Oklahoma regulators to consider prorationing of crude production

Oklahoma regulators could likely vote Wednesday to approve a prorationing of oil production in the state after being requested to make the move in April by industry groups contending the low price of crude oil resulted in a “waste” of the product. However, oil and gas operators are split on the issue and some oppose it, favoring the free market process rather than government intervention.

Corporation Commissioners, in an afternoon meeting will consider two matters, including a request by the Oklahoma Energy Producers Alliance and one by the Tulsa LPD Energy company.

In a meeting last week regarding the LPD Energy company request for a “waste” declaration, a move that would allow the firm to escape legal liability by shutting in some of its wells, two commissioners expressed support.

As OK Energy Today reported last week, Commissioners considered taking a more permanent action after approving an emergency order in April at the request of LPD Energy. But the matter was delayed a week because some parties had not seen the formal request.

During the discussion, Commissioner Bob Anthony continued his opposition to declaring crude oil production a “waste” and said he was opposed to LPD’s request.

“I remind people that I subsequently dissented on the original vote,” said Anthony during the virtual meeting, “and I would today.”

Corporation Commissioner Dana Murphy responded that she supported the Tulsa firm’s request.

“I’m supportive of issuing the order. There may be a notice issue, but I find it appropriate and reasonable and confirms with our rules. So I’m prepared to support the order.”

Commission Chairman Todd Hiett also came out in support.

“It’s my intention to support this order,” he said, indicating he had supported the original request for the emergency order.

However, the Commission has been targeted by many who oppose the interventionist move and waged a letter-writing campaign urging the regulators to “Stop Proration and Support Our Oklahoma Economy.”

Dozens of letters were received with the identical message.

“I am writing today as a fellow Oklahoman, who believes strongly in a free market economy, and I am concerned that the Oklahoma Corporation Commission might approve production quotas within the oil and gas industry, said each of the letters. “Proration and other petitions before the commission would limit the flow of capital into Oklahoma by mandating production cuts—going against free market principles.”

In May, Dave D. Le Norman, chairman of the Petroleum Alliance of Oklahoma came out against the OEPA’s request as well as the emergency order granted LPD Energy.

“While the emergency order notes the dramatic drop in price of oil and corresponding revenue decline to operators it should also be noted that the free market already is addressing U.S. crude oil
oversupply more quickly and efficiently than can any government entity. A significant portion of Oklahoma’s production already is being shut in. The Alliance requests that the Commission reject the application thereby terminating the emergency order.”

But as OK Energy Today pointed out in early May, the Oklahoma Supreme Court has already ruled against any prorationing in a 1988 case involving Conoco’s challenge of a Corporation Commission decision. The supreme court sided with Conoco in its argument that the Commission “lacked statutory authority to promulgate rule setting allowable production rates for unallocated gas wells on state-wide basis.”

The ruling was against a decision taken by the commissioners at the time, James Townsend, Bob Hopkins and Norma Eagleton. To date, the supreme court ruling appears to have been ignored by the Corporation Commission in considering the latest requests to allow legal well shut-ins.

 

In April when the emergency order was approved, LPD Energy owner Lee Levinson told reporters, “Since I’ve been in this business, about 50 years, this may be the most important order I’ve ever been involved in.”

Approval of an interim order by the commissioners would give him legal grounds to shut in the wells and stop producing oil that is selling for about $35 a barrel. It would also mean his firm would not be in violation of the lease with the mineral or land owners.

The request by the Oklahoma Energy Producers Alliance is very similar but more on a statewide basis.

David Little, President of the OEPA told OK Energy Today the request is critical.

“Having the allowable provides the Commission the ability to control the volume of oil produced now that prices are getting better.  With storage levels at record highs and oil stored in tankers floating in the ocean, it is critical that a large volume is NOT put into the market at one time.”

He said the large volume of crude oil would cause oil prices to decline.

“It is against the law for producers to collectively discuss volumes produced.  This would appear as “price fixing.”  However, the Commission has the power to control the amount of oil produced.  Just as they currently do with gas,” he stated in an email.

The request for the statewide “waste” declaration was made not just by the OEPA but also by Keener Oil and Gas Company, Columbus Oil Company, Brown & Borelli, Inc., Cimarron Production Co., Inc., Cantrell Investments, LLC, Postwood Energy, LLC, GLM Energy, Inc., Toklan Oil & Gas Corporation, Guest Petroleum, Inc., Singer Oil Company, and RKR Exploration, Inc.

Their formal request is a “waste” determination that “there
is not Market Demand at a Price Equivalent to the Actual Value of Oklahoma Crude Oil being Taken, and by Adjusting, Modifying, Amending, Setting or Establishing Allowables for
Production of Oklahoma Crude Oil or Providing for the Prorationing of the Production of Oklahoma Crude Oil, or the Granting of Such Other Relief as may be Appropriate and
Necessary for the Prevention of the Waste of Oklahoma Crude Oil and the Taking of Oklahoma Crude Oil at Less than its Actual Value.”

The virtual meeting will begin at 1:30 p.m.

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