I've always felt like
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one of the charges that the public puts in us is,
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that look, affordable, reliable energy is good
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for everybody in the United States.
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It's good for the state of Texas.
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And so as we look at this,
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I think that always is in the back of my mind.
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All that said, what Commissioner Craddick opened up with,
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talking about what statute says, this is a fairly,
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I feel like it's a fairly data-intensive exercise.
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Good discussion as we listen to what people see,
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what data they're seeing.
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As I ask these three questions, at least for myself:
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Is there a waste happening?
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Is that waste tied to an overproduction
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in excess of reasonable demand?
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And then if the Railroad Commission was to prorate,
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how would it address those two things, and would
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it make a positive impact in terms of preventing waste?
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And that's the data I'm hoping to see today,
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so I'll probably ask those same series of questions,
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over and over, and like the Chairman
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and like Commissioner Craddick, I'm really looking forward
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to the discussion today.
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Thank you everyone who has prepared remarks
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and has come prepared to talk through this with us.
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Thank you Commissioner, I appreciate that.
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I wanna thank everybody on my part
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for taking time to join us.
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It says a lot for the citizens of Texas
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and for this industry that we've had a tremendous
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amount of response to having this invitation to participate.
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And we are honored and appreciate everybody
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that is participating today.
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Those that have just written in remarks or taking a stand,
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it's important for people to know
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that the Railroad Commission is listening during this time
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of unprecedented problems in OPEC.
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Who would have thought a month ago
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we'd be facing this type of dilemma?
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As this virus, wreaks havoc upon the healthcare system,
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it's done additional, tremendous harm to our oil
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and gas industry as all are aware of.
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I'd like to start by saying, I think President Trump,
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as did the Commissioner Craddick and Commissioner Sitton,
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that he's done a job of standing up for oil and gas,
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and I appreciate him, his administration,
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the folks with him, but I also also thank,
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the phone calls that he's arranged for myself,
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and I'm sure that other Commissioners,
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with the Department of Energy, the Department of State,
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and it's been quite an inspiring time to be involved
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in a conversation worldwide as a significance,
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and understand the power of the state of Texas,
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the industry and the Railroad Commission
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has in this situation.
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It was interesting to read an article this morning
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that the Railroad Commission of Texas
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has the power to lend oil production,
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but the President does not.
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And that's kind of a sobering responsibility
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we find ourselves holding today.
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I'd like to thank our Texas congressional delegation,
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especially our senators.
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It was inspiring to see the two senators
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that showed up in the White House office
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when the industry had the meeting, were Senator Cornyn
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and Senator Cruz, they were both there from our state,
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representing oil and gas in that meeting
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that President Trump held.
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I appreciate everyone's patience that the Commission
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has put this meeting together.
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Our staff at the Commission is what I always say,
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the value of the Texas Railroad Commission,
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as has been posted the most respected regulatory agency
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on planet earth, is not necessarily
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the elected Commissioners through the years.
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It's the hundreds of employees across the state of Texas,
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that make the Railroad Commission of Texas,
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respected as this.
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Much like it is in our nation's best interest
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to manufacture consumer goods, to protect ourselves
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from foreign entities that may own the rights to,
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we found our pharmaceuticals
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that I think our Congress administration
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is now very concerned about.
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And I thank luck so is this discovery and this oil
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that we have found and natural gas and minerals
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that God has blessed Texas with.
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And I think it's very important that we
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and the Federal Government understand,
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we do not want a foreign entity controlling the production
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of oil and gas from the United States,
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and especially do not want that in Texas in times ahead.
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So I believe this is a national security issue,
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much like pharmaceuticals have been planned.
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I'll state in my initial statement on this issue,
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and despite my reservations on this limiting,
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open to discussion, and I think all of us
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as Commissioners have our individual concerns,
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and I wanna join Commissioner Sitton
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in saying how much I appreciate, and I will make it clear,
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that when I say something in public,
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or through an article or I'll do something,
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it is totally independent of the other two Commissioners,
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and it's independent of the Railroad Commission of Texas.
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It's only when the three of us, with equal power,
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come together and make a decision
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that the Railroad Commission has spoken.
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So for the press and all who here,
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perhaps me make statements, that's Wayne's opinion.
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And until these three come together,
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we share equal authority in this agency,
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I'm only chairman by the gift and grace
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of the other two Commissioners that have allowed it.
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And so that concludes my opening statement,
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and are there any more remarks before we begin testimonies?
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Okay, hearing none,
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Callie would you please call up the first witness?
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Yes, thank you.
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This is Callie Farad, moderator for the open meeting.
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Scott Sheffield, with Pioneer Natural Resources,
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you are invited to speak.
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Hello, this is Chairman Christian.
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Before you begin your testimony, would you please state
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for the record, your name, who you represent,
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and whether you're testifying for,
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against or neutral on prorating?
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(participant speaks faintly)
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Yes, I mean, Sheffield (voice drowned out)
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This is Chairman Christian.
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Before you speak, your testimony,
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would you please state your name, who you represent
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and whether you are testifying
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for, against, or neutral on prorating.
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Thank you, good morning (voice drowns out).
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I'm Scott Sheffield, CEO and President
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of Pioneer Natural Resources, and for proration.
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I'll go and begin my remarks.
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Chairman Christian, Commissioner Craddick,
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and Commissioner Sitton, hope everyone is well
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in your families and your staffs are well.
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Also thank you for doing something
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about having a hearing for the first time since 1973,
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to consider proration.
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(indistinct) towards the OPEC from 1930 to 1973,
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in prorating and setting the price of oil.
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The price of oil was set between two and $3 a barrel.
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As an Ex-reservoir engineer, I'd rather have stable prices
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with you, that is prorated, than what I have lived with
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in my entire career, 35 years, as CEO.
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As you've seen on slide four, tracking the price of oil,
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over the last 40 years.
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OPEC took over in the seventies,
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and been prorating since 1973.
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Look at the price chart on slide number four.
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It has been an economic disaster,
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especially the last 10 years.
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Our industry has created so much economic waste,
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that nobody would buy our stock, or own our stocks.
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We have gone from 15% of the S&P 500,
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to 2.5% of the S&P 500.
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We were at 28% in the 1980s.
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Exxon has gone from 500 billion of market cap,
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to 130 the last few years, recently.
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Nobody would want to give capital,
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because we have all destroyed capital
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and created economic waste.
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Only the Majors and EOG have raised capital
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in the last five weeks, 50 billion of debt.
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The equity and debt markets are closed, to everybody else.
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I have read most of the pros and cons against proration,
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and will spend most of my time on slide number two.
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I love the (indistinct) paper by IEEFA,
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which I'm not familiar with written by Tom Sanzillo,
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who will present later.
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I circulated that paper to our board
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who thought it was very thought-provoking.
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The Railroad Commission is compelled to act
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when production is an excess of reasonable market demand.
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Secondly, they say if the Texas Railroad Commission
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does not regulate longterm, we will disappear
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as an industry like the coal industry.
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For those that do not know, the entire market cap
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of coal is equal to Pioneer's market cap.
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Mr. Sheffield, the time has expired.
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Commissioners, would you like to continue
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to hear the presentation,
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or are there any questions at this time?
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I still have about two more minutes.
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I'd like to hear the rest of this two minutes,
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if that's okay.
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Please continue, Mr. Sheffield.
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Our goal, when we started five weeks ago,
00:14:00.460 --> 00:14:02.320
we thought it would be part of a global solution
00:14:02.320 --> 00:14:04.370
to reduce supply and reduction
00:14:04.370 --> 00:14:07.000
of 25 to 30 million barrel demand loss.
00:14:10.095 --> 00:14:13.080
We've been dependent on OPEC and OPEC-plus since 2016,
00:14:13.080 --> 00:14:15.940
since we've added 4 million barrels a day,
00:14:15.940 --> 00:14:18.890
three of it from the Permian since 2016.
00:14:18.890 --> 00:14:22.160
We have stolen market share from OPEC-plus.
00:14:22.160 --> 00:14:25.290
Again, we have invested billions in the last four years.
00:14:25.290 --> 00:14:28.780
Most of those wells now are considered economic waste.
00:14:28.780 --> 00:14:31.880
The return on capital employee for our industry last year,
00:14:31.880 --> 00:14:33.800
averaged five to 6%,
00:14:33.800 --> 00:14:38.000
with only two companies exceeding 10%; Pioneer and EOG.
00:14:38.000 --> 00:14:40.820
The Majors averaged five to 6%.
00:14:40.820 --> 00:14:43.910
This is not efficient, but against economic waste.
00:14:43.910 --> 00:14:48.910
All other industries have averaged 10% plus.
00:14:51.400 --> 00:14:53.270
The President has entered into a historic deal
00:14:53.270 --> 00:14:55.320
with OPEC-plus, which we support.
00:14:55.320 --> 00:14:58.860
But oil prices did not move, in fact, they dropped about 8%.
00:14:58.860 --> 00:15:00.350
They're down to $21 today.
00:15:01.870 --> 00:15:04.940
Last week, the Delaware was getting $3
00:15:04.940 --> 00:15:07.710
in the Midland Basin was getting $10.
00:15:09.660 --> 00:15:12.920
The cuts were 10 million barrels a day, we need more.
00:15:12.920 --> 00:15:15.520
Texas can lead in getting a real G-20 cut,
00:15:16.670 --> 00:15:17.950
a 5 million barrels a day.
00:15:17.950 --> 00:15:20.730
Not a fake 5 million barrels a day.
00:15:20.730 --> 00:15:22.700
Oklahoma, it looks like they're moving forward
00:15:22.700 --> 00:15:24.240
on Commission hearings.
00:15:24.240 --> 00:15:28.870
North Dakota is reducing flaring to reduce production.
00:15:28.870 --> 00:15:31.220
Secondly, our storage is filling to the brim.
00:15:31.220 --> 00:15:34.010
Pioneer had called our 10 largest producers
00:15:34.010 --> 00:15:35.920
of crude oil about two weeks ago.
00:15:35.920 --> 00:15:38.430
We're going to be full in Cushing in the next four
00:15:38.430 --> 00:15:41.870
to five weeks, and we'll be full all across the state.
00:15:41.870 --> 00:15:44.050
No one that is saying disputes this.
00:15:44.050 --> 00:15:46.550
Small producers and medium producers without a mechanism
00:15:46.550 --> 00:15:49.660
to transport the crude oil to the Gulf Coast
00:15:49.660 --> 00:15:51.690
or Cushing will be totally disadvantaged.
00:15:51.690 --> 00:15:53.910
If you read the article about Texland
00:15:53.910 --> 00:15:56.510
in the "Wall Street Journal", a great article,
00:15:56.510 --> 00:15:58.900
"They will be curtailed 75 to a hundred percent,
00:15:58.900 --> 00:16:00.360
is that fair?"
00:16:00.360 --> 00:16:02.400
Storage is full and the Fujairah and Saldanha,
00:16:02.400 --> 00:16:04.140
in the Middle East and South Africa.
00:16:04.140 --> 00:16:06.710
Cushing again, will be full four weeks.
00:16:06.710 --> 00:16:09.530
Storage does not have to be totally full in the world,
00:16:09.530 --> 00:16:12.080
but will create huge bottlenecks.
00:16:12.080 --> 00:16:15.260
It does not take a rocket science to do the math.
00:16:15.260 --> 00:16:16.790
30 million barrels a day of loss
00:16:16.790 --> 00:16:20.530
minus 10 million barrels a day, if OPEC cuts 20 million.
00:16:20.530 --> 00:16:23.180
20 times 30, 600 million.
00:16:23.180 --> 00:16:26.600
That's 1.2 billion of filling up storage
00:16:26.600 --> 00:16:29.060
within 30 to 60 days.
00:16:29.060 --> 00:16:32.040
As I understand, under the law, waste occurs
00:16:32.040 --> 00:16:34.190
when production of oil is in excess
00:16:34.190 --> 00:16:35.970
of reasonable market demand.
00:16:35.970 --> 00:16:38.510
Waste is occurring today, and expected to continue,
00:16:38.510 --> 00:16:41.740
and the Texas Railroad Commission is obligated by law,
00:16:41.740 --> 00:16:44.390
to act to prevent or lessen the waste.
00:16:45.990 --> 00:16:48.400
Is waste occurring? Obviously, yes.
00:16:48.400 --> 00:16:50.290
We've hit the five-minute mark.
00:16:50.290 --> 00:16:51.380
Commissioners, would you like
00:16:51.380 --> 00:16:53.020
to continue hearing the presentation,
00:16:53.020 --> 00:16:55.130
or are there any questions at this time?
00:16:55.130 --> 00:16:58.510
How about one more minute, please?
00:16:58.510 --> 00:17:00.330
Please extend your statement.
00:17:01.410 --> 00:17:02.550
Please continue, Mr. Sheffield.
00:17:02.550 --> 00:17:04.710
Yes, is waste occurring? Yes.
00:17:04.710 --> 00:17:06.880
No one disputes that production in Texas
00:17:06.880 --> 00:17:09.030
and globally vastly exceeds demand.
00:17:09.030 --> 00:17:10.970
Certainly none of those who submitted comments
00:17:10.970 --> 00:17:13.150
to the Commission disagree.
00:17:13.150 --> 00:17:15.290
Witnesses here today, have strongly different views
00:17:15.290 --> 00:17:18.310
about whether proration is the remedy, and that's the issue.
00:17:18.310 --> 00:17:21.480
But no one disputed the fact that waste is occurring.
00:17:23.630 --> 00:17:26.580
The Commission really does not have any wiggle room
00:17:26.580 --> 00:17:28.440
to do nothing in the unprecedented,
00:17:28.440 --> 00:17:31.020
disastrous circumstances of today.
00:17:32.010 --> 00:17:33.880
Now I'm gonna go to the cons.
00:17:33.880 --> 00:17:37.170
Free market; if anyone thinks we really have a free market,
00:17:37.170 --> 00:17:38.790
please look at slide four.
00:17:38.790 --> 00:17:39.790
You have to be joking.
00:17:39.790 --> 00:17:43.820
After 35 years as a CEO, I've never seen a free market.
00:17:43.820 --> 00:17:45.600
Me and the company speaking after me
00:17:45.600 --> 00:17:47.880
are asking for government debt bailouts,
00:17:47.880 --> 00:17:51.150
tariffs, carbon tax credits, is that free market?
00:17:51.150 --> 00:17:53.660
Survival of the fittest, deficient operators.
00:17:53.660 --> 00:17:54.870
Those companies could care less
00:17:54.870 --> 00:17:56.880
about the small and medium producers.
00:17:56.880 --> 00:17:59.910
Most of the companies using this have the worst track record
00:17:59.910 --> 00:18:03.040
in shareholder-returns and return on capital employed.
00:18:03.040 --> 00:18:06.290
They are not efficient and causing economic waste.
00:18:06.290 --> 00:18:08.480
Government intervention; people don't really admit,
00:18:08.480 --> 00:18:10.710
but I had several calls from CEOs.
00:18:10.710 --> 00:18:13.180
They do not want the Texas Railroad Commission
00:18:13.180 --> 00:18:14.510
to running their business.
00:18:14.510 --> 00:18:17.850
They're afraid of OPEC continuing, that's another cartel.
00:18:17.850 --> 00:18:21.700
EIA data recently shows 2 million barrels a day declined.
00:18:21.700 --> 00:18:24.670
800,000 taken off of growth, it's misleading.
00:18:24.670 --> 00:18:28.110
So we're only dropping from 12-three to 11-eight.
00:18:28.110 --> 00:18:31.850
They're also using 900,000 barrels a day, at stripper wells.
00:18:31.850 --> 00:18:35.630
Pioneer has only removed 5,000 barrels a day
00:18:35.630 --> 00:18:37.190
in 30% of our marginal wells.
00:18:37.190 --> 00:18:38.830
Those stripper wells will come back,
00:18:38.830 --> 00:18:41.170
When the oil is back to 25 to 30.
00:18:41.170 --> 00:18:45.810
Only 500,000 barrels decline in 2021 from EIA data.
00:18:45.810 --> 00:18:48.370
Also they released their productivity report.
00:18:48.370 --> 00:18:51.890
It's showing the Permian is only dropping 76,000
00:18:51.890 --> 00:18:53.320
from April to may.
00:18:54.870 --> 00:18:57.380
So how do you solve the storage problem,
00:18:57.380 --> 00:18:58.940
with Permian dropping?
00:18:58.940 --> 00:19:00.400
Lastly, to preserved the industry,
00:19:00.400 --> 00:19:02.030
I highly suggest the Texas Railroad Commission
00:19:02.030 --> 00:19:04.600
begin to lead, learn, take action,
00:19:04.600 --> 00:19:06.910
getting more involved in OPEC.
00:19:06.910 --> 00:19:09.310
I had a chance to get to know several of the oil ministers
00:19:09.310 --> 00:19:10.880
over the last several years,
00:19:10.880 --> 00:19:13.210
both from Saudi Arabia and across the world.
00:19:13.210 --> 00:19:15.800
I'm always amazed what work Ken Heinz did.
00:19:15.800 --> 00:19:17.390
It's easy to prorate and monitor.
00:19:17.390 --> 00:19:20.380
We recommend that Texas reduce 1 million barrels a day,
00:19:20.380 --> 00:19:23.260
for the month of May and be prepared to reduce again,
00:19:23.260 --> 00:19:25.540
maybe cut to 10% in June.
00:19:25.540 --> 00:19:28.440
I compare this to a crisis in 1986.
00:19:28.440 --> 00:19:30.650
This is probably gonna be worse than 86.
00:19:31.990 --> 00:19:34.870
Demand is not gonna be come roaring back.
00:19:34.870 --> 00:19:37.510
I'm gonna conclude with the final comments,
00:19:37.510 --> 00:19:40.200
we did have six comments about flaring.
00:19:40.200 --> 00:19:41.890
So I wanna finish on that suggestion.
00:19:41.890 --> 00:19:44.580
As a leader to reduce flaring in Texas,
00:19:44.580 --> 00:19:46.450
I love the idea to shut-in everyone
00:19:46.450 --> 00:19:49.990
in the monthly rise state report that is above 2%.
00:19:49.990 --> 00:19:51.000
It'll be a home run for
00:19:51.000 --> 00:19:52.970
the three Texas Railroad Commissioners.
00:19:52.970 --> 00:19:57.070
You can cut off, you can also reduce CO-two emissions.
00:19:57.070 --> 00:19:58.850
I will stop there, we conclude my remarks.
00:19:58.850 --> 00:20:00.180
Thank you for giving me more time.
00:20:00.180 --> 00:20:01.013
Thank you.
00:20:05.280 --> 00:20:07.290
Are there any other questions at this time?
00:20:09.671 --> 00:20:10.630
I do, Mr. Chairman.
00:20:13.090 --> 00:20:13.923
Mr. Sitton.
00:20:16.270 --> 00:20:20.200
Mr. Sheffield, you talked about waste,
00:20:20.200 --> 00:20:22.550
you have a lot of comments in here about waste.
00:20:25.910 --> 00:20:29.080
One of our challenges I believe is to quantify that waste.
00:20:29.080 --> 00:20:31.420
In other words, there's gonna be a lot of opinions
00:20:31.420 --> 00:20:34.080
about waste today.
00:20:34.080 --> 00:20:35.840
Can you quantify that waste for us?
00:20:36.690 --> 00:20:37.730
Yes, Commissioner Sitton.
00:20:37.730 --> 00:20:40.830
I'm gonna let Mark Berg answer that question.
00:20:45.990 --> 00:20:47.350
Good morning Commissioner.
00:20:48.840 --> 00:20:52.250
Just to quickly review what we mean by economic waste.
00:20:52.250 --> 00:20:53.640
I just want to run through
00:20:53.640 --> 00:20:56.260
our understanding of the definition.
00:20:56.260 --> 00:20:59.080
Economic waste is production in excess of market demand,
00:21:00.114 --> 00:21:01.830
and market demand is defined as,
00:21:01.830 --> 00:21:04.900
what is needed for consumption plus storage.
00:21:06.050 --> 00:21:06.883
Some have argued that
00:21:06.883 --> 00:21:08.980
there's sufficient storage in this market.
00:21:10.640 --> 00:21:13.050
Many of those are trade associations
00:21:13.050 --> 00:21:16.360
who are seeking a certain objective in this hearing.
00:21:17.600 --> 00:21:21.430
If you seek out the multiple market intelligence firms,
00:21:21.430 --> 00:21:24.480
including two of whom are speaking today,
00:21:24.480 --> 00:21:26.720
they would agree that market demand loss
00:21:26.720 --> 00:21:28.590
from the COVID-19 virus is somewhere
00:21:28.590 --> 00:21:31.040
in the range of 20 to 30 million barrels per day.
00:21:32.390 --> 00:21:34.830
So at this rate, the world storage,
00:21:34.830 --> 00:21:36.540
including the storage in the United States
00:21:36.540 --> 00:21:38.690
will fill up sometime between May and July.
00:21:39.900 --> 00:21:42.200
It can't possibly mean that the Railroad Commission,
00:21:42.200 --> 00:21:46.780
must wait until all storage is completely consumed and gone,
00:21:46.780 --> 00:21:49.780
before it prorates because that would make proration futile.
00:21:51.200 --> 00:21:52.400
And the law is clear
00:21:52.400 --> 00:21:56.000
that the Railroad Commission must prorate.
00:21:56.000 --> 00:21:58.330
If you look at the legislative history,
00:21:58.330 --> 00:22:01.840
Ernest Thompson testified in the early 19 hundreds
00:22:01.840 --> 00:22:04.050
that it should be permissive that the Railroad Commission
00:22:04.050 --> 00:22:05.200
could elect to prorate,
00:22:06.054 --> 00:22:08.570
and our the legislature decided otherwise.
00:22:08.570 --> 00:22:10.660
And they did that because they thought it was important
00:22:10.660 --> 00:22:13.150
to preserve the critical resources of the state,
00:22:14.000 --> 00:22:16.700
and not allow them to be wasted for political reasons.
00:22:17.910 --> 00:22:20.840
So to get to your question, Commissioner,
00:22:20.840 --> 00:22:22.690
you have to ask what good will it do?
00:22:23.901 --> 00:22:25.400
And the best way I can answer that question
00:22:25.400 --> 00:22:27.800
is to look at the behavior of all of our companies
00:22:27.800 --> 00:22:29.660
over the last few weeks.
00:22:29.660 --> 00:22:33.350
All of us united in the belief, in asking our president
00:22:34.310 --> 00:22:36.680
to go to all of the international community,
00:22:36.680 --> 00:22:40.520
and particular of the OPEC countries, and seek a compromise
00:22:40.520 --> 00:22:43.620
between the Russians and the Saudis, to end a price war.
00:22:44.680 --> 00:22:47.080
And we all applauded the cut in production that came
00:22:47.080 --> 00:22:50.220
as a result of OPEC, of 9.7 million barrels per day.
00:22:51.180 --> 00:22:52.620
So why did we do that?
00:22:52.620 --> 00:22:55.720
We did that because it's constructive for pricing.
00:22:55.720 --> 00:22:56.950
It reduces waste.
00:22:58.460 --> 00:23:00.650
We didn't do that for any other purpose
00:23:00.650 --> 00:23:03.920
than the simple laws of economics.
00:23:03.920 --> 00:23:05.420
When you have an oversupplied market,
00:23:05.420 --> 00:23:08.560
if you cut supply, it stabilizes improves prices.
00:23:09.730 --> 00:23:13.180
The same will occur, if the Railroad Commission cuts.
00:23:13.180 --> 00:23:16.420
The same will occur if other G-20 nations cut.
00:23:17.740 --> 00:23:21.640
And so the way we look at it, if Texas cuts 20%,
00:23:21.640 --> 00:23:25.070
as Scott suggests, the 1 million barrels per day
00:23:25.070 --> 00:23:26.920
that would come out of the market for every month,
00:23:26.920 --> 00:23:29.840
would create another 30 million barrels of storage,
00:23:29.840 --> 00:23:31.610
which is equivalent to what we're all pointing
00:23:31.610 --> 00:23:33.281
to as the SPR, for every month
00:23:33.281 --> 00:23:35.410
that we prorate a million barrels per day.
00:23:36.780 --> 00:23:39.970
Can you actually pinpoint the dollar amount per barrel
00:23:39.970 --> 00:23:43.750
that it improves as a result of a cut and supply?
00:23:43.750 --> 00:23:45.780
That's a very difficult thing to forecast,
00:23:45.780 --> 00:23:49.100
but I go back to the fact that all of us sought cuts
00:23:49.100 --> 00:23:51.580
from OPEC for the very reason that we thought
00:23:51.580 --> 00:23:53.680
it would improve pricing and reduce waste.
00:23:56.030 --> 00:23:58.710
Mr. Berg, if you would please state your name,
00:23:59.600 --> 00:24:03.040
who you represent and whether you're for, against,
00:24:03.040 --> 00:24:07.140
or just neutral on the issue.
00:24:07.140 --> 00:24:09.060
Yes, Mr. Chairman, thank you.
00:24:09.060 --> 00:24:11.440
I'm Mark Berg, Executive Vice President,
00:24:11.440 --> 00:24:15.530
Pioneer Natural Resources, and I'm for proration.
00:24:15.530 --> 00:24:16.650
Thank you, sir.
00:24:16.650 --> 00:24:17.500
Thank you, sir.
00:24:18.650 --> 00:24:19.950
Mr. Chairman, I have a follow up question
00:24:19.950 --> 00:24:21.880
that may I continue?
00:24:21.880 --> 00:24:22.713
Certainly.
00:24:24.630 --> 00:24:29.630
Mr. Berg, you said that how would...
00:24:29.850 --> 00:24:31.880
You kinda jumped forward to my third question,
00:24:31.880 --> 00:24:34.350
how would this help you?
00:24:34.350 --> 00:24:37.520
You said if we cut 1 million barrels a day
00:24:37.520 --> 00:24:40.460
of production in Texas, then that would result
00:24:40.460 --> 00:24:41.600
in 30 million barrels
00:24:41.600 --> 00:24:43.970
of additional storage created per month.
00:24:43.970 --> 00:24:47.910
Can you unpack them, how would that prevent waste?
00:24:48.970 --> 00:24:52.450
I think what's the crux of our discussion today is,
00:24:52.450 --> 00:24:55.410
great there's new storage or more storage.
00:24:55.410 --> 00:24:57.650
What will that do to actually prevent waste?
00:24:58.969 --> 00:25:02.140
It has to be price-supportive, Commissioner.
00:25:03.220 --> 00:25:08.210
That's the reason why all of us saw OPEC cuts,
00:25:08.210 --> 00:25:09.510
that it supports pricing.
00:25:09.510 --> 00:25:11.340
It takes only 80 barrels off the market,
00:25:11.340 --> 00:25:14.730
it reduces oversupply in the market,
00:25:14.730 --> 00:25:16.890
it reduces the overhang that will exist
00:25:16.890 --> 00:25:20.180
until this COVID virus is brought under control,
00:25:21.120 --> 00:25:22.480
and it supports prices.
00:25:22.480 --> 00:25:25.950
It's all the reasons why over the last 40 years,
00:25:25.950 --> 00:25:30.260
we all look to OPEC to control pricing by cutting supply.
00:25:31.880 --> 00:25:34.160
Can you pinpoint an exact dollar amount?
00:25:34.160 --> 00:25:35.270
That's a very hard thing to do.
00:25:35.270 --> 00:25:38.480
I would ask you to seek out advice from some
00:25:38.480 --> 00:25:41.920
of the independent market intelligence firms
00:25:41.920 --> 00:25:43.750
who're speaking to you today.
00:25:43.750 --> 00:25:44.800
It's very hard to predict
00:25:44.800 --> 00:25:47.210
what sort of incremental price support you'll get.
00:25:47.210 --> 00:25:49.000
But that's the reason why that's done.
00:25:49.000 --> 00:25:52.260
It provides greater pricing support for the industry,
00:25:52.260 --> 00:25:54.740
it also puts the industry in a position
00:25:54.740 --> 00:25:56.820
where you don't have every single barrel
00:25:58.140 --> 00:26:00.580
of available storage left,
00:26:00.580 --> 00:26:04.480
and forcing in widespread shutting of oil production
00:26:04.480 --> 00:26:06.360
in Texas, as a result of that.
00:26:06.360 --> 00:26:09.060
And the waste that will occur as a result of that.
00:26:09.060 --> 00:26:12.340
It also, in a situation, will avoid forcing prices
00:26:12.340 --> 00:26:14.950
to the very lowest levels, so that producers
00:26:14.950 --> 00:26:17.490
are forced to shut-in light of the fact
00:26:17.490 --> 00:26:21.370
that the storage is going to be low.
00:26:21.370 --> 00:26:25.000
And as the point I made earlier, it cannot possibly be
00:26:25.000 --> 00:26:26.960
that the Railroad Commission has to wait
00:26:26.960 --> 00:26:30.160
until every single barrel of storage is consumed,
00:26:30.160 --> 00:26:33.140
before you prorate, because otherwise there's no point
00:26:33.140 --> 00:26:35.240
in having a statute that you must prorate.
00:26:37.560 --> 00:26:40.950
So Mr. Berg, is your point that you're making
00:26:40.950 --> 00:26:44.240
on waste and proration is,
00:26:44.240 --> 00:26:47.350
if one of the independent economics firms
00:26:47.350 --> 00:26:51.470
that are presenting today, gives us a price differential
00:26:51.470 --> 00:26:54.630
at current production and prorate production,
00:26:54.630 --> 00:26:57.870
or at a excess capacity and full capacity
00:26:57.870 --> 00:26:59.720
that that's the mechanism
00:26:59.720 --> 00:27:01.220
by which we should calculate waste.
00:27:01.220 --> 00:27:03.380
Is that the point you're getting to?
00:27:04.320 --> 00:27:05.450
It's one mechanism,
00:27:06.330 --> 00:27:08.840
but I would also point out Commissioner,
00:27:08.840 --> 00:27:11.110
you don't have to calculate waste.
00:27:11.110 --> 00:27:13.160
The statute doesn't say that the Railroad Commission
00:27:13.160 --> 00:27:15.440
must calculate waste in order to prorate.
00:27:15.440 --> 00:27:18.290
All you have to do is to determine that there is waste.
00:27:20.080 --> 00:27:21.770
But, I understand that-
00:27:21.770 --> 00:27:24.560
And again, as it's defined, it's production
00:27:24.560 --> 00:27:27.760
in excess of market demand, and it's that simple.
00:27:27.760 --> 00:27:32.270
And as Scott pointed out, it cannot be that anyone
00:27:32.270 --> 00:27:34.160
is arguing that we're producing in excess
00:27:34.160 --> 00:27:35.710
of market demand in this situation.
00:27:35.710 --> 00:27:38.430
The only question is, how much has demand dropped
00:27:38.430 --> 00:27:40.830
as a result of this awful virus?
00:27:40.830 --> 00:27:43.360
And there are some conflicting views on that,
00:27:43.360 --> 00:27:46.250
but if you look at most of the market intelligence firms,
00:27:46.250 --> 00:27:47.260
they are all in the range
00:27:47.260 --> 00:27:49.450
of 20 to 30 million barrels per day
00:27:49.450 --> 00:27:52.290
of demand loss associated with the virus.
00:27:54.540 --> 00:27:56.500
Thank you, actually lead to my last question,
00:27:56.500 --> 00:27:58.870
I think for Mr. Sheffield and Mr. Berg.
00:28:00.050 --> 00:28:02.950
If the world is oversupplied,
00:28:02.950 --> 00:28:05.580
20 to 30 million barrels per day,
00:28:05.580 --> 00:28:07.630
which I've used the number you just gave,
00:28:08.690 --> 00:28:09.860
how does...
00:28:11.400 --> 00:28:14.250
Texas is producing 5 million barrels a day, give or take.
00:28:15.100 --> 00:28:20.100
How does our proration bring balance to that market?
00:28:22.704 --> 00:28:26.121
(Scott speaking faintly)
00:28:29.268 --> 00:28:31.443
I can't hear Mr. Sheffield, can-
00:28:33.000 --> 00:28:34.110
Is it unmuted now?
00:28:34.110 --> 00:28:35.730
Oh, thank you.
00:28:35.730 --> 00:28:37.810
Commissioner Sitton, in my view,
00:28:37.810 --> 00:28:41.260
somewhere between 10 and 20 million barrels a day of cuts
00:28:41.260 --> 00:28:43.430
is gonna cause the futures market
00:28:43.430 --> 00:28:46.770
to start turning around green versus red.
00:28:46.770 --> 00:28:51.500
I don't know what that number is; 15, 12, 13, 14.
00:28:51.500 --> 00:28:55.030
But I thank the President, that he did a great deal
00:28:55.030 --> 00:28:57.680
in getting the 10 million barrel day cut,
00:28:57.680 --> 00:29:01.860
but what was missing is getting the G-20 countries,
00:29:01.860 --> 00:29:06.860
Brazil, Canada, and the US to really create real cuts.
00:29:07.310 --> 00:29:09.010
So if we cut a million,
00:29:09.010 --> 00:29:11.140
is that gonna help Oklahoma get over the hump?
00:29:11.140 --> 00:29:13.010
Is that gonna get out of North Dakota?
00:29:13.010 --> 00:29:15.080
Is Canada gonna come back?
00:29:15.080 --> 00:29:17.360
Saudi has already mentioned that they're gonna have
00:29:17.360 --> 00:29:19.000
to probably cut some more.
00:29:19.000 --> 00:29:21.920
So I'm guessing they're got a need another four
00:29:21.920 --> 00:29:25.620
or five or 6 million barrels a day cut,
00:29:25.620 --> 00:29:28.970
before you turn the futures market around
00:29:28.970 --> 00:29:33.220
to where we see that oil will start moving to $30,
00:29:33.220 --> 00:29:35.790
versus just today, we're getting $15.
00:29:38.590 --> 00:29:40.690
Why do you pick the number $30?
00:29:42.655 --> 00:29:46.820
The breakeven cost of most independents today,
00:29:46.820 --> 00:29:49.720
including finding costs, was published last week
00:29:49.720 --> 00:29:53.850
by Rusty Braziel, it's about 25 to $26.
00:29:53.850 --> 00:29:57.200
We need $30 to survive.
00:29:57.200 --> 00:30:01.200
$20, you'll have 80% bankruptcies,
00:30:01.200 --> 00:30:03.890
250,000 employees laid off.
00:30:03.890 --> 00:30:06.900
$30 is what I call, we're crippled.
00:30:06.900 --> 00:30:09.190
But at least the industry will survive,
00:30:09.190 --> 00:30:11.080
waiting until the virus ends,
00:30:11.080 --> 00:30:14.130
and demand picks up by the end of 2021.
00:30:16.630 --> 00:30:17.463
Okay.
00:30:20.185 --> 00:30:23.017
(voices drowned in crosstalk)
00:30:23.017 --> 00:30:24.840
Any more questions?
00:30:24.840 --> 00:30:25.673
Ms. Craddick.
00:30:28.410 --> 00:30:29.750
You'll need to unmute yourself,
00:30:29.750 --> 00:30:30.850
Commissioner Craddick.
00:30:35.250 --> 00:30:36.510
Try one more time.
00:30:37.920 --> 00:30:39.390
Okay, sorry.
00:30:39.390 --> 00:30:42.100
Technology is not my game some days.
00:30:42.100 --> 00:30:42.933
All right.
00:30:42.933 --> 00:30:44.650
So thank you all, and thanks all for testifying.
00:30:44.650 --> 00:30:46.850
So I've got some just procedural questions.
00:30:46.850 --> 00:30:49.100
Scott, you and I have talked a little bit
00:30:49.100 --> 00:30:53.520
in the last couple of days about EIA.
00:30:53.520 --> 00:30:56.590
So let me ask this question and whether you or Mark,
00:30:56.590 --> 00:30:58.440
whoever wants to answer.
00:30:58.440 --> 00:31:00.430
So y'all, didn't make a nomination,
00:31:00.430 --> 00:31:02.150
but you're talking about 20%.
00:31:02.150 --> 00:31:05.360
Is that the number you're kinda looking at generally,
00:31:05.360 --> 00:31:07.900
if we decide to go down proration,
00:31:07.900 --> 00:31:10.580
is that an appropriate number you think today?
00:31:10.580 --> 00:31:14.870
Yes, I recommend 20% and then evaluated
00:31:14.870 --> 00:31:17.610
every 30-day period, and be willing to cut it
00:31:17.610 --> 00:31:19.970
to 10 the next month that things are improving,
00:31:19.970 --> 00:31:22.000
could be loaned to cut to zero.
00:31:22.000 --> 00:31:24.380
It all depends on how fast demand comes back,
00:31:24.380 --> 00:31:26.000
and what happens to the storage.
00:31:26.000 --> 00:31:28.220
Okay, 'cause it's kind of obviously moving.
00:31:28.220 --> 00:31:31.378
So I just wanted to clarify what your number was.
00:31:31.378 --> 00:31:35.340
So you and I both agree, I think that EIA never
00:31:35.340 --> 00:31:37.410
has the greatest numbers.
00:31:37.410 --> 00:31:40.600
So I've looked at Railroad Commission numbers,
00:31:40.600 --> 00:31:44.380
we just put out January numbers in the past week about,
00:31:44.380 --> 00:31:46.930
and so we're three months behind,
00:31:46.930 --> 00:31:49.340
of what I think real time numbers.
00:31:49.340 --> 00:31:54.010
So in January, we've already declined, from December
00:31:54.010 --> 00:31:58.820
of last year, we've already declined, roughly 17%,
00:31:58.820 --> 00:32:02.760
that companies had already begun production cuts.
00:32:02.760 --> 00:32:06.060
Let's assume from January to today,
00:32:06.060 --> 00:32:07.710
because we don't have good numbers,
00:32:07.710 --> 00:32:10.360
EIA doesn't have good numbers, they don't exist yet.
00:32:10.360 --> 00:32:11.820
We're a three month lag time.
00:32:11.820 --> 00:32:14.700
Let's assume we're more than that.
00:32:14.700 --> 00:32:17.010
If we're looking at proration, you're suggesting
00:32:17.010 --> 00:32:20.050
we starting at may, what number do we start with?
00:32:20.050 --> 00:32:23.080
Do we start with December numbers, with January numbers,
00:32:23.080 --> 00:32:24.950
with May numbers, so we take into account
00:32:24.950 --> 00:32:26.410
that people have already began to cut,
00:32:26.410 --> 00:32:27.850
I guess is my question.
00:32:27.850 --> 00:32:29.540
I just wanna know what our starting point is.
00:32:29.540 --> 00:32:32.000
If you have an idea can you give us some direction?
00:32:32.000 --> 00:32:33.600
I don't know the answer.
00:32:33.600 --> 00:32:35.510
Yes, to give you an idea of what's gonna
00:32:35.510 --> 00:32:36.530
happen first quarter
00:32:36.530 --> 00:32:40.040
is that most producers probably are going
00:32:40.040 --> 00:32:43.050
to report a significant increase in production.
00:32:43.050 --> 00:32:44.330
I know that Pioneer is.
00:32:44.330 --> 00:32:46.370
I can't get into it because we're a public company,
00:32:46.370 --> 00:32:47.890
we haven't announced earnings.
00:32:47.890 --> 00:32:49.990
So the amount of wells are being completed
00:32:49.990 --> 00:32:51.760
in January, February, and March,
00:32:51.760 --> 00:32:53.990
we're gonna report it in May and all the producers
00:32:53.990 --> 00:32:56.460
had first quarter increased significantly
00:32:56.460 --> 00:32:57.930
over fourth quarter '19.
00:32:59.060 --> 00:33:01.560
My suggestion is use fourth quarter '19 data
00:33:01.560 --> 00:33:06.560
because it's three months behind, there'll be less cut.
00:33:06.830 --> 00:33:09.230
If you want to be more aggressive, use the first quarter.
00:33:09.230 --> 00:33:11.560
But if you cut 20% off the first quarter,
00:33:11.560 --> 00:33:12.540
it'll be a higher number
00:33:12.540 --> 00:33:16.020
for all the producers versus fourth quarter in '19.
00:33:16.020 --> 00:33:16.853
Okay, all right.
00:33:16.853 --> 00:33:17.850
Well that gives me a starting point
00:33:17.850 --> 00:33:20.280
because my question is what's my starting point.
00:33:20.280 --> 00:33:23.420
And so because I don't know the answer to that.
00:33:23.420 --> 00:33:27.190
That's one of our questions.
00:33:28.770 --> 00:33:32.210
So if we started in December and say, we've got,
00:33:33.611 --> 00:33:35.610
I'll get to that one because I've got somebody else
00:33:35.610 --> 00:33:37.320
who says they've already begun to cut.
00:33:37.320 --> 00:33:40.120
So do we take into account then,
00:33:40.120 --> 00:33:43.340
that some people will have begun the cut.
00:33:43.340 --> 00:33:44.510
There are some operators
00:33:44.510 --> 00:33:47.060
that are unfilled as by written testimony.
00:33:47.060 --> 00:33:48.330
We can take into account that
00:33:48.330 --> 00:33:50.020
they've already begun doing those cuts,
00:33:50.020 --> 00:33:52.460
or do we just start with the end of last year?
00:33:53.310 --> 00:33:56.090
I'll use the "Wall Street Journal" article as an example.
00:33:56.090 --> 00:33:59.480
Texland who's testifying later, I've never met the CEO
00:33:59.480 --> 00:34:01.970
and the owner of Texland, but it's an interesting story.
00:34:01.970 --> 00:34:04.920
So the reason they're cutting, 'cause they were providing,
00:34:04.920 --> 00:34:07.730
their oil was being sold by a large producer I gather.
00:34:07.730 --> 00:34:09.930
I will not comment on the name.
00:34:09.930 --> 00:34:11.140
That that company told them
00:34:11.140 --> 00:34:13.690
that we're not gonna take any oil.
00:34:13.690 --> 00:34:16.030
And so they don't have firm transportation
00:34:16.030 --> 00:34:17.730
to get their oil out.
00:34:17.730 --> 00:34:20.810
And so that's an example of if you cut him 20%,
00:34:20.810 --> 00:34:25.440
so he would go from 7,000 to 5,400 barrels a day,
00:34:25.440 --> 00:34:27.240
5,600 barrels a day.
00:34:27.240 --> 00:34:29.420
So at least he's selling 5,600.
00:34:29.420 --> 00:34:32.070
And so he's being disadvantaged by the large,
00:34:32.070 --> 00:34:34.820
integrated in the large companies, and the large purchases
00:34:34.820 --> 00:34:36.840
because he doesn't have firm transportation.
00:34:36.840 --> 00:34:39.410
So that's an example, Texland, is that
00:34:39.410 --> 00:34:42.060
the reason they're cutting is they have to cut.
00:34:42.900 --> 00:34:45.410
Harold Hamm, when he announced them in the journal
00:34:45.410 --> 00:34:47.640
on the Wall Street last week, he had to cut
00:34:47.640 --> 00:34:50.160
because the refiner says, "We can't take your oil."
00:34:50.160 --> 00:34:51.990
It was a forced cut.
00:34:51.990 --> 00:34:56.680
And so by prorating, it's about fairness in my opinion, too.
00:34:56.680 --> 00:34:59.760
That's the last pitch, I try to stress.
00:34:59.760 --> 00:35:01.960
I started with the company, as you all know,
00:35:03.050 --> 00:35:06.010
as a fifth person, I've always cared about the small
00:35:06.010 --> 00:35:07.810
and medium independents, to be fair.
00:35:09.490 --> 00:35:10.500
And I appreciate the Chair,
00:35:10.500 --> 00:35:12.400
I think that part of the conversation today
00:35:12.400 --> 00:35:13.430
is about the small guys.
00:35:13.430 --> 00:35:16.450
What I'm not sure that there's an agreement
00:35:16.450 --> 00:35:20.650
that us versus forced cuts by industry
00:35:20.650 --> 00:35:23.440
because the market's working are the same,
00:35:23.440 --> 00:35:25.140
but we can argue that.
00:35:25.140 --> 00:35:27.710
I got another question just though for you,
00:35:27.710 --> 00:35:30.070
just cause I'm gonna ask you as an engineer.
00:35:30.070 --> 00:35:31.960
'Cause if I'm not the engineer in the room.
00:35:31.960 --> 00:35:33.460
I'm just trying to understand.
00:35:37.082 --> 00:35:39.230
If we're shutting in wells or forcing cuts,
00:35:39.230 --> 00:35:41.840
however they're happening, tell me what it could
00:35:41.840 --> 00:35:44.880
or couldn't do to our fields and our reservoirs.
00:35:44.880 --> 00:35:47.290
Can you explain just kind of, I wanna make sure
00:35:47.290 --> 00:35:51.780
that we are not damaging reservoirs
00:35:51.780 --> 00:35:54.360
in the short and/or long-term because that to me
00:35:54.360 --> 00:35:57.400
is a way that we would have waste as well.
00:35:57.400 --> 00:35:59.160
And so I'd like to understand that,
00:35:59.160 --> 00:36:02.200
just to remember, I'm not the engineer,
00:36:02.200 --> 00:36:04.080
so just kind of high level if you don't mind,
00:36:04.080 --> 00:36:06.550
I'd appreciate just for understanding.
00:36:06.550 --> 00:36:08.730
Yeah, sure Commissioner Craddick.
00:36:08.730 --> 00:36:11.550
We have examples of wells that we have shut-in
00:36:11.550 --> 00:36:14.280
for as long as six months, and brought them on,
00:36:14.280 --> 00:36:16.090
and there's been no damage.
00:36:16.090 --> 00:36:18.090
Since we have drilled the most horizontal wells
00:36:18.090 --> 00:36:20.730
in the Permian Basin today, also we have the
00:36:20.730 --> 00:36:23.240
most operated wells in the Permian Basin,
00:36:23.240 --> 00:36:24.860
all in the Midland Basin.
00:36:24.860 --> 00:36:26.700
We have some of the best examples,
00:36:26.700 --> 00:36:29.860
we have seen, I've spent hours and hours with our staff,
00:36:29.860 --> 00:36:31.140
talking about proration.
00:36:32.010 --> 00:36:34.280
We think it's best to give the operator a choice.
00:36:34.280 --> 00:36:37.470
You can do it on leases or you can shut-in.
00:36:37.470 --> 00:36:40.540
You can do it by reducing the time clock,
00:36:40.540 --> 00:36:41.980
on a horizontal well, you can run
00:36:41.980 --> 00:36:44.690
it 18 hours a day versus 24 hours a day.
00:36:44.690 --> 00:36:46.900
It's probably better to actually shut-in leases,
00:36:46.900 --> 00:36:48.910
as long as you don't lose production.
00:36:48.910 --> 00:36:49.930
If you shut in the leases,
00:36:49.930 --> 00:36:52.230
at least you can reduce the operating expense.
00:36:52.230 --> 00:36:54.890
And so you have more positive cashflow in that example,
00:36:54.890 --> 00:36:57.490
but I think you should leave it up to each operator,
00:36:57.490 --> 00:37:02.490
how they shut-in their 20%, but no damage at all.
00:37:02.610 --> 00:37:05.050
So you're talking 20% across the board.
00:37:05.050 --> 00:37:10.050
So you envisioned that we don't say 20% in a field,
00:37:10.190 --> 00:37:12.000
it's just 20% across the board,
00:37:12.000 --> 00:37:14.157
no matter where you are in the state?
00:37:14.157 --> 00:37:17.440
Is that what's on your vision?
00:37:17.440 --> 00:37:19.550
Yes, by the operator, and I think you should come up
00:37:19.550 --> 00:37:22.030
with an exemption, maybe a thousand barrels a day
00:37:22.030 --> 00:37:24.380
for small producers, maybe you raise that.
00:37:24.380 --> 00:37:27.840
Anybody less than a thousand would be totally exempted.
00:37:27.840 --> 00:37:29.850
Okay, all right.
00:37:29.850 --> 00:37:32.330
And so let me ask you, what if you have the joint venture,
00:37:32.330 --> 00:37:34.270
who gets the 20%?
00:37:34.270 --> 00:37:35.620
Do you have a thought about that?
00:37:35.620 --> 00:37:36.453
I'm just asking-
00:37:36.453 --> 00:37:39.230
Yeah, we actually have a joint venture
00:37:40.070 --> 00:37:44.250
with the Chinese in southern part of the Midland Basin.
00:37:44.250 --> 00:37:49.250
And so it would be cut equally in that joint venture.
00:37:49.640 --> 00:37:51.260
Okay, all right.
00:37:51.260 --> 00:37:54.390
All right, so let me ask this, and Mark you kinda touched
00:37:54.390 --> 00:37:55.570
on this too, so that's why kinda,
00:37:55.570 --> 00:37:57.250
I don't care which one of you answer.
00:37:57.250 --> 00:38:00.170
So you're only talking about doing it month-to-month.
00:38:02.355 --> 00:38:06.130
In Mark's comments you say, under control,
00:38:06.130 --> 00:38:08.140
whenever coronavirus is under control.
00:38:08.140 --> 00:38:11.570
So how long do y'all anticipate, or do we know
00:38:11.570 --> 00:38:15.310
if we decided to prorate, how long would we be doing this?
00:38:16.390 --> 00:38:18.870
Would we be doing it till we get back to a hundred percent,
00:38:18.870 --> 00:38:22.380
which is what we've done historically?
00:38:22.380 --> 00:38:25.310
You need to be a hundred percent of availability
00:38:25.310 --> 00:38:27.220
of what you produce in the market?
00:38:27.220 --> 00:38:28.870
How long do you have any idea?
00:38:28.870 --> 00:38:30.910
Can you give a timeframe for that?
00:38:30.910 --> 00:38:32.930
I mean the end of the year, six months,
00:38:32.930 --> 00:38:35.360
I mean, I don't know the answer.
00:38:35.360 --> 00:38:37.270
Yes, I have a good example.
00:38:37.270 --> 00:38:38.890
We had a board meeting yesterday.
00:38:38.890 --> 00:38:41.400
One of our directors is on the board of one
00:38:41.400 --> 00:38:43.610
of the largest carriers, airline carriers
00:38:43.610 --> 00:38:44.910
in the United States.
00:38:44.910 --> 00:38:46.830
They have two scenario plannings.
00:38:46.830 --> 00:38:49.230
Nobody is wanna get into a tube
00:38:49.230 --> 00:38:51.300
when we lift shelter-in-place.
00:38:51.300 --> 00:38:55.040
Nobody wants to get into a steel tube with 250 people.
00:38:55.040 --> 00:38:57.080
And so they planned two scenarios.
00:38:57.080 --> 00:39:01.020
One scenario, if we get a treatment, not a vaccine,
00:39:01.020 --> 00:39:04.300
but if we get a treatment that lowers the mortality rate,
00:39:04.300 --> 00:39:08.420
down to the normal flow, they're assuming 50% capacity
00:39:08.420 --> 00:39:11.540
by the end of this year for airlines.
00:39:11.540 --> 00:39:15.420
Their second scenario is that no treatment comes.
00:39:15.420 --> 00:39:17.220
Mortality rate is still high.
00:39:17.220 --> 00:39:20.210
So the vaccine comes in 12 to 18 months.
00:39:20.210 --> 00:39:25.210
They have 0% capacity or less than 10 until the end of 2021.
00:39:27.570 --> 00:39:30.730
My personal opinion is, this is gonna go longer
00:39:30.730 --> 00:39:32.240
than anybody expected.
00:39:32.240 --> 00:39:34.170
It's back to the 1930s.
00:39:34.170 --> 00:39:37.330
So I'm probably more pessimistic that you may have
00:39:37.330 --> 00:39:39.050
to prorate longer, sad to say.
00:39:40.480 --> 00:39:41.313
Okay.
00:39:42.470 --> 00:39:44.400
All right, and then you all have talked about,
00:39:44.400 --> 00:39:46.490
and I appreciate, you all want Texas to lead,
00:39:46.490 --> 00:39:48.320
but what if other states don't do this?
00:39:48.320 --> 00:39:50.130
And I think that's a concern
00:39:50.130 --> 00:39:53.530
that we might all share sitting in this room.
00:39:53.530 --> 00:39:55.350
Look, I know Oklahoma was talking about it
00:39:55.350 --> 00:39:56.820
and they have a different process,
00:39:56.820 --> 00:40:00.050
but to me we all have the same process to figure out
00:40:00.050 --> 00:40:03.809
how we're all doing it or doing it pretty much the same.
00:40:03.809 --> 00:40:08.040
If you disadvantage one state, in my mind then that's it.
00:40:08.040 --> 00:40:09.800
And I appreciate Texas is big,
00:40:09.800 --> 00:40:13.020
but we aren't the only one carrying the load
00:40:13.020 --> 00:40:14.450
as far as the United States.
00:40:14.450 --> 00:40:16.940
And so what if no other state does it,
00:40:16.940 --> 00:40:20.220
are people just gonna, I mean, I get where your land is,
00:40:20.220 --> 00:40:21.940
but others may just move across the border
00:40:21.940 --> 00:40:23.540
to New Mexico, for instance.
00:40:23.540 --> 00:40:25.950
If you're in the Permian, you might have an opportunity,
00:40:25.950 --> 00:40:27.230
or to North Dakota,
00:40:27.230 --> 00:40:29.440
or you might have some other opportunities.
00:40:29.440 --> 00:40:30.850
I think that concerns me that
00:40:30.850 --> 00:40:32.420
if we're the only ones doing it,
00:40:32.420 --> 00:40:36.400
and decided to go down this road, then one,
00:40:36.400 --> 00:40:39.560
have we really helped and moved the market enough
00:40:39.560 --> 00:40:43.350
for our operators, and two, we disadvantaged ourselves
00:40:43.350 --> 00:40:45.140
in a lot of respect?
00:40:45.140 --> 00:40:45.973
Yes, thank you.
00:40:45.973 --> 00:40:49.430
We have never recommended that Texas do it by itself.
00:40:49.430 --> 00:40:52.560
We always recommend that'd be part of a global deal.
00:40:52.560 --> 00:40:56.400
That global deal, as I said earlier is way too small.
00:40:56.400 --> 00:40:58.500
I think there has to be a second cut.
00:40:58.500 --> 00:41:00.810
Maybe you'll put it under consideration.
00:41:00.810 --> 00:41:03.010
I think there's gonna have to be a second cut.
00:41:03.010 --> 00:41:05.420
Maybe you'll participate in that second cut.
00:41:05.420 --> 00:41:08.740
But the 5 million barrels a day that the G-20 promised,
00:41:08.740 --> 00:41:13.080
based on capital reductions is not real.
00:41:13.080 --> 00:41:15.250
And so that's why the market is turning down,
00:41:15.250 --> 00:41:18.560
all is down 10% since this deal was cut.
00:41:18.560 --> 00:41:20.310
And so it's not helping.
00:41:20.310 --> 00:41:22.580
The market is saying, you need more cuts.
00:41:22.580 --> 00:41:25.330
So maybe you put everything on hold and wait until,
00:41:25.330 --> 00:41:26.250
see what Oklahoma does,
00:41:26.250 --> 00:41:29.560
see what North Dakota does and see what the G-20 does.
00:41:29.560 --> 00:41:32.980
See if Saudis comes back and ask for a second cut.
00:41:32.980 --> 00:41:34.750
That's my recommendation.
00:41:34.750 --> 00:41:35.780
Okay.
00:41:35.780 --> 00:41:38.830
And then my kind of last question in this line, real quick.
00:41:39.880 --> 00:41:42.010
If Saudi, look we're gonna have a challenge,
00:41:42.010 --> 00:41:43.720
I think we've all talked about this,
00:41:43.720 --> 00:41:47.620
about how we, as staff and process,
00:41:47.620 --> 00:41:49.150
since we haven't done it since '73,
00:41:49.150 --> 00:41:50.130
we're trying to figure it out.
00:41:50.130 --> 00:41:52.680
So I'm asking some procedural and some other questions.
00:41:52.680 --> 00:41:54.840
We don't know if we can manage it or figure out
00:41:54.840 --> 00:41:56.380
how we're going to.
00:41:56.380 --> 00:41:59.380
If somebody, and so that's gonna be a challenge for us
00:41:59.380 --> 00:42:01.700
and we're trying to figure it out, but in your mind,
00:42:01.700 --> 00:42:04.040
if somebody's cheating the system,
00:42:04.040 --> 00:42:05.450
which we know OPEC does a bit,
00:42:05.450 --> 00:42:07.720
so I'm not suggesting anybody is,
00:42:07.720 --> 00:42:09.990
but if somebody's not giving us good numbers
00:42:09.990 --> 00:42:12.310
or we catch them, do you anticipate we would put
00:42:12.310 --> 00:42:15.040
some kind of penalty to those operators?
00:42:15.040 --> 00:42:17.820
Do you have any idea how would that would work?
00:42:17.820 --> 00:42:19.420
Yes, I did a research,
00:42:19.420 --> 00:42:23.270
which the Commissioners did back in 1932 to 1973.
00:42:24.520 --> 00:42:28.700
I know there was penalties, but I strongly suggest
00:42:28.700 --> 00:42:30.760
that people need to adhere to it,
00:42:30.760 --> 00:42:33.460
and that you would install some type of penalty.
00:42:33.460 --> 00:42:34.410
Okay.
00:42:34.410 --> 00:42:36.120
And then my last question as we go in,
00:42:36.120 --> 00:42:37.740
you said we come back in monthly,
00:42:37.740 --> 00:42:39.600
which I think is what we've historically done.
00:42:39.600 --> 00:42:42.210
So I appreciate your recognizing that.
00:42:42.210 --> 00:42:44.580
Historically we've always gone in and looked at,
00:42:44.580 --> 00:42:47.560
purchasers have given us numbers,
00:42:47.560 --> 00:42:49.790
and this is an operator-driven,
00:42:49.790 --> 00:42:51.210
I'm not saying it's wrong or right.
00:42:51.210 --> 00:42:52.960
It's just different than we've ever done,
00:42:52.960 --> 00:42:55.240
and I know we're gonna get some other data.
00:42:55.240 --> 00:42:59.530
Are there specific people that may not have commented
00:42:59.530 --> 00:43:01.480
that we need to continue to reach out to,
00:43:01.480 --> 00:43:04.780
to continue to get good data as for a purchasers
00:43:04.780 --> 00:43:05.613
or other people?
00:43:05.613 --> 00:43:07.140
That's how it's always been driven for us,
00:43:07.140 --> 00:43:10.020
and I think Oklahoma as well, to my understanding.
00:43:10.020 --> 00:43:12.570
I'm just trying to figure out process again for me.
00:43:14.563 --> 00:43:15.630
Do you have any idea who you'd add?
00:43:15.630 --> 00:43:17.490
Yeah, I mean market intelligence,
00:43:17.490 --> 00:43:19.260
I mean there's various players,
00:43:19.260 --> 00:43:21.210
I mean all the big producers.
00:43:21.210 --> 00:43:23.670
I mean all the big gatherers in the state,
00:43:23.670 --> 00:43:26.180
will have data, market intelligence groups.
00:43:26.180 --> 00:43:27.290
There's a lot of groups out there.
00:43:27.290 --> 00:43:28.770
So we can research
00:43:28.770 --> 00:43:31.400
and make recommendations to you.
00:43:31.400 --> 00:43:32.770
Okay, okay.
00:43:32.770 --> 00:43:34.610
And then from your perspective,
00:43:34.610 --> 00:43:37.150
and this may be Mark going to answer this question,
00:43:37.150 --> 00:43:39.690
you've answered this question more than,
00:43:39.690 --> 00:43:41.450
Scott you're doing a good job, you know the answers,
00:43:41.450 --> 00:43:44.390
but do we need to be concerned about antitrust?
00:43:44.390 --> 00:43:46.740
I get that, we as a regulator don't,
00:43:46.740 --> 00:43:49.350
but is that a consideration you all are looking at?
00:43:49.350 --> 00:43:51.160
'Cause I think that's something we don't,
00:43:51.160 --> 00:43:54.390
I don't want anybody to get in that loop by the way.
00:43:54.390 --> 00:43:56.880
So I just wondered on.
00:43:56.880 --> 00:43:59.010
Yes, Commissioner, I think it's very clear-
00:43:59.010 --> 00:44:00.900
Mark, will you unmute please?
00:44:00.900 --> 00:44:01.902
Oh sorry.
00:44:01.902 --> 00:44:03.780
That's okay.
00:44:03.780 --> 00:44:05.800
Commissioner, I think it's very clear as producers,
00:44:05.800 --> 00:44:09.010
we cannot agree to orchestrated cuts that's
00:44:09.010 --> 00:44:11.630
in violation of the antitrust laws and we haven't
00:44:11.630 --> 00:44:14.270
nor would we participate in anything like that.
00:44:14.270 --> 00:44:15.910
That's the reason why we really appealed
00:44:15.910 --> 00:44:17.640
to the Railroad Commission because we saw
00:44:17.640 --> 00:44:20.310
that as the only legal and proper way to go
00:44:20.310 --> 00:44:23.120
about the taking the over-supply off the market.
00:44:24.290 --> 00:44:27.210
Okay, and then my last question,
00:44:27.210 --> 00:44:30.260
just to clarify, just one more time,
00:44:31.884 --> 00:44:33.390
Scott, you brought up flaring.
00:44:33.390 --> 00:44:35.200
Is there anything else we ought to be looking
00:44:35.200 --> 00:44:37.050
at besides just proration?
00:44:37.050 --> 00:44:40.010
I mean, are there other tools that you
00:44:40.010 --> 00:44:42.580
would suggest to us actively looking at as we're trying
00:44:42.580 --> 00:44:46.151
to look at, say even the independents, frankly,
00:44:46.151 --> 00:44:49.210
that might be helpful besides just proration?
00:44:49.210 --> 00:44:52.090
I mean, you mentioned flaring, are there the things
00:44:52.090 --> 00:44:53.490
that you have looked at?
00:44:53.490 --> 00:44:55.140
Yeah, the only other issue on flaring,
00:44:55.140 --> 00:44:58.927
I didn't get a chance to finish was that
00:44:58.927 --> 00:45:00.910
it'll probably hurt the real small producers.
00:45:00.910 --> 00:45:03.690
They don't have the cost, we'll probably need
00:45:03.690 --> 00:45:06.860
some type of exemption on the small producers on flaring.
00:45:06.860 --> 00:45:09.000
It turns out some of the biggest flarers
00:45:09.000 --> 00:45:10.900
are some of the integrateds.
00:45:10.900 --> 00:45:14.850
When you look at Rice Dean's list, they're way over 2%,
00:45:14.850 --> 00:45:17.110
most of them in the Permian Basin.
00:45:17.110 --> 00:45:18.790
And so it's the small producer.
00:45:18.790 --> 00:45:21.850
I think the flaring has got to go down.
00:45:21.850 --> 00:45:24.180
I wish I would get stricter in regard
00:45:24.180 --> 00:45:26.590
to giving flaring permits.
00:45:26.590 --> 00:45:29.350
Most producers say it's operational,
00:45:29.350 --> 00:45:31.410
but the problem is as we had the hearing
00:45:31.410 --> 00:45:36.170
and or the testimony that you came to,
00:45:36.170 --> 00:45:37.820
I appreciate it Commissioner Craddick,
00:45:37.820 --> 00:45:41.320
with Jason Bordoff, 'cause I think we learned a lot there,
00:45:41.320 --> 00:45:44.230
but there was a mismatch between the producer,
00:45:44.230 --> 00:45:46.760
the midstream company, the plant operator,
00:45:46.760 --> 00:45:47.890
and then the downstream.
00:45:47.890 --> 00:45:49.327
And that's one of the biggest problems.
00:45:49.327 --> 00:45:52.490
But if you get stricter in that regard,
00:45:52.490 --> 00:45:55.740
it'll force all three groups to talk in the future.
00:45:56.820 --> 00:45:58.420
Okay, thank you.
00:45:58.420 --> 00:45:59.810
Thank you all for answering questions,
00:45:59.810 --> 00:46:01.450
that's all I've got right now Mr. Chairman,
00:46:01.450 --> 00:46:02.710
thank you very much.
00:46:02.710 --> 00:46:03.543
Thank you, Commissioner.
00:46:03.543 --> 00:46:06.030
A couple of questions I have before we go.
00:46:07.376 --> 00:46:09.560
The market's already cut production.
00:46:09.560 --> 00:46:13.320
Pipelines had to stop, we're about to peak storage.
00:46:13.320 --> 00:46:16.720
So production, if I'm not mistaken is already down,
00:46:16.720 --> 00:46:19.430
the market is decreasing this.
00:46:19.430 --> 00:46:22.300
Why is it necessary that we have additional regulations
00:46:22.300 --> 00:46:25.630
if the market in itself has already cut production,
00:46:25.630 --> 00:46:27.210
or is limiting production?
00:46:28.250 --> 00:46:32.940
Yes, Chairman example that I gave you is EIA data,
00:46:34.080 --> 00:46:36.410
is only showing a very, very small drop
00:46:36.410 --> 00:46:37.620
in the Permian Basin.
00:46:37.620 --> 00:46:41.350
Permian Basin is your biggest culprit in regard to oil,
00:46:41.350 --> 00:46:44.000
and the Eagle Ford has been on a decline,
00:46:44.000 --> 00:46:45.960
even before the crisis hit.
00:46:45.960 --> 00:46:47.430
And the Permian is still growing.
00:46:47.430 --> 00:46:49.800
As I said earlier, we were growing first quarter.
00:46:49.800 --> 00:46:52.790
Almost every producer I know was growing first quarter.
00:46:52.790 --> 00:46:57.770
And so the reason you cut is basically to open up storage
00:46:58.990 --> 00:47:03.880
and allow the, it's going to take too long
00:47:03.880 --> 00:47:04.830
for what you're saying.
00:47:04.830 --> 00:47:08.420
So I've stated publicly, at the current prices,
00:47:08.420 --> 00:47:11.110
we're gonna lose 3 million barrels a day,
00:47:11.110 --> 00:47:15.080
to 6 million barrels a day by the end of 2021.
00:47:15.080 --> 00:47:18.700
The problem is, most of that occurs next year.
00:47:18.700 --> 00:47:21.220
It doesn't occur in the third quarter,
00:47:21.220 --> 00:47:23.650
it doesn't occur in the second quarter.
00:47:23.650 --> 00:47:26.000
The reason is, most independents are hedged,
00:47:26.000 --> 00:47:27.190
private and public.
00:47:27.190 --> 00:47:29.700
There's $22 billion worth of hedges
00:47:29.700 --> 00:47:31.890
in place by our industry.
00:47:31.890 --> 00:47:35.150
So people are drilling through their hedges or completing
00:47:35.150 --> 00:47:36.590
through their hedges.
00:47:36.590 --> 00:47:40.350
And so what happens is that we're gonna fill up
00:47:40.350 --> 00:47:42.080
and the price is gonna collapse even more.
00:47:42.080 --> 00:47:47.080
We're gonna see a $3, a $10 oil until we solve the problem.
00:47:47.300 --> 00:47:52.300
By you prorating, and we're gonna get that price rebound
00:47:53.380 --> 00:47:55.680
at some point, along with others.
00:47:55.680 --> 00:47:58.050
As I've stated, never do it by yourself.
00:47:58.050 --> 00:48:02.040
Always do it with OPEC, OPEC-plus, or with the G-20,
00:48:02.040 --> 00:48:03.580
or with other states.
00:48:03.580 --> 00:48:04.830
But we're having a crisis
00:48:04.830 --> 00:48:06.340
and it's gonna hit the next four weeks.
00:48:06.340 --> 00:48:10.710
So what you're saying, the production cuts are happening,
00:48:10.710 --> 00:48:13.490
but it's a very, very slow process.
00:48:13.490 --> 00:48:15.820
We don't see much production decline ourselves
00:48:15.820 --> 00:48:17.400
until towards the end of the year.
00:48:17.400 --> 00:48:19.800
until you go into 2021.
00:48:19.800 --> 00:48:21.740
So it's happening very, very slowly.
00:48:22.610 --> 00:48:23.620
If you understand.
00:48:23.620 --> 00:48:26.350
You've stated that we don't need to do this in a vacuum,
00:48:26.350 --> 00:48:28.980
and we're 40% United States production.
00:48:29.910 --> 00:48:32.510
Are you saying we should pass this contingent
00:48:32.510 --> 00:48:36.370
upon agreement of other states or somebody else?
00:48:36.370 --> 00:48:39.950
I mean, you mentioned we should not do it ourselves alone.
00:48:39.950 --> 00:48:42.570
And Commissioner Craddick mentioned that in her question,
00:48:42.570 --> 00:48:44.000
we are not by ourselves.
00:48:44.000 --> 00:48:46.660
So I'm not understanding clearly how,
00:48:46.660 --> 00:48:49.230
are you suggesting we do it contingent upon
00:48:49.230 --> 00:48:52.140
some other states agreeing or somebody else?
00:48:53.760 --> 00:48:55.540
The other states is not as critical.
00:48:55.540 --> 00:48:58.210
I think what's more important is part of G-20,
00:48:58.210 --> 00:49:02.200
a second round of OPEC cuts, which I think will happen.
00:49:02.200 --> 00:49:05.130
Otherwise G-20 more enforced cuts.
00:49:05.130 --> 00:49:07.530
As I mentioned, the 5 million barrels a day
00:49:07.530 --> 00:49:08.720
is not a real cut.
00:49:09.740 --> 00:49:13.330
Even Saudi has mentioned that, my sources tell me,
00:49:13.330 --> 00:49:16.300
that they would like for the US to have real cuts.
00:49:16.300 --> 00:49:19.480
It wasn't mandated in this 9.7 Agreement,
00:49:19.480 --> 00:49:22.140
but they would like the US to have real cuts.
00:49:22.140 --> 00:49:25.130
I'm saying the market's going to create the atmosphere
00:49:25.130 --> 00:49:28.830
to have real cuts by all G-20 countries,
00:49:28.830 --> 00:49:31.850
and probably another round of cuts by OPEC.
00:49:31.850 --> 00:49:34.360
North Dakota, if they reduce flaring like
00:49:34.360 --> 00:49:37.670
they're looking at, we'll get to 150,000 barrels a day,
00:49:37.670 --> 00:49:41.350
maybe 140, 10% of 1.4 million barrels a day,
00:49:41.350 --> 00:49:43.250
140,000 barrels a day.
00:49:43.250 --> 00:49:46.250
Oklahoma is only producing 500,000 barrels a day.
00:49:46.250 --> 00:49:47.780
If they agreed, if Commissioners agreed
00:49:47.780 --> 00:49:50.210
to have their hearing, which is the next step,
00:49:50.210 --> 00:49:53.720
there are only 500, so 10% there is 50,000.
00:49:53.720 --> 00:49:55.650
So I wouldn't make it contingent just
00:49:55.650 --> 00:49:58.400
on North Dakota or Oklahoma, but more a part
00:49:58.400 --> 00:49:59.480
of the next round of cuts,
00:49:59.480 --> 00:50:03.110
whether it's G-20, or OPEC or OPEC-plus.
00:50:03.110 --> 00:50:05.450
Okay, so what I'm understanding is, you're saying we
00:50:05.450 --> 00:50:09.470
should make this contingent upon a series of OPEC cuts.
00:50:09.470 --> 00:50:10.920
Is that correct?
00:50:10.920 --> 00:50:12.560
Including G-20.
00:50:12.560 --> 00:50:15.190
So G-20, OPEC, OPEC-plus.
00:50:15.190 --> 00:50:18.490
So you can go different directions.
00:50:18.490 --> 00:50:22.050
You can say you'll take this testimony today with everybody,
00:50:22.050 --> 00:50:24.240
after they testify under advisement.
00:50:24.240 --> 00:50:26.920
But be prepared, do their homework,
00:50:26.920 --> 00:50:29.410
do the research, be prepared to implement
00:50:29.410 --> 00:50:32.490
at the moment's notice, if it looks like it's needed.
00:50:33.350 --> 00:50:35.670
Okay, last question is,
00:50:35.670 --> 00:50:39.680
what would you suggest the penalties, how would that work
00:50:39.680 --> 00:50:42.480
from the Railroad Commission for those who overproduce
00:50:42.480 --> 00:50:44.700
after we pass this agenda.
00:50:44.700 --> 00:50:46.100
Do you have any suggestions?
00:50:47.790 --> 00:50:48.900
Mark, you can-
00:50:48.900 --> 00:50:52.370
Mr. Chairman, I think probably what would be best is,
00:50:52.370 --> 00:50:54.460
Brian Sullivan could speak.
00:50:54.460 --> 00:50:56.160
Brian has done a lot of research
00:50:56.160 --> 00:50:57.380
on how this worked previously,
00:50:57.380 --> 00:50:59.530
and how we would recommend that it be done.
00:51:01.480 --> 00:51:03.480
That that'd be good.
00:51:03.480 --> 00:51:05.510
Please, is he available?
00:51:05.510 --> 00:51:06.343
Yes.
00:51:08.528 --> 00:51:09.361
If he would.
00:51:10.960 --> 00:51:14.470
Apparently it can't be done on a moment's notice.
00:51:14.470 --> 00:51:17.550
Then we'll ask him to give those records
00:51:17.550 --> 00:51:20.440
to all three Commissioners, because recommendation on that-
00:51:20.440 --> 00:51:23.620
In a nutshell, Mr. Chairman, it can be done
00:51:23.620 --> 00:51:25.540
through a penalty system where basically
00:51:25.540 --> 00:51:30.140
if there are barrels sold in excess of the prorated amount,
00:51:30.140 --> 00:51:33.820
the producer would owe a premium in the form of a penalty,
00:51:33.820 --> 00:51:35.300
and you would have to account for that.
00:51:35.300 --> 00:51:38.080
It could be accounted for on a monthly basis
00:51:38.080 --> 00:51:41.260
on production reports, from the producer to the Commission.
00:51:42.280 --> 00:51:43.330
Thank you very much.
00:51:43.330 --> 00:51:44.830
Are there any other questions?
00:51:47.080 --> 00:51:49.970
If not, we thank you gentlemen for appearing today,
00:51:49.970 --> 00:51:52.780
and I appreciate so much your concern for Texas
00:51:52.780 --> 00:51:55.110
and for all those main workers that you have
00:51:55.110 --> 00:51:59.200
and represent here in Texas and across the United States.
00:51:59.200 --> 00:52:00.033
Thank you-
00:52:00.033 --> 00:52:00.882
Thank you,
00:52:00.882 --> 00:52:01.890
thank you, chairman.
Thank you, chairman.
00:52:02.870 --> 00:52:05.630
Okay, moving on to our next speaker.
00:52:05.630 --> 00:52:08.290
Lee Tillman with Marathon Oil and Gas,
00:52:08.290 --> 00:52:09.550
you are invited to speak.
00:52:11.210 --> 00:52:14.900
Mr. Tillman if you would, please identify yourself,
00:52:14.900 --> 00:52:17.560
who you're representing, whether you're for, against,
00:52:17.560 --> 00:52:20.570
or just speaking neutral on this issue.
00:52:23.280 --> 00:52:24.980
And it may take just a few minutes
00:52:24.980 --> 00:52:27.370
to transfer here.
00:52:33.920 --> 00:52:35.360
Okay Mr. Tillman, you're on,
00:52:35.360 --> 00:52:37.820
and I see that you're muted at this time.
00:52:37.820 --> 00:52:38.970
Are you able to unmute?
00:52:48.320 --> 00:52:50.320
Okay, it looks like we can hear you now.
00:52:56.170 --> 00:52:57.620
Mr. Tillman, are you there?
00:53:18.940 --> 00:53:21.080
Callie should you just move to the next,
00:53:21.080 --> 00:53:22.350
and come back to Mr. Tillman
00:53:22.350 --> 00:53:25.090
when the electronics are worked out?
00:53:37.760 --> 00:53:39.430
Or we can just talking amongst ourselves,
00:53:39.430 --> 00:53:42.420
as apparently no one else wants to talk with us today.
00:53:42.420 --> 00:53:44.900
(laughing) I think there's a few waiting.
00:53:44.900 --> 00:53:49.900
So might work out, if we can work out
00:53:50.230 --> 00:53:53.070
the problems with Mr. Tillman,
00:53:53.070 --> 00:53:54.530
if he's not available this time,
00:53:54.530 --> 00:53:58.120
can we move to the next speaker?
00:53:59.489 --> 00:54:00.810
I'm just happy, I'm not the only one
00:54:00.810 --> 00:54:02.790
that can't figure out how to work the technology,
00:54:02.790 --> 00:54:06.080
I feel much better, so much better.
00:54:06.080 --> 00:54:08.920
Yes, let's move on, thank you.
00:54:08.920 --> 00:54:13.780
Mr. Tillman, just email the RRC conference email,
00:54:13.780 --> 00:54:14.710
and they will assist you.
00:54:14.710 --> 00:54:18.330
At this time we'll call Matt Gallagher with Parsley Energy.
00:54:18.330 --> 00:54:20.180
You are invited to speak.
00:54:20.180 --> 00:54:22.590
Mr. Gallagher, if you would please identify yourself,
00:54:22.590 --> 00:54:25.910
who you represent and whether you're for, against,
00:54:25.910 --> 00:54:28.420
or just speaking neutral on this subject.
00:54:30.390 --> 00:54:32.620
Hello, this is Matt Gallagher.
00:54:33.460 --> 00:54:36.290
Do you have video capabilities if needed?
00:54:36.290 --> 00:54:37.920
I believe I have some slides.
00:54:37.920 --> 00:54:41.350
I'm President, CEO of Parsley Energy,
00:54:41.350 --> 00:54:44.300
and I am for proration, based on market demand.
00:54:45.720 --> 00:54:47.080
Okay, please proceed.
00:54:48.440 --> 00:54:49.990
Thank you, Chairman Christian,
00:54:49.990 --> 00:54:52.170
Commissioner Craddick, and Commissioner Sitton,
00:54:52.170 --> 00:54:53.710
for the time today.
00:54:53.710 --> 00:54:55.760
We are living in unprecedented times.
00:54:55.760 --> 00:54:57.900
This past month, we have seen a larger deviation
00:54:57.900 --> 00:55:01.250
from historic supply/demand imbalances than ever before.
00:55:01.250 --> 00:55:02.660
Ever!
00:55:02.660 --> 00:55:03.560
Slide two, please.
00:55:04.610 --> 00:55:07.020
In the United States and specifically in Texas,
00:55:07.020 --> 00:55:09.770
our industry relies on stable regulatory frameworks
00:55:09.770 --> 00:55:11.380
to operate successfully.
00:55:11.380 --> 00:55:13.510
It is because of this balance between regulators
00:55:13.510 --> 00:55:16.040
and free enterprise that our American oil and gas industry
00:55:16.040 --> 00:55:17.540
has seen such great success.
00:55:18.610 --> 00:55:21.520
Regulators, exercising lawful authority
00:55:21.520 --> 00:55:25.470
during extraordinary conditions is not anti-free market.
00:55:25.470 --> 00:55:28.350
Rather it is essential to stable free markets.
00:55:28.350 --> 00:55:31.300
It's even called upon by the great economist Adam Smith.
00:55:32.740 --> 00:55:35.780
In this case, it is utilizing a symphony of solutions
00:55:35.780 --> 00:55:37.530
to ensure that we are able to return
00:55:37.530 --> 00:55:40.080
to the conditions of pre-COVID-19 times.
00:55:41.110 --> 00:55:44.290
The Texas Railroad Commission is instructed to act,
00:55:44.290 --> 00:55:46.940
when excess production exists or is imminent.
00:55:51.080 --> 00:55:53.890
According to the Texas Natural Resource Code,
00:55:53.890 --> 00:55:56.740
already small operators are having purchasing contracts,
00:55:56.740 --> 00:55:59.500
canceled and storage is nearing capacity.
00:55:59.500 --> 00:56:02.740
Excess production exists, and is imminent.
00:56:02.740 --> 00:56:04.830
Our President and the United States Congress injected
00:56:04.830 --> 00:56:06.960
over $6 trillion into the economy,
00:56:06.960 --> 00:56:08.680
when combining congressional stimulus
00:56:08.680 --> 00:56:10.500
and Federal Reserve actions.
00:56:10.500 --> 00:56:12.770
6 trillion, to provide stability
00:56:12.770 --> 00:56:14.850
to our national free market system.
00:56:16.310 --> 00:56:18.720
What we are talking about in this hearing
00:56:18.720 --> 00:56:21.620
is not fiscal (indistinct), not a bail out,
00:56:21.620 --> 00:56:25.510
but pragmatic, lawful and temporary regulatory action,
00:56:25.510 --> 00:56:28.510
to help mitigate chaotic physical flow conditions,
00:56:28.510 --> 00:56:31.180
caused by projected infrastructure limitations.
00:56:32.050 --> 00:56:33.630
We have the forecasting and knowledge
00:56:33.630 --> 00:56:34.960
that demand is impacted
00:56:34.960 --> 00:56:37.900
by over 30 million barrels per day, worldwide.
00:56:37.900 --> 00:56:41.360
OPEC-plus has agreed to a 9.7 million barrels per day cut.
00:56:41.360 --> 00:56:44.490
That leaves 20 million barrels per day in surplus supply,
00:56:44.490 --> 00:56:47.960
with growing concern about physical storage capacity.
00:56:47.960 --> 00:56:50.090
A temporary proration of domestic production
00:56:50.090 --> 00:56:53.800
is pragmatic and urgent, and shouldn't even be an argument.
00:56:53.800 --> 00:56:56.080
We are asking our industry to take the reigns
00:56:56.080 --> 00:56:57.390
in their own hands.
00:56:57.390 --> 00:57:01.000
And for the regulatory body of the largest producing state,
00:57:01.000 --> 00:57:03.120
in the largest producing country in the world,
00:57:03.120 --> 00:57:06.290
to take their well-earned leadership position.
00:57:06.290 --> 00:57:09.180
We saw dramatic interruptions to infrastructure capabilities
00:57:09.180 --> 00:57:12.100
during Hurricane Harvey, a storm that came quickly
00:57:12.100 --> 00:57:14.200
and left devastating results.
00:57:14.200 --> 00:57:16.800
This pandemic storm has now been on our shores
00:57:16.800 --> 00:57:18.300
for over a month.
00:57:18.300 --> 00:57:20.390
There is no reason to run full-speed
00:57:20.390 --> 00:57:22.080
into infrastructure gridlock.
00:57:22.080 --> 00:57:24.340
It's the obligation of the regulatory bodies
00:57:24.340 --> 00:57:25.900
to prevent waste.
00:57:25.900 --> 00:57:28.190
The numbers are indisputable.
00:57:28.190 --> 00:57:29.380
I'm approaching three minutes,
00:57:29.380 --> 00:57:32.160
I have about two to three minutes more.
00:57:32.160 --> 00:57:33.160
five, three, please.
00:57:36.930 --> 00:57:39.080
Next let's talk about what is at that stake.
00:57:39.080 --> 00:57:43.290
The domestic energy sector, and energy security is at stake.
00:57:43.290 --> 00:57:45.930
Our industry changed the world geopolitical dynamic
00:57:45.930 --> 00:57:48.820
in the last decade on the shoulders of the independents.
00:57:48.820 --> 00:57:51.720
It was the small operators that fostered innovation.
00:57:51.720 --> 00:57:54.070
And we need the small operators to remain.
00:57:54.070 --> 00:57:56.430
That's why the proposed temporary proration
00:57:56.430 --> 00:57:57.730
should exempt the smaller companies
00:57:57.730 --> 00:57:59.630
on a volume measure basis.
00:57:59.630 --> 00:58:02.320
Innovation does not come in isolation.
00:58:02.320 --> 00:58:05.500
It comes from hundreds of operators and healthy partnership
00:58:05.500 --> 00:58:07.740
with our oil-field service sector-
00:58:07.740 --> 00:58:09.260
Mr. Gallagher, we have reached
00:58:09.260 --> 00:58:11.510
the three minute timeline, Commissioners,
00:58:11.510 --> 00:58:14.310
would you like to continue or do you have any questions?
00:58:18.580 --> 00:58:21.020
I'd like to let him continue, please.
00:58:21.020 --> 00:58:23.460
All right, please continue.
00:58:23.460 --> 00:58:24.930
Thank you, Commissioner Sitton.
00:58:24.930 --> 00:58:27.430
I've spoken to many domestic heads of service companies.
00:58:27.430 --> 00:58:29.380
They're hanging on by a thread.
00:58:29.380 --> 00:58:31.310
They've noted operators would drop them
00:58:31.310 --> 00:58:34.000
on a dime's notice if their pricing is off slightly,
00:58:34.000 --> 00:58:36.340
or if they take a public stance opposing a policy
00:58:36.340 --> 00:58:37.520
of a customer.
00:58:37.520 --> 00:58:39.280
Rystad projects that 100,000 jobs
00:58:39.280 --> 00:58:41.910
are set to be cut in Texas alone.
00:58:41.910 --> 00:58:44.180
The service sector has no oil production.
00:58:44.180 --> 00:58:46.350
Their lifeblood is capital activity.
00:58:46.350 --> 00:58:48.610
If we allow storage to hit tank-tops
00:58:48.610 --> 00:58:52.420
while at full production, a return to base activity levels
00:58:52.420 --> 00:58:54.150
will be extended by months.
00:58:54.150 --> 00:58:57.260
The service sector will have no operating cashflow to get by
00:58:57.260 --> 00:58:59.890
and will lay off hundreds of thousands more.
00:58:59.890 --> 00:59:03.170
These jobs once lost, will not return to current levels.
00:59:03.170 --> 00:59:05.850
That has been the case in the downturns of the eighties,
00:59:05.850 --> 00:59:08.980
late nineties, and 2014 to 16.
00:59:08.980 --> 00:59:11.490
Uniform temporary proration by operator
00:59:11.490 --> 00:59:14.070
will enable a healthier condition for a broad swath
00:59:14.070 --> 00:59:16.680
of the service sector and to maintain baseline activity
00:59:16.680 --> 00:59:18.550
across the state of Texas,
00:59:18.550 --> 00:59:21.850
instead of concentrating on a depleted pool of labor
00:59:21.850 --> 00:59:23.710
into a few large service companies.
00:59:23.710 --> 00:59:25.900
This will help innovation and competition,
00:59:25.900 --> 00:59:28.130
when the effects of COVID-19 have eased,
00:59:28.130 --> 00:59:31.890
and Texas is again needed as a leading supplier of crude.
00:59:31.890 --> 00:59:33.900
Finally, I wanna look forward to bringing
00:59:33.900 --> 00:59:35.570
the country back online.
00:59:35.570 --> 00:59:38.710
With COVID-19, temporary social distancing efforts
00:59:38.710 --> 00:59:41.030
have flattened the curve, mitigating the peak
00:59:41.030 --> 00:59:45.010
of both new cases and deaths versus early expert modeling.
00:59:45.010 --> 00:59:48.020
Similarly, temporary proration will help extend
00:59:48.020 --> 00:59:51.450
the useful capacity of our domestic infrastructure.
00:59:51.450 --> 00:59:54.600
It will especially help bring our industry back online,
00:59:54.600 --> 00:59:57.030
months sooner versus a scenario where we produce
00:59:57.030 --> 01:00:00.970
at maximum rates, until infrastructure gridlock is achieved.
01:00:00.970 --> 01:00:01.920
Slide four, please.
01:00:03.110 --> 01:00:06.430
If Texas takes no action, we find ourselves producing
01:00:06.430 --> 01:00:09.420
at a national decline rates due to single digit pricing.
01:00:09.420 --> 01:00:12.160
Texas could lose 2.5 million barrels per day,
01:00:12.160 --> 01:00:13.860
in one year's time.
01:00:13.860 --> 01:00:17.560
Or Texas takes a pragmatic leadership stance,
01:00:17.560 --> 01:00:19.750
providing comfort for others across the country
01:00:19.750 --> 01:00:21.520
and the globe to assess their volumes,
01:00:21.520 --> 01:00:23.620
and adhere to their reductions.
01:00:23.620 --> 01:00:25.800
Many other states are considering similar actions,
01:00:25.800 --> 01:00:28.270
I encourage the Railroad Commission to take action,
01:00:28.270 --> 01:00:29.120
cementing it's place
01:00:29.120 --> 01:00:31.820
as the best-in-class industry regulators.
01:00:31.820 --> 01:00:34.750
If Texas takes this step, others will follow.
01:00:34.750 --> 01:00:37.680
In summary, Texas needs to temporarily prorate production
01:00:37.680 --> 01:00:38.780
to provide the best chance
01:00:38.780 --> 01:00:41.000
at stabilizing its strongest industry.
01:00:41.000 --> 01:00:43.810
It's temporary proration, based off market demand,
01:00:43.810 --> 01:00:46.590
gives clarity to the nearly 3,000 operators in Texas.
01:00:46.590 --> 01:00:48.470
It will mitigate the rate at
01:00:48.470 --> 01:00:51.030
which infrastructure hits maximum capacity,
01:00:51.030 --> 01:00:54.140
smooth the chaotic responses to that situation,
01:00:54.140 --> 01:00:56.560
slow our state's effective decline rate,
01:00:56.560 --> 01:00:58.720
and accelerate the time until our industry
01:00:58.720 --> 01:01:00.020
and our service sector partners
01:01:00.020 --> 01:01:02.210
can return to base level activities.
01:01:02.210 --> 01:01:04.240
Action taken by the Railroad Commission,
01:01:04.240 --> 01:01:06.700
is one part of a symphony of solutions needed
01:01:06.700 --> 01:01:10.340
to protect our workers and ensure a healthier industry
01:01:10.340 --> 01:01:12.930
for the long run, and for Texas.
01:01:12.930 --> 01:01:14.630
Thank you very much.
01:01:14.630 --> 01:01:16.530
Are there any questions members?
01:01:18.170 --> 01:01:19.270
Commissioner Craddick.
01:01:20.430 --> 01:01:23.670
I have a question, I heard you say that contracts
01:01:23.670 --> 01:01:25.130
were being canceled.
01:01:25.130 --> 01:01:29.190
Is it your position that it's our job
01:01:29.190 --> 01:01:32.830
as a regulatory agency to be involved with contracts?
01:01:32.830 --> 01:01:37.160
I wanna clarify that, 'cause I've heard that on both sides,
01:01:37.160 --> 01:01:40.840
and that you think you should have firm contracts,
01:01:40.840 --> 01:01:43.970
which I'm all for, but you're telling me contractor
01:01:43.970 --> 01:01:45.410
are being canceled.
01:01:45.410 --> 01:01:48.600
Could you clarify what is going on with that,
01:01:48.600 --> 01:01:50.550
and if you think as a regulatory body,
01:01:50.550 --> 01:01:51.860
it's our role to be involved
01:01:51.860 --> 01:01:54.710
in your contracts and placement?
01:01:54.710 --> 01:01:56.790
Yes, Commissioner, thank you for the question.
01:01:56.790 --> 01:01:59.759
I personally do not believe that the Railroad Commission
01:01:59.759 --> 01:02:04.620
should get involved in any business contractual situation.
01:02:05.720 --> 01:02:09.070
I think the definition of waste and some
01:02:09.070 --> 01:02:10.530
of the counter arguments is that there
01:02:10.530 --> 01:02:14.580
is a fulsome market for all of Texas' crude.
01:02:14.580 --> 01:02:16.810
And that's simply not the case,
01:02:16.810 --> 01:02:18.980
through talks with many operators,
01:02:18.980 --> 01:02:21.730
having their purchasing contracts canceled.
01:02:21.730 --> 01:02:24.440
There's clearly not a market for their crude.
01:02:24.440 --> 01:02:26.550
And it goes back to the definition
01:02:26.550 --> 01:02:30.400
and the regulatory action when waste occurs.
01:02:30.400 --> 01:02:33.330
So I think each operator will have to live
01:02:33.330 --> 01:02:35.780
with the consequences of their contracts,
01:02:35.780 --> 01:02:38.160
and have those discussions on their own.
01:02:39.080 --> 01:02:44.050
Parsley has not had any contracts canceled.
01:02:44.050 --> 01:02:46.630
It does generally affect the smaller producers,
01:02:46.630 --> 01:02:50.130
but there is not a fulsome market for Texas crude,
01:02:50.130 --> 01:02:53.520
currently as evidenced by many producers getting
01:02:55.514 --> 01:02:58.011
their contracts canceled.
01:02:58.011 --> 01:02:59.250
Thank you, for answering the question.
01:03:01.190 --> 01:03:02.240
Any more questions?
01:03:04.850 --> 01:03:06.510
Yes, sir, Mr. Chairman.
01:03:06.510 --> 01:03:07.343
Mr. Sitton.
01:03:08.190 --> 01:03:11.370
Mr. Gallagher, I'll ask the same question.
01:03:11.370 --> 01:03:14.860
One of the challenges I think for us is that we have to,
01:03:14.860 --> 01:03:16.480
there's gonna be an argument about,
01:03:16.480 --> 01:03:18.900
certainly the debate is, is there waste?
01:03:18.900 --> 01:03:22.090
Is that waste brought on by production
01:03:22.090 --> 01:03:25.440
in excess of reasonable demand, i.e over-supply?
01:03:25.440 --> 01:03:29.910
How might Railroad Commission progression affect that waste?
01:03:32.015 --> 01:03:33.370
I think what I'm trying to get round is,
01:03:33.370 --> 01:03:35.800
can we quantify the waste and therefore tie
01:03:35.800 --> 01:03:38.970
that to quantifying proration.
01:03:40.770 --> 01:03:42.960
So I ask you the same question I'm asking everybody,
01:03:42.960 --> 01:03:46.110
can you quantify the waste for us?
01:03:47.180 --> 01:03:48.420
I reckon that
01:03:48.420 --> 01:03:50.410
it is very difficult to quantify,
01:03:50.410 --> 01:03:55.410
but if we used the data of demand versus supply,
01:03:56.440 --> 01:03:59.120
we've seen currently global waste on the tune
01:03:59.120 --> 01:04:00.810
of 20 million barrels a day.
01:04:00.810 --> 01:04:03.630
If we take that back to Texas volumes,
01:04:03.630 --> 01:04:06.140
there are data through business intelligence
01:04:06.140 --> 01:04:09.130
that show that the Texas storage capabilities.
01:04:09.130 --> 01:04:14.130
I would argue that it is not healthy and not safe,
01:04:14.450 --> 01:04:17.310
to go over 80% of our operating capacity
01:04:17.310 --> 01:04:20.530
in storage capacity at these storage facilities.
01:04:20.530 --> 01:04:24.190
So that could be a number that we use to watch.
01:04:24.190 --> 01:04:27.550
You have lightning conditions through natural storms,
01:04:27.550 --> 01:04:30.340
fires that can occur, and then of course,
01:04:30.340 --> 01:04:32.290
spills that would happen in a dramatic fashion.
01:04:32.290 --> 01:04:34.300
You saw that after Hurricane Harvey,
01:04:34.300 --> 01:04:37.330
you saw many chemical plants and storage facilities
01:04:37.330 --> 01:04:40.310
in the Houston areas with devastating results
01:04:40.310 --> 01:04:43.030
when they were at maximum storage capacity.
01:04:43.030 --> 01:04:46.440
So I think potentially that 80% of storage
01:04:46.440 --> 01:04:48.570
where we were able to quantify the storage amount
01:04:48.570 --> 01:04:50.740
and the volumes in storage across Texas,
01:04:50.740 --> 01:04:53.120
that could be one tool to use
01:04:53.120 --> 01:04:55.840
through the third party aggregation firms.
01:04:58.390 --> 01:05:00.100
If I can ask you to clarify a little bit,
01:05:00.100 --> 01:05:05.100
you're saying that if we use 80% of our total storage,
01:05:06.030 --> 01:05:08.540
of the nation's, of Cushing total storage volume
01:05:08.540 --> 01:05:11.010
is kind of a threshold that anything
01:05:11.010 --> 01:05:13.550
that produces over that would be waste?
01:05:16.290 --> 01:05:17.260
I think it's yes.
01:05:17.260 --> 01:05:19.410
I think you'd have to look into the slope
01:05:19.410 --> 01:05:23.230
of storage increases, and I just know at Parsley,
01:05:23.230 --> 01:05:28.230
we have our tank set tops at 80% of capacity,
01:05:28.320 --> 01:05:31.430
due to optimal operating conditions,
01:05:31.430 --> 01:05:35.600
to not allow physical waves to occur beyond economic waves,
01:05:35.600 --> 01:05:38.790
so I think the economic argument is more cut and dry,
01:05:38.790 --> 01:05:41.960
but then above that 80% threshold on capacity,
01:05:41.960 --> 01:05:44.180
you get into physical waste conditions
01:05:44.180 --> 01:05:47.790
that are very risky for the state operating conditions,
01:05:47.790 --> 01:05:49.340
and across the country as well.
01:05:50.580 --> 01:05:52.960
Can you unpack this so I got that?
01:05:52.960 --> 01:05:55.270
Can you unpack the economic side of that,
01:05:55.270 --> 01:05:57.860
so you said the economics is more cut and dry.
01:05:59.310 --> 01:06:01.980
Barrels per day, how do you translate
01:06:01.980 --> 01:06:03.500
that to economic waste?
01:06:05.400 --> 01:06:06.370
I think when you look
01:06:06.370 --> 01:06:11.180
at the local market pricing,
01:06:11.180 --> 01:06:16.060
you've seen almost single digit pricing at times
01:06:16.060 --> 01:06:17.440
in the Midland Basin.
01:06:18.930 --> 01:06:21.460
And then you're having producers produce
01:06:21.460 --> 01:06:26.380
these volumes below their operating costs
01:06:26.380 --> 01:06:29.790
for periods of time, responding too slowly
01:06:29.790 --> 01:06:31.860
to market conditions,
01:06:31.860 --> 01:06:35.110
as evidenced by our industry's economic results
01:06:35.110 --> 01:06:37.640
over the past two decades, really.
01:06:38.810 --> 01:06:42.410
So I think it's clear that the resources of Texas
01:06:42.410 --> 01:06:45.570
and even the mineral owners are being wasted
01:06:45.570 --> 01:06:49.730
in short spurts of time, and although potentially 80%
01:06:49.730 --> 01:06:52.780
or so of the companies will react in a timely fashion,
01:06:54.280 --> 01:06:58.760
it hasn't been timely enough for what's happening
01:06:58.760 --> 01:07:01.700
with this COVID-19 shock to demand.
01:07:04.060 --> 01:07:05.400
So did I understand your point?
01:07:05.400 --> 01:07:10.400
There was that this discounted price over all of the barrels
01:07:11.210 --> 01:07:15.140
being produced is ultimately the measure of the waste?
01:07:15.140 --> 01:07:16.830
Is that your point?
01:07:18.030 --> 01:07:19.070
Yes, if you compare it
01:07:19.070 --> 01:07:24.070
to the Rusty Braziel report where the producing cost
01:07:24.260 --> 01:07:27.070
is in the mid-twenties per barrel,
01:07:27.070 --> 01:07:29.900
and if you see all the production produced
01:07:29.900 --> 01:07:33.490
in the state minus that's currently still being produced,
01:07:33.490 --> 01:07:38.173
minus the $21 posted price, minus the net-backs
01:07:39.210 --> 01:07:41.430
and the transportation costs, the data
01:07:41.430 --> 01:07:45.030
between a healthy operating cost and the current sales price
01:07:45.030 --> 01:07:47.930
would be a good proxy to use for economic waste.
01:07:50.600 --> 01:07:52.411
All right, I appreciate you working with me on this,
01:07:52.411 --> 01:07:55.080
but because I'm trying to get to these numbers as you say,
01:07:55.080 --> 01:07:57.880
and if they will sell for $21 a barrel,
01:07:59.160 --> 01:08:01.870
net-backs and discounts and then the wellhead
01:08:01.870 --> 01:08:03.123
is something else, you're saying
01:08:03.123 --> 01:08:07.140
that there's some differential in here,
01:08:07.140 --> 01:08:09.050
both by the times all the barrels being produced.
01:08:09.050 --> 01:08:10.630
So if it's a $10 differential,
01:08:10.630 --> 01:08:12.460
times 10 million barrels a day,
01:08:12.460 --> 01:08:16.120
that's a hundred million dollars a day.
01:08:16.120 --> 01:08:17.340
I'm using example I don't know
01:08:17.340 --> 01:08:19.490
if it's not following your logic correctly?
01:08:20.490 --> 01:08:21.323
Yes, Commissioner,
01:08:21.323 --> 01:08:24.980
I think that's a logical way to calculate economic waste,
01:08:24.980 --> 01:08:26.840
as it's occurring today.
01:08:27.890 --> 01:08:28.723
Okay.
01:08:32.910 --> 01:08:37.890
Jump forward to the question that if we were to prorate,
01:08:41.680 --> 01:08:43.310
get title for us here,
01:08:43.310 --> 01:08:46.270
I mean, how is that going to resolve this?
01:08:46.270 --> 01:08:49.670
You talked, I think same thing as the Pioneer guys,
01:08:49.670 --> 01:08:52.380
you've talked about there's 10 to 20 million barrels a day
01:08:52.380 --> 01:08:57.380
of excess supply remaining, I believe after the 70 cuts
01:08:57.670 --> 01:09:01.060
is what you're projecting.
01:09:01.060 --> 01:09:05.230
So if we cut the 20% to get to your 80% number,
01:09:05.230 --> 01:09:09.470
we got 20% or 1 million barrels a day change,
01:09:09.470 --> 01:09:12.570
how does that address, or how does that prevent waste?
01:09:14.125 --> 01:09:17.190
I equated, I'm a visual learner, I guess,
01:09:17.190 --> 01:09:20.110
and I equated it to the optics of the flattening
01:09:20.110 --> 01:09:23.500
the curve situation when we tackled COVID
01:09:23.500 --> 01:09:26.640
as a country four weeks ago.
01:09:26.640 --> 01:09:31.320
There were early spikes of, the draw on the infrastructure,
01:09:31.320 --> 01:09:33.130
the healthcare infrastructure.
01:09:33.130 --> 01:09:36.310
And if you did nothing, you almost spike into that,
01:09:36.310 --> 01:09:39.720
and it would be chaos at the infrastructure level,
01:09:39.720 --> 01:09:41.960
the healthcare infrastructure level.
01:09:41.960 --> 01:09:45.430
Through social distancing efforts, you mitigated,
01:09:45.430 --> 01:09:49.420
but did not alleviate the situation.
01:09:49.420 --> 01:09:51.070
And I think we can all agree
01:09:51.070 --> 01:09:55.540
that we are better off for it as a country.
01:09:55.540 --> 01:09:57.470
This would be much the same.
01:09:57.470 --> 01:10:00.780
This would alleviate, but not mitigate the situation.
01:10:00.780 --> 01:10:03.490
OPEC's cut was a good first step,
01:10:03.490 --> 01:10:06.780
rather than the Commission taking action
01:10:06.780 --> 01:10:08.370
as the largest producing state,
01:10:08.370 --> 01:10:11.000
it would be the next leadership stance.
01:10:11.000 --> 01:10:13.860
And again, this would be temporary, you could review
01:10:13.860 --> 01:10:18.430
if others are coming along in the G-20,
01:10:18.430 --> 01:10:23.160
and potentially reverse the order after a 30 day period,
01:10:23.160 --> 01:10:27.650
if other states and other countries are not acting properly.
01:10:27.650 --> 01:10:31.570
But it is doing our part to flatten the curve
01:10:31.570 --> 01:10:35.540
and draw on the Texas infrastructure.
01:10:38.110 --> 01:10:42.130
Mr. Gallagher, (indistinct) can you for example try
01:10:42.130 --> 01:10:45.130
to quantify if we were prorate, how does that prevent waste?
01:10:47.260 --> 01:10:50.270
Excuse me, I said, how, maybe the better question is,
01:10:50.270 --> 01:10:52.400
can you get me just the numbers, if right now
01:10:53.517 --> 01:10:56.060
there is a hundred million dollars of waste per day,
01:10:56.060 --> 01:10:58.800
in economics using that logic,
01:10:58.800 --> 01:11:01.310
how would us prorating affect that?
01:11:03.720 --> 01:11:05.976
I think you'd see the stabilization,
01:11:05.976 --> 01:11:10.976
and this is speculation, but by cutting off,
01:11:11.030 --> 01:11:15.000
instead of continuing at the current high production rates,
01:11:15.000 --> 01:11:20.000
if we saw a reduction of 20%, we would see a stabilization
01:11:20.180 --> 01:11:25.180
into the mid twenties, equalizing near your cash costs,
01:11:26.727 --> 01:11:28.680
instead of negative costs.
01:11:30.240 --> 01:11:32.620
And again, that calculation logic that we walked
01:11:32.620 --> 01:11:35.530
through earlier, instead of taking away a negative number,
01:11:35.530 --> 01:11:36.720
it would be breakeven
01:11:37.590 --> 01:11:41.730
at the 80% production levels essentially,
01:11:41.730 --> 01:11:46.730
and you would no longer have economic waste at that time.
01:11:47.500 --> 01:11:52.250
So it would be dependent on further cost stabilization.
01:11:52.250 --> 01:11:55.230
And that's where reviewing on a 30-day basis
01:11:55.230 --> 01:11:56.470
would be necessary to see
01:11:56.470 --> 01:11:58.700
if that stabilization is occurring.
01:12:00.620 --> 01:12:03.610
Okay, last question I think.
01:12:03.610 --> 01:12:07.086
We heard the gentlemen from Pioneer
01:12:07.086 --> 01:12:09.900
about when storage is going to fill up,
01:12:09.900 --> 01:12:11.820
they're saying Cushing, filling up
01:12:11.820 --> 01:12:14.640
somewhere four to five weeks, which seems
01:12:14.640 --> 01:12:18.690
to be the critical point at which they're concerned
01:12:18.690 --> 01:12:20.600
about the supply chain issues.
01:12:22.470 --> 01:12:26.960
How long do you think until that issue surfaces
01:12:26.960 --> 01:12:28.260
and we ran into that wall?
01:12:29.450 --> 01:12:31.030
That is if you look
01:12:31.030 --> 01:12:33.600
at current production rates and you look
01:12:33.600 --> 01:12:38.160
at spreadsheet capacities, that is the timeframe
01:12:38.160 --> 01:12:39.650
that we would see that occurring.
01:12:39.650 --> 01:12:43.700
Additionally, there's 14 million barrels a day of VLCC's,
01:12:43.700 --> 01:12:47.220
in addition to historic import rates
01:12:47.220 --> 01:12:50.370
that people are bringing over from Saudi Arabia
01:12:51.400 --> 01:12:56.400
that Texas refineries have purchased at discounted prices,
01:12:56.790 --> 01:12:59.290
that will accelerate some of that storage capacity
01:13:01.485 --> 01:13:04.542
that's off of historic trends.
01:13:04.542 --> 01:13:05.375
And then as I mentioned, spreadsheet calculations
01:13:05.375 --> 01:13:06.850
do not always translate to healthy operating conditions.
01:13:06.850 --> 01:13:10.110
So I would be biased towards thinking
01:13:10.110 --> 01:13:15.110
that you would hit those conditions a week to two sooner.
01:13:15.470 --> 01:13:17.380
So I do think the situation is urgent.
01:13:19.160 --> 01:13:19.993
Okay.
01:13:21.108 --> 01:13:23.498
Thank you, Mr. Gallagher, that's all I have.
01:13:23.498 --> 01:13:24.680
Thank you Commissioner.
Mr. Gallagher,
01:13:25.595 --> 01:13:26.930
a couple of questions I have.
01:13:28.087 --> 01:13:31.580
Earlier it was said that we pass this proration,
01:13:31.580 --> 01:13:35.630
contingent upon other states and internationally,
01:13:36.490 --> 01:13:37.990
other things being done.
01:13:37.990 --> 01:13:41.050
Can you give your opinion on this,
01:13:41.050 --> 01:13:44.930
contingent upon other forces agreeing to this?
01:13:44.930 --> 01:13:47.680
Number one, our concern is, Texas being 40%.
01:13:47.680 --> 01:13:50.431
Are we gonna undershoot just our own state
01:13:50.431 --> 01:13:51.560
with no help from anybody else?
01:13:51.560 --> 01:13:53.700
So is there a contingency you
01:13:53.700 --> 01:13:55.940
would agree to upon us passing this?
01:13:58.100 --> 01:13:58.933
Thank you chairman.
01:13:58.933 --> 01:14:01.300
I was refined that I think we need
01:14:01.300 --> 01:14:02.670
to take a leadership stance,
01:14:02.670 --> 01:14:05.350
but on a temporary and reviewable basis.
01:14:05.350 --> 01:14:06.560
We've seen the strength
01:14:06.560 --> 01:14:09.550
of American diplomacy across the globe.
01:14:10.510 --> 01:14:12.320
With Texas taking this stance,
01:14:12.320 --> 01:14:14.610
the Commission taking a potential.
01:14:14.610 --> 01:14:18.170
temporary proration stance, that would allow the Governor
01:14:18.170 --> 01:14:22.603
and our President to continue those diplomatic efforts
01:14:23.910 --> 01:14:28.780
with new leverage, a newfound leverage position of action.
01:14:28.780 --> 01:14:31.940
So I don't think we should wait.
01:14:31.940 --> 01:14:35.380
I think we should take pragmatic action
01:14:35.380 --> 01:14:38.800
on a temporary basis, use the diplomatic efforts,
01:14:38.800 --> 01:14:43.150
and if we do not see a commensurate response
01:14:43.150 --> 01:14:48.150
from the G-20 and other states, I think it's very fair
01:14:48.270 --> 01:14:51.110
for the Railroad Commission to take that into consideration,
01:14:51.110 --> 01:14:55.563
When they do a 30-day update, and potentially pull away
01:14:56.580 --> 01:14:59.250
from proration, if there is no broader response.
01:15:00.270 --> 01:15:03.100
You mentioned earlier that, if I understood correctly,
01:15:03.100 --> 01:15:05.160
that you estimate as an earlier witness,
01:15:05.160 --> 01:15:07.310
there's gonna be under four to five weeks
01:15:07.310 --> 01:15:10.620
that we'll reach maximum capacity for storage.
01:15:10.620 --> 01:15:14.250
Will that not in itself stop the production?
01:15:14.250 --> 01:15:16.670
What's the disadvantage of that occurring,
01:15:16.670 --> 01:15:20.720
versus us passing the rule if it's gonna happen anyway,
01:15:20.720 --> 01:15:23.020
that's what I'm saying, or will happen anyway?
01:15:24.560 --> 01:15:25.393
Yes, sir.
01:15:25.393 --> 01:15:27.090
I think that's what we were trying to address
01:15:27.090 --> 01:15:29.530
with our visual on the slide.
01:15:29.530 --> 01:15:33.530
If you slam into max capacity with these peaks,
01:15:34.860 --> 01:15:38.610
it really wipes out the industry in a dramatic fashion.
01:15:38.610 --> 01:15:39.990
Especially the service sector,
01:15:39.990 --> 01:15:42.330
and hundreds of thousands of additional jobs.
01:15:42.330 --> 01:15:45.220
It's the trigger of an additional, as you mentioned,
01:15:45.220 --> 01:15:47.620
four weeks, that's an additional month
01:15:47.620 --> 01:15:51.190
of complete shutdown operations for the service sector.
01:15:53.336 --> 01:15:57.943
I'm not under any illusion that cutting across the board
01:15:58.838 --> 01:16:02.810
would make things rosy again for the service sector,
01:16:02.810 --> 01:16:05.670
but it could stabilize some activity
01:16:05.670 --> 01:16:08.590
across the board at known rates.
01:16:08.590 --> 01:16:10.490
It gives clarity to operators
01:16:10.490 --> 01:16:12.820
and planning on the service side.
01:16:12.820 --> 01:16:17.340
If we slam in at full speed into a train wreck,
01:16:17.340 --> 01:16:20.760
then we can predict the outcomes are gonna be much worse,
01:16:20.760 --> 01:16:24.540
even if it's a four-month delay, I mean, four-week delay
01:16:24.540 --> 01:16:26.110
to return activity.
01:16:26.110 --> 01:16:28.290
We're going to have much less competition
01:16:28.290 --> 01:16:31.300
and hundreds of thousands of additional lost jobs
01:16:31.300 --> 01:16:32.320
on the backside of it.
01:16:32.320 --> 01:16:35.190
So you slam in at a peak rate,
01:16:35.190 --> 01:16:37.460
and then you go on very steep decline,
01:16:37.460 --> 01:16:41.430
versus moderating that even four weeks sooner, would help.
01:16:43.020 --> 01:16:45.380
I'm concerned as I'm sure all are
01:16:45.380 --> 01:16:47.920
about our smaller producers.
01:16:47.920 --> 01:16:49.910
And these are folks that are perhaps
01:16:49.910 --> 01:16:53.560
just barely producing oil on some old wells
01:16:53.560 --> 01:16:56.930
across the state of Texas, they're very small producers.
01:16:56.930 --> 01:17:00.900
Do you have any comments of how we can address the concerns
01:17:00.900 --> 01:17:04.800
of these small producers producing small royalty checks
01:17:04.800 --> 01:17:07.760
for some of our royalty owners across the state,
01:17:07.760 --> 01:17:10.560
that really are gonna be shut down,
01:17:10.560 --> 01:17:13.980
if it's just not worth producing for some of those?
01:17:13.980 --> 01:17:16.250
Do you have any answer or any comments toward
01:17:16.250 --> 01:17:18.110
those small producers?
01:17:19.270 --> 01:17:22.480
Yes, so I think over 90 to 95%
01:17:22.480 --> 01:17:26.370
of Texas' production is administered
01:17:26.370 --> 01:17:31.250
through the top 100 operators.
01:17:31.250 --> 01:17:35.970
So you're left with almost 2,900 remaining operators
01:17:36.900 --> 01:17:40.280
that are very immaterial to the cut, but as you mentioned,
01:17:40.280 --> 01:17:43.920
very material to the way of life for thousands
01:17:43.920 --> 01:17:46.460
or hundreds of thousands of people across the state,
01:17:46.460 --> 01:17:49.500
and the country, when you include royalty payments
01:17:49.500 --> 01:17:52.480
to make their mortgages, et cetera.
01:17:52.480 --> 01:17:56.450
So I think the state can still achieve its objective
01:17:56.450 --> 01:18:00.650
with exemptions based off marginal wells
01:18:00.650 --> 01:18:03.340
and small producers.
01:18:03.340 --> 01:18:07.960
And if we look at the daily production of those producers
01:18:07.960 --> 01:18:11.540
and do some sort of exemption based off that,
01:18:11.540 --> 01:18:14.520
I think it will still move the needle based
01:18:14.520 --> 01:18:15.870
on the remaining operators.
01:18:17.404 --> 01:18:18.620
Okay, thank you very much.
01:18:18.620 --> 01:18:20.590
Any other question members?
01:18:20.590 --> 01:18:21.690
Commissioner Craddick.
01:18:23.110 --> 01:18:24.550
Yes, I've got one more, Matt.
01:18:24.550 --> 01:18:26.610
So one of my other questions
01:18:26.610 --> 01:18:29.800
and I gave it to Scott too, are there other things
01:18:29.800 --> 01:18:33.080
that you see we should or shouldn't be doing besides,
01:18:33.080 --> 01:18:36.460
or other tools we have besides just doing proration?
01:18:38.840 --> 01:18:41.039
I read through a lot of the ideas
01:18:41.039 --> 01:18:46.039
and through my talks with nearly 40 other heads
01:18:46.270 --> 01:18:50.460
of businesses, one of the competing ideas I saw,
01:18:50.460 --> 01:18:55.190
which I have not run the analysis on it,
01:18:55.190 --> 01:19:00.190
but it was to limit allowables on early tied in-line wells
01:19:02.120 --> 01:19:07.120
when we file our completion allowable to 500 barrels a day.
01:19:08.730 --> 01:19:11.760
That would disproportionately hit,
01:19:11.760 --> 01:19:15.210
obviously the horizontal Permian producers,
01:19:15.210 --> 01:19:16.680
the large producers as well,
01:19:16.680 --> 01:19:18.640
but it's just a tool to look at.
01:19:19.720 --> 01:19:24.590
So as you evaluate how to administer this,
01:19:24.590 --> 01:19:27.770
that's one within the toolkit that they have
01:19:27.770 --> 01:19:29.890
at your disposal is what type of allowable
01:19:30.950 --> 01:19:33.720
to approve to new wells, new completions.
01:19:35.330 --> 01:19:37.540
Okay, all right, thank you very much.
01:19:37.540 --> 01:19:41.010
I mean, I'm not sure that that's the best option I have had,
01:19:41.010 --> 01:19:44.410
frankly, I've had somebody that emailed me last week,
01:19:44.410 --> 01:19:46.930
saying we just shouldn't issue any more drilling permits.
01:19:46.930 --> 01:19:50.183
Which I don't think is necessarily the best option either.
01:19:50.183 --> 01:19:53.760
But so let me ask you, 'cause you are more
01:19:53.760 --> 01:19:54.880
of the horizontal space.
01:19:54.880 --> 01:19:57.030
Do you think we at tree and we're talking
01:19:57.030 --> 01:19:59.050
about limiting allowables, do you think
01:19:59.050 --> 01:20:01.290
we're out of trade verticals versus horizontals
01:20:01.290 --> 01:20:05.770
different as far as how we look, how we proration,
01:20:05.770 --> 01:20:07.550
or how we would deal with them?
01:20:09.020 --> 01:20:11.190
Well, I think the cleanest tool
01:20:11.190 --> 01:20:15.680
would be to apply it by operator.
01:20:15.680 --> 01:20:17.870
Again, the operators will have the best knowledge
01:20:17.870 --> 01:20:21.120
with their purchasers of how to administer the 20%.
01:20:21.120 --> 01:20:24.520
The purchasers do have limits on how much
01:20:24.520 --> 01:20:27.400
they can produce currently by lease.
01:20:27.400 --> 01:20:30.020
We've hit maximums when they haven't been filed
01:20:30.020 --> 01:20:31.900
and the purchasers call us and say,
01:20:31.900 --> 01:20:35.000
"We've hit maximums, please update your allowables."
01:20:35.000 --> 01:20:38.710
So they would just follow that condition by operator basis,
01:20:38.710 --> 01:20:42.240
and I think if there's exemptions for the small operators
01:20:42.240 --> 01:20:46.050
that produce less than if it's 10,000 barrels a day,
01:20:46.050 --> 01:20:48.100
or 1000 barrels a day,
01:20:48.100 --> 01:20:51.970
that would be the cleanest way to administer this.
01:20:53.950 --> 01:20:54.783
Okay-
01:20:56.673 --> 01:20:57.506
(Craddick's voice drowned)
Mr. Gallagher,
01:20:57.506 --> 01:21:00.530
I'm concerned, I'm thinking you're talking
01:21:00.530 --> 01:21:03.650
about such a short time window, under one month
01:21:03.650 --> 01:21:06.540
for our proration to take effect.
01:21:06.540 --> 01:21:08.200
And I'm wading through the norm, procedures
01:21:08.200 --> 01:21:10.400
of the Railroad Commission, this may be a question
01:21:10.400 --> 01:21:14.110
for our staff, but you may have done research on this.
01:21:14.110 --> 01:21:16.210
I don't know whether we can pass proration
01:21:17.160 --> 01:21:22.160
as per a certain date, certain and then retro-fine,
01:21:22.170 --> 01:21:25.610
retro-implement penalties to those
01:21:25.610 --> 01:21:26.900
that pass that certain date?
01:21:26.900 --> 01:21:30.730
Do you have any ideas on how we can this quickly,
01:21:30.730 --> 01:21:33.930
get proration taking effect, to prevent less than a month
01:21:33.930 --> 01:21:38.200
from now, the problem that you've stated?
01:21:40.070 --> 01:21:43.260
Well, I commend you, Chairman
01:21:43.260 --> 01:21:44.990
and the Commissioners for pulling
01:21:44.990 --> 01:21:46.700
this emergency meeting together.
01:21:46.700 --> 01:21:51.700
Of course, we started our efforts about four weeks ago.
01:21:51.770 --> 01:21:54.470
It took a lot of time for us to pull our data
01:21:54.470 --> 01:21:55.590
together for this request.
01:21:55.590 --> 01:21:58.930
And you move very quickly, once you heard the request,
01:21:58.930 --> 01:22:03.020
I do think you're moving at an expeditious rate.
01:22:03.020 --> 01:22:08.020
I do hope that with the other marginal wells,
01:22:08.220 --> 01:22:10.840
that there are temporary marginal wells being shut-in,
01:22:10.840 --> 01:22:14.060
Parsley has shut-in about 400 barrels a day,
01:22:14.060 --> 01:22:16.770
through my talks with others, they have shut-in
01:22:17.620 --> 01:22:20.580
small amounts of uneconomic wells
01:22:20.580 --> 01:22:23.740
that maybe it extends a week or so.
01:22:23.740 --> 01:22:26.460
So all we can hope is that we continue
01:22:26.460 --> 01:22:28.170
in an expeditious manner.
01:22:29.160 --> 01:22:31.250
But I think what you're pointing out
01:22:31.250 --> 01:22:35.600
is that the urgency is real, and continuing
01:22:35.600 --> 01:22:39.700
at this expeditious pace, I'm very thankful for that.
01:22:40.720 --> 01:22:45.720
And so I take it, the normal hearings process
01:22:46.510 --> 01:22:48.720
would be too long for us to go into it,
01:22:48.720 --> 01:22:51.760
we needs some type of emergency action, would you think?
01:22:53.340 --> 01:22:55.780
Yes, to the extent of those are available
01:22:55.780 --> 01:22:58.680
with the data and hearing that you have heard,
01:22:58.680 --> 01:23:01.480
I think, and with emergency,
01:23:01.480 --> 01:23:05.000
it just shortens the temporary nature as you can.
01:23:05.000 --> 01:23:09.180
So a 30-day temporary start should be
01:23:09.180 --> 01:23:12.390
within the comfort zone.
01:23:12.390 --> 01:23:14.490
And then that can be reviewed
01:23:14.490 --> 01:23:17.450
in a more fulsome manner as time unfolds.
01:23:17.450 --> 01:23:21.540
'Cause this COVID-19 is clearly an emergency shock
01:23:21.540 --> 01:23:23.480
that hit us very quickly.
01:23:23.480 --> 01:23:25.550
Alright, thank you very much.
01:23:25.550 --> 01:23:27.930
I appreciate it, any other question members?
01:23:27.930 --> 01:23:30.180
I do have one more, Mr. Chairman.
01:23:30.180 --> 01:23:31.710
Mr. Sitton.
01:23:31.710 --> 01:23:32.543
Thank you.
01:23:34.430 --> 01:23:37.740
Mr. Gallagher, the previous presentation,
01:23:37.740 --> 01:23:39.470
they threw out the options followup
01:23:39.470 --> 01:23:42.040
on Commissioner Craddick's question about mechanisms.
01:23:42.040 --> 01:23:46.520
What do you think about the idea
01:23:46.520 --> 01:23:48.800
that's been floated out there and was mentioned before,
01:23:48.800 --> 01:23:53.070
about us getting a lot more strict about flaring
01:23:53.070 --> 01:23:55.890
and restricting flaring permits or flaring volumes
01:23:55.890 --> 01:24:00.450
as a mechanism to reduce the effects of prorating?
01:24:02.780 --> 01:24:04.920
I do think it's a separate topic,
01:24:04.920 --> 01:24:08.720
but it definitely dovetails into what the Commission
01:24:08.720 --> 01:24:12.490
has been evaluating over over the prior months,
01:24:12.490 --> 01:24:17.280
and the unique situation we had with growing production
01:24:18.170 --> 01:24:21.180
on a world scale by millions of barrels a day,
01:24:21.180 --> 01:24:23.180
over the prior few years.
01:24:23.180 --> 01:24:26.970
So I think our industry is trying to improve,
01:24:26.970 --> 01:24:31.480
every operator is trying to reduce their footprint,
01:24:31.480 --> 01:24:35.710
and we want to sell products, not vent or flair our product.
01:24:35.710 --> 01:24:38.250
So I do think that's a logical thing
01:24:38.250 --> 01:24:40.190
to tie in to this analysis.
01:24:40.190 --> 01:24:45.190
If it can help accelerate the reduction of our waste,
01:24:49.110 --> 01:24:53.720
be it on the crude side or on methane and natural gas side.
01:24:53.720 --> 01:24:57.200
I think that is a very reasonable solution.
01:24:58.710 --> 01:24:59.543
Thank you.
01:25:00.751 --> 01:25:02.370
There are no further questions.
01:25:02.370 --> 01:25:04.390
Thank you for speaking with us today, we appreciate
01:25:04.390 --> 01:25:06.740
so much your participation.
01:25:06.740 --> 01:25:09.300
And we'll give it back to Ms. Farad.
01:25:09.300 --> 01:25:11.580
Yes, I understand that Mr. Tillman
01:25:11.580 --> 01:25:12.890
is now available.
01:25:14.800 --> 01:25:18.330
Mr. Tillman, if you're available, please state your name,
01:25:18.330 --> 01:25:21.830
who you represent, and if you're for, against,
01:25:21.830 --> 01:25:25.040
or just speaking neutrally on this issue.
01:25:26.450 --> 01:25:27.650
Yes, thank you, Chairman.
01:25:27.650 --> 01:25:30.690
Lee Tillman, Chairman, President and CEO
01:25:30.690 --> 01:25:33.550
of Marathon Oil, against proration.
01:25:34.940 --> 01:25:37.290
First, let me just start off by saying good morning,
01:25:37.290 --> 01:25:40.370
Chairman Christian, Commissioners Craddick and Sitton.
01:25:40.370 --> 01:25:42.200
Thank you very much for the opportunity
01:25:42.200 --> 01:25:44.990
to provide remarks on this issue.
01:25:44.990 --> 01:25:48.380
These are extraordinarily tough times, some of the toughest
01:25:48.380 --> 01:25:50.390
in my over 30 years in this industry,
01:25:50.390 --> 01:25:52.360
and I wanna thank the Commissioners
01:25:52.360 --> 01:25:55.760
and all RRC employees for their dedication
01:25:55.760 --> 01:25:59.020
to public service during this unprecedented health crisis.
01:25:59.960 --> 01:26:02.540
Let me begin by simply stating that we believe
01:26:02.540 --> 01:26:05.720
in free markets and oppose actions suggested
01:26:05.720 --> 01:26:09.780
by the petitioners, that aim to prorate domestic production,
01:26:09.780 --> 01:26:11.580
in the great state of Texas.
01:26:11.580 --> 01:26:13.890
I urge the Commission to support Texas
01:26:13.890 --> 01:26:17.200
as a free market state, that enables efficiency
01:26:17.200 --> 01:26:20.720
and competition among independent EMP companies,
01:26:20.720 --> 01:26:22.980
big and small alike with the freedom
01:26:22.980 --> 01:26:25.680
to react to global market conditions.
01:26:25.680 --> 01:26:27.620
We do not believe proration in Texas
01:26:27.620 --> 01:26:30.570
will have the desired effect, or any meaningful effect
01:26:30.570 --> 01:26:33.170
on global oversupply, and would only serve
01:26:33.170 --> 01:26:36.670
to disadvantage Texans, for four key reasons.
01:26:36.670 --> 01:26:39.230
First, Texas operators are already shutting in,
01:26:39.230 --> 01:26:43.400
the least profitable wells in response to market forces,
01:26:43.400 --> 01:26:45.690
the way a free market should work.
01:26:45.690 --> 01:26:48.810
To assume that operators would shut-in production
01:26:48.810 --> 01:26:51.490
in an ad hoc and haphazard manner,
01:26:51.490 --> 01:26:54.630
as stated by the petitioners, is inconsistent
01:26:54.630 --> 01:26:56.750
with fundamental business principles,
01:26:56.750 --> 01:27:00.700
and would better describe the outcome of a unilateral
01:27:00.700 --> 01:27:03.980
and blanket proration, not the free market.
01:27:03.980 --> 01:27:06.510
Second, our world has dramatically changed
01:27:06.510 --> 01:27:08.370
from the last time proration was used.
01:27:08.370 --> 01:27:11.030
Global markets are so interconnected
01:27:11.030 --> 01:27:13.180
that it is easy for capital investment dollars
01:27:13.180 --> 01:27:17.350
to simply be moved to other basins with less regulation.
01:27:17.350 --> 01:27:21.020
It also supposes that the regulator, not the operator
01:27:21.020 --> 01:27:24.313
is best positioned to make curtailment decisions
01:27:24.313 --> 01:27:26.310
and that the regulator can implement
01:27:26.310 --> 01:27:29.400
such reductions in a fair and equitable manner.
01:27:30.290 --> 01:27:34.770
Third, supply and demand imbalances will always occur.
01:27:34.770 --> 01:27:38.290
And in those times, some companies will succeed,
01:27:38.290 --> 01:27:39.530
and others will fail.
01:27:39.530 --> 01:27:43.090
So we have to ask, what would be the threshold
01:27:43.090 --> 01:27:46.110
to toss aside free market principles in the future.
01:27:47.020 --> 01:27:50.070
Last, opening the Pandora's box of proration,
01:27:50.070 --> 01:27:52.610
especially when it cannot be expected
01:27:52.610 --> 01:27:56.530
to have any meaningful effect on global over-supply,
01:27:56.530 --> 01:27:58.900
would put it in play as a powerful tool
01:27:58.900 --> 01:28:01.360
to be used to restrain production
01:28:01.360 --> 01:28:03.790
for reasons other than preventing waste.
01:28:04.680 --> 01:28:07.150
In closing, the Shale Revolution would not have began
01:28:07.150 --> 01:28:09.850
here in Texas without free market principles.
01:28:09.850 --> 01:28:11.880
We're facing a unique set of challenges,
01:28:11.880 --> 01:28:14.530
but the oil and gas industry will emerge
01:28:14.530 --> 01:28:16.840
from this stronger than before.
01:28:16.840 --> 01:28:18.940
When a vocal minority takes a position
01:28:18.940 --> 01:28:21.780
in favor of artificial market manipulation
01:28:21.780 --> 01:28:24.770
that is so far removed from the consensus
01:28:24.770 --> 01:28:28.170
of a vast majority of operators, one can only surmise
01:28:28.170 --> 01:28:29.970
that their motives and objectives
01:28:29.970 --> 01:28:32.160
are primarily company-specific,
01:28:32.160 --> 01:28:35.320
as opposed to broadly industry-supportive.
01:28:35.320 --> 01:28:37.150
The best solution to our current crisis
01:28:37.150 --> 01:28:40.320
is to get the world healthy, and back to work.
01:28:40.320 --> 01:28:43.350
While not abandoning the free market principles
01:28:43.350 --> 01:28:46.680
that have created US energy independence.
01:28:46.680 --> 01:28:48.890
Thank you very much for the time.
01:28:48.890 --> 01:28:50.660
Thank you Mr. Tillman.
01:28:50.660 --> 01:28:53.260
Commissioners, any questions? Commissioner Craddick.
01:28:54.140 --> 01:28:55.900
Lee, thank you for being here,
01:28:55.900 --> 01:28:57.950
and I'm glad you had electronic problems too,
01:28:57.950 --> 01:29:00.670
'cause I'm the one who always has seemed to have issues.
01:29:00.670 --> 01:29:03.400
So I appreciate you making the effort today.
01:29:03.400 --> 01:29:04.550
I wanted to follow up.
01:29:04.550 --> 01:29:06.950
You said, that you are already making some cuts.
01:29:08.836 --> 01:29:11.250
We had testimony earlier that people
01:29:11.250 --> 01:29:13.220
were gonna have the first quarter,
01:29:13.220 --> 01:29:16.540
a lot of people who have increased their production.
01:29:16.540 --> 01:29:17.820
You're saying there's already cuts.
01:29:17.820 --> 01:29:19.820
Do you have some perspective on that,
01:29:19.820 --> 01:29:21.580
whether which direction we're going,
01:29:21.580 --> 01:29:23.410
it seems we were cutting back?
01:29:23.410 --> 01:29:26.890
Just trying to understand that dynamic at this point.
01:29:26.890 --> 01:29:28.260
Yes, Commissioner Craddick, obviously,
01:29:28.260 --> 01:29:32.300
I can't disclose specific company information at this point,
01:29:32.300 --> 01:29:33.133
but what we do know-
01:29:33.133 --> 01:29:34.976
I don't expect you to.
01:29:34.976 --> 01:29:39.976
Is that capital budget cuts have occurred 40 to 50%
01:29:40.060 --> 01:29:41.810
in the space.
01:29:41.810 --> 01:29:46.070
I think this notion that the US is not taking action
01:29:46.070 --> 01:29:47.570
is simply false.
01:29:47.570 --> 01:29:50.210
The US is well ahead of this curve.
01:29:50.210 --> 01:29:53.620
Well ahead of even OPEC-plus' decision.
01:29:53.620 --> 01:29:56.790
And I know there are flaws in any data set,
01:29:56.790 --> 01:29:59.140
but if you look at current EIA estimates,
01:29:59.140 --> 01:30:03.440
US shale production is already expected to fall
01:30:03.440 --> 01:30:08.440
by 400,000 barrels per day from January to May of this year.
01:30:08.510 --> 01:30:12.740
If you expand that and you look at total US oil production,
01:30:12.740 --> 01:30:16.950
exit to exit volumes for T 19 and for T 20,
01:30:16.950 --> 01:30:21.920
are expected to fall by 1.8 million barrels per day.
01:30:21.920 --> 01:30:26.030
And I would suggest that that information today
01:30:26.030 --> 01:30:28.390
is even dated, that those numbers
01:30:28.390 --> 01:30:31.760
will likely head to much higher levels.
01:30:31.760 --> 01:30:35.280
So for us, the free markets are working.
01:30:35.280 --> 01:30:39.190
Decisions are being taken on both economic
01:30:39.190 --> 01:30:40.900
and commercial basis,
01:30:40.900 --> 01:30:43.130
and that's the way markets should work.
01:30:45.136 --> 01:30:48.200
Thank you, I appreciate the information.
01:30:48.200 --> 01:30:51.220
My other question you operate in other states.
01:30:51.220 --> 01:30:53.550
So can you maybe give me a perspective,
01:30:53.550 --> 01:30:56.050
are other states considering this, that you work in?
01:30:56.050 --> 01:30:57.890
How would that work?
01:30:57.890 --> 01:31:01.650
Do you see, I know Oklahoma you're up in Oklahoma.
01:31:01.650 --> 01:31:04.640
Some days had, maybe they've had a petition.
01:31:04.640 --> 01:31:06.940
I don't know if they're really having conversations,
01:31:06.940 --> 01:31:09.500
or other, not just states, but in other markets
01:31:09.500 --> 01:31:12.500
you're working in, kind of how would that affect.
01:31:12.500 --> 01:31:15.540
If we did, one done in other states, other markets,
01:31:15.540 --> 01:31:17.240
how would that affect what you do
01:31:17.240 --> 01:31:20.074
and are other people looking at?
01:31:20.074 --> 01:31:22.710
Yes, as you're no doubt aware,
01:31:22.710 --> 01:31:25.460
both of the petitioners for Texas proration,
01:31:25.460 --> 01:31:27.940
are Texas Permian producers only.
01:31:27.940 --> 01:31:30.190
In other words, they are single-basin companies
01:31:30.190 --> 01:31:33.440
with no production outside of the Texas Permian.
01:31:33.440 --> 01:31:36.760
Our company, Marathon Oil, and many other opponents
01:31:36.760 --> 01:31:39.640
of proration have multi-basin portfolios.
01:31:39.640 --> 01:31:42.490
Specifically, Marathon Oil has production
01:31:42.490 --> 01:31:47.490
in Texas, Oklahoma, New Mexico, and North Dakota,
01:31:47.560 --> 01:31:49.760
which provides us a much broader perspective
01:31:49.760 --> 01:31:52.280
across the US oil and gas space.
01:31:52.280 --> 01:31:55.480
As such our decisions with respect to production,
01:31:55.480 --> 01:31:58.920
curtailment are not limited to just Texas,
01:31:58.920 --> 01:32:00.870
but rather we must consider which barrels
01:32:00.870 --> 01:32:03.440
across our multi-basin portfolio,
01:32:03.440 --> 01:32:06.470
have the highest cash contribution per barrel,
01:32:06.470 --> 01:32:10.240
which we define as revenue minus variable cash cost.
01:32:10.240 --> 01:32:14.190
And for Marathon Oil, our South Texas Eagle Ford Asset,
01:32:14.190 --> 01:32:17.780
has some of the highest cash contribution barrels
01:32:17.780 --> 01:32:21.000
in our portfolio, and consequently business fundamentals
01:32:21.000 --> 01:32:23.830
would dictate that our Eagle Ford barrels
01:32:23.830 --> 01:32:27.700
will be the last barrels we will consider curtailing,
01:32:27.700 --> 01:32:30.180
on a purely economic basis.
01:32:30.180 --> 01:32:32.410
In this scenario, Texas proration
01:32:32.410 --> 01:32:35.180
would eliminate our freedom to protect some
01:32:35.180 --> 01:32:39.010
of our most economic barrels by arbitrarily forcing us
01:32:39.010 --> 01:32:41.430
to curtail legal production.
01:32:41.430 --> 01:32:44.750
This in my opinion, highlights yet another shortcoming
01:32:44.750 --> 01:32:47.260
of unilateral proration by Texas,
01:32:47.260 --> 01:32:50.316
as there is an underlying assumption that Texas barrels
01:32:50.316 --> 01:32:54.910
must be the least economic and a given company's portfolio,
01:32:54.910 --> 01:32:56.870
which is simply not the case.
01:32:56.870 --> 01:32:58.430
It also serves to demonstrate
01:32:58.430 --> 01:33:00.780
how archaic state-level proration is,
01:33:01.629 --> 01:33:04.180
as a mechanism to eliminate waste
01:33:04.180 --> 01:33:06.450
in an interconnected global market,
01:33:06.450 --> 01:33:09.110
where Texas cannot be isolated,
01:33:09.110 --> 01:33:11.440
and is simply one participant
01:33:11.440 --> 01:33:14.920
in a much broader supply and demand landscape.
01:33:14.920 --> 01:33:17.820
And I'll reiterate, operators exercising
01:33:17.820 --> 01:33:20.680
free market principles is the only efficient
01:33:20.680 --> 01:33:22.970
and equitable means to respond
01:33:22.970 --> 01:33:25.330
to supply and demand imbalances,
01:33:25.330 --> 01:33:27.500
in what today is a global market.
01:33:27.500 --> 01:33:31.390
We are not living in the energy market of the 1930s,
01:33:31.390 --> 01:33:33.980
when these rules were initially developed.
01:33:33.980 --> 01:33:37.130
Otherwise, regulators will be forced to pick winners
01:33:37.130 --> 01:33:41.790
and losers, via flawed mechanisms developed at a time
01:33:41.790 --> 01:33:44.650
when global energy markets could be simplified
01:33:44.650 --> 01:33:47.470
to state-level supply and demand.
01:33:49.210 --> 01:33:50.640
Okay, thank you, I appreciate.
01:33:50.640 --> 01:33:52.670
I think that's all my questions right now Mr. Chairman.
01:33:52.670 --> 01:33:53.503
I appreciate.
01:33:53.503 --> 01:33:54.910
Thank you Lee, for participating.
01:33:54.910 --> 01:33:56.880
Thank you, Commissioner Craddick.
01:33:56.880 --> 01:33:57.980
Any other questions?
01:33:59.650 --> 01:34:01.160
Yes, I guess sir.
01:34:03.760 --> 01:34:05.660
Lee, thanks for being here.
01:34:05.660 --> 01:34:07.730
I appreciate as your insight.
01:34:11.010 --> 01:34:13.420
I'm going through the same set of questions.
01:34:13.420 --> 01:34:15.020
Right now if you look at the statutes,
01:34:15.020 --> 01:34:17.970
you look at what's happening in the market, is there waste?
01:34:19.110 --> 01:34:20.270
I believe that there
01:34:20.270 --> 01:34:23.760
is supply and demand imbalances Commissioner Sitton,
01:34:23.760 --> 01:34:26.040
that exist at various points
01:34:26.040 --> 01:34:28.440
in time and the commodity cycle.
01:34:28.440 --> 01:34:31.170
And if we're gonna ascribe waste to all of
01:34:31.170 --> 01:34:33.990
those fluctuations, where we have a deviation
01:34:33.990 --> 01:34:36.890
between supply and demand, the Railroad Commission
01:34:36.890 --> 01:34:37.990
is gonna be very busy.
01:34:41.960 --> 01:34:44.340
So is that a yes, there is oversupply
01:34:44.340 --> 01:34:46.420
but no, there is no waste?
01:34:46.420 --> 01:34:49.360
I would say today, there is certainly
01:34:49.360 --> 01:34:52.710
over-supply at a global scale in the market,
01:34:52.710 --> 01:34:56.410
to define waste within the boundary of the state of Texas,
01:34:56.410 --> 01:34:58.790
I think is not prudent to do so.
01:35:01.050 --> 01:35:06.050
Going off of the guy who presented
01:35:06.550 --> 01:35:11.260
right before you, Lee, was walking through some logic
01:35:11.260 --> 01:35:16.260
in terms of margins and current price levels,
01:35:16.960 --> 01:35:19.720
loosing money versus break-even,
01:35:19.720 --> 01:35:22.010
backed by an upkeep maths, whatever it is,
01:35:22.010 --> 01:35:23.710
it's some number of dollars per barrel,
01:35:23.710 --> 01:35:25.560
times the number of barrels produced.
01:35:26.570 --> 01:35:28.010
We didn't get the specifics,
01:35:28.010 --> 01:35:30.990
but between the first few presentations,
01:35:30.990 --> 01:35:35.290
it seems like it's anywhere between five and $15 a barrel.
01:35:35.290 --> 01:35:36.950
So if I do that math, it works out
01:35:36.950 --> 01:35:41.677
to a hundred million dollars a day of discounts,
01:35:44.250 --> 01:35:46.500
due to the oversupply,
01:35:46.500 --> 01:35:48.650
and due to the current production levels.
01:35:49.950 --> 01:35:53.100
How do you feel about those economic numbers?
01:35:53.100 --> 01:35:56.810
Let's say the economics are $100 million a day,
01:35:56.810 --> 01:36:00.030
that this level, let's just cap at this many barrels.
01:36:00.030 --> 01:36:01.240
What is your response to that?
01:36:01.240 --> 01:36:02.890
What's your feeling on that?
01:36:02.890 --> 01:36:04.510
Well, I would say that those economics
01:36:04.510 --> 01:36:07.260
have applied beginning time we've seen supply
01:36:07.260 --> 01:36:10.290
and demand imbalances and dislocations
01:36:10.290 --> 01:36:14.520
that created abnormal downward pressure on the commodity.
01:36:14.520 --> 01:36:19.520
We saw that in 2015, we saw a bit of in 2008,
01:36:21.090 --> 01:36:24.940
but certainly then even with those price dislocations,
01:36:24.940 --> 01:36:27.330
we didn't declare waste and start trying
01:36:27.330 --> 01:36:31.430
to artificially manipulate what is a free market
01:36:31.430 --> 01:36:34.770
and an independent market in the state of Texas and the US.
01:36:38.730 --> 01:36:43.420
So in other words, the fact that the economics,
01:36:45.060 --> 01:36:45.893
I guess, it's your point
01:36:45.893 --> 01:36:47.460
that we should ignore the economics?
01:36:47.460 --> 01:36:50.200
No, I mean, I would argue that companies
01:36:50.200 --> 01:36:54.830
are the ultimate arbiter of the economics within the fields.
01:36:54.830 --> 01:36:57.000
They will have shareholders and stakeholders
01:36:57.000 --> 01:37:01.590
that they have to account to already.
01:37:01.590 --> 01:37:05.300
Again, my argument is that the prudent operators
01:37:05.300 --> 01:37:08.160
are taking the necessary actions
01:37:08.160 --> 01:37:10.180
to support their own business models
01:37:10.180 --> 01:37:12.570
and their unique portfolios.
01:37:12.570 --> 01:37:17.570
And again, to presuppose that a regulator can intercede
01:37:18.780 --> 01:37:21.770
with all the various commercial arrangements,
01:37:21.770 --> 01:37:26.250
a global market place, and do that in a fair, equitable,
01:37:26.250 --> 01:37:29.720
and efficient manner, I find very challenging.
01:37:29.720 --> 01:37:33.680
I also find it not to be particularly an effective
01:37:33.680 --> 01:37:36.610
or fair solution in a market
01:37:36.610 --> 01:37:39.620
that is already strongly responding.
01:37:39.620 --> 01:37:43.420
Again if, whether you believe the EIA numbers or not,
01:37:43.420 --> 01:37:47.190
the bottom line is that production is coming down.
01:37:47.190 --> 01:37:51.150
We are essentially carving capital investment
01:37:51.150 --> 01:37:53.820
in unconventional reservoirs that typically
01:37:53.820 --> 01:37:57.940
have declined, on the order of 30 to 40%,
01:37:57.940 --> 01:37:59.830
without further divestment.
01:37:59.830 --> 01:38:02.170
So the decline is happening today,
01:38:02.170 --> 01:38:04.410
it will continue to happen.
01:38:04.410 --> 01:38:07.830
I would argue that among the global producers,
01:38:07.830 --> 01:38:12.640
the US has acted first and has acted quite strongly
01:38:12.640 --> 01:38:16.240
in terms of their contribution to the supply side.
01:38:16.240 --> 01:38:20.360
But the reality is that we are not going
01:38:20.360 --> 01:38:24.630
to solve the current commodity price dislocation
01:38:24.630 --> 01:38:27.040
until demand returns.
01:38:27.040 --> 01:38:30.920
Today, all the supply actions, and you've seen it even
01:38:30.920 --> 01:38:33.720
with an almost 10 million barrel reduction,
01:38:33.720 --> 01:38:36.060
announced by OPEC-plus,
01:38:36.060 --> 01:38:40.980
that this has become a demand-driven correction.
01:38:40.980 --> 01:38:45.680
And that demand destruction has been created by an event.
01:38:45.680 --> 01:38:48.760
And that event is a global pandemic.
01:38:48.760 --> 01:38:52.080
But my argument is, the markets are responding
01:38:52.080 --> 01:38:55.310
as they should, particularly here in the US.
01:38:55.310 --> 01:38:57.530
And again, to intercede in what
01:38:57.530 --> 01:39:00.550
is a very complex market again,
01:39:00.550 --> 01:39:04.610
this is not the state of Texas in the '30s and '40s,
01:39:04.610 --> 01:39:08.540
when we could draw a material balance around the state
01:39:08.540 --> 01:39:10.810
and match up supply and demand.
01:39:10.810 --> 01:39:12.760
That is simply not the case any longer.
01:39:14.970 --> 01:39:16.670
Just so that we put fine points on it,
01:39:16.670 --> 01:39:19.010
because the other day the statute
01:39:19.010 --> 01:39:22.480
that we're working under talks about waste,
01:39:23.950 --> 01:39:25.790
production in excess of reasonable demand.
01:39:25.790 --> 01:39:28.010
And it sounds like what you're saying is,
01:39:28.010 --> 01:39:30.240
but please correct me if I'm wrong here,
01:39:31.669 --> 01:39:33.440
that I understand that look,
01:39:33.440 --> 01:39:37.030
Texas is not an isolated vacuum, so that's what to look at,
01:39:37.030 --> 01:39:39.710
and in the end it seems like what you're saying to us
01:39:39.710 --> 01:39:42.200
is that when we consider waste, we shouldn't be considering
01:39:42.200 --> 01:39:44.500
the economics, leave that to private business.
01:39:45.460 --> 01:39:48.890
Correct, I would say that, economic forces
01:39:48.890 --> 01:39:53.890
will ultimately drive supply and demand back into balance.
01:39:55.380 --> 01:39:58.000
It may be long, it may be painful,
01:39:59.250 --> 01:40:02.500
we are a price-taker as an industry.
01:40:02.500 --> 01:40:04.890
I mean, we could make the argument that Texas
01:40:04.890 --> 01:40:08.490
has been over-producing into a well-supplied market,
01:40:08.490 --> 01:40:12.100
probably for five to seven years.
01:40:12.100 --> 01:40:15.200
But certainly we have not asked the regulator
01:40:15.200 --> 01:40:18.610
to intercede and correct that imbalance
01:40:18.610 --> 01:40:20.720
such that it would offer price support.
01:40:23.830 --> 01:40:28.830
If I can jump over to, coming to the over-supply
01:40:29.480 --> 01:40:32.360
and trying to get our hands around Texas specific.
01:40:34.278 --> 01:40:36.290
It seems like from the first two presentations
01:40:36.290 --> 01:40:37.990
that they thought it's weighing heavily
01:40:37.990 --> 01:40:40.190
on the local storage issues.
01:40:40.190 --> 01:40:41.960
Well, I've read through some accounts here,
01:40:41.960 --> 01:40:44.000
I don't know which economics probably it was,
01:40:44.000 --> 01:40:48.359
I think we had Web Mackenzie, Rice Dad, Rob Bidan,
01:40:48.359 --> 01:40:51.360
(indistinct) trading information.
01:40:52.270 --> 01:40:56.097
And one of them mentioned the disparity between WTI
01:41:01.730 --> 01:41:03.900
and Brent that as a percentage basis,
01:41:03.900 --> 01:41:05.900
that's at its highest levels in history right now.
01:41:05.900 --> 01:41:08.950
I think Brent set up 40, forgive me,
01:41:08.950 --> 01:41:12.220
I remember the number was 40% premium today.
01:41:14.268 --> 01:41:18.480
How does that speak to between local storage issues,
01:41:18.480 --> 01:41:20.270
and therefore the local impacts here,
01:41:20.270 --> 01:41:25.270
as well as the disparity between Brent and WTI.
01:41:25.290 --> 01:41:28.200
How does that speak to local over-supplies
01:41:28.200 --> 01:41:29.850
as opposed to global over-supply?
01:41:30.770 --> 01:41:35.770
Well, obviously Brent and WTI are ultimately traded
01:41:35.940 --> 01:41:37.450
on the global market.
01:41:37.450 --> 01:41:41.290
Brent has some advantages, from an access and being pretty
01:41:41.290 --> 01:41:43.650
much a waterborne product for the most part.
01:41:44.800 --> 01:41:49.300
US barrels that we do have been a net exporter,
01:41:49.300 --> 01:41:53.030
clearly are much more confined in that sense.
01:41:53.030 --> 01:41:57.160
And therefore in times when storage arbitrage exists,
01:41:57.160 --> 01:42:01.640
you can get obviously that Brent/WTI spread gets higher.
01:42:01.640 --> 01:42:06.270
But again, these are all elements of the global marketplace.
01:42:06.270 --> 01:42:09.800
I mean, we fought hard to get our barrels,
01:42:10.992 --> 01:42:14.560
made in America barrels into the global market.
01:42:14.560 --> 01:42:18.010
It wasn't so long ago that we essentially
01:42:18.010 --> 01:42:21.740
could not export US barrels.
01:42:21.740 --> 01:42:25.140
It took action at the federal level
01:42:25.140 --> 01:42:28.630
to give us that opportunity and we have
01:42:28.630 --> 01:42:32.060
become a net exporter in that sense.
01:42:32.060 --> 01:42:35.540
So we enjoy the benefit of that, and we also have
01:42:35.540 --> 01:42:38.240
to accept the fact that participation
01:42:38.240 --> 01:42:41.230
in that global marketplace will always have
01:42:41.230 --> 01:42:43.620
some downside risk as well.
01:42:43.620 --> 01:42:47.690
That's part of the risk of being a going enterprise
01:42:47.690 --> 01:42:50.870
in any business, particularly a commodity business.
01:42:50.870 --> 01:42:54.800
So storage is simply yet another one of those market factors
01:42:54.800 --> 01:42:56.690
that we have to contend with.
01:42:56.690 --> 01:42:59.640
It's no different than access to transportation
01:42:59.640 --> 01:43:02.110
and other things that many others have mentioned.
01:43:03.460 --> 01:43:06.050
Companies that have made those arrangements
01:43:06.050 --> 01:43:10.270
and have made those investments, including things
01:43:10.270 --> 01:43:14.080
like hedging will ultimately be better prepared.
01:43:14.080 --> 01:43:18.240
Whether that supply and demand imbalances is really large,
01:43:18.240 --> 01:43:20.740
and what we hope is short-lived like today,
01:43:20.740 --> 01:43:22.540
or whether we end up in a lower
01:43:22.540 --> 01:43:25.170
for longer commodity price environment,
01:43:25.170 --> 01:43:30.170
again, the most efficient, the most well-prepared companies,
01:43:30.210 --> 01:43:33.590
will ultimately be the ones that not only survive,
01:43:33.590 --> 01:43:35.770
but also thrive in that environment.
01:43:38.730 --> 01:43:41.270
Specifics, I wanna unpack
01:43:41.270 --> 01:43:43.844
this one a little more detail please.
01:43:43.844 --> 01:43:46.330
The talk about the storage issue, from the stuff
01:43:49.310 --> 01:43:52.120
that was turned in and the previous two presenters,
01:43:52.120 --> 01:43:55.560
it seems there's some consensus that storage
01:43:55.560 --> 01:43:58.680
is gonna fill up as early as four weeks,
01:43:58.680 --> 01:44:00.540
as late as some time in July.
01:44:00.540 --> 01:44:03.150
It seems to be that it's some where in there.
01:44:03.150 --> 01:44:04.850
Do you agree with that time frame?
01:44:05.824 --> 01:44:09.760
I certainly think that physical storage access
01:44:09.760 --> 01:44:12.370
is a major question right now.
01:44:12.370 --> 01:44:15.330
A lot of that obviously is highly dependent
01:44:15.330 --> 01:44:19.210
upon where domestic production had,
01:44:19.210 --> 01:44:21.320
and how that storage is ultimately used.
01:44:21.320 --> 01:44:23.560
And a great example was the fact that,
01:44:23.560 --> 01:44:27.560
yeah, I think domestic storage is a bit North
01:44:27.560 --> 01:44:29.640
of 640 million barrels.
01:44:30.880 --> 01:44:33.360
Obviously you have to look at the individual paths
01:44:33.360 --> 01:44:36.280
to draw specific regional conclusions,
01:44:36.280 --> 01:44:38.980
but let's just take that as a gross number
01:44:38.980 --> 01:44:42.850
that generally speaking is probably pushing 50%
01:44:42.850 --> 01:44:45.320
of ultimate physical capacity.
01:44:45.320 --> 01:44:48.640
That is of course X any action
01:44:48.640 --> 01:44:51.640
from the Strategic Petroleum Reserve, and we know
01:44:51.640 --> 01:44:55.190
that on the federal side, the Department of Energy
01:44:55.190 --> 01:44:58.480
has clearly opened that up for storage.
01:44:58.480 --> 01:45:02.680
And ultimately we hope for some direct purchases as well.
01:45:02.680 --> 01:45:05.660
So I do think there's a lot of variability in that number.
01:45:05.660 --> 01:45:10.660
And again, we may be able to pinpoint very precisely
01:45:10.980 --> 01:45:15.340
where we might think supply is, the elasticity and demand,
01:45:15.340 --> 01:45:18.930
and the timing in which that demand reasserts itself
01:45:18.930 --> 01:45:20.040
is very challenging.
01:45:20.040 --> 01:45:23.830
We already have some global economies that are responding.
01:45:23.830 --> 01:45:27.290
China is one of those, and has of course been one
01:45:27.290 --> 01:45:31.690
of the biggest importers of US crude over time.
01:45:31.690 --> 01:45:35.300
So I would just argue that there is that risk,
01:45:35.300 --> 01:45:39.600
that physical storage risks, to try to put an exact timing
01:45:39.600 --> 01:45:43.600
on that with all of the variables that we're facing today,
01:45:43.600 --> 01:45:45.100
I think it's very challenging.
01:45:45.100 --> 01:45:48.540
And I do think that there is capacity today.
01:45:48.540 --> 01:45:52.310
We need to use that capacity in the most efficient manner.
01:45:52.310 --> 01:45:57.170
The DOE is also aggressively seeking additional
01:45:57.170 --> 01:46:01.780
above-ground storage opportunities, and I would also add
01:46:01.780 --> 01:46:06.780
that there are other, I think more broad regulatory actions
01:46:07.150 --> 01:46:11.730
that can continue to help our industry,
01:46:11.730 --> 01:46:14.640
but those are much more broad and probably
01:46:14.640 --> 01:46:17.230
much better implemented at a federal level.
01:46:22.290 --> 01:46:25.530
This last comment you just made about federal level,
01:46:25.530 --> 01:46:30.530
are you speaking to actions that might be taken for example,
01:46:33.420 --> 01:46:36.090
to have some involve foreign crude,
01:46:36.090 --> 01:46:38.080
are the things you're talking about?
01:46:38.080 --> 01:46:40.080
Some of the comments in the text we received
01:46:40.080 --> 01:46:41.590
about those reactions?
01:46:41.590 --> 01:46:43.570
No, I think I'm talking about some things,
01:46:43.570 --> 01:46:46.320
much more fundamental, Commissioner Sitton.
01:46:46.320 --> 01:46:48.859
I'm talking about flexibility
01:46:48.859 --> 01:46:52.330
to suspend production on leases,
01:46:52.330 --> 01:46:55.870
flexibility for automatic lease extension.
01:46:55.870 --> 01:46:58.670
Again, giving operators the flexibility
01:46:58.670 --> 01:47:03.660
to take the necessary supply reduction actions
01:47:03.660 --> 01:47:07.080
without negative impacts in the future,
01:47:07.080 --> 01:47:10.390
the extension of STR storage,
01:47:10.390 --> 01:47:12.850
as well as potential direct purchases.
01:47:12.850 --> 01:47:16.720
Even government and military purchases of refined products,
01:47:16.720 --> 01:47:20.600
to try to support refinery runs, and maybe advance
01:47:21.500 --> 01:47:26.130
some of that demand recovery that is gonna be so essential,
01:47:26.130 --> 01:47:29.340
as we move into the second half of the year.
01:47:29.340 --> 01:47:32.190
Those are the types of things I'm referring to.
01:47:32.190 --> 01:47:33.023
Okay.
01:47:33.960 --> 01:47:38.920
When we talk about our role at the Railroad Commission,
01:47:38.920 --> 01:47:41.250
we're following the Natural Resources Code, and statute.
01:47:41.250 --> 01:47:45.530
The statute that this process is falling under,
01:47:45.530 --> 01:47:50.530
talks about waste, production in excess of facility,
01:47:51.260 --> 01:47:53.920
market facilities, and regional market demand.
01:47:53.920 --> 01:47:58.440
You've given very eloquent explanation of why you feel like,
01:47:58.440 --> 01:48:00.010
and I think what you're saying is,
01:48:00.010 --> 01:48:03.550
"Yes, there's over supply, but it doesn't constitute waste."
01:48:03.550 --> 01:48:05.740
And ultimately you don't think that there's a role
01:48:05.740 --> 01:48:08.760
for the government to be involved in any of this.
01:48:08.760 --> 01:48:11.550
Did I understand that, that's the gist of it?
01:48:11.550 --> 01:48:15.160
Yeah, my core argument here is
01:48:15.160 --> 01:48:20.120
that the correction in supply and demand imbalances
01:48:20.120 --> 01:48:22.910
is best served through free market principles,
01:48:22.910 --> 01:48:26.610
where you have operators that have the knowledge
01:48:26.610 --> 01:48:28.140
of their own portfolios,
01:48:28.140 --> 01:48:30.590
the knowledge of their commercial agreements,
01:48:30.590 --> 01:48:32.800
making those decisions,
01:48:32.800 --> 01:48:36.280
as opposed to a very blunt instrument.
01:48:36.280 --> 01:48:38.740
And today, anyway, an instrument that
01:48:38.740 --> 01:48:42.340
would only be applied to the state of Texas.
01:48:42.340 --> 01:48:47.030
And I think you would unduly penalize Texas at a time
01:48:47.030 --> 01:48:50.100
when I just don't think that is proper or fair.
01:48:51.990 --> 01:48:54.530
On that point is that, I was going to ask you,
01:48:54.530 --> 01:48:57.020
one of the things that the previous presenters talked
01:48:57.020 --> 01:49:01.410
about was more of, not just a US,
01:49:01.410 --> 01:49:06.410
but even a global continued process to cut more barrels.
01:49:08.960 --> 01:49:10.850
But yes, the question is, do you believe
01:49:10.850 --> 01:49:12.730
that the United States, for example, the President
01:49:12.730 --> 01:49:17.010
should continue to work with other nations to try
01:49:17.010 --> 01:49:18.960
to curtail production if that's needed?
01:49:19.830 --> 01:49:22.620
Well, I think that we are positioned
01:49:22.620 --> 01:49:26.760
as a company all along has been on the supply side.
01:49:28.020 --> 01:49:32.650
The role of the President, Secretary Pompeo,
01:49:32.650 --> 01:49:35.370
who have we talked directly with,
01:49:35.370 --> 01:49:38.790
was to drive toward a diplomatic solution
01:49:38.790 --> 01:49:41.230
between the Russian and the Saudi.
01:49:41.230 --> 01:49:44.850
In that discussion, the President, his advisors,
01:49:44.850 --> 01:49:48.030
Secretary Pompeo, Secretary of Energy,
01:49:48.030 --> 01:49:50.230
had been very clear that we are
01:49:50.230 --> 01:49:53.860
not negotiating with Saudi and Russia.
01:49:53.860 --> 01:49:57.460
This is their issue to resolve.
01:49:57.460 --> 01:50:02.460
The free markets and the actions of independent companies
01:50:03.010 --> 01:50:07.580
here in the US are already taking the necessary steps
01:50:07.580 --> 01:50:10.340
to address US supply.
01:50:10.340 --> 01:50:13.930
So that discussion, I think now has yielded
01:50:13.930 --> 01:50:17.590
at least an agreement to make the first step
01:50:17.590 --> 01:50:20.530
in those supply cuts for these large,
01:50:20.530 --> 01:50:22.800
foreign state-owned players.
01:50:22.800 --> 01:50:24.580
And I think that's a great first step.
01:50:24.580 --> 01:50:29.580
And I truly see the benefit of those steps in themselves,
01:50:30.480 --> 01:50:35.480
as we get into a more normal demand situation
01:50:35.910 --> 01:50:37.470
in the second half of this year.
01:50:37.470 --> 01:50:40.930
I think it will be very difficult to correct
01:50:40.930 --> 01:50:45.820
some of the shortcomings simply by pulling the supply lever
01:50:45.820 --> 01:50:50.070
in the second quarter, as we are really experiencing
01:50:50.070 --> 01:50:53.370
the most dramatic effects of this demand destruction.
01:50:55.640 --> 01:51:00.640
So I guess my, sorry, my question was, if the market today
01:51:01.090 --> 01:51:03.840
is still 10 to 20 million barrels a day over-supplied,
01:51:06.134 --> 01:51:09.533
and if this demand destruction remains,
01:51:11.610 --> 01:51:15.330
do you believe that there still should be efforts
01:51:15.330 --> 01:51:19.460
to get international supply down?
01:51:20.884 --> 01:51:22.820
And that is your position then that's the United States
01:51:22.820 --> 01:51:25.800
would say, "We will continue to allow companies
01:51:25.800 --> 01:51:26.940
to make decisions but we
01:51:26.940 --> 01:51:29.690
should urge international countries to cut"?
01:51:31.200 --> 01:51:33.060
I think the President
01:51:33.060 --> 01:51:36.210
has already demonstrated his willingness,
01:51:36.210 --> 01:51:40.050
particularly for those state-owned entities
01:51:40.050 --> 01:51:43.970
that control a good portion of the global supply,
01:51:43.970 --> 01:51:47.020
to ensure that they're not artificially manipulating
01:51:47.020 --> 01:51:51.070
or destabilizing the market by their actions.
01:51:51.070 --> 01:51:55.360
And to the extent that he can continue that dialogue
01:51:55.360 --> 01:51:58.840
and pull barrels out of the supply side,
01:51:58.840 --> 01:52:01.510
that can only be helpful.
01:52:01.510 --> 01:52:05.920
The concept that somehow that we're going to come
01:52:05.920 --> 01:52:10.920
into play by Texas prorating and actually holding sway
01:52:11.880 --> 01:52:16.880
in those discussions, I find somewhat hard to fathom.
01:52:17.320 --> 01:52:22.180
I mean, the bottom-line is, is that we're already cutting,
01:52:22.180 --> 01:52:24.040
and cutting deeply.
01:52:25.190 --> 01:52:29.120
There is going to be damage to our industry
01:52:29.120 --> 01:52:32.910
from this correction, just as there's been damage
01:52:32.910 --> 01:52:35.550
to the industry in past corrections.
01:52:35.550 --> 01:52:40.550
And unfortunately, today there is no amount of supply cut
01:52:41.540 --> 01:52:45.390
that will mitigate some of that damage.
01:52:45.390 --> 01:52:48.510
I think longer-term, those supply actions
01:52:48.510 --> 01:52:51.130
will prove to be constructive.
01:52:51.130 --> 01:52:54.330
But in the near-term, I think it's very difficult
01:52:54.330 --> 01:52:57.210
to see how those will ultimately outweigh
01:52:57.210 --> 01:52:59.600
the demand impact from COVID-19.
01:53:02.450 --> 01:53:04.200
Thank you Lee, that's all I have.
01:53:05.750 --> 01:53:07.450
Thank you, Commissioner.
01:53:07.450 --> 01:53:10.760
A question I have, from reading your letter Mr. Tillman,
01:53:10.760 --> 01:53:13.300
you mentioned that previously the Commission
01:53:13.300 --> 01:53:16.100
only regulated leases, and in this case,
01:53:16.100 --> 01:53:18.630
we're talking about regulating production.
01:53:18.630 --> 01:53:22.220
Can you clarify what the difference might entail
01:53:22.220 --> 01:53:26.470
that you brought up between leasing and implementing
01:53:26.470 --> 01:53:27.920
this provision on production?
01:53:28.910 --> 01:53:31.270
Yeah, well, certainly at a lease level,
01:53:31.270 --> 01:53:34.300
you're bringing it down to a granularity
01:53:34.300 --> 01:53:39.170
where many more specifics can be considered,
01:53:39.170 --> 01:53:41.660
including I think a wonderful point
01:53:41.660 --> 01:53:44.000
that Commissioner Craddick brought up
01:53:44.000 --> 01:53:46.940
around longterm reservoir impacts,
01:53:46.940 --> 01:53:51.280
which as some presenters have already alluded to,
01:53:52.730 --> 01:53:56.150
there are certainly in the horizontal wells that we drill,
01:53:56.150 --> 01:53:58.620
depending upon the reservoir type,
01:53:58.620 --> 01:54:03.100
we can endure those shut-ins, but there are other producers
01:54:03.100 --> 01:54:08.100
where having very specific shut-in requirements,
01:54:08.230 --> 01:54:11.580
even at a lease level will prove to be damaging
01:54:11.580 --> 01:54:14.720
to the longterm recovery of those reservoirs.
01:54:14.720 --> 01:54:18.620
At a producer level, I think the challenge is that
01:54:18.620 --> 01:54:22.410
you have such a diversity in the producers.
01:54:22.410 --> 01:54:25.300
Trying to level that playing field
01:54:25.300 --> 01:54:27.860
at that kind of gross level,
01:54:27.860 --> 01:54:31.310
I believe will be very challenging
01:54:31.310 --> 01:54:34.710
to create a fair and equitable solution.
01:54:34.710 --> 01:54:38.190
You've already heard people talking about the exceptions
01:54:38.190 --> 01:54:40.790
that might be required, and I can just see
01:54:40.790 --> 01:54:43.440
that spinning out of control.
01:54:43.440 --> 01:54:46.680
And at some stage you have to question,
01:54:47.825 --> 01:54:52.500
who is in the best position to render those decisions?
01:54:52.500 --> 01:54:57.500
And should the Railroad Commission again be interceding
01:54:58.360 --> 01:55:01.740
in what will ultimately be commercial arrangements,
01:55:01.740 --> 01:55:05.130
potentially force majeure declaration.
01:55:05.130 --> 01:55:08.080
Is that where the Railroad Commission wants to find itself?
01:55:09.290 --> 01:55:10.690
Okay, thank you very much.
01:55:12.132 --> 01:55:15.870
Fellow Commissioners, at this time,
01:55:15.870 --> 01:55:18.850
we've taken in our first three witnesses,
01:55:18.850 --> 01:55:20.750
about two-hours time.
01:55:20.750 --> 01:55:23.130
And I know we've established a lot of details,
01:55:23.130 --> 01:55:25.030
and great information we've made.
01:55:25.030 --> 01:55:28.860
And mine I encourage having sent those with testimony over
01:55:28.860 --> 01:55:32.540
in the dome across the street to, following
01:55:32.540 --> 01:55:34.500
in the morning, many times taking testimony.
01:55:34.500 --> 01:55:38.470
We certainly are willing, every question, everything.
01:55:38.470 --> 01:55:41.130
This too important to take shortcuts.
01:55:41.130 --> 01:55:43.480
But may I suggest we, in respect
01:55:43.480 --> 01:55:48.480
of the several dozen scheduled testifiers coming ahead,
01:55:48.640 --> 01:55:51.280
We might be very prudent with our questions
01:55:52.870 --> 01:55:55.410
both coming from this side, but at the same time discussion
01:55:55.410 --> 01:55:57.880
is taking much more than the limited testimony.
01:55:57.880 --> 01:56:00.450
So just I've thrown that out there as consideration
01:56:00.450 --> 01:56:03.280
in fairness to the several dozen ahead,
01:56:03.280 --> 01:56:05.010
to be as efficient as we can
01:56:05.010 --> 01:56:07.170
with our questions and our answers.
01:56:07.170 --> 01:56:09.900
Thank you. Callie, your time.
01:56:09.900 --> 01:56:11.820
All right, thank you.
01:56:11.820 --> 01:56:16.800
We now ask Doug Suttles with Ovintiv, to speak.
01:56:18.030 --> 01:56:20.400
Mr. Suttles, if you would please identify yourself,
01:56:20.400 --> 01:56:22.770
the company that you're representing, and whether
01:56:22.770 --> 01:56:26.980
you are for, against, or neutral on the subject at hand.
01:56:28.070 --> 01:56:30.000
Yes, my name is Doug Suttles.
01:56:30.000 --> 01:56:33.900
I'm the CEO of Ovintiv, and we're against proration.
01:56:35.890 --> 01:56:38.910
Thank you Commissioners for the opportunity to speak today.
01:56:39.770 --> 01:56:41.330
I'm the CEO of Ovintiv.
01:56:41.330 --> 01:56:45.180
We are a publicly traded independent oil and gas company,
01:56:45.180 --> 01:56:47.180
whose roots go back to 1881.
01:56:48.050 --> 01:56:49.950
We are a major producer in Texas,
01:56:49.950 --> 01:56:51.570
and the second largest producer
01:56:51.570 --> 01:56:53.420
of unconventional oil and gas.
01:56:53.420 --> 01:56:55.550
We've pioneered many of the innovations
01:56:55.550 --> 01:56:58.640
for developing shale resources.
01:56:58.640 --> 01:57:01.060
I'm the third generation to work in this industry,
01:57:01.060 --> 01:57:02.720
and my daughter is the fourth.
01:57:02.720 --> 01:57:05.520
My grandfather began working in the oil fields
01:57:05.520 --> 01:57:07.990
of West Texas some 80 years ago.
01:57:07.990 --> 01:57:10.390
My mom grew up in Midland, my dad Fall City.
01:57:10.390 --> 01:57:13.160
My parents were married in Midland, Texas.
01:57:13.160 --> 01:57:16.200
I've worked in this industry almost 40 years.
01:57:16.200 --> 01:57:20.190
Texas, and the oil and gas industry mean a great deal to me.
01:57:21.210 --> 01:57:24.010
The market is always in a condition of imbalance,
01:57:24.010 --> 01:57:27.570
at times, over-supplied and at times under-supplied.
01:57:27.570 --> 01:57:30.200
In the last 50 years, we've had many periods
01:57:30.200 --> 01:57:34.060
where the market was over-supplied, resulting in low prices.
01:57:34.060 --> 01:57:37.770
The late eighties, the late nineties, the financial crisis,
01:57:37.770 --> 01:57:42.100
and the significant downturn in 2015 and 16.
01:57:42.100 --> 01:57:44.390
None of these periods was it deemed that waste
01:57:44.390 --> 01:57:48.040
was occurring in Texas and prorationing necessary.
01:57:48.040 --> 01:57:50.420
In fact, despite these difficult periods,
01:57:50.420 --> 01:57:54.370
the industry grew and the Texas Miracle occurred.
01:57:54.370 --> 01:57:57.580
The nation reached energy independence, oil and natural gas
01:57:57.580 --> 01:58:01.290
were available on affordables, communities prospered,
01:58:01.290 --> 01:58:03.650
thousands were employed in great jobs,
01:58:03.650 --> 01:58:06.570
and billions of dollars were invested.
01:58:06.570 --> 01:58:08.880
Companies and individuals risked capital.
01:58:08.880 --> 01:58:10.320
They took their chances.
01:58:10.320 --> 01:58:13.010
Some prospered, some did not.
01:58:13.010 --> 01:58:15.460
Texas disproportionately prospered.
01:58:15.460 --> 01:58:17.940
Texas has been a place open for business,
01:58:17.940 --> 01:58:19.710
where you can take a chance,
01:58:19.710 --> 01:58:21.500
where free markets are celebrated,
01:58:21.500 --> 01:58:23.550
where innovation is encouraged.
01:58:23.550 --> 01:58:26.130
Entrepreneurial-ism is part of the culture,
01:58:26.130 --> 01:58:29.410
and where government doesn't control business.
01:58:29.410 --> 01:58:30.800
The market is working.
01:58:30.800 --> 01:58:33.070
Activity and production are realigning
01:58:33.070 --> 01:58:37.430
to the current unusual circumstances, and doing so quickly.
01:58:37.430 --> 01:58:39.780
The market effectively dealt with disruptions
01:58:39.780 --> 01:58:43.870
over the last 50 years, and the Texas Miracle occurred.
01:58:43.870 --> 01:58:45.800
It will work again today.
01:58:45.800 --> 01:58:48.540
The industry will survive, and it will prosper again.
01:58:48.540 --> 01:58:51.790
It will emerge stronger and more competitive.
01:58:51.790 --> 01:58:53.830
We've always dealt with uncertainty;
01:58:53.830 --> 01:58:57.510
prices, access to capital, new technology,
01:58:57.510 --> 01:59:01.290
social concerns, and, the next big discovery.
01:59:01.290 --> 01:59:03.010
But we haven't had to worry
01:59:03.010 --> 01:59:05.250
about Texas interfering in the market.
01:59:06.250 --> 01:59:09.740
If you interfere, our industry will ultimately be weaker,
01:59:09.740 --> 01:59:11.580
less efficient and less competitive.
01:59:11.580 --> 01:59:15.230
It will have a new risk; government interference.
01:59:15.230 --> 01:59:17.240
When will it happen again?
01:59:17.240 --> 01:59:18.850
I urge you not to interfere.
01:59:18.850 --> 01:59:21.200
Keep Texas a place where entrepreneurial-ism
01:59:21.200 --> 01:59:23.270
and innovation are celebrated,
01:59:23.270 --> 01:59:26.340
the market is open, and free from interference.
01:59:26.340 --> 01:59:28.730
I say this as someone whose family has lived
01:59:28.730 --> 01:59:30.660
through the ups and downs of our industry
01:59:30.660 --> 01:59:32.400
for four generations.
01:59:32.400 --> 01:59:35.850
My company and my family are proud of what we do,
01:59:35.850 --> 01:59:38.100
and proud we can do it in Texas.
01:59:38.100 --> 01:59:40.120
What we do powers the world,
01:59:40.120 --> 01:59:42.500
and makes our modern life possible.
01:59:42.500 --> 01:59:45.500
Thank you for the opportunity to speak this morning.
01:59:45.500 --> 01:59:46.820
Thank you.
01:59:46.820 --> 01:59:47.920
Any questions members?
01:59:49.600 --> 01:59:50.700
Commissioner Craddick.
01:59:51.550 --> 01:59:53.180
I just have a couple of quick ones.
01:59:53.180 --> 01:59:56.730
Thank you, Doug, for being here today, and taking the time.
01:59:56.730 --> 01:59:58.890
You talked in your letter and you touched
01:59:58.890 --> 02:00:02.010
on waste and mitigation of that.
02:00:02.010 --> 02:00:05.400
Could you elaborate just a little bit,
02:00:05.400 --> 02:00:07.980
if we believe there's waste or not,
02:00:07.980 --> 02:00:10.780
how you're mitigating some of those issues?
02:00:11.920 --> 02:00:13.860
Yeah, Commissioner, it's a great question,
02:00:13.860 --> 02:00:16.880
because if you look, the market's already dealing with that.
02:00:17.860 --> 02:00:20.950
In last week's report, the DOE estimated production
02:00:20.950 --> 02:00:24.550
was down in United States, 600,000 barrels a day.
02:00:24.550 --> 02:00:27.710
Our company has voluntarily shut-in production.
02:00:27.710 --> 02:00:31.000
We anticipate we'll probably shut-in more production,
02:00:31.000 --> 02:00:32.840
and we're determining ourselves
02:00:32.840 --> 02:00:36.090
where we believe waste occurs, and where it doesn't occur.
02:00:36.090 --> 02:00:38.040
Where the price we're receiving for the barrel
02:00:38.040 --> 02:00:41.220
is insufficient to not only cover our costs,
02:00:41.220 --> 02:00:42.630
but generate what we think
02:00:42.630 --> 02:00:45.490
is a suitable return on our investment.
02:00:45.490 --> 02:00:47.200
So I think that actually the market
02:00:47.200 --> 02:00:49.640
is the most efficient mechanism for dealing
02:00:49.640 --> 02:00:52.580
with this question, and it's done so
02:00:52.580 --> 02:00:54.210
in all of the last downturns,
02:00:54.210 --> 02:00:57.880
in 2015 and 2016, we saw prices similar to
02:00:57.880 --> 02:00:58.970
what we see today,
02:00:58.970 --> 02:01:03.110
and the market effectively dealt with that.
02:01:03.110 --> 02:01:03.943
Thank you.
02:01:03.943 --> 02:01:06.740
And my other question is, and you touched on it too,
02:01:07.868 --> 02:01:09.400
in both your letter and your testimony
02:01:09.400 --> 02:01:10.970
about regulatory certainty.
02:01:10.970 --> 02:01:13.110
Could you address that and kind of elaborate
02:01:13.110 --> 02:01:16.230
why you would choose to be in Texas for instance,
02:01:16.230 --> 02:01:18.800
versus another area that you might operate,
02:01:18.800 --> 02:01:22.060
and how important that is in your investment,
02:01:22.060 --> 02:01:24.300
and what you do across the board?
02:01:25.450 --> 02:01:26.580
Yes, Commissioner.
02:01:26.580 --> 02:01:30.790
So our company, as I stated in my comments there,
02:01:30.790 --> 02:01:33.860
we actually are one of the largest producers,
02:01:33.860 --> 02:01:36.340
independent oil and gas producers in the world actually.
02:01:36.340 --> 02:01:39.030
We produce in Texas, we produce in Oklahoma,
02:01:39.030 --> 02:01:41.640
we produce in North Dakota, Utah,
02:01:41.640 --> 02:01:44.280
and British Columbia and Alberta.
02:01:45.120 --> 02:01:47.210
And actually when we deploy capital,
02:01:47.210 --> 02:01:49.030
because capital is quite fluid.
02:01:49.030 --> 02:01:50.830
It looks at risk and opportunity,
02:01:50.830 --> 02:01:55.060
and it flows to the point where those two look optimal.
02:01:55.060 --> 02:01:58.110
And one of the reasons the Shale Revolution occurred
02:01:58.110 --> 02:02:01.720
in places like the United States and Canada is,
02:02:01.720 --> 02:02:04.560
we had a stable regulatory environment.
02:02:04.560 --> 02:02:05.520
It was predictable.
02:02:05.520 --> 02:02:08.310
So it removed one of the big risks
02:02:08.310 --> 02:02:10.730
you actually have in other parts of the world.
02:02:10.730 --> 02:02:12.920
In fact, the parts of the world,
02:02:12.920 --> 02:02:15.230
where they have significant government control
02:02:15.230 --> 02:02:18.940
of production, don't have independents of any scale.
02:02:18.940 --> 02:02:21.770
If there are any, there are very few and very large.
02:02:21.770 --> 02:02:23.990
It's only in places like the United States
02:02:23.990 --> 02:02:26.700
where you have this stable regulatory environment,
02:02:26.700 --> 02:02:29.760
where we actually understand what the risks are
02:02:29.760 --> 02:02:31.430
and the rules we'll play by are,
02:02:31.430 --> 02:02:33.210
before we make our investments.
02:02:33.210 --> 02:02:35.720
That actually led to what we all refer to now
02:02:35.720 --> 02:02:36.810
as the Texas miracle.
02:02:38.190 --> 02:02:40.600
And when you touch on Alberta,
02:02:40.600 --> 02:02:42.780
and if you don't have to go very far,
02:02:42.780 --> 02:02:45.350
but I have talked to the regulator up there,
02:02:45.350 --> 02:02:47.710
can you kinda tell us the difference between
02:02:47.710 --> 02:02:49.720
what Alberta does and what potentially
02:02:49.720 --> 02:02:51.040
is proposed down here?
02:02:51.040 --> 02:02:53.580
And some of the pitfalls we need to be aware
02:02:53.580 --> 02:02:56.090
of in case we're going down this road?
02:02:56.090 --> 02:02:58.640
I'll appreciate it since you operate in both areas.
02:02:59.580 --> 02:03:01.570
Yeah, in Alberta several years ago,
02:03:01.570 --> 02:03:05.720
they decided to control the amount of heavy-oil production.
02:03:05.720 --> 02:03:07.810
And we're not a heavy-oil producer in Canada.
02:03:07.810 --> 02:03:11.450
We produce condensate and lighter oils up there.
02:03:11.450 --> 02:03:14.140
But what was interesting when they put this in place,
02:03:14.140 --> 02:03:15.900
they were trying to impact the market.
02:03:15.900 --> 02:03:18.198
But in fact, the unintended consequences
02:03:18.198 --> 02:03:19.940
were quite significant.
02:03:19.940 --> 02:03:22.270
And in their case, they actually had more time
02:03:22.270 --> 02:03:24.180
to put the program in place,
02:03:24.180 --> 02:03:25.850
than what people are talking about here.
02:03:25.850 --> 02:03:29.550
And I think previous witnesses have already talked about
02:03:29.550 --> 02:03:32.150
some of the great complexity here,
02:03:32.150 --> 02:03:34.010
and actually some of the inefficiencies.
02:03:34.010 --> 02:03:37.870
So what happens is, if you don't do this in the optimal way,
02:03:37.870 --> 02:03:40.700
it actually means that producers, on average,
02:03:40.700 --> 02:03:42.790
may be performing much poorer,
02:03:42.790 --> 02:03:44.680
as opposed to performing better,
02:03:44.680 --> 02:03:47.040
because they now can't control which barrel
02:03:47.040 --> 02:03:49.440
they believe is most economic to produce,
02:03:49.440 --> 02:03:51.890
versus which barrel they should actually shut-in.
02:03:53.432 --> 02:03:55.450
The current government in Alberta has been trying
02:03:55.450 --> 02:03:58.530
to figure out how to unwind their proration program.
02:03:58.530 --> 02:04:02.260
And it's found it very difficult once they put it in place.
02:04:02.260 --> 02:04:04.500
And I think this would be a concern in Texas,
02:04:04.500 --> 02:04:07.440
that once we've done this, when will we do it again?
02:04:07.440 --> 02:04:10.150
What are the rules under which it will be applied?
02:04:10.150 --> 02:04:12.300
And of course, it feels very unusual
02:04:12.300 --> 02:04:16.170
because we've successfully operated with wide swings
02:04:16.170 --> 02:04:17.770
in oil and gas prices.
02:04:17.770 --> 02:04:20.316
We've actually successfully operated with periods
02:04:20.316 --> 02:04:23.130
of over-supply and under-supply.
02:04:23.130 --> 02:04:26.890
And through that period, the Texas industry, and globally,
02:04:26.890 --> 02:04:29.120
the industry has grown and met the needs
02:04:29.120 --> 02:04:32.280
and created a lot of benefits in particular for Texas.
02:04:34.090 --> 02:04:36.390
Thank you, I appreciate you taking the time.
02:04:37.290 --> 02:04:38.840
Any other questions, members?
02:04:41.140 --> 02:04:41.973
Yes, sir.
02:04:43.710 --> 02:04:48.710
Doug, thank you for being here, and for presenting today.
02:04:48.830 --> 02:04:50.700
You talked a lot about the previous history,
02:04:50.700 --> 02:04:52.330
and the ups and downs in terms
02:04:52.330 --> 02:04:54.530
of over-supply, under-supply in history.
02:04:56.770 --> 02:05:00.030
Some of the data that we're getting from some of the groups
02:05:00.030 --> 02:05:01.980
that are analyzing this downturn,
02:05:01.980 --> 02:05:03.930
they've talked a lot about the fact that they're aware
02:05:03.930 --> 02:05:08.930
the world is currently as much as 30% over-supplied today.
02:05:09.830 --> 02:05:11.850
I think the biggest before this was
02:05:11.850 --> 02:05:13.750
in the five point something range.
02:05:16.266 --> 02:05:19.040
I ask the same question; do you think that there is waste?
02:05:19.040 --> 02:05:23.403
The statute defines waste as production
02:05:23.403 --> 02:05:26.700
in excess of reasonable market demand.
02:05:28.702 --> 02:05:29.870
Do you think there's waste?
02:05:30.950 --> 02:05:31.910
Yeah, Commissioner.
02:05:31.910 --> 02:05:34.020
I think that if we applied it strictly,
02:05:34.020 --> 02:05:35.190
as you just described it,
02:05:35.190 --> 02:05:37.360
there were lots and lots of periods of waste,
02:05:37.360 --> 02:05:40.300
because the market is always imbalanced.
02:05:40.300 --> 02:05:43.340
It's always either under-supplied or over-supplied.
02:05:43.340 --> 02:05:46.020
And actually what happens is the market responds to that.
02:05:46.020 --> 02:05:49.800
Capital increases or decreases, people shut wells in,
02:05:49.800 --> 02:05:52.580
or they drill new wells and turn those wells on.
02:05:52.580 --> 02:05:56.160
So I don't believe that's the correct way to define waste.
02:05:56.160 --> 02:05:59.280
And in fact, at the time at which those ideas
02:05:59.280 --> 02:06:00.330
were originally proposed,
02:06:00.330 --> 02:06:02.830
Texas was producing most of the world's oil.
02:06:02.830 --> 02:06:07.650
Today it produces only 5% of the world's oil.
02:06:07.650 --> 02:06:09.830
So I think the market is clearly over-supplied,
02:06:09.830 --> 02:06:12.280
at the moment, it's a demand problem.
02:06:12.280 --> 02:06:15.690
And of course what's very difficult to predict is,
02:06:15.690 --> 02:06:18.180
is when will demand begin to return?
02:06:18.180 --> 02:06:20.660
Let's all hope it's sooner rather than later.
02:06:20.660 --> 02:06:23.250
And we can all see governments at the federal level,
02:06:23.250 --> 02:06:25.090
at the state level, at the national level,
02:06:25.090 --> 02:06:27.120
are all working to try to figure it out
02:06:27.120 --> 02:06:29.680
how to get the economy moving again.
02:06:29.680 --> 02:06:31.370
But today we are over-supplied.
02:06:31.370 --> 02:06:33.360
But if we use that definition,
02:06:33.360 --> 02:06:36.350
we're over-supplied quite frequently over time.
02:06:39.890 --> 02:06:42.390
Doug, so back to it, seems like what you're saying,
02:06:42.390 --> 02:06:43.223
"Yeah, we're over-supplied,
02:06:43.223 --> 02:06:47.580
but that's not waste in today's world."
02:06:48.620 --> 02:06:50.060
Is that right?
02:06:50.060 --> 02:06:50.893
That's correct.
02:06:50.893 --> 02:06:54.090
I think that, and in addition, each company needs
02:06:54.090 --> 02:06:56.500
to make its own decision about,
02:06:56.500 --> 02:06:57.950
and it does this all the time.
02:06:57.950 --> 02:07:00.920
It considers risk, it considers regulatory environments
02:07:00.920 --> 02:07:03.830
and costs, on whether it deploys capital
02:07:03.830 --> 02:07:07.110
and when it produces oil or gas or when it doesn't.
02:07:07.110 --> 02:07:09.620
And trying to artificially set that number,
02:07:09.620 --> 02:07:12.470
I think is incredibly difficult and will lead
02:07:12.470 --> 02:07:15.350
to a much less efficient system, which likely
02:07:15.350 --> 02:07:17.970
in the end of the day, means that the consumer
02:07:17.970 --> 02:07:20.140
ends up paying more for these products,
02:07:20.140 --> 02:07:24.060
and probably has less reliability about their availability.
02:07:25.510 --> 02:07:30.510
So I think my last question then, to you is,
02:07:30.810 --> 02:07:32.700
similarly, the first presenter talked
02:07:32.700 --> 02:07:35.424
about being a part of a global initiative.
02:07:35.424 --> 02:07:37.830
It seems like you're fairly against
02:07:37.830 --> 02:07:38.760
any government involvement.
02:07:38.760 --> 02:07:41.960
Does that mean that you, as we talk about looking for,
02:07:41.960 --> 02:07:44.680
if there are additional cuts, maybe ask this,
02:07:44.680 --> 02:07:49.090
are you supportive of the national efforts
02:07:49.090 --> 02:07:51.570
to try to get Saudis and Russians to curtail,
02:07:51.570 --> 02:07:55.050
or do you feel that we shouldn't be involved in that either?
02:07:55.050 --> 02:07:57.140
Well, I think once we get
02:07:57.140 --> 02:08:00.210
into the geopolitical sphere, it becomes quite complex.
02:08:00.210 --> 02:08:02.720
Because of the relationship the United States
02:08:02.720 --> 02:08:06.160
has with places like Saudi Arabia, or the Russians
02:08:06.160 --> 02:08:07.740
is more than just about oil
02:08:07.740 --> 02:08:10.750
and it involves many, many different features.
02:08:10.750 --> 02:08:12.500
So I think those are best left
02:08:12.500 --> 02:08:15.340
to the decisions by the White House.
02:08:15.340 --> 02:08:18.570
Clearly the timing of the dispute between the Saudis
02:08:18.570 --> 02:08:20.890
and the Russians was quite unfortunate,
02:08:20.890 --> 02:08:22.700
and destabilized these markets.
02:08:22.700 --> 02:08:25.100
But that was a dispute between two countries,
02:08:25.100 --> 02:08:27.090
and for lots of geopolitical interests,
02:08:27.090 --> 02:08:28.380
the President of United States,
02:08:28.380 --> 02:08:31.490
and his team have decided to intervene.
02:08:31.490 --> 02:08:34.490
I do not believe that is wise for Texas,
02:08:34.490 --> 02:08:36.950
or the United States, or free-market countries
02:08:36.950 --> 02:08:39.320
to become embroiled in the politics of OPEC.
02:08:40.290 --> 02:08:42.290
I'm sorry, I'll get the last question.
02:08:43.800 --> 02:08:47.280
First presenters talks about flaring as a mechanism
02:08:47.280 --> 02:08:52.280
to cut back on, or reduced permanent flaring
02:08:53.440 --> 02:08:57.100
as a way to prevent waste and then curtail production.
02:08:57.100 --> 02:08:59.160
What are your thoughts on that?
02:08:59.160 --> 02:09:01.110
Yeah, I mean, just as a company,
02:09:01.110 --> 02:09:03.320
we do not develop where we have to flare.
02:09:03.320 --> 02:09:05.620
We do not develop oil or gas resources
02:09:05.620 --> 02:09:07.400
that we can't sell into the marketplace.
02:09:07.400 --> 02:09:10.190
So the only time you'll see our company flaring
02:09:10.190 --> 02:09:12.700
is when they're operational upsets.
02:09:12.700 --> 02:09:15.030
We would actually support and have supported
02:09:15.030 --> 02:09:17.740
and have been a part of regulatory discussions
02:09:17.740 --> 02:09:21.860
in multiple jurisdictions about putting stricter regulations
02:09:21.860 --> 02:09:23.250
on flaring and venting.
02:09:23.250 --> 02:09:25.400
I don't believe it's the right tool
02:09:25.400 --> 02:09:27.650
to manage this supply issue today,
02:09:27.650 --> 02:09:29.900
the supply/demand issue today.
02:09:29.900 --> 02:09:32.770
But we do support the concept that we come up
02:09:32.770 --> 02:09:35.750
with stricter rules to reduce flaring in the state of Texas.
02:09:35.750 --> 02:09:38.530
I just don't think those can be developed
02:09:38.530 --> 02:09:42.720
in the time necessary to impact this issue around demand.
02:09:43.910 --> 02:09:44.950
Okay, thanks Doug.
02:09:45.990 --> 02:09:47.761
Yup thank you, Commissioner.
02:09:47.761 --> 02:09:49.811
(Which solves) is an old financial guy.
02:09:50.828 --> 02:09:52.250
The only question I have for you;
02:09:52.250 --> 02:09:55.250
if we were to implement this proration,
02:09:56.590 --> 02:09:59.800
how would that affect, do you feel the future investment
02:09:59.800 --> 02:10:04.610
from your company or others on Texas versus other location,
02:10:04.610 --> 02:10:07.060
would it have an effect long-term investment,
02:10:07.060 --> 02:10:10.633
knowing that tool that we were using?
02:10:11.734 --> 02:10:14.360
Yes, Chairman, it would.
02:10:14.360 --> 02:10:17.310
And my career has taken me all over the world.
02:10:17.310 --> 02:10:19.810
I've worked in the Middle East, I've worked in Russia,
02:10:19.810 --> 02:10:21.300
I've worked all over South America.
02:10:21.300 --> 02:10:24.750
I've worked in the Caspian, I've worked in Africa,
02:10:24.750 --> 02:10:26.820
and I've worked in the North Sea.
02:10:26.820 --> 02:10:28.820
And every place you deploy capital,
02:10:28.820 --> 02:10:30.740
you look at the risks you're taking.
02:10:30.740 --> 02:10:32.300
And some of those are technical,
02:10:32.300 --> 02:10:36.480
some of them are geological, some of our access to markets,
02:10:36.480 --> 02:10:40.120
but also the regulatory environment matters a great deal.
02:10:40.120 --> 02:10:42.920
There's a reason why in countries
02:10:42.920 --> 02:10:45.420
where the governments control production,
02:10:45.420 --> 02:10:47.940
that independents are rarely seen.
02:10:47.940 --> 02:10:50.290
And that is there's just too much risk.
02:10:50.290 --> 02:10:52.920
So if Texas decides to prorate production,
02:10:52.920 --> 02:10:56.650
we'll have to consider when we invest in the future,
02:10:56.650 --> 02:10:59.750
will we be able to produce those barrels or not,
02:10:59.750 --> 02:11:02.040
and under what circumstances?
02:11:02.040 --> 02:11:03.540
And that will create a new risk,
02:11:03.540 --> 02:11:06.140
and it will make Texas ultimately less competitive.
02:11:07.490 --> 02:11:09.000
Thank you so much for your testimony today.
02:11:09.000 --> 02:11:11.140
We appreciate it tremendously.
02:11:11.140 --> 02:11:12.690
Callie, your turn.
02:11:14.070 --> 02:11:15.530
Okay, thank you.
02:11:15.530 --> 02:11:18.990
It has been requested that we take a short five minute break
02:11:19.940 --> 02:11:23.510
that will put us back at 11.47.
02:11:23.510 --> 02:11:25.200
Commissioners, are you okay with that,
02:11:25.200 --> 02:11:27.430
or would you like to continue on?
02:11:27.430 --> 02:11:30.489
Sounds good to me. (voice drowned out)
02:11:30.489 --> 02:11:33.420
All right, we will continue at 11:48.
02:11:34.831 --> 02:11:35.664
Thank you.
02:11:35.664 --> 02:11:36.550
Thank you.
02:11:50.010 --> 02:11:52.080
I believe you're still on mute somehow.
02:11:54.313 --> 02:11:55.340
Did that unmute me?
02:11:55.340 --> 02:11:57.160
It did, thank you.
02:11:57.160 --> 02:11:59.550
Okay, can you please introduce our next speaker,
02:11:59.550 --> 02:12:00.840
and I'll recognize him.
02:12:01.900 --> 02:12:05.140
Okay, next we have Harry Pefanis,
02:12:05.140 --> 02:12:09.490
with Plains All American Pipeline, you are invited to speak.
02:12:09.490 --> 02:12:12.210
Mr. Pefanis, if you would, please welcome
02:12:12.210 --> 02:12:15.430
to the discussion and please identify yourself,
02:12:15.430 --> 02:12:18.390
who you represent, and if you're for, against,
02:12:18.390 --> 02:12:21.880
or just commenting on the issue at hand.
02:12:25.210 --> 02:12:26.170
Thank you Chairman Christian,
02:12:26.170 --> 02:12:28.420
Commissioner Craddick and Commissioner Sitton.
02:12:28.420 --> 02:12:31.390
We appreciate the opportunity to offer comments today,
02:12:31.390 --> 02:12:33.200
for the record, my name is Harry Pefanis,
02:12:33.200 --> 02:12:36.590
and I'm the President and Chief Commercial Officer
02:12:36.590 --> 02:12:40.760
of Plains All American Pipeline, (indistinct) entity,
02:12:40.760 --> 02:12:42.900
engaged in transportation, storage and term link
02:12:42.900 --> 02:12:46.120
of crude oil in North America.
02:12:46.120 --> 02:12:49.450
And to be honest, we have not dedicated the resources
02:12:49.450 --> 02:12:51.920
to take a position in this matter.
02:12:51.920 --> 02:12:56.920
So our comments today will be based on relaying our views
02:12:59.080 --> 02:13:02.910
of supply and demand and the fundamentals
02:13:02.910 --> 02:13:05.740
and the potential impact to the Permian Basin,
02:13:05.740 --> 02:13:07.570
and just clarifying some of the positions
02:13:07.570 --> 02:13:10.480
that we had communicated to
02:13:11.630 --> 02:13:13.430
some of our producers and suppliers.
02:13:14.340 --> 02:13:19.340
So let me start with adding little color to a communication
02:13:20.820 --> 02:13:25.580
that we sent on March 24th, to a number of our suppliers.
02:13:25.580 --> 02:13:28.200
And I'm just gonna give you the 32nd version
02:13:28.200 --> 02:13:29.450
of that letter.
02:13:29.450 --> 02:13:32.660
At that time, our view, as the demand was falling
02:13:32.660 --> 02:13:35.520
at a faster rate than production could be reduced,
02:13:35.520 --> 02:13:38.580
it decreased drawing activity in deferral completions.
02:13:38.580 --> 02:13:41.190
And storage could balance the market temporarily,
02:13:41.190 --> 02:13:43.630
but without adjustments by producers,
02:13:43.630 --> 02:13:46.420
commercial stores could be filled by mid May.
02:13:47.390 --> 02:13:49.010
And at that point will just leave the SPR,
02:13:49.010 --> 02:13:51.730
the only facility with a meaningful amount
02:13:51.730 --> 02:13:53.550
of storage capacity.
02:13:53.550 --> 02:13:55.950
And so we encouraged our producer customers
02:13:55.950 --> 02:13:58.110
to practically manage their production,
02:13:58.110 --> 02:14:00.925
as we felt like they were best suited to manage
02:14:00.925 --> 02:14:03.090
how they would produce in this type of environment,
02:14:03.090 --> 02:14:06.460
instead of just waiting to find out sometime in may,
02:14:06.460 --> 02:14:07.430
that there would potentially
02:14:07.430 --> 02:14:09.330
not be at home for the oil production.
02:14:10.680 --> 02:14:15.410
Looking back at mid May, the date was sort of based
02:14:15.410 --> 02:14:18.740
on the assumptions that there's roughly 120 million barrels
02:14:18.740 --> 02:14:22.430
of unused commercial stores in the United States.
02:14:23.280 --> 02:14:25.180
We thought we could see reductions
02:14:25.180 --> 02:14:28.900
in refinery runs in the 30 to 35% range,
02:14:28.900 --> 02:14:31.560
and that we thought there could be a potential reduction
02:14:31.560 --> 02:14:34.100
in crude oil exports at that same level.
02:14:34.100 --> 02:14:37.350
So that would translate into, when you factor out
02:14:37.350 --> 02:14:39.800
sort of reductions in net imports,
02:14:39.800 --> 02:14:43.370
maybe a three to 4 million barrel a day reduction
02:14:43.370 --> 02:14:44.890
in demand for US production.
02:14:44.890 --> 02:14:47.200
And of course all that assumed
02:14:47.200 --> 02:14:48.370
that there would be no curtailments
02:14:48.370 --> 02:14:51.090
or no actions proactively taken by producers.
02:14:51.090 --> 02:14:54.200
So we all know the market's not static and linear.
02:14:54.200 --> 02:14:57.360
And the actual scenario that unfolded
02:14:57.360 --> 02:14:58.410
over the next few weeks or months,
02:14:58.410 --> 02:15:01.080
it's could be different than what we modeled,
02:15:01.080 --> 02:15:03.970
but we have gone back since the time of our letter,
02:15:03.970 --> 02:15:07.540
looked at what the stores done over the last few weeks.
02:15:07.540 --> 02:15:11.770
If you look at the EIA, it's sort of built
02:15:11.770 --> 02:15:15.090
at the range we're expecting trending
02:15:15.090 --> 02:15:17.470
towards a mid May fill day.
02:15:18.310 --> 02:15:20.230
But we're seeing producers make adjustments,
02:15:20.230 --> 02:15:22.570
and that could push the timing out of that.
02:15:22.570 --> 02:15:24.790
And I'll also point out that
02:15:24.790 --> 02:15:26.510
if you look at the Permian Basin,
02:15:26.510 --> 02:15:29.370
storage there has actually been pretty flat,
02:15:29.370 --> 02:15:30.940
really for most of the year.
02:15:32.220 --> 02:15:37.220
So before I sort of conclude the comments that I prepared,
02:15:37.440 --> 02:15:41.870
I just wanna point out one thing from comments,
02:15:41.870 --> 02:15:44.130
that I heard earlier, someone had mentioned
02:15:44.130 --> 02:15:47.810
that a report had stated that the difference
02:15:47.810 --> 02:15:52.030
between Brent and WTI was at historical levels.
02:15:52.030 --> 02:15:54.870
And so you're looking at my computer screen,
02:15:54.870 --> 02:15:56.490
if you just look across the board,
02:15:56.490 --> 02:16:00.337
it's about a $2 differential between Brent and WTI.
02:16:02.580 --> 02:16:05.770
So I just wanted to point that out before I conclude it.
02:16:05.770 --> 02:16:08.080
So that's really concludes my comments.
02:16:08.080 --> 02:16:10.140
And I'm happy to try and answer
02:16:10.140 --> 02:16:13.090
any questions you may have for me or Plains.
02:16:13.090 --> 02:16:14.430
Okay, thank you very much.
02:16:14.430 --> 02:16:16.080
Members, are there any questions?
02:16:17.950 --> 02:16:19.340
Ms. Craddick.
02:16:19.340 --> 02:16:22.630
Harry, I've got kind of question for you.
02:16:22.630 --> 02:16:27.630
Maybe know the answer or not, but it's kinda me trying
02:16:27.760 --> 02:16:31.590
to understand from your perspective of pipes.
02:16:31.590 --> 02:16:34.490
So say we've decided proration
02:16:34.490 --> 02:16:36.040
and that's the direction we go.
02:16:37.208 --> 02:16:39.680
Do you believe that we will allow
02:16:39.680 --> 02:16:42.410
whether it's from your company or others,
02:16:42.410 --> 02:16:46.700
additional opportunities for smaller operators
02:16:46.700 --> 02:16:48.640
to have access to your pipes?
02:16:48.640 --> 02:16:51.960
I appreciate the storage issue, I'm talking longterm.
02:16:51.960 --> 02:16:54.620
Does that give them some additional opportunities,
02:16:56.712 --> 02:16:57.840
is there more opportunity for them
02:16:57.840 --> 02:17:00.840
or better pricing opportunities to get it to market?
02:17:00.840 --> 02:17:04.610
I think that's one of the questions that I've had,
02:17:04.610 --> 02:17:07.190
if this helps them or not longterm
02:17:07.190 --> 02:17:09.060
from a pipeline perspective.
02:17:10.310 --> 02:17:11.250
I would say that if you look
02:17:11.250 --> 02:17:13.260
at the Permian Basin in general,
02:17:13.260 --> 02:17:18.260
there's more pipe capacity than production.
02:17:18.480 --> 02:17:20.370
So it's really gonna be dependent
02:17:20.370 --> 02:17:22.980
on who is your purchaser.
02:17:22.980 --> 02:17:24.500
Who's moving the crude on the pipe.
02:17:24.500 --> 02:17:27.110
And does that purchaser have a market
02:17:27.110 --> 02:17:28.950
for the crude they're requiring?
02:17:28.950 --> 02:17:29.783
Okay.
02:17:31.470 --> 02:17:32.303
Okay.
02:17:34.900 --> 02:17:36.400
All right, (indistinct) was one
02:17:36.400 --> 02:17:38.370
of my main questions so there is...
02:17:40.038 --> 02:17:42.060
I just wanna see if we're gonna help out
02:17:42.060 --> 02:17:43.560
some of these operators or not.
02:17:43.560 --> 02:17:45.904
So I appreciate the answer.
02:17:45.904 --> 02:17:46.737
(Harry mumbles).
02:17:49.838 --> 02:17:51.288
Any more questions members?
02:17:52.510 --> 02:17:53.990
Yes, sir.
02:17:53.990 --> 02:17:56.960
Yes, thank you.
02:17:56.960 --> 02:17:59.190
Harry, thank you once again for coming,
02:17:59.190 --> 02:18:01.140
for being here and testifying.
02:18:02.590 --> 02:18:05.130
Back to the same question I keep asking.
02:18:06.040 --> 02:18:08.930
Production in excess of reasonable market demand.
02:18:08.930 --> 02:18:11.380
You appreciate you laid out that early scenario.
02:18:11.380 --> 02:18:14.530
It sounds like what you're saying is,
02:18:14.530 --> 02:18:16.770
you sent these letters a while back,
02:18:16.770 --> 02:18:19.290
and your current analysis still looks like mid May
02:18:19.290 --> 02:18:21.070
is when storage becomes an issue.
02:18:22.350 --> 02:18:23.720
Did I understand that right?
02:18:24.620 --> 02:18:27.350
Yeah, so let me just say,
02:18:27.350 --> 02:18:30.260
if you go to Cushing instance, Cushing's gonna fill.
02:18:30.260 --> 02:18:33.480
The differentials there, it doesn't matter,
02:18:33.480 --> 02:18:37.550
people are gonna be encouraged to fill storage equation.
02:18:37.550 --> 02:18:40.090
But yes, the trend is,
02:18:40.090 --> 02:18:44.680
maybe we're seeing some production reductions implemented,
02:18:45.930 --> 02:18:48.030
but over the last few weeks, the trend is still,
02:18:48.030 --> 02:18:52.830
we're still seeing that we should fill sometime in May.
02:18:54.730 --> 02:18:59.730
Okay, as a midstream transporter, (chuckles)
02:19:04.293 --> 02:19:05.830
and I know you're (indistinct) your pipeline open,
02:19:05.830 --> 02:19:07.340
but what I'm asking-
02:19:07.340 --> 02:19:09.910
What do you mean (voice drowned out by Sitton)?
02:19:09.910 --> 02:19:11.300
Fair, thank you.
02:19:11.300 --> 02:19:13.690
What I'm asking is from the standpoint of,
02:19:13.690 --> 02:19:16.030
you've got so much, you can push out the back end of a pipe,
02:19:16.030 --> 02:19:19.300
and so much you can pull in the front of the pipe.
02:19:19.300 --> 02:19:22.790
When storage fills up, so when you came up
02:19:22.790 --> 02:19:24.220
with these letter were sound,
02:19:24.220 --> 02:19:26.340
but it was two, three weeks ago.
02:19:26.340 --> 02:19:28.360
What are you seeing in terms
02:19:28.360 --> 02:19:32.450
of supply in excess of demand?
02:19:32.450 --> 02:19:34.500
Once storage fills up,
02:19:34.500 --> 02:19:36.920
what does that mean you guys will need to do
02:19:36.920 --> 02:19:40.580
in terms of curtailing production at that point?
02:19:41.750 --> 02:19:43.510
Yes, so that's a good question.
02:19:43.510 --> 02:19:48.200
Well, what we've done from a transportation standpoint
02:19:48.200 --> 02:19:51.270
is we've told all of our shippers
02:19:51.270 --> 02:19:53.950
that we have provision on our carers,
02:19:53.950 --> 02:19:56.730
a carer is rules and regulations on the pipeline.
02:19:56.730 --> 02:20:01.730
That they have to have proof of a market
02:20:03.890 --> 02:20:08.890
at the destination, before we would accept nominations.
02:20:11.500 --> 02:20:16.500
So we can't act as a storage facility
02:20:16.630 --> 02:20:18.790
for everybody that doesn't have a market.
02:20:18.790 --> 02:20:23.790
So what we tried to do is, we've implemented a process
02:20:23.850 --> 02:20:26.210
that we're only taking crude into the pipe
02:20:26.210 --> 02:20:29.160
that has a home at the other end.
02:20:29.160 --> 02:20:31.160
Did I answer your question?
02:20:31.160 --> 02:20:33.250
It does in terms of process.
02:20:33.250 --> 02:20:35.120
What I'm asking is when you,
02:20:36.090 --> 02:20:38.180
clearly you see something coming,
02:20:38.180 --> 02:20:41.320
a concern over amount of location to send that crude.
02:20:42.369 --> 02:20:47.369
And so what I'm asking is, how much of a challenge is that?
02:20:47.940 --> 02:20:51.080
When you look out and say, "When your storage fills up,
02:20:51.080 --> 02:20:53.610
we're gonna be able to take this much crude," at that point,
02:20:53.610 --> 02:20:57.247
versus what you were taking today or two weeks ago.
02:20:59.639 --> 02:21:03.250
So it's a hard question because
02:21:03.250 --> 02:21:08.020
it's gonna really just depend on who at the other end
02:21:08.020 --> 02:21:11.250
of that pipe can take the crude.
02:21:11.250 --> 02:21:14.620
So operationally it's not difficult,
02:21:14.620 --> 02:21:17.557
because all pipes have storage and storage
02:21:17.557 --> 02:21:18.870
is sort of the shock absorber.
02:21:18.870 --> 02:21:23.860
And when it gets filled, it is a tougher environment
02:21:23.860 --> 02:21:27.520
because it's basically a barrel in, barrel out scenario.
02:21:27.520 --> 02:21:31.620
in that environment, which is not usually the case,
02:21:31.620 --> 02:21:33.910
usually we use our system stores
02:21:33.910 --> 02:21:38.910
to balance daily fluctuations in supply and demand.
02:21:39.790 --> 02:21:44.290
So it could end up backing up production at the wellhead.
02:21:47.260 --> 02:21:49.220
I realized here, forgive me if I'm asking you
02:21:49.220 --> 02:21:53.120
to speculate too much, but I feel like you guys are trying
02:21:53.120 --> 02:21:57.880
to do your best to look at this from a data perspective.
02:21:59.714 --> 02:22:03.277
A month ago, how much crude did the Plains move per day?
02:22:06.090 --> 02:22:11.090
So if we moved about, we can look at it
02:22:14.480 --> 02:22:17.960
in the context of how many barrels of crude
02:22:17.960 --> 02:22:20.960
that we charged tariffs on every day.
02:22:20.960 --> 02:22:25.950
So some of that is, moving the same barrel
02:22:25.950 --> 02:22:27.670
on two different pipes, so it's a little bit
02:22:27.670 --> 02:22:30.740
of double counting, but it's about 6 million barrels a day
02:22:30.740 --> 02:22:32.630
on our system, six and a half million barrels a day
02:22:32.630 --> 02:22:34.860
on our system, overall.
02:22:34.860 --> 02:22:36.000
Okay.
02:22:36.000 --> 02:22:38.460
Thank you Harry, if we fast forward to mid May,
02:22:38.460 --> 02:22:40.580
storage fills up.
02:22:42.950 --> 02:22:46.110
At that point given what's happening in the market today,
02:22:47.070 --> 02:22:50.080
what you're seeing, how much crude would you be moving
02:22:50.080 --> 02:22:54.095
by the end of May, if we continue on this path?
02:22:54.095 --> 02:22:57.030
(laughs) Yeah, that is a tough question.
02:23:02.990 --> 02:23:05.380
We look at it more globally, not globally,
02:23:05.380 --> 02:23:07.430
more North American, (indistinct) saying.
02:23:08.690 --> 02:23:10.530
We think three to 4 million barrels a day,
02:23:10.530 --> 02:23:15.530
coming off pipes in general, in the US.
02:23:15.710 --> 02:23:16.543
Okay.
02:23:19.490 --> 02:23:21.170
And I'm not just explaining why,
02:23:21.170 --> 02:23:23.430
I'm trying to, you guys have a different vantage point
02:23:23.430 --> 02:23:26.570
than say a refinery or a producer.
02:23:26.570 --> 02:23:31.570
So I'm trying to understand, in our statute's definition
02:23:31.570 --> 02:23:33.500
of waste, which is production in excess
02:23:33.500 --> 02:23:36.020
of reasonable market demand, trying to get a sense of that.
02:23:36.020 --> 02:23:39.430
So thank you, that is (voice drowned out by Harry)
02:23:39.430 --> 02:23:43.290
Yeah, and I'll say what we were trying to do
02:23:43.290 --> 02:23:47.220
with our suppliers and producers is say,
02:23:47.220 --> 02:23:50.970
"Listen, there's a wall coming,
02:23:50.970 --> 02:23:54.860
and you have a chance to be proactive.
02:23:54.860 --> 02:23:57.750
Think about how you can manage your production
02:23:57.750 --> 02:24:00.640
so that when the wall hits,
02:24:02.300 --> 02:24:06.450
you have curtailed the production
02:24:06.450 --> 02:24:09.130
that is best suited for your company."
02:24:09.130 --> 02:24:10.570
That's the way we were trying
02:24:10.570 --> 02:24:14.230
to advise our suppliers and producers.
02:24:15.720 --> 02:24:20.720
Have you seen a notable drop in the last couple
02:24:21.170 --> 02:24:23.320
of months in terms of the people shipping
02:24:23.320 --> 02:24:25.920
on your, in a crude oil
02:24:27.390 --> 02:24:29.910
Yeah, so it's actually been,
02:24:29.910 --> 02:24:34.910
I would say, when I look in Texas, our binds have been
02:24:36.360 --> 02:24:41.360
about flat through the first few months of the year,
02:24:42.960 --> 02:24:47.530
slightly down in April, but not huge.
02:24:47.530 --> 02:24:50.740
And we've had conversations with a number of producers
02:24:50.740 --> 02:24:54.160
that have indicated that they would be curtailing
02:24:54.160 --> 02:24:57.610
and shutting in production second half
02:24:57.610 --> 02:24:59.430
of April and into May.
02:25:06.555 --> 02:25:11.555
Those vines are meaningful, but those are just discussions.
02:25:13.081 --> 02:25:16.437
Those curtailments haven't occurred yet, I would say.
02:25:19.269 --> 02:25:21.720
I appreciate, let me make sure that I'm not coming
02:25:21.720 --> 02:25:23.000
to far and too much of this.
02:25:23.000 --> 02:25:25.110
Because we've had some presenters today saying
02:25:25.110 --> 02:25:28.181
the market is responding, we're taking barrels offline.
02:25:28.181 --> 02:25:30.180
It sounds like you have not seen that yet
02:25:30.180 --> 02:25:31.520
in terms of the products that you're moving,
02:25:31.520 --> 02:25:34.760
but you expect to see it, based on commentary.
02:25:36.650 --> 02:25:39.540
Yeah, we are seeing a little bit so far.
02:25:41.600 --> 02:25:46.510
So I would also say that a lot of the April business
02:25:46.510 --> 02:25:51.510
was sort of concluded before we started seeing
02:25:52.520 --> 02:25:55.170
a lot of demand disruption in the US.
02:25:55.170 --> 02:25:59.500
So we thought May would be the month
02:25:59.500 --> 02:26:04.270
where you would see the larger market impact.
02:26:06.850 --> 02:26:10.830
Okay, so it's too early right now to see the impacts
02:26:10.830 --> 02:26:12.637
of voluntary sheddings?
02:26:16.250 --> 02:26:17.720
Yeah, to large scale, like I said,
02:26:17.720 --> 02:26:19.100
I think we're starting to see
02:26:19.100 --> 02:26:20.800
some producers curtail production,
02:26:22.900 --> 02:26:25.200
and we're definitely getting feedback on producers
02:26:25.200 --> 02:26:27.980
that they plan to curtail more production.
02:26:27.980 --> 02:26:30.770
Okay, my last question, and I know the chairman
02:26:30.770 --> 02:26:35.131
is trying to get me to lighten up my questions a little bit.
02:26:35.131 --> 02:26:39.690
The question I'm trying to understand for everybody is,
02:26:39.690 --> 02:26:42.910
is there waste, is that due market over-supply?
02:26:42.910 --> 02:26:46.470
And if we were to do some sort of proration,
02:26:46.470 --> 02:26:48.170
is there any positive impact on that?
02:26:48.170 --> 02:26:49.710
Does that help to prevent waste?
02:26:49.710 --> 02:26:52.200
My question to you is that one;
02:26:52.200 --> 02:26:55.490
if we were to somehow curtail production, prorate,
02:26:58.425 --> 02:27:01.243
what does that mean to you in terms of balancing supply
02:27:01.243 --> 02:27:06.243
and production and consumption, sorry?
02:27:09.435 --> 02:27:11.090
Do you see a benefit to that in terms of
02:27:11.090 --> 02:27:14.693
you all moving product, supply chain, that sort of thing?
02:27:16.860 --> 02:27:18.660
I hate to avoid your question, but we've really,
02:27:18.660 --> 02:27:22.060
haven't dug that deeply to develop informed opinion
02:27:22.060 --> 02:27:25.490
as to whether, sort of a systematic proration
02:27:25.490 --> 02:27:29.100
would make more sense or not.
02:27:30.580 --> 02:27:35.580
We sort of looked at curtailments are gonna be required.
02:27:35.710 --> 02:27:40.620
So it's hard to envision a scenario
02:27:40.620 --> 02:27:45.620
where demand increases soon enough to create a situation
02:27:48.780 --> 02:27:51.580
where we don't have some type of production curtailment.
02:27:53.410 --> 02:27:55.080
Okay, thank you, Harry.
02:27:56.210 --> 02:27:57.760
Certainly. Thank you.
02:27:58.730 --> 02:28:00.280
Any other questions, members?
02:28:02.100 --> 02:28:05.150
If not, we thank you so much for appearing today.
02:28:06.330 --> 02:28:07.830
Thank you, good afternoon.
02:28:07.830 --> 02:28:09.040
Thank you. Callie.
02:28:10.320 --> 02:28:11.640
Yes, thank you.
02:28:11.640 --> 02:28:16.050
We now have Jim Teague, with Enterprise Products Partners.
02:28:16.050 --> 02:28:18.310
You are invited to speak.
02:28:18.310 --> 02:28:21.143
Mr. Teague, it's glad to have you at the proceeding,
02:28:21.143 --> 02:28:23.156
by the way just as I
02:28:23.156 --> 02:28:26.214
(voiced drowned out due to radio interference)
02:28:26.214 --> 02:28:29.930
Mr. Teague, if you've got the admin monitor going
02:28:29.930 --> 02:28:31.850
and the same conversation as this,
02:28:31.850 --> 02:28:33.930
you will need to end the admin monitor.
02:28:38.238 --> 02:28:40.230
I wish I knew what she was talking about Mr. Teague,
02:28:40.230 --> 02:28:44.530
but whatever she said, you need to do it. (laughs)
02:28:44.530 --> 02:28:46.120
Well, it's good to have you here, Mr.Teague
02:28:46.120 --> 02:28:48.140
and of course, Dan Duncan the founder
02:28:48.140 --> 02:28:51.090
of your company originated from about five miles
02:28:51.090 --> 02:28:52.620
from where I now sit.
02:28:52.620 --> 02:28:54.910
And he's a proud citizen originally
02:28:54.910 --> 02:28:56.800
of our Shelby County, Texas.
02:28:56.800 --> 02:28:59.120
So it's good to have you here today, if you would please,
02:28:59.120 --> 02:29:01.760
identify yourself, the company you represent,
02:29:01.760 --> 02:29:04.710
and if you are for, against, or just speaking
02:29:04.710 --> 02:29:07.220
on neutral to the motion at hand.
02:29:08.068 --> 02:29:10.190
(laughing) Chairman and I grew up just
02:29:10.190 --> 02:29:12.560
across the border in Desoto Parish.
02:29:12.560 --> 02:29:15.110
So I'm really familiar with Central Texas.
02:29:15.110 --> 02:29:16.120
Okay, good.
02:29:16.120 --> 02:29:16.953
I'm Jim Teague
02:29:16.953 --> 02:29:19.780
with Enterprise Products Partners, and we are against.
02:29:21.450 --> 02:29:22.830
We thank you for the opportunity
02:29:22.830 --> 02:29:24.280
to speak today on this topic.
02:29:25.341 --> 02:29:28.030
We presented a letter to the Commission on April eighth,
02:29:28.030 --> 02:29:31.580
outlining our views, and today I'm really
02:29:31.580 --> 02:29:32.880
in support of that letter.
02:29:34.100 --> 02:29:36.140
This virus has destroyed,
02:29:36.140 --> 02:29:38.730
approximately 25 million barrels a day,
02:29:38.730 --> 02:29:41.190
of global hydrocarbon demand.
02:29:41.190 --> 02:29:43.920
And it was like it fell off a cliff, it was overnight.
02:29:45.448 --> 02:29:48.540
We've seen wholesale gasoline being sold
02:29:48.540 --> 02:29:52.530
for less than 25 cents a gallon in some markets.
02:29:52.530 --> 02:29:56.420
As a result, refineries have got their operating capacity
02:29:56.420 --> 02:30:00.330
at 25 to 40% as they scrambled to adjust
02:30:00.330 --> 02:30:01.970
to new market conditions.
02:30:03.890 --> 02:30:06.590
Global oil and gas and venture chemicals,
02:30:06.590 --> 02:30:10.850
aren't really just a Texas issue, these are global issues.
02:30:10.850 --> 02:30:13.270
And until the global economies re-open,
02:30:13.270 --> 02:30:14.670
that healing will not begin.
02:30:15.745 --> 02:30:18.410
To give you an example of the cliff that we fell off of
02:30:18.410 --> 02:30:21.720
from the beginning of March to the end of March.
02:30:21.720 --> 02:30:26.720
Worldwide commercial flights went from 14,000 flights a day,
02:30:26.950 --> 02:30:28.710
to 5,000 flights a day.
02:30:29.750 --> 02:30:32.380
North America was much the same.
02:30:32.380 --> 02:30:35.170
US gasoline demand has dropped 50%,
02:30:35.170 --> 02:30:37.410
and currently stands at a 50-year low.
02:30:38.480 --> 02:30:42.570
Retail stores have shuttered under staying at home orders,
02:30:42.570 --> 02:30:43.970
our restaurants are closed,
02:30:43.970 --> 02:30:47.250
and frankly the most devastating thing to me,
02:30:47.250 --> 02:30:49.410
is that bars were also closed.
02:30:50.250 --> 02:30:52.250
Putting all of this in perspective,
02:30:52.250 --> 02:30:54.670
global demand for hydrocarbons has fallen
02:30:54.670 --> 02:30:57.250
from about a hundred million barrels a day,
02:30:57.250 --> 02:30:59.860
to something under 75 million barrels a day,
02:30:59.860 --> 02:31:01.880
and it may still be falling.
02:31:03.090 --> 02:31:05.540
However, the Texas Railroad Commission
02:31:05.540 --> 02:31:09.300
cannot solve a global pandemic issue.
02:31:10.430 --> 02:31:13.290
Other states would love to see a cut by the Commission
02:31:13.290 --> 02:31:16.510
that would, it would give them more running length.
02:31:16.510 --> 02:31:18.220
Frankly, for the life of me,
02:31:18.220 --> 02:31:21.450
given a 20 million barrel a day overall,
02:31:21.450 --> 02:31:25.210
I don't see the rationale of those pushing for this.
02:31:26.080 --> 02:31:30.350
Do you really think that a cut by Texas
02:31:30.350 --> 02:31:34.010
could fill a 25 million barrel demand hole?
02:31:35.100 --> 02:31:38.340
Asking for you to take this action makes me wonder
02:31:38.340 --> 02:31:40.640
about the true agenda.
02:31:40.640 --> 02:31:42.490
Are they really trying to fix a problem
02:31:42.490 --> 02:31:45.740
or do they wanna argue that government action
02:31:45.740 --> 02:31:47.550
by you gives them the opportunity
02:31:47.550 --> 02:31:49.550
to get out of some of their obligations?
02:31:52.100 --> 02:31:54.760
We have to see the reality of the situation.
02:31:54.760 --> 02:31:56.490
It's not hard math.
02:31:56.490 --> 02:31:58.660
This is a demand issue.
02:31:58.660 --> 02:32:02.677
But I believe, and by the way, Mr. Chairman,
02:32:02.677 --> 02:32:06.490
(indistinct), free markets work.
02:32:06.490 --> 02:32:11.100
Free markets will balance the supply-demand equation.
02:32:12.630 --> 02:32:15.000
Free markets are already working.
02:32:16.170 --> 02:32:17.730
OPEC-plus has agreed
02:32:17.730 --> 02:32:21.660
to almost a 10 million barrel a day production cut.
02:32:21.660 --> 02:32:24.660
They didn't do this because they were magnanimous.
02:32:24.660 --> 02:32:27.950
They did it because they couldn't stand the price.
02:32:27.950 --> 02:32:31.690
Price creates supply, and price creates demand.
02:32:32.750 --> 02:32:36.980
When this is behind us, low prices will create more demand,
02:32:38.080 --> 02:32:41.400
and low prices create less supply.
02:32:41.400 --> 02:32:44.150
and the market will move towards balancing.
02:32:44.150 --> 02:32:45.520
That's the way it's always been.
02:32:45.520 --> 02:32:48.230
That's the way it always will be, regardless-
02:32:48.230 --> 02:32:50.440
That's the three-minute mark at this time,
02:32:50.440 --> 02:32:52.580
Commissioners, would you like to hear further comments,
02:32:52.580 --> 02:32:54.300
or are there any questions?
02:32:54.300 --> 02:32:56.970
Please let him complete his remarks, I requests
02:32:56.970 --> 02:32:57.940
I'm almost through.
02:32:57.940 --> 02:32:59.830
Very good, please continue, Mr. Teague.
02:32:59.830 --> 02:33:01.720
That's the way it's always been,
02:33:01.720 --> 02:33:03.900
and that's the way it always will be,
02:33:03.900 --> 02:33:05.700
regardless of what you guys do.
02:33:06.830 --> 02:33:10.060
I listened to Lee's comments and Doug's comments,
02:33:10.060 --> 02:33:11.780
and let me make a point.
02:33:11.780 --> 02:33:16.010
We've had to make difficult decisions in the last month,
02:33:16.010 --> 02:33:20.150
on our pipelines plants and our docks.
02:33:20.150 --> 02:33:24.950
We made those decisions based on our own economics.
02:33:24.950 --> 02:33:28.630
And we will make more difficult decisions based
02:33:28.630 --> 02:33:30.800
on the economics we have,
02:33:30.800 --> 02:33:33.860
based on what the market gives us at the time.
02:33:33.860 --> 02:33:35.530
We believe in free markets.
02:33:35.530 --> 02:33:39.460
We believe that markets will ultimately balance.
02:33:39.460 --> 02:33:42.780
It'll be a dynamic balance, because sometimes
02:33:42.780 --> 02:33:45.150
we'll have more supply than we need,
02:33:45.150 --> 02:33:47.450
sometimes we'll have more demand than we need.
02:33:48.690 --> 02:33:49.523
Thank you.
02:33:50.933 --> 02:33:54.220
Thank you, Mr. Teague, are there any questions members?
02:33:54.220 --> 02:33:55.980
Commissioner Craddick.
02:33:55.980 --> 02:33:58.540
Jim, thanks for being here and taking the time,
02:33:58.540 --> 02:33:59.899
I've a couple of questions.
02:33:59.899 --> 02:34:02.420
You referenced that you've already made
02:34:02.420 --> 02:34:05.317
some tough decisions and I know you're not just one part
02:34:05.317 --> 02:34:07.520
of the food chain, but all the way across.
02:34:07.520 --> 02:34:09.720
Could you kinda give us that perspective of,
02:34:11.090 --> 02:34:15.190
you're not an EMP, but you're the rest of the part of it.
02:34:15.190 --> 02:34:17.120
And could you kind of give us the perspective
02:34:17.120 --> 02:34:19.100
of how you're balancing that
02:34:19.100 --> 02:34:22.390
and what you see for you all as a company?
02:34:22.390 --> 02:34:25.880
Well, one of the things is as refineries
02:34:25.880 --> 02:34:28.960
have cut their operating capacity,
02:34:28.960 --> 02:34:31.494
what we're finding is what we sell to them
02:34:31.494 --> 02:34:35.440
or what we buy from 'em, they don't have what we wanna buy,
02:34:35.440 --> 02:34:38.340
and they need less of what we want to sell.
02:34:38.340 --> 02:34:41.050
That's one thing, Commissioner.
02:34:41.050 --> 02:34:44.580
The other thing is, we are seeing through-puts
02:34:44.580 --> 02:34:49.150
in our pipelines start to go down.
02:34:49.150 --> 02:34:52.720
Nominations are due tomorrow, I think.
02:34:52.720 --> 02:34:57.120
And I expect that those nominations will be less
02:34:57.120 --> 02:35:01.637
than they have been, and in discussions with our producers,
02:35:03.608 --> 02:35:06.540
most of them are saying, "Expect us to cut production."
02:35:09.450 --> 02:35:10.460
And so we're seeing it,
02:35:10.460 --> 02:35:13.120
you're starting to see it go down, as we speak.
02:35:13.120 --> 02:35:16.060
And my second question is you're not just doing crude.
02:35:16.060 --> 02:35:18.610
So you've other products.
02:35:18.610 --> 02:35:21.661
If we prorated, would that affect your other products?
02:35:21.661 --> 02:35:23.790
Or just, how could you explain that
02:35:23.790 --> 02:35:25.490
to us a little bit more in detail?
02:35:26.360 --> 02:35:28.040
Yeah, if you prorate,
02:35:28.040 --> 02:35:30.900
this is rich gas with a lot of LPG.
02:35:30.900 --> 02:35:33.090
That's the one area of our business
02:35:33.090 --> 02:35:35.950
that has remained strong, is our LPG export.
02:35:37.200 --> 02:35:39.900
Our docks are pretty are (voice drowned out)
02:35:39.900 --> 02:35:42.750
actually we're sold out on LPG exports.
02:35:42.750 --> 02:35:47.750
So to the extent you prorate, given the richness of the gas,
02:35:47.930 --> 02:35:49.110
there'll be less LPGs.
02:35:50.980 --> 02:35:52.470
Okay, thank you.
02:35:53.580 --> 02:35:54.413
Okay.
02:35:54.413 --> 02:35:56.010
Are there any questions members?
02:35:58.070 --> 02:35:58.977
If not-
02:35:58.977 --> 02:35:59.810
(voices drowned in crosstalk)
02:35:59.810 --> 02:36:01.110
Oops! Commissioner Sitton.
02:36:01.970 --> 02:36:03.860
Yeah, I think I have one.
02:36:03.860 --> 02:36:05.830
Jim, thanks, thank you very much for being here.
02:36:05.830 --> 02:36:09.330
And I may just have one question because you seem
02:36:09.330 --> 02:36:12.310
like you agreed with some of the previous testimony that if,
02:36:12.310 --> 02:36:14.590
I'm gonna sum up, if I'm wrong, tell me but I'm trying
02:36:14.590 --> 02:36:16.690
to be efficient as I was instructed to be,
02:36:18.100 --> 02:36:21.270
that yeah, there's over supply,
02:36:21.270 --> 02:36:24.630
we've got demand destruction, but it seems like,
02:36:25.630 --> 02:36:29.160
is your position on this, yes, there's over supply,
02:36:29.160 --> 02:36:32.250
but that doesn't constitute waste, and that we,
02:36:32.250 --> 02:36:35.700
as a Commission should ignore the economics,
02:36:35.700 --> 02:36:37.640
let private business work that out?
02:36:37.640 --> 02:36:38.920
That from a waste perspective,
02:36:38.920 --> 02:36:43.580
all we should focus on is the molecules themselves, I guess,
02:36:43.580 --> 02:36:45.770
and let you guys worry about the economics?
02:36:45.770 --> 02:36:48.870
Yeah, I think I define waste
02:36:48.870 --> 02:36:51.110
as inefficient producers continuing
02:36:51.110 --> 02:36:53.910
to produce in a time like this.
02:36:56.310 --> 02:37:01.310
Ultimately producers have a difficult decision to make.
02:37:01.534 --> 02:37:03.390
You keep talking about waste,
02:37:03.390 --> 02:37:06.360
and you keep talking about storage filling up.
02:37:06.360 --> 02:37:08.510
Well, first of all, I've never seen a situation
02:37:08.510 --> 02:37:10.580
where storage fills up.
02:37:10.580 --> 02:37:13.300
Market adjusts for that.
02:37:13.300 --> 02:37:16.120
And at a certain point, at a certain price,
02:37:16.120 --> 02:37:18.290
somebody's going to buy this crude oil.
02:37:18.290 --> 02:37:21.090
Now what the producer has to decide is,
02:37:21.090 --> 02:37:23.210
do they want that price?
02:37:23.210 --> 02:37:26.200
And if not, then they have to cut production.
02:37:26.200 --> 02:37:30.360
But I don't believe that I just, I've never seen,
02:37:30.360 --> 02:37:32.300
and I've been around a while,
02:37:32.300 --> 02:37:34.860
I've never seen storage filled up!
02:37:34.860 --> 02:37:36.970
I don't accept that thesis,
02:37:36.970 --> 02:37:40.240
because invariably, markets work,
02:37:40.240 --> 02:37:45.240
and somebody will stick their head up, and offer a price.
02:37:45.510 --> 02:37:48.410
Then the seller has to decide whether they want the price.
02:37:51.270 --> 02:37:53.530
Okay, I appreciate that.
02:37:54.600 --> 02:37:57.650
I guess you don't agree with my questioning on the storage,
02:37:57.650 --> 02:38:00.350
but I'm going off of the testimony that was submitted,
02:38:00.350 --> 02:38:01.370
the comments that were submitted
02:38:01.370 --> 02:38:04.120
by a lot of these independent firms.
02:38:04.120 --> 02:38:08.960
I think Wood McKenzie says that storage
02:38:08.960 --> 02:38:11.560
will be 98% full in July,
02:38:11.560 --> 02:38:16.560
Rice Dad says we would hit sometime in mid July,
02:38:17.530 --> 02:38:20.130
Rapidan actually said in their presentation
02:38:20.130 --> 02:38:22.980
that a crude tsunami was unavoidable.
02:38:22.980 --> 02:38:25.550
So it seemed like that was a pretty common theme
02:38:25.550 --> 02:38:27.410
that I saw in all of the testimony that was submitted.
02:38:27.410 --> 02:38:29.410
It seems like you disagree that?
02:38:30.410 --> 02:38:31.970
I disagree with it in the sense
02:38:31.970 --> 02:38:35.460
that a little later somebody is going to make an offer
02:38:35.460 --> 02:38:39.020
for their crude, and then they got a hard decision to make.
02:38:39.020 --> 02:38:41.030
But I mean, if you place an offer to me,
02:38:41.030 --> 02:38:41.863
I'll listen to that.
02:38:41.863 --> 02:38:44.690
And I think, "Okay, that's an academic definition."
02:38:44.690 --> 02:38:48.760
We're dealing with a commodity that has a global market.
02:38:48.760 --> 02:38:50.450
And it's either gonna muscle its way
02:38:50.450 --> 02:38:53.370
into the global market, or it's gonna be shut off,
02:38:53.370 --> 02:38:54.650
one of two.
02:38:56.461 --> 02:38:57.790
You're talking about storage as if
02:38:57.790 --> 02:38:59.770
everything's always static,
02:38:59.770 --> 02:39:01.630
and people are gonna keep producing
02:39:01.630 --> 02:39:04.160
and this pandemic is gonna be around forever.
02:39:04.160 --> 02:39:05.810
That's just not the case, Commissioner,
02:39:05.810 --> 02:39:07.510
I don't believe that for a minute.
02:39:10.320 --> 02:39:12.990
I agree with you, that wasn't just,
02:39:12.990 --> 02:39:14.730
I got to be the person, that was my question.
02:39:14.730 --> 02:39:17.860
That was not, I'm certainly trying to assess
02:39:17.860 --> 02:39:21.550
whether or not there are so much excess capacity
02:39:21.550 --> 02:39:24.080
in produce that we run into a supply-chain issue
02:39:24.080 --> 02:39:26.380
with a limited amount of storage
02:39:26.380 --> 02:39:28.250
that I believe exists in the United States.
02:39:28.250 --> 02:39:30.750
But once again, I'm going off of the testimony
02:39:30.750 --> 02:39:33.601
that I receive in trying to assess that data.
02:39:33.601 --> 02:39:36.240
Yeah, you don't just have storage,
02:39:36.240 --> 02:39:38.340
you've got docks, you've got water access.
02:39:39.630 --> 02:39:43.050
When demand starts recovering, refineries crank up.
02:39:43.050 --> 02:39:47.080
So I've personally not accept that everything's
02:39:47.080 --> 02:39:51.360
just must keep building, sooner or later a bubble opens
02:39:51.360 --> 02:39:54.260
and somebody sticks their head up and makes an offer.
02:39:54.260 --> 02:39:59.260
And somebody has to decide, do they wanna sell it?
02:40:02.660 --> 02:40:07.660
Frankly, we are converting in-gel wells.
02:40:07.680 --> 02:40:11.300
Right now we're converting wells to diesel storage
02:40:11.300 --> 02:40:14.120
we're converting wells to gasoline storage.
02:40:14.120 --> 02:40:18.260
And we have offered to convert wells to crude oil storage,
02:40:18.260 --> 02:40:20.980
and we've made that offer to a couple of folks
02:40:20.980 --> 02:40:23.310
and we've not gotten any takers.
02:40:27.200 --> 02:40:28.570
I don't have any other questions.
02:40:30.490 --> 02:40:31.720
Thank you very much, Mr. Teague.
02:40:31.720 --> 02:40:34.820
I appreciate very much your participating today,
02:40:34.820 --> 02:40:36.040
and good to visit with you.
02:40:36.040 --> 02:40:36.873
Thank you, sir.
02:40:38.880 --> 02:40:40.810
Thank you, moving on,
02:40:40.810 --> 02:40:44.140
we now have Mark Houser with University Lands,
02:40:44.140 --> 02:40:46.190
you are invited to speak.
02:40:46.190 --> 02:40:48.470
Mr. Houser, welcome to the discussion.
02:40:48.470 --> 02:40:50.940
Would you please state your name, who you represent,
02:40:50.940 --> 02:40:53.110
and if you're for, against,
02:40:53.110 --> 02:40:55.180
or neutral on the issue at hand.
02:40:56.430 --> 02:40:57.780
Well, thank you Mr. Chairman
02:40:57.780 --> 02:40:59.180
and Commissioners Craddick and Sitton
02:40:59.180 --> 02:41:01.510
for having this session.
02:41:01.510 --> 02:41:04.800
My name is Mark Houser, I'm the CEO of University Lands.
02:41:04.800 --> 02:41:05.950
And in my role, I'm here
02:41:05.950 --> 02:41:08.700
to just present information relative to the issue.
02:41:10.230 --> 02:41:13.330
I appreciate the Commission's efforts on behalf of Texas,
02:41:13.330 --> 02:41:15.300
specifically for allowing these discussions
02:41:15.300 --> 02:41:17.860
and feedback from so many stakeholders.
02:41:17.860 --> 02:41:18.990
And I think we're the first
02:41:18.990 --> 02:41:21.069
and they'll be other mineral owners.
02:41:21.069 --> 02:41:24.290
And putting it in perspective, University Lands manages
02:41:24.290 --> 02:41:25.930
the surface and mineral interests
02:41:25.930 --> 02:41:29.020
of 2.1 million acres across West Texas,
02:41:29.020 --> 02:41:30.810
that benefit more than 20 educational
02:41:30.810 --> 02:41:33.760
and health institutions across the UT and AM systems.
02:41:34.690 --> 02:41:37.040
UL's primary revenue source is royalty income
02:41:37.040 --> 02:41:38.680
from oil and gas development
02:41:38.680 --> 02:41:41.880
on 1.4 of these 2.1 million acres.
02:41:41.880 --> 02:41:44.920
Over the past 10 years, we've generated $8.2 billion
02:41:44.920 --> 02:41:48.530
of royalty income and 460 million of surface income.
02:41:49.500 --> 02:41:52.470
Daily gross production is about 180,000 barrels a day
02:41:52.470 --> 02:41:56.600
and 600 million cubic feet from 9,000 producing wells.
02:41:56.600 --> 02:41:58.580
And they're over 250 different oil
02:41:58.580 --> 02:42:00.610
and gas companies operating on these lands.
02:42:00.610 --> 02:42:04.990
And they have a huge economic impact beyond just the royalty
02:42:04.990 --> 02:42:07.540
and surface income in West Texas, and in our state.
02:42:08.410 --> 02:42:10.490
We work proactively with oil and gas operators
02:42:10.490 --> 02:42:12.430
to maximize longterm value,
02:42:12.430 --> 02:42:14.230
through promoting consistent development
02:42:14.230 --> 02:42:16.350
through price cycles.
02:42:16.350 --> 02:42:20.230
We estimate there's about 20,000 potential
02:42:20.230 --> 02:42:21.650
additional drilling locations
02:42:21.650 --> 02:42:24.540
within the resource-base of these lands,
02:42:24.540 --> 02:42:28.300
with current break-even prices from $25 a barrel to 60.
02:42:29.230 --> 02:42:31.880
Unfortunately with the unprecedented coronavirus,
02:42:31.880 --> 02:42:34.350
demand shrank and Russia and Saudi disagreements,
02:42:34.350 --> 02:42:36.470
supply (indistinct) has created, in my opinion,
02:42:36.470 --> 02:42:39.340
what's a chasm instead of a down-cycle.
02:42:39.340 --> 02:42:42.250
In response to this chasm, UL is working with operators
02:42:42.250 --> 02:42:44.670
to significantly reduce activity.
02:42:44.670 --> 02:42:46.870
Examples include deferring existing drilling
02:42:46.870 --> 02:42:50.230
and completion requirements, allowing wells shut-ins,
02:42:50.230 --> 02:42:53.780
while ensuring leases remain in good standing.
02:42:53.780 --> 02:42:57.470
We expect our UL rig count, the operators rig count
02:42:57.470 --> 02:43:01.360
to decline from an average of 17 rigs in 2019,
02:43:01.360 --> 02:43:04.760
to somewhere around five to seven by late 2020.
02:43:04.760 --> 02:43:07.420
We're projecting mineral revenue will decline
02:43:07.420 --> 02:43:11.410
from 1 billion in 2019 to around 500 million,
02:43:11.410 --> 02:43:13.480
depending on price in 2021.
02:43:14.670 --> 02:43:16.750
According to a new Federal Reserve Bank survey,
02:43:16.750 --> 02:43:20.180
almost 40% of producers face insolvency
02:43:20.180 --> 02:43:23.810
within the year if crude prices remained at $30 a barrel.
02:43:23.810 --> 02:43:26.030
This implies that a hundred companies operating
02:43:26.030 --> 02:43:28.360
on University Lands could become insolvent,
02:43:28.360 --> 02:43:31.610
if there aren't significant and quick oil price increases.
02:43:31.610 --> 02:43:33.720
This would create a significant disruption
02:43:33.720 --> 02:43:36.440
on both University Lands and across the market,
02:43:36.440 --> 02:43:38.610
putting the availability of capital and manpower
02:43:38.610 --> 02:43:41.000
at further risk, and not providing
02:43:41.000 --> 02:43:43.260
for consistent development,
02:43:43.260 --> 02:43:45.210
and leaving a lot of oil in the ground.
02:43:46.490 --> 02:43:48.660
I know some of you oil operators support the concept
02:43:48.660 --> 02:43:51.680
of prorationing, some oppose, and likely many
02:43:51.680 --> 02:43:52.980
that are undecided.
02:43:52.980 --> 02:43:54.750
While all companies are hurting presently,
02:43:54.750 --> 02:43:57.060
there are many operators that are somewhat well positioned
02:43:57.060 --> 02:44:00.390
for this chasm and many in significant perils.
02:44:00.390 --> 02:44:02.540
There are always winners and losers in markets
02:44:02.540 --> 02:44:05.200
and oil companies can or should be protected.
02:44:05.200 --> 02:44:07.760
That being the case, this unparalleled challenge
02:44:07.760 --> 02:44:09.920
to our industry requires the consideration
02:44:09.920 --> 02:44:12.350
of all options and opportunities.
02:44:12.350 --> 02:44:14.900
The US position as the leading oil producer in the world,
02:44:14.900 --> 02:44:17.200
seems to be requiring our federal leaders,
02:44:17.200 --> 02:44:20.780
consider helping reduce the staggering oil inventories,
02:44:20.780 --> 02:44:24.060
by working to reduce oil and gas production countrywide.
02:44:24.060 --> 02:44:27.070
While market forces are already driving reductions
02:44:27.070 --> 02:44:28.920
to some extent, and there have been
02:44:28.920 --> 02:44:31.340
some global reduction commitments, the volumes needed
02:44:31.340 --> 02:44:33.400
to affect real change at the global level,
02:44:33.400 --> 02:44:36.570
may ultimately require more sacrifice by all.
02:44:36.570 --> 02:44:38.970
Considering Texas' position as the leading producer
02:44:38.970 --> 02:44:41.500
in the US, the Texas Railroad Commission's authority
02:44:41.500 --> 02:44:44.870
to prorate oil production is one potential tool
02:44:44.870 --> 02:44:48.350
in the toolbox for a US solution.
02:44:48.350 --> 02:44:49.990
This could also provide a more orderly
02:44:49.990 --> 02:44:52.310
and organized adjustment across the state,
02:44:52.310 --> 02:44:53.640
than is currently occurring.
02:44:53.640 --> 02:44:56.380
As many shut-ins are being driven by pipeline companies
02:44:56.380 --> 02:44:57.760
that are refusing to move product
02:44:57.760 --> 02:44:59.660
for companies with unsecured takeaway.
02:45:00.570 --> 02:45:03.160
From a more tactical perspective, the Railroad Commission
02:45:03.160 --> 02:45:05.650
should consider utilizing it's prorationing authority
02:45:05.650 --> 02:45:08.620
to help promote reducing the amount of associated gas,
02:45:08.620 --> 02:45:11.790
unnecessarily being flared in the Permian Basin.
02:45:11.790 --> 02:45:13.410
This could help in reducing oil supply,
02:45:13.410 --> 02:45:15.840
reducing the waste of natural gas, and demonstrating
02:45:15.840 --> 02:45:18.370
to an observing public, the industry's commitment
02:45:18.370 --> 02:45:20.540
to the continued environmental stewardship.
02:45:21.380 --> 02:45:23.750
Thanks for listening, I know from talking with each of you,
02:45:23.750 --> 02:45:25.860
that you realize the incredible positive impact
02:45:25.860 --> 02:45:28.400
that the development of our state's oil and gas resources
02:45:28.400 --> 02:45:30.750
have on Texans and all Americans,
02:45:30.750 --> 02:45:34.040
as we work to provide low-cost energy for the world.
02:45:34.040 --> 02:45:36.300
That concludes my comments.
02:45:36.300 --> 02:45:37.133
Thank you, Hr. Houser,
02:45:37.133 --> 02:45:39.840
are there any questions, Commissioners?
02:45:41.980 --> 02:45:43.600
If none, Callie it's back to you.
02:45:44.440 --> 02:45:45.970
I do. I'm sorry, I'm lined up.
02:45:45.970 --> 02:45:47.602
I'm not flagging very well, sorry,
02:45:47.602 --> 02:45:48.653
(panel laughing)
02:45:48.653 --> 02:45:49.486
(voice drowned in crosstalk) please.
02:45:50.802 --> 02:45:52.070
Yeah now, there you go.
02:45:53.040 --> 02:45:56.890
Mark, thank you for being here for lending your testimony.
02:45:56.890 --> 02:45:57.970
You went through that really quick,
02:45:57.970 --> 02:46:00.760
I tried to get some numbers down but,
02:46:00.760 --> 02:46:03.000
I guess, let me just ask you broadly,
02:46:03.000 --> 02:46:04.860
from a mineral perspective,
02:46:05.950 --> 02:46:10.050
in this landscape is there production
02:46:10.050 --> 02:46:12.190
in excess of reasonable demand?
02:46:12.190 --> 02:46:14.807
Are you seeing waste?
02:46:14.807 --> 02:46:17.850
And if so, how would you quantify
02:46:17.850 --> 02:46:19.650
that from mineral owner perspective?
02:46:20.570 --> 02:46:23.020
Well, again, we're I think
02:46:23.020 --> 02:46:24.780
maybe a somewhat unique mineral-owner
02:46:24.780 --> 02:46:26.920
in that our revenue goes into an endowment.
02:46:26.920 --> 02:46:29.400
So we really think about the long-term,
02:46:29.400 --> 02:46:31.820
and with all the projections I see around,
02:46:31.820 --> 02:46:34.040
oil demand for the longterm,
02:46:34.040 --> 02:46:37.780
to sell at these prices is just not acceptable.
02:46:37.780 --> 02:46:39.970
And we have been proactive in that,
02:46:39.970 --> 02:46:42.010
and calling a lot of our operators and saying,
02:46:42.010 --> 02:46:45.630
"look, if there are drilling commitments you have,
02:46:45.630 --> 02:46:47.750
we'll talk about extensions.
02:46:47.750 --> 02:46:49.370
If there's wells you can shut-in
02:46:49.370 --> 02:46:50.780
that may compromise the lease,
02:46:50.780 --> 02:46:53.010
we'll talk about delaying it."
02:46:53.010 --> 02:46:57.280
And that's because to me, if we can lower production
02:46:57.280 --> 02:47:00.370
and maybe as an example, sell eight barrels
02:47:00.370 --> 02:47:03.650
at 35 bucks a barrel, instead of selling 10 barrels
02:47:03.650 --> 02:47:05.950
at 20 bucks a barrel, I'll do it.
02:47:05.950 --> 02:47:09.550
Because ultimately we wanna capture the most resource.
02:47:09.550 --> 02:47:10.560
And I wanna make sure
02:47:10.560 --> 02:47:12.790
there's good longterm decisions made here,
02:47:12.790 --> 02:47:15.430
to make sure we're capturing the most oil we can
02:47:15.430 --> 02:47:18.760
out of these oil and gas fields over the longterm.
02:47:18.760 --> 02:47:21.350
I do get concerned, then these times,
02:47:21.350 --> 02:47:23.650
operator's gonna start making hasty decisions,
02:47:23.650 --> 02:47:26.810
drilling wells they shouldn't, not spacing wells properly,
02:47:26.810 --> 02:47:28.297
and those sorts of things.
02:47:36.490 --> 02:47:38.750
Are there any more questions at this time?
02:47:38.750 --> 02:47:39.583
Ms. Craddick?
02:47:41.300 --> 02:47:42.630
Commissioner Craddick.
02:47:42.630 --> 02:47:44.910
Mark, thanks for the chance, I had one question.
02:47:44.910 --> 02:47:47.180
You said that there were other tools,
02:47:47.180 --> 02:47:48.770
are you considered this one tool.
02:47:48.770 --> 02:47:50.640
Are there any other tools that you think
02:47:50.640 --> 02:47:53.440
would be helpful for us to consider at the point?
02:47:54.390 --> 02:47:56.890
Well, I think certainly the proration
02:47:56.890 --> 02:47:58.020
and he is the topic of the day.
02:47:58.020 --> 02:48:01.040
I mentioned in my comments, considering I think
02:48:01.040 --> 02:48:03.860
this will be less impactful in terms of oil volumes,
02:48:03.860 --> 02:48:08.210
but the discussion around flaring,
02:48:08.210 --> 02:48:10.410
I think Commissioner Craddick it's something that
02:48:10.410 --> 02:48:13.100
this could be a tool in helping
02:48:13.100 --> 02:48:16.820
to kind of solve two birds with one stone.
02:48:16.820 --> 02:48:21.820
But in any sort of event, I believe that prorationing
02:48:22.550 --> 02:48:25.800
really needs to be part of the somehow coordinated US effort
02:48:25.800 --> 02:48:26.950
for it to be impactful.
02:48:28.300 --> 02:48:29.133
Thank you.
02:48:30.290 --> 02:48:31.470
Thank you very much, Mr. Houser.
02:48:31.470 --> 02:48:33.870
I appreciate your being with us today.
02:48:33.870 --> 02:48:35.210
Thank you.
02:48:35.210 --> 02:48:36.630
Okay, Callie?
02:48:36.630 --> 02:48:38.500
Okay, I have been directed that
02:48:38.500 --> 02:48:40.820
this is now the lunch break.
02:48:40.820 --> 02:48:43.390
Commissioners, are you okay with that?
02:48:43.390 --> 02:48:44.223
Certainly.
02:48:44.223 --> 02:48:45.056
Done.
02:48:45.056 --> 02:48:47.960
Okay, it'll be a 20-minute break.
02:48:47.960 --> 02:48:49.020
So therefore we'll
02:48:49.020 --> 02:48:50.615
be returning-
20 minutes!
02:48:50.615 --> 02:48:53.020
(chuckles) You better eat fast that.
02:48:54.040 --> 02:48:57.380
We'll be returning at 12:47.
02:48:57.380 --> 02:48:58.213
Sound, okay.
02:48:59.394 --> 02:49:01.404
(participant speaks faintly)